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As Of Filer Filing For·On·As Docs:Size Issuer Agent 4/30/02 Thrivent Var Annuity Account B 485BPOS 4/30/02 5:336K Lutheran Brotherhoo… Fds L B Variable Annuity Account I |
Document/Exhibit Description Pages Size 1: 485BPOS Post-Effective Amendment HTML 483K 4: EX-23 E&Y Consent HTML 6K 2: EX-23 Jcb Opinion/Consent HTML 6K 3: EX-23 Pwc Consent HTML 6K 5: EX-24 POA Boushek HTML 6K
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1 | 1st Page - Filing Submission | ||||
" | The Contracts | ||||
" | Charges and Deductions | ||||
" | Allocation of Premiums | ||||
" | Transfers | ||||
" | Surrender Charge (Contingent Deferred Sales Charge) | ||||
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" | Money Market Subaccount | ||||
" | Calculation of Performance |
LB VA Registration Statement |
Registration No. 333-76154 & 811-7934 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. _______ [ ] Post-Effective Amendment No. __1____ [X] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. ___18__ [X] LB VARIABLE ANNUITY ACCOUNT I (Exact Name of Registrant) AID ASSOCIATION FOR LUTHERANS (Name of Depositor) 625 Fourth Avenue South, Minneapolis, Minnesota 55415 (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, including Area Code: (612) 340-7005 NAME AND ADDRESS OF AGENT FOR SERVICE John C. Bjork 625 Fourth Avenue South Minneapolis, Minnesota 55415 APPROXIMATE DATE OF THE PROPOSED PUBLIC OFFERING As soon as practicable after effectiveness of the Registration Statement. It is proposed that this filing will become effective (check appropriate box): [ ] immediately upon filing pursuant to paragraph (b) of Rule 485 [X] on April 30, 2002 purusant to paragraph (b) of Rule 485 [ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485 [ ] on (date) pursuant to paragraph (a)(1) of Rule 485 [ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485 [ ] on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment TITLE OF SECURITIES BEING REGISTERED Interest in a separate account under individual flexible premium deferred variable annuity contracts. ===================================================================================================== Prospectus Individual Flexible Premium Variable Annuity Contract Issued by Aid Association for Lutherans 625 Fourth Avenue South * Minneapolis, Minnesota 55415 (612) 340-7210 * (800) 990-6290 On January 1, 2002, Lutheran Brotherhood ("LB") merged with and into Aid Association for Lutherans ("AAL"). The merged organization intends to begin operating by a new name as soon as possible after the new name is approved by its members and appropriate regulators. In the meantime, it will do business as Aid Association for Lutherans/Lutheran Brotherhood or AAL/LB. This Prospectus describes an individual flexible premium variable annuity contract (the "Contract") previously offered by LB and now offered by AAL/LB ("we", "us" or "our"). We are a fraternal benefit society organized under Wisconsin law. We offer the Contract only in situations in which the Contract's Annuitant is eligible for membership with us. We may sell the Contract to or in connection with retirement plans which may or may not qualify for special Federal tax treatment under the Internal Revenue Code. We allocate net premiums based on the Annuitant's designation to one or more Subaccounts of LB Variable Annuity Account I (the "Variable Account"), and/or to the Fixed Account (which is the general account of ours, and which pays interest in an amount that is at least as great as the guaranteed fixed rate). The assets of each Subaccount will be invested solely in a corresponding Portfolio of AAL Variable Product Series Fund, Inc. or LB Series Fund, Inc. (each a "Fund", and collectively the "Funds"), which are diversified, open-end management investment companies (commonly known as a "mutual funds"). We provide the overall investment management for each of the Portfolios of the Funds, although some of the Portfolios are managed by an investment subadviser. The accompanying Prospectuses for the Funds describe the investment objectives and attendant risks of the following Portfolios of the Funds: AAL Variable Product Series Fund, Inc.: o AAL Technology Stock Portfolio o AAL Small Cap Stock Portfolio o AAL Small Cap Index Portfolio o AAL Mid Cap Stock Portfolio o AAL Mid Cap Index Portfolio o AAL Capital Growth Portfolio o AAL Large Company Index Portfolio o AAL Balanced Portfolio o AAL High Yield Bond Portfolio (subadvised by Pacific Investment Management Company) o AAL Bond Index Portfolio LB Series Fund, Inc.: o Opportunity Growth Portfolio o FTI Small Cap Growth Portfolio (subadvised by Franklin Advisers, Inc.) o MFS Mid Cap Growth Portfolio (subadvised by Massachusetts Financial Services Company) o Mid Cap Growth Portfolio o World Growth Portfolio (subadvised by T. Rowe Price International, Inc.) o FI All Cap Portfolio (subadvised by Fidelity Management & Research Company) o Growth Portfolio o MFS Investors Growth Portfolio (subadvised by Massachusetts Financial Services Company) o TRP Growth Stock Portfolio (subadvised by T. Rowe Price Associates, Inc.) o Value Portfolio o High Yield Portfolio o Income Portfolio o Limited Maturity Bond Portfolio o Money Market Portfolio. Additional information about us, the Contract and the Variable Account is contained in a Statement of Additional Information ("SAI") dated April 30, 2002. That SAI was filed with the Securities and Exchange Commission and is incorporated by reference in this Prospectus. You may obtain a copy of the SAI without charge by writing to us at our address above. In addition, the Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains the SAI. The Table of Contents for the SAI may be found on Page 29 of this Prospectus. Appendix A sets forth definitions of special terms used in this Prospectus. An investment in the Contract is not a deposit of a bank or financial institution and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Contract involves investment risk including the possible loss of principal. The Securities and Exchange Commission has not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. This Prospectus sets forth concisely the information about the Contract that a prospective investor ought to know before investing, and should be read and kept for future reference. It is valid only when accompanied or preceded by the current Prospectuses of AAL Variable Product Series Fund, Inc. and LB Series Fund, Inc. The date of this Prospectus is April 30, 2002. Table of Contents Page Fee and Expense Table 4 Summary The Contract 9 Annuity Provisions 9 Federal Tax Status 9 Condensed Financial Information 9 Performance Related Information 9 AAL/LB and the Variable Account AAL/LB 11 The Variable Account 11 Investment Options Variable Investment Options 12 Investment Management 14 Addition, Deletion or Substitution of Investments 14 The Contracts Purchasing a Contract 15 Processing Your Application 15 Allocation of Premium 15 Free Look Period 15 Accumulated Value, Accumulation Units and Accumulation Unit Value 16 Minimum Accumulated Value 16 Death Benefit Before the Maturity Date 17 Death Benefit After the Maturity Date 17 Surrender (Redemption) 17 Transfers 18 Telephone Transfers 18 Special Transfer Service--Dollar Cost Averaging 18 Assignments 19 Contract Owner, Beneficiaries and Annuitants 19 Charges and Deductions Surrender Charge (Contingent Deferred Sales Charge) 20 Administrative Charge 20 Mortality and Expense Risk Charge 20 Expenses of the Funds 21 Taxes 21 Sufficiency of Charges 21 Annuity Provisions Maturity Date 22 Maturity Proceeds 22 Settlement Options 22 Frequency of Annuity Payments 22 Amount of Variable Annuity Payments 22 Subaccount Annuity Unit Value 23 General Provisions Postponement of Payments 24 Payment by Check 24 Date of Receipt 24 Reports to Contract Owners 24 Contract Inquiries 24 Federal Tax Status Introduction 24 Variable Account Tax Status 24 Taxation of Annuities in General 24 Qualified Plans 26 1035 Exchanges 26 Diversification Requirements 26 Withholding 26 Other Considerations 26 Employment-Related Benefit Plans 27 Voting Rights 27 Sales and Other Agreements 28 Legal Proceedings 28 Legal Matters 28 Financial Statements and Experts 28 Statement of Additional Information Table of Contents 29 Order Form 29 Appendix A - Definitions Appendix B - Condensed Financial Information Appendix C - More Information About the Fixed Account Fee and Expense Table -------------------------------------------------------------------------------------------------------- The purpose of this table is to help you understand the various costs and expenses associated with your Contract. You may allocate premiums and transfer Accumulated Value to any one of the Subaccounts or to the Fixed Account or to any combination of the Subaccounts and the Fixed Account. You pay no initial sales charge when you purchase the Contract. All costs that you bear directly or indirectly for the Subaccounts and Portfolios are shown below. Contract Owner Expenses Sales Load Imposed on Purchase (as a percentage of purchase payments) 0% Maximum Deferred Sales Load (as a percentage of Excess Amount surrendered) 6%(1) Exchange Fee 0% Annual Contract Fee $30.00(2) Annual Subaccount Expenses (as a percentage of average daily Accumulated Value or Annuity Unit Value) Current(3) Maximum ------- ------- Mortality and Expense Risk Charge 1.10% 1.25% Total Subaccount Annual Expenses 1.10% 1.25% AAL Variable Product Series Fund, Inc. Annual Expenses (as a percentage of average net assets of each Portfolio) Total Annual Other Portfolio Advisory Expenses After Expenses After Portfolio Fees Reimbursement Reimbursement(4) ------------------------------------------------------------------------------------------------------- AAL Technology Stock Portfolio .75% 0% .75% AAL Small Cap Stock Portfolio .70 0 .70 AAL Small Cap Index Portfolio .34 0.06 .40 AAL Mid Cap Stock Portfolio .70 0 .70 AAL Mid Cap Index Portfolio .35 0 .35 AAL Capital Growth Portfolio .65 0 .65 AAL Large Company Index Portfolio .32 0.03 .35 AAL Balanced Portfolio .32 0.03 .35 AAL High Yield Bond Portfolio .40 0 .40 AAL Bond Index Portfolio .35 0 .35 LB Series Fund, Inc. Annual Expenses (as a percentage of average net assets of each Portfolio) Other Total Annual Advisory Expenses After Portfolio Portfolio Fees Reimbursement(5) Expenses -------------------------------------------------------------------------------------------------------- Opportunity Growth Portfolio .40% 0% .40% FTI Small Cap Growth Portfolio $0-$500 million 1.00 0 1.00 More than $500 million .90 0 .90 MFS Mid Cap Growth Portfolio $0-$500 million .90 0 .90 More than $500 million .80 0 .80 Mid Cap Growth Portfolio .40 0 .40 World Growth Portfolio .85 0 .85 FI All Cap Portfolio $0-$500 million .95 0 .95 More than $500 million .90 0 .90 Growth Portfolio .40 0 .40 MFS Investors Growth Portfolio $0-$500 million .80 0 .80 More than $500 million .70 0 .70 TRP Growth Stock Portfolio $0-$500 million .80 0 .80 More than $500 million .70 0 .70 Value Portfolio .60 0 .60 High Yield Portfolio .40 0 .40 Income Portfolio .40 0 .40 Limited Maturity Bond Portfolio .40 0 .40 Money Market Portfolio .40 0 .40 Examples The following examples illustrate the expenses that you would incur on a $1,000 investment and a 5% return on assets. In these examples, the $30 annual administrative charge is approximated as a 0.02% charge based on our average contract size. The examples reflect any current reimbursements of Fund expenses. These reimbursements are anticipated to continue through 2002, but may be terminated at any time. The examples should not be considered as representative of past or future expenses, and actual expenses may be greater or less than those shown. Based on the current mortality and expense risk charge, if you surrender or annuitize your Contract at the end of the applicable time period, you would pay the following expenses: Subaccount 1 year 3 years 5 years 10 years -------------------------------------------------------------------------------------------------------- Technology Stock Subaccount(6) $ 75 $ 98 $ N/A $ N/A Small Cap Stock Subaccount(6) 74 97 N/A N/A Small Cap Index Subaccount(6) 71 88 N/A N/A Mid Cap Stock Subaccount(6) 74 97 N/A N/A Mid Cap Index Subaccount(6) 71 86 N/A N/A Capital Growth Subaccount(6) 74 95 N/A N/A Large Company Index Subaccount(6) 71 86 N/A N/A Balanced Subaccount(6) 71 86 N/A N/A High Yield Bond Subaccount(6) 71 88 N/A N/A Bond Index Subaccount(6) 71 86 N/A N/A Opportunity Growth Subaccount 71 88 104 181 FTI Small Cap Growth Subaccount(7) 77 106 N/A N/A MFS Mid Cap Growth Subaccount(7) 76 103 N/A N/A Mid Cap Growth Subaccount 71 88 104 181 World Growth Subaccount 76 101 127 230 FI All Cap Subaccount(7) 77 104 N/A N/A Growth Subaccount 71 88 104 181 MFS Investors Growth Subaccount(7) 75 100 N/A N/A TRP Growth Stock Subaccount(7) 75 100 N/A N/A Value Subaccount(7) 73 94 N/A N/A High Yield Subaccount 71 88 104 181 Income Subaccount 71 88 104 181 Limited Maturity Bond Subaccount(7) 71 88 N/A N/A Money Market Subaccount 71 88 104 181 -------------------------------------------------------------------------------------------------------- Based on the current mortality and expense risk charge, if you do not surrender or annuitize your Contract, you would pay the following expenses: Subaccount 1 year 3 years 5 years 10 years -------------------------------------------------------------------------------------------------------- Technology Stock Subaccount(6) $ 19 $ 59 $ N/A $ N/A Small Cap Stock Subaccount(6) 18 57 N/A N/A Small Cap Index Subaccount(6) 15 48 N/A N/A Mid Cap Stock Subaccount(6) 18 57 N/A N/A Mid Cap Index Subaccount(6) 15 46 N/A N/A Capital Growth Subaccount(6) 18 56 N/A N/A Large Company Index Subaccount(6) 15 48 N/A N/A Balanced Subaccount(6) 15 46 N/A N/A High Yield Bond Subaccount(6) 15 48 N/A N/A Bond Index Subaccount(6) 15 46 N/A N/A Opportunity Growth Subaccount 15 48 83 181 FTI Small Cap Growth Subaccount(7) 22 66 N/A N/A MFS Mid Cap Growth Subaccount(7) 21 63 N/A N/A Mid Cap Growth Subaccount 15 48 83 181 World Growth Subaccount 20 62 106 230 FI All Cap Subaccount(7) 21 65 N/A N/A Growth Subaccount 15 48 83 181 MFS Investors Growth Subaccount(7) 19 60 N/A N/A TRP Growth Stock Subaccount(7) 19 60 N/A N/A Value Subaccount(7) 17 54 N/A N/A High Yield Subaccount 15 48 83 181 Income Subaccount 15 48 83 181 Limited Maturity Bond Subaccount(7) 15 48 N/A N/A Money Market Subaccount 15 48 83 181 -------------------------------------------------------------------------------------------------------- Based on the maximum mortality and expense risk charge, if you surrender or annuitize your Contract at the end of the applicable time period, you would pay the following expenses: Subaccount 1 year 3 years 5 years 10 years -------------------------------------------------------------------------------------------------------- Technology Stock Subaccount(6) $ 76 $102 $ N/A $ N/A Small Cap Stock Subaccount(6) 76 101 N/A N/A Small Cap Index Subaccount(6) 73 92 N/A N/A Mid Cap Stock Subaccount(6) 76 101 N/A N/A Mid Cap Index Subaccount(6) 72 90 N/A N/A Capital Growth Subaccount(6) 75 99 N/A N/A Large Company Index Subaccount(6) 72 90 N/A N/A Balanced Subaccount(6) 72 90 N/A N/A High Yield Bond Subaccount(6) 73 92 N/A N/A Bond Index Subaccount(6) 72 90 N/A N/A Opportunity Growth Subaccount 73 92 112 198 FTI Small Cap Growth Subaccount(7) 78 110 N/A N/A MFS Mid Cap Growth Subaccount(7) 78 107 N/A N/A Mid Cap Growth Subaccount 73 92 112 198 World Growth Subaccount 77 106 135 245 FI All Cap Subaccount(7) 78 109 N/A N/A Growth Subaccount 73 92 112 198 MFS Investors Growth Subaccount(7) 77 104 N/A N/A TRP Growth Stock Subaccount(7) 77 104 N/A N/A Value Subaccount(7) 75 98 N/A N/A High Yield Subaccount 73 92 112 198 Income Subaccount 73 92 112 198 Limited Maturity Bond Subaccount(7) 73 92 N/A N/A Money Market Subaccount 73 92 112 198 -------------------------------------------------------------------------------------------------------- Based on the maximum mortality and expense risk charge, if you do not surrender or annuitize your Contract, you would pay the following expenses: Subaccount 1 year 3 years 5 years 10 years -------------------------------------------------------------------------------------------------------- Technology Stock Subaccount 6) $ 21 $ 63 $ N/A $ N/A Small Cap Stock Subaccount(6) 20 62 N/A N/A Small Cap Index Subaccount(6) 17 53 N/A N/A Mid Cap Stock Subaccount(6) 20 62 N/A N/A Mid Cap Index Subaccount(6) 16 50 N/A N/A Capital Growth Subaccount(6) 19 60 N/A N/A Large Company Index Subaccount(6) 16 50 N/A N/A Balanced Subaccount(6) 16 50 N/A N/A High Yield Bond Subaccount(6) 17 52 N/A N/A Bond Index Subaccount(6) 16 50 N/A N/A Opportunity Growth Subaccount 17 53 91 198 FTI Small Cap Growth Subaccount(7) 23 71 N/A N/A MFS Mid Cap Growth Subaccount(7) 22 68 N/A N/A Mid Cap Growth Subaccount 17 53 91 198 World Growth Subaccount 22 66 114 245 FI All Cap Subaccount(7) 23 69 N/A N/A Growth Subaccount 17 53 91 198 MFS Investors Growth Subaccount(7) 21 65 N/A N/A TRP Growth Stock Subaccount(7) 21 65 N/A N/A Value Subaccount(7) 19 59 N/A N/A High Yield Subaccount 17 53 91 198 Income Subaccount 17 53 91 198 Limited Maturity Bond Subaccount(7) 17 53 N/A N/A Money Market Subaccount 17 53 91 198 -------------------------------------------------------------------------------------------------------- Notes to Fee and Expense Table: (1) A surrender charge is deducted only if a full or partial surrender occurs during the first six Contract Years; no surrender charge is deducted for surrenders occurring in Contract Years seven and later. The surrender charge will also be deducted at the time annuity payments begin, except under certain circumstances. Up to 10% of the Accumulated Value existing at the time the first surrender in a Contract Year is made may be surrendered without charge; only the Excess Amount will be subject to a surrender charge. The maximum charge is 6% of the Excess Amount and is in effect for the first Contract Year. Thereafter, the surrender charge decreases by 1% each subsequent Contract Year. (2) A $30 annual administrative charge is deducted on each Contract Anniversary only if, on that Contract Anniversary, the total of premiums paid under the Contract minus all prior surrenders is less than $5,000 and the Accumulated Value is less than $5,000. The $30 fee is a Contract charge and is deducted proportionately from the Subaccounts and the Fixed Account that make up the Contract's Accumulated Value. (3) The current charge for mortality and expense risk fees is equal to an annual rate of 1.10%, and we guarantee that this charge will never exceed an annual rate of 1.25%. See Page 20. (4) We have agreed to pay on behalf of the Fund or to reimburse the Fund for all expenses in excess of 0.35% for the Bond Index and Money Market Portfolios and 0.40% for the High Yield Bond Portfolio. We also intend to reimburse all expenses in excess of the management fees for the Technology Stock, Small Cap Stock, Mid Cap Stock, Mid Cap Index, and Capital Growth Portfolios. We can reduce or terminate this voluntary reimbursement upon 30-days' written notice to the Fund. Absent the expense reimbursement, the total portfolio expenses for the period ended December 31, 2001 would have been: Total Annual Portfolio Other Expenses Fund Expenses ---------------------------------------------------------- AAL Technology Stock Portfolio 1.01% 1.76% AAL Small Cap Stock Portfolio .65 1.35 AAL Mid Cap Stock Portfolio .75 1.45 AAL Mid Cap Index Portfolio .78 1.13 AAL Capital Growth Portfolio .39 1.04 AAL High Yield Bond Portfolio .25 .65 AAL Bond Index Portfolio .14 .49 We may discontinue these expense reimbursements at any time. (5) The amount shown for Fund Annual Expenses does not reflect a deduction for operating expenses of the Fund, other than the investment advisory fee, because we and our affiliate, Lutheran Brotherhood Variable Insurance Products Company ("LBVIP"), have agreed to reimburse the Fund for these operating expenses. For the fiscal year of the Fund ending December 31, 2001, the Fund was reimbursed approximately $4,026,766 for such operating expenses which would have represented approximately 0.05% of the average daily net assets of each of the Portfolios in the Fund without the reimbursement. The Expense Reimbursement Agreement can be terminated at any time by the mutual agreement of the Fund, AAL/LB and LBVIP, but the Fund, AAL/LB and LBVIP currently contemplate that the Expense Reimbursement Agreement will continue so long as the Fund remains in existence. If the Expense Reimbursement Agreement were terminated, the Fund would be required to pay these operating expenses, which would reduce the net investment return on the shares of the Fund held by the Subaccounts of the Variable Account. (6) The Subaccount first became available on April 30, 2002, so the expenses are provided for only the one- and three-year periods. (7) The Subaccount first became available on November 30, 2001, so the expenses are provided for only the one- and three-year periods. Summary -------------------------------------------------------------------------------------------------------- Please refer to Appendix A at the end of this Prospectus for definitions of several technical terms, which can help you understand details about your Contract. The Summary is an introduction to various topics related to the Contract. For more detailed information on each subject, refer to the appropriate Page numbers. The Contract Detailed explanations are provided in "The Contracts" (See Pages 15-19.) Issuance of a Contract. We issue individual flexible premium variable annuity contracts. In order to purchase a Contract, you must submit an application to us through one of our licensed representatives, who is also a registered representative of Lutheran Brotherhood Securities Corp. ("LBSC") or AAL Capital Management Corporation ("AAL CMC"). The Contracts are offered only in situations in which the Annuitant is eligible for membership with us. The Contract may be sold to or in connection with retirement plans which may or may not qualify for special Federal tax treatment under the Internal Revenue Code. Annuity payments under the Contract are deferred until a selected later date. The minimum acceptable initial premium is $600 on an annualized basis. We may, at our discretion, waive this initial premium requirement. You may make subsequent premiums under the Contracts, but we may choose not to accept any subsequent premium less than $50. Free Look Period. You have the right to return the Contract within 10 days after you receive it. Allocation of Premiums. You may allocate premiums under the Contract to one or more of the Subaccounts of the Variable Account and to the Fixed Account. Some of the Subaccounts may be unavailable in some states. The Accumulated Value of the Contract in the Subaccounts and, except to the extent fixed amount annuity payments have been elected, the amount of annuity payments will vary, primarily based on the investment experience of the Portfolios whoe shares are held in the Subaccounts designated. Premiums allocated to the Fixed Account will accumulate at fixed rates of interest declared by us. (See Appendix C.) On the date we approve the Contract Owner's application, we will transfer from the general account the initial premium (after deduction of any required premium taxes) and any interest accrued during the underwriting period among the Subaccount(s) and/or Fixed Account according to the Contract Owner's instructions. See "The Contracts--Allocation of Premiums." Subsequent premiums will be allocated among the Subaccounts and the Fixed Account in the same proportion as the initial premium, at the end of the Valuation Period in which we receive the subsequent premium. Surrenders. If a Written Notice from you requesting a surrender is received on or before the Maturity Date, we will pay to you all or part of the Accumulated Value of a Contract after deducting any applicable surrender charge. Partial surrenders must be for at least $200, and may be requested only if the remaining Accumulated Value is not less than $1,000. Under certain circumstances the Contract Owner may make surrenders after the Maturity Date. Transfers. On or before the Maturity Date, you may request the transfer of all or a part of your Contract's Accumulated Value to other Subaccounts or to the Fixed Account. The total amount transferred each time must be at least $200 (unless the total value in the Subaccount or the Fixed Account is less than $200, in which case the entire amount may be transferred). We reserve the right to limit the number of transfers in any Contract Year; although, we will always allow at least two transfers a year. With respect to the Fixed Account, transfers out of the Fixed Account are limited to only one each Contract Year and must be made on or within 45 days after a Contract Anniversary. After the Maturity Date, you may, by Written Notice and only once each Contract Year, change the percentage allocation of variable annuity payments among the available Subaccounts Annuity Provisions See Pages 22-23 for more details. You may select an annuity settlement option or options, and you may select whether payments are to be made on a fixed or variable (or a combination of fixed and variable) basis. Federal Tax Status For a description of the Federal income tax status of annuities, see Pages 24-26. Generally, a distribution from a Contract before the taxpayer attains age 59 1/2 will result in a penalty tax of 10% of the amount of the distribution which is includable in gross income. Condensed Financial Information Condensed financial information derived from the financial statements of the Variable Account is contained in Appendix B. Performance Related Information The Variable Account may advertise certain performance-related information concerning the Subaccounts. Yields. The Variable Account may advertise the Money Market Subaccount's "yield" and "effective yield". Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Subaccount refers to the income generated by an investment in the Subaccount over a seven-day period (which period will be stated in the advertisement). This income is then "annualized". That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Subaccount is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. The annualized current yield and effective yield for the seven-day base period ended December 31, 2001, was 0.63% and 0.63%, respectively. For more information, see the Statement of Additional Information. The Variable Account may also advertise for the other Subaccounts yield quotations based on a 30-day (or one month) period, which is computed by dividing the net investment income per Accumulation Unit earned during the period (the net investment income earned by the Portfolio attributable to shares owned by the Subaccount less expenses incurred during the period) by the maximum offering price per Accumulation Unit on the last day of the period. The current yield for the 30-day base period ended December 31, 2001 for the High Yield Subaccount was 9.98%. The current yield for the same 30-day base period for the Income Subaccount was 4.40%. For more information, see the Statement of Additional Information. Total Returns. From time to time, we may advertise the average annual total return quotations for the Subaccounts for the 1-, 5- and since inception periods computed by finding the average annual compounded rates of return over the 1-, 5- and since inception periods that would equate the initial amount invested to the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5- or since inception periods. For some subaccounts, average annual total return figures also are provided for a 10-year period based on a hypothetical contract assumed to have been invested in a Portfolio when that Portfolio was first available for investment under a variable annuity contract issued by our indirect subsidiary, LBVIP. The average annual total returns for the Subaccounts for the 1-year, 5-year, and since inception periods through December 31, 2001, and for the 10-year period for a hypothetical contract issued by LBVIP are as follows: Inception Since Subaccount Date 1 Year 5 Year Inception 10 Year -------------------------------------------------------------------------------------------------------- Opportunity Growth Subaccount 1/18/96 -23.30% -2.22% 1.05% N/A% Mid Cap Growth Subaccount 1/30/98 -24.92 N/A 9.29 N/A World Growth Subaccount 1/18/96 -26.13 -0.18 1.50 N/A Growth Subaccount 2/3/94 -24.35 11.40 12.60 12.18 High Yield Subaccount 2/3/94 -9.81 -2.43 5.84 4.85 Income Subaccount 2/3/94 0.46 5.13 6.96 5.90 Money Market Subaccount 2/18/88 -2.70 3.64 4.35 3.57 -------------------------------------------------------------------------------------------------------- The average annual total return quotations assume a steady rate of growth. Actual performance fluctuates and will vary from the quoted results for periods of time with the quoted periods. The average annual total return quotations do not include the annual administrative charge of $30 deducted from any Contract for which the total of premiums paid under such Contract minus all prior surrenders is less than $5,000 and the Accumulated Value is less than $5,000. Inclusion of the administrative charge would reduce the total return figures shown above. The average annual total return quotations assume applicable surrender charge upon surrender. For more information, see the Statement of Additional Information. AAL/LB On January 1, 2002, LB merged with and into AAL. The merged organization intends to begin operating by a new name as soon as possible after the new name is approved by its members and appropriate regulators. In the meantime, we will do business as AAL/LB. We are a fraternal benefit society owned and operated for our members. We were organized in 1902 under Wisconsin law, and we are in compliance with Internal Revenue Code Section 501(c)(8). We are currently licensed to transact life insurance business in all 50 states and the District of Columbia. We issue the Contracts. We are subject to regulation by the Office of the Commissioner of Insurance of the State of Wisconsin as well as by the insurance regulators of all the other states and jurisdictions in which we do business. We submit annual reports on our operations and finances to insurance officials in such states and jurisdictions. The forms of Contracts described in this Prospectus are filed with and (where required) approved by insurance officials in each state and jurisdiction in which Contracts are sold. We are also subject to certain Federal securities laws and regulations. The Variable Account We established the Variable Account as a separate account in 1993 pursuant to the laws of the State of Minnesota. As a result of LB's merger with and into AAL, the Variable Account now is operated under the laws of the State of Wisconsin. The Variable Account meets the definition of a "separate account" under the federal securities laws. We have caused the Variable Account to be registered with the Securities and Exchange Commission (the "SEC") as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"). This registration does not involve supervision by the SEC of the management or investment policies or practices. The assets of the Variable Account are owned by us, and we are not a trustee with respect to such assets. However, the Wisconsin laws under which the Variable Account is operated provide that the Variable Account shall not be chargeable with liabilities arising out of any other business we may conduct. We may transfer to our general account assets of the Variable Account which exceed the reserves and other liabilities of the Variable Account. Income and realized and unrealized gains and losses from each Subaccount of the Variable Account are credited to or charged against that Subaccount without regard to any of our other income, gains or losses. We may accumulate in the Variable Account the charge for expense and mortality risk, mortality gains and losses and investment results applicable to those assets that are in excess of net assets supporting the Contracts. Variable Investment Options You may allocate the premiums paid under the Contract and transfer from the Contract's Accumulated Value to one or more of the Subaccounts of the Variable Account. We invest the assets of each Subaccount in corresponding Portfolios of the Funds. The Subaccounts and corresponding Portfolios of the Funds are: Subaccount Corresponding Portfolio -------------------------------------------------------------------------------------------------------- Technology Stock Subaccount AAL Technology Stock Portfolio Small Cap Stock Subaccount AAL Small Cap Stock Portfolio Small Cap Index Subaccount AAL Small Cap Index Portfolio Mid Cap Stock Subaccount AAL Mid Cap Stock Portfolio Mid Cap Index Subaccount AAL Mid Cap Index Portfolio Capital Growth Subaccount AAL Capital Growth Portfolio Large Company Index Subaccount AAL Large Company Index Portfolio Balanced Subaccount AAL Balanced Portfolio High Yield Bond Subaccount AAL High Yield Bond Portfolio Bond Index Subaccount AAL Bond Index Portfolio Opportunity Growth Subaccount Opportunity Growth Portfolio FTI Small Cap Growth Subaccount FTI Small Cap Growth Portfolio MFS Mid Cap Growth Subaccount MFS Mid Cap Growth Portfolio Mid Cap Growth Subaccount Mid Cap Growth Portfolio World Growth Subaccount World Growth Portfolio FI All Cap Subaccount FI All Cap Portfolio Growth Subaccount Growth Portfolio MFS Investors Growth Subaccount MFS Investors Growth Portfolio TRP Growth Stock Subaccount TRP Growth Stock Portfolio Value Portfolio Value Portfolio High Yield Subaccount High Yield Portfolio Income Subaccount Income Portfolio Limited Maturity Bond Subaccount Limited Maturity Bond Portfolio Money Market Subaccount Money Market Portfolio Each of the Portfolios of AAL Variable Products Series Fund, Inc. has an investment objective as described below: AAL Technology Stock Portfolio. To seek long-term capital appreciation by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks. AAL Small Cap Stock Portfolio. To seek long-term capital growth by investing primarily in small company common stocks and securities convertible into small company common stocks. AAL Small Cap Index Portfolio. To strive for capital growth that approximates the performance of the S&P SmallCap 600 Index* by investing primarily in common stocks of the index. AAL Mid Cap Stock Portfolio. To seek long-term capital growth by investing primarily in common stocks and securities convertible into common stocks of mid-sized companies. AAL Mid Cap Index Portfolio. To seek total returns that track the performance of the S&P MidCap 400 Index* by investing primarily in common stocks comprising the Index. AAL Capital Growth Portfolio. To seek long-term capital growth by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks. AAL Large Company Index Portfolio. To strive for investment results that approximate the performance of the S&P 500* Index by investing primarily in common stocks of the Index. AAL Balanced Portfolio. To seek capital growth and income by investing in a mix of common stocks, bonds and money market instruments. Securities are selected consistent with the policies of the AAL Large Company Index and AAL Bond Index Portfolios. AAL High Yield Bond Portfolio. To strive for high current income and secondarily capital growth by investing primarily in high-risk, high yield bonds commonly referred to as "junk bonds." AAL Bond Index Portfolio. To strive for investment results similar to the total return of the Lehman Aggregate Bond Index by investing primarily in bonds and other debt securities included in the Index. Each of the Portfolios of LB Series Fund, Inc. has an investment objective as described below: Opportunity Growth Portfolio. To achieve long-term growth of capital by investing primarily in a professionally-managed diversified portfolio of smaller capitalization common stocks. FTI Small Cap Growth Portfolio. To achieve long-term capital growth by investing primarily in a diversified portfolio of common stocks of U.S. small capitalization companies. MFS Mid Cap Growth Portfolio. To achieve long-term growth of capital by investing primarily in a non-diversified portfolio of common stocks of companies with medium market capitalizations.** * "Standard & Poor's(R)", "S&P(R)", "Standard & Poor's 500", "500", "Standard & Poor's SmallCap 600 Index", "S&P SmallCap 600 Index", "Standard & Poor's MidCap 400 Index" and "S&P MidCap 400 Index" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by us. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the product. (Please see the Statement of Additional Information of AAL Variable Product Series Fund, Inc. which sets forth certain additional disclaimers and limitations of liabilities on behalf of S&P.) ** The MFS Mid Cap Growth Portfolio is a non-diversified mutual fund. This means that the Portfolio may invest a relatively high percentage of its assets in a small number of issuers and is more susceptible to any single economic, political or regulatory event affecting those issuers than is a diversified Portfolio. Mid Cap Growth Portfolio. To achieve long-term growth of capital by investing primarily in a professionally-managed diversified portfolio of common stocks of companies with medium market capitalizations. World Growth Portfolio. To achieve long-term growth of capital by investing primarily in a professionally-managed diversified portfolio of common stocks of established, non-U.S. companies. FI All Cap Portfolio. Seeks long-term growth of capital. Growth Portfolio. To achieve long-term growth of capital through investment primarily in common stocks of established corporations that appear to offer attractive prospects of a high total return from dividends and capital appreciation. MFS Investors Growth Portfolio. To achieve long-term growth of capital and future income by investing primarily in a diversified portfolio of common stocks of companies that appear to offer better than average long-term growth potential. TRP Growth Stock Portfolio. To achieve long-term growth of capital and, secondarily, increase dividend income by investing primarily in a diversified portfolio of common stocks of well-established growth companies. Value Portfolio. To achieve long-term growth of capital. High Yield Portfolio. To achieve a higher level of income through investment in a diversified portfolio of high yield securities ("junk bonds") which involve greater risks than higher quality investments. The Portfolio will also considering growth of capital as a secondary objective. Income Portfolio. To achieve a high level of income over the longer term while providing reasonable safety of capital through investment primarily in readily marketable intermediate- and long-term fixed income securities. Limited Maturity Bond Portfolio. To seek a high level of current income consistent with stability of principal. Money Market Portfolio. To achieve the maximum current income that is consistent with stability of capital and maintenance of liquidity through investment in high-quality, short-term debt obligations. We cannot assure that the Portfolios of the Funds will achieve their respective investment objectives. You should periodically evaluate your allocation among the Subaccounts in light of current market conditions and the investment risks associated with investing in the Funds' various Portfolios. A full description of the Funds and their investment objectives, policies and restrictions, expenses, risks associated with investing in the Funds' Portfolios and other aspects of the Funds' operations is contained in the accompanying prospectuses for the Funds, which should be carefully read in conjunction with this Prospectus. As custodian for the Variable Account, we will hold shares of the Funds purchased by each Subaccount of the Variable Account. The Funds are designed to provide an investment vehicle for variable annuity and variable life insurance contracts. Shares of the Funds are sold to other insurance company separate accounts of LBVIP and ours. The Funds may, in the future, create new portfolios. It is conceivable that in the future it may be disadvantageous for both variable annuity separate accounts and variable life insurance separate accounts and for LBVIP and us to invest simultaneously in the Funds, although we do not foresee any such disadvantages to either variable annuity or variable life insurance contract owners. The management of the Funds intends to monitor events in order to identify any material conflicts between such contract owners and to determine what action, if any, should be taken in response. Material conflicts could result from, for example: o Changes in state insurance laws o Changes in Federal income tax law o Changes in the investment management of the Funds o Differences in voting instructions between those given by the contract owners from the different separate accounts If we believe the response of one or both Funds to any of those events or conflicts insufficiently protects Contract Owners, we may take appropriate action on our own. Such action could include the sale of the Funds' shares by one or more of the separate accounts, which could have adverse consequences. The Funds are registered with the SEC under the 1940 Act as diversified, open-end management investment companies (commonly called "mutual funds"). This registration does not involve supervision by the SEC of the management or investment practices or policies of the Funds. Shares of the Funds may be sold to other separate accounts, and the Funds may in the future create new Portfolios. The Variable Account will purchase and redeem shares from the Funds at net asset value. Shares will be redeemed to the extent necessary for us to collect charges under the Contracts, to make payments upon surrenders, to provide benefits under the Contracts, or to transfer assets from one Subaccount to another as requested by Contract Owners. Any dividend or capital gain distribution received from a Portfolio of either Fund will be reinvested immediately at net asset value in shares of that Portfolio and retained as assets of the corresponding Subaccount. Investment Management We act as investment adviser for the Portfolios of the Funds, and we are a registered investment adviser under the Investment Advisers Act of 1940. AAL Variable Product Series Fund, Inc. and AAL/LB have engaged the following investment subadvisers: o Pacific Investment Management Company ("PIMCO") serves as subadviser for the AAL High Yield Bond Portfolio. AAL Variable Product Series Fund, Inc. and AAL/LB pay PIMCO an annual fee for its subadvisory services. Subadvisory fees are described fully in the Statement of Additional Information for the Fund. LB Series Fund, Inc. and AAL/LB have engaged the following investment subadvisers: o Franklin Advisers, Inc. serves as subadviser for the FTI Small Cap Growth Portfolio. o Massachusetts Financial Services Company serves as subadviser for the MFS Mid Cap Growth Portfolio and the MFS Investors Growth Portfolio. o T. Rowe Price International, Inc., serves as subadviser for the World Growth Portfolio. o Fidelity Management & Research Company serves as subadviser for the FI All Cap Portfolio. FMR Co., Inc. serves as the Portfolio's sub-subadviser. o T. Rowe Price Associates, Inc. serves as subadviser for the TRP Growth Stock Portfolio. LB Series Fund, Inc. and AAL/LB pay each of the above Subadvisers an annual fee for subadvisory services. Subadvisory fees are described fully in the Statement of Additional Information for the Fund. Addition, Deletion or Substitution of Investments We reserve the right, subject to applicable law, to make additions to, deletions from, or substitutions for the shares that are held in the Variable Account or that the Variable Account may purchase. If Portfolio shares of the Funds are no longer available for investment or if in our judgment further investment in any Portfolio should become inappropriate in view of the purposes of the Variable Account, we may redeem the shares, if any, of that Portfolio and substitute shares of another registered open-end management company. We will not substitute any shares attributable to a Contract interest in a Subaccount of the Variable Account without notice and prior approval of the SEC and state insurance authorities, to the extent required by applicable law. We also reserve the right to establish additional Subaccounts of the Variable Account, each of which would invest in shares corresponding to a new Portfolio of one of the Funds or in shares of another investment company having a specified investment objective. Subject to applicable law and any required SEC approval, we may, in our sole discretion, establish new Subaccounts or eliminate one or more Subaccounts if marketing needs, tax considerations or investment conditions warrant. Any new Subaccounts may be made available to existing Contract Owners on a basis to be determined by us. If any of these substitutions or changes are made, we may by appropriate endorsement change the Contract to reflect the substitution or change. If we deem it to be in the best interest of Contract Owners and Annuitants, and subject to any approvals that may be required under applicable law, the Variable Account may be operated as a management company under the 1940 Act, it may be deregistered under that Act if registration is no longer required, or it may be combined with other separate accounts of ours. Purchasing a Contract You purchase a Contract by submitting an application to us through one of our licensed representatives who is also a registered representative of LBSC or AAL CMC. In your application you select the features of your Contract, including: o The amount of your initial premium. This premium must be at least $600 on an annualized basis, though we may choose to waive this requirement. o How you plan to pay premiums after the initial premium. We may require any such premium to be at least $50. o How you want your premiums allocated among the Subaccount(s) and/or Fixed Account. o Your age at the time you want annuity payments to begin. This will establish the Maturity Date, which must be a Contract Anniversary at least three years after the Date of Issue. o The beneficiary to receive the benefit payable upon the death of the Annuitant. Processing Your Application We will process your application after we have received both it and your initial premium. Your contract's Date of Issue will be the date on which we receive the initial premium. If we determine that your application is in good order, we will approve it within two days after the Date of Issue. If we determine that the application is not in good order, we will attempt to complete it within five business days. If the application is not complete at the end of this period, we will tell you the reason for the delay and inform you that we will return the initial premium to you unless you specifically consent to our keeping it until the application is complete. Allocation of Premium If we approve your application on the Date of Issue, we will allocate the initial premium among the Subaccount(s) and/or the Fixed Account according to your application on that date. Otherwise, we will deposit your initial premium in our general account where it will earn interest at a rate which we determine. The interest and any cost of crediting interest will be paid by us, not other Contract Owners. On the date we approve your application, we will allocate your initial premium (including any interest earned while in the general account) among the Subaccount(s) and/or the Fixed Account according to your application. The allocation percentages which you select must be in whole numbers and their sum must be 100%. We reserve the right to adjust allocation percentages to eliminate fractional percentages. Premiums which you pay after the initial premium are allocated at the end of the Valuation Period in which we receive them using the allocation percentages specified in your application. You may change the allocation percentages for future premiums without charge and at any time by giving us Written Notice or, if you have completed the Telephone Transaction Authorization Form, by telephone. Any change will apply to all future premiums unless you request another change. The values in the Subaccounts of the Variable Account will vary with the investment experience of the corresponding Portfolios. You bear the entire investment risk of the amounts allocated to Subaccounts of the Variable Account. You should periodically review your allocations of premiums in light of market conditions and your overall financial objectives. Free Look Period After you receive your contract, you have a "free look" period of 10 days (20 days in Nevada and North Carolina; 30 days if you are age 60 or over and reside in California) to decide if you want to keep it. If you decide to cancel the contract within the free look period, you may do so by returning it to us or to the representative through whom you bought it. When we receive the contract at our office at 625 Fourth Avenue South, Minneapolis, Minnesota 55415, we will cancel it and refund to you an amount which depends on the state in which your contract was issued. In Georgia, Idaho, Michigan, Nebraska, Nevada, New Hampshire, North Carolina, Oklahoma, South Carolina, Utah and Washington, we will refund all premiums which you have paid. In Pennsylvania, we will refund the sum of: (a) The difference between the premiums paid and the amounts allocated to the Variable and Fixed Accounts; and (b) The Accumulated Value on the day the contract is first received by us or our representative. In all other states, we will refund the sum of: (a) The Accumulated Value on the date the returned contract is received by us or our representative; (b) Any charges we made for premium taxes; and (c) The amount attributable to your contract for risk charges and taxes, if any, deducted from the Variable Account, and for advisory fees charged against the net asset value in the portfolios of the Funds. In addition to the "free look" period described, the Employee Retirement Income Security Act of 1974 ("ERISA") grants certain revocation rights to contracts issued as individual retirement annuities ("IRA's). If your contract is an IRA and you revoke it under the rights granted by ERISA, we will refund all premiums which you have paid regardless of the state in which the contract was issued. Accumulated Value, Accumulation Units, and Accumulation Unit Value Accumulated Value. Your Contract's value is expressed as its Accumulated Value. On or before the Maturity Date, Your Contract's Accumulated Value is the sum of: o The amount which your contract has in the Fixed Account; and o The amounts which your contract has in each of the Subaccounts. Amounts in the Subaccounts are calculated at the end of each Valuation Period as follows: o First, we calculate the Accumulation Unit Value for each Subaccount. This calculation recognizes those actions and events occurring during the current Valuation Period which affect the total dollar value of the Subaccount without affecting the number of Accumulation Units held by the Subaccount. (See Accumulation Unit Value below.) o Next, Contract transactions for the current Valuation Period are made. These transactions in and out of each Subaccount are done in terms of buying and selling Accumulation Units of the Subaccount at the current (i.e. newly-calculated) Accumulation Unit Value for the Subaccount. o Finally, we calculate the amount which your contract has in each Subaccount by multiplying your number of Accumulation Units in the Subaccount by the current Accumulation Unit Value for the Subaccount. The Accumulated Value calculated at the end of a Valuation Period applies to all days in that period, including days which are not Valuation Days. Your Contract's Accumulated Value will reflect the investment experience of the chosen Subaccounts of the Variable Account, any amount of value in the Fixed Account, any premiums that you pay, any surrenders you make, and any charges we assess in connection with the Contract. There is no guaranteed minimum Accumulated Value, and, because a Contract's Accumulated Value on any future date depends upon a number of variables, it cannot be predetermined. Accumulation Units. Transactions in and out of a Subaccount are made by buying or selling Accumulation Units of the Subaccount at the Subaccount Accumulation Unit Value. Your contract buys Accumulation Units in a Subaccount when: o You allocate premiums to that Subaccount; or o You transfer Accumulated Value into that Subaccount from another Subaccount or from the Fixed Account. Accumulation Units in a Subaccount are sold when: o You transfer Accumulated Value out of that Subaccount into another Subaccount or the Fixed Account; o You make a surrender from that Subaccount; or o We deduct all or part of the Administrative Charge from that Subaccount. Accumulation Unit Value. A Subaccount's Accumulation Unit Value is the unit price that is used whenever Accumulation Units of the Subaccount are bought or sold. Accumulation Unit Values may increase or decrease at the end of each Valuation Period. We re-determine the Accumulation Unit Value for each Subaccount at the end of each Valuation Period before making any transactions for that period that would affect the number of units held in the Subaccount. Each Subaccount's Accumulation Unit Value is calculated as the total dollar value of that Subaccount divided by the total number of Accumulation Units held by that Subaccount for all contracts (including Accumulation Units held as reserves for variable annuities). The total dollar value of a Subaccount is: (a) the net asset value of the corresponding Portfolio of the Subaccount at the end of the current Valuation Period, plus (b) the amount of any dividend or capital gain distribution declared by the Portfolio if the "ex-dividend" date occurs during the current Valuation Period, plus or minus (c) a charge or credit for any taxes reserved which we determine to be a result of the investment operation of the Portfolio, minus (d) the mortality and expense risk charge. This charge is currently 0.003014% (but guaranteed never to exceed 0.003425%) of the net assets of the Subaccount for each day during the current Valuation Period (see Page 20). Minimum Accumulated Value We require your contract to maintain a minimum Accumulated Value. The amount which must be maintained depends on your premium paying history as follows: (a) At the end of any 24-month period in which you pay no premiums, your Accumulated Value must be at least $1000 after all contract charges have been applied. (b) If you pay at least one premium every 24-months, we require only that the Accumulated Value always be sufficient to cover the contract's administrative charge (see Page 20). If we know that your contract will not meet these requirements on an upcoming Contract Anniversary, we will notify you 60 days before that anniversary and inform you of the minimum dollar amount which you must pay to keep the contract in force. If you fail to pay at least that amount, we will terminate your contract on the Contract Anniversary. If we do so because your contract failed to meet Requirement (a), we will pay you the remaining Accumulated Value. If your contract fails to meet Requirement (b) your contract terminates without value. Death Benefit Before the Maturity Date If the Annuitant dies before the Maturity Date, the Beneficiary will be entitled to receive the contract's death benefit. The amount of the death benefit will be the greatest of: o The Accumulated Value on the date we calculate the death benefit o The sum of all premiums we received for the contract, less the amount of all partial surrenders (including any applicable charges) which you made; and o The Accumulated Value on the preceding Minimum Death Benefit Date plus the sum of the premiums we received for the contract after that date, less the amount of any partial surrenders (including any applicable charges) which you made after that date. The first Minimum Death Benefit Date is the Date of Issue of this contract. Thereafter, Minimum Death Benefit Dates occur every six years on the Contract Anniversary. We calculate the death benefit on the later of: (a) The date we receive proof of the Annuitant's death; and (b) The date we receive a written request from the Beneficiary for either a single sum payment or a settlement option. If the Beneficiary requests a single sum payment, we will pay the death benefit within seven days after the date we calculate it. If the beneficiary requests a settlement option, it must be an option that you could have selected before the Maturity Date, and the option must provide that either: a) The principal and interest are completely distributed within five years after the date of death; or b) If the beneficiary is a natural person, distribution of the principal and interest is made by means of a periodic payment which begins within one year after the date of death and is not guaranteed for a period which extends beyond the life expectancy of the beneficiary. If we do not receive a written request from the beneficiary within one year from the date of the Annuitant's death, we will deem the Beneficiary to have requested a single sum payment. Any proceeds not subsequently withdrawn will be paid in a lump sum on the date five years after the date of death. (If the Beneficiary is your spouse, he or she may, to the extent permitted by law, elect to continue the contract in force, in which case your spouse will become and be treated as the Annuitant.) If your contract was issued in connection with a Qualified Plan, additional restrictions on the manner of payment of the death benefit may apply. Any such restrictions will be stated in the contract or the plan documents. Purchasers acquiring contracts pursuant to Qualified Plans should consult qualified pension or tax advisers. Death Benefit After the Maturity Date If the annuitant dies while we are paying you an annuity income under a settlement option, any death benefit payable will depend on the terms of the settlement option. If a death benefit is payable, the beneficiary may elect to receive the proceeds in the form of a settlement option, but only if the payments are paid at least as rapidly as payments were being paid under the settlement option in effect on the date of death. If your contract was issued in connection with a Qualified Plan, additional restrictions on the manner of payment of the death benefit may apply. Surrender (Redemption) On or before the Maturity Date, you may surrender all or part of your contract's Accumulated Value by giving us Written Notice. Any surrender which you request will be made at the end of the Valuation Period during which the requirements for surrender are completed. We will pay you the proceeds from a surrender within seven days after the surrender is made. The proceeds will be the amount surrendered less any surrender charge (see Page 20). A surrender reduces your Accumulated Value by the amount surrendered. For amounts surrendered from a Subaccount, this is done by selling Accumulation Units of the Subaccount. For partial surrenders, we allocate the surrender among the Subaccounts and the Fixed Account so that all accounts are reduced in value by the same percentage. With our approval, you may specify a different allocation for a partial surrender. A partial surrender must be at least $200 and must not reduce the remaining Accumulated Value to less than $1,000. When you request a partial surrender, you specify the amount which you want to receive as a result of the surrender. If there are no surrender charges or withholding taxes associated with the surrender, the amount surrendered will be the amount which you request. Otherwise, the amount surrendered will be the amount necessary to provide the amount requested after we apply the surrender charge and any withholding taxes. After the Maturity Date, your contract does not have an Accumulated Value which can be surrendered. However, if you are receiving annuity payments under certain settlement options, surrender may be allowed. Surrender is not allowed if your settlement option involves a life income or if you agreed not to revoke or change the option once annuity payments begin. For other settlement options, the amount available for surrender will be the commuted value of any unpaid annuity payments computed on the basis of the assumed interest rate incorporated in the annuity payments. For all surrenders, you should consider the tax implications of a surrender before you make a surrender request. See Pages 24-26. Transfers On or before the Maturity Date, you may request the transfer of all or a part of your contract's Accumulated Value among the Subaccounts of the Variable Account and the Fixed Account. You can request a transfer in two ways: 1) By giving us written notice 2) By telephone after completing a Telephone Transaction Authorization Form. We will make the transfer without charge at the end of the Valuation period during which we receive your request. For transfers from the Fixed account to a Subaccount of the Variable Account, the amount taken from the Fixed Account is used to buy Accumulation Units of the chosen Subaccount. For transfers from a Subaccount, Accumulation Units of the Subaccount are sold and the resulting dollar amount is, depending on your request, either transferred to the Fixed Account or used to buy Accumulation Units of another Subaccount. Transfers are subject to the following conditions: o The total amount transferred must be at least $200. However, if the total value in a Subaccount or the Fixed Account is less than $200, the entire amount may be transferred. o We reserve the right to limit the number of transfers in each Contract Year. However, we will always allow at least two transfers per Contract Year. (For contracts issued in Texas, we allow twelve transfers per Contract Year.) o In any Contract Year, only one of your allowed transfers may be from the Fixed Account. Any transfer from the Fixed Account must be made on or within 45 days after a Contract Anniversary. Transfers will also be subject to any conditions which the Portfolio whose shares are involved may impose. After the Maturity Date, you may, by Written Notice and only once each calendar quarter, change the percentage allocation of variable annuity payments among the available Subaccounts. Telephone Transfers Telephone transfers are available when you complete the Telephone Transaction Authorization Form. If you elect to complete the Telephone Transaction Authorization Form, you thereby agree that we, our agents and employees will not be liable for any loss, liability cost or expense when we, our agents and employees act in accordance with the telephone transfer instructions that have been properly received and recorded on voice recording equipment. If a telephone authorization or instruction, processed after you have completed the Telephone Transaction Authorization Form, is later determined not to have been made by you or was made without your authorization, and a loss results from such unauthorized instruction, you bear the risk of this loss. We will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. In the event we do not employ such procedures, we may be liable for any losses due to unauthorized or fraudulent instructions. Such procedures may include, among others, requiring forms of personal identification prior to acting upon telephone instructions, providing written confirmation of such instructions and/or tape recording telephone instructions. Special Transfer Service -- Dollar Cost Averaging We administer a dollar cost averaging program which enables you to pre-authorize the periodic transfer of predetermined dollar amounts from the Money Market Subaccount to as many of the other Subaccounts or to the Fixed Account as you specify. There is no charge for participating in the dollar cost averaging program. It is generally suitable if you are making a substantial deposit to your Contract and wish to use the other Subaccounts or the Fixed Account investment option, but desire to control the risk of investing at the top of a market cycle. This program allows such investments to be made in equal installments over time in an effort to reduce such risk. Dollar cost averaging does not guarantee that the Variable Account will gain in value, nor will it protect against a decline in value if market prices fall. However, if you can continue to invest regularly throughout changing market conditions, it can be an effective strategy to help meet your long-term goals. If you are interested in the dollar cost averaging program you may obtain an application and full information concerning the program and its restrictions from us. If you enter into a dollar cost averaging agreement with us, it will continue until the amount in the Money Market Subaccount is exhausted or you terminate the agreement. Assignments Assignment is the transfer of contract ownership from one party to another. If a Contract is used in a Qualified Plan and the Contract Owner is a trust, custodian or employer, then the Contract Owner may transfer ownership to the Annuitant. Otherwise, the Contract may not be sold, assigned, discounted or pledged as collateral for a loan or as security for performance of an obligation or for any other purpose to any person other than us. If the Contract is not used in a Qualified Plan, then ownership may be transferred, but not to a natural person, and the Contract may be assigned as Collateral. We are not bound by an assignment unless it is in writing and filed at our office at 625 Fourth Avenue South, Minneapolis, Minnesota 55415. We are not responsible for the validity or effect of any assignment. You should consider the tax implications of an assignment. See Pages 24-26. Contract Owner, Beneficiaries and Annuitants Unless another owner is named in the application, the Annuitant is the owner of the Contract and may exercise all of the owner's rights under the Contract. The Contract Owner may name a Beneficiary to receive the death benefit payable under the Contract. If the Beneficiary is not living on the date payment is due or if no Beneficiary has been named, the death benefit will be paid to the estate of the Annuitant. The owner may change the Beneficiary by giving us Written Notice of the change. The change will not be effective until we receive your Written Notice at our office at 625 Fourth Avenue South, Minneapolis, Minnesota 55415. Once we receive it, the change will be effective as of the date on which you signed the notice. However, the change will not affect any payments made or actions taken by us before we received your notice, and we will not be responsible for the validity of any change. Charges and Deductions Surrender Charge (Contingent Deferred Sales Charge) We do not deduct a charge for sales expenses from premiums at the time premiums are paid. Instead, we deduct a charge at the time you surrender all or part of the your Accumulated Value. This surrender charge applies only during the first six Contract Years. During those years, we calculate the surrender charge as a percentage of the amount which you surrender, subject to certain exceptions noted below. Surrender Charges Contract Year Percent Applied ---------------------------------------------------- 1 6% 2 5% 3 4% 4 3% 5 2% 6 1% ---------------------------------------------------- After Contract Year 6 there is no charge for making surrenders. In addition, during the first six Contract Years we will limit or waive surrender charges as follows: o Cumulative Percent-of-Premium Limit. For all surrenders, we will limit the Surrender Charge so that on any date, the sum of all surrender charges applied to that date will not exceed 6.5% of the total of premiums you have paid to that date. o Surrenders Paid Under Certain Settlement Options. For surrenders which you make after Contract Year 3, there is no surrender charge applied to amounts which you elect to have paid under: 1) A settlement option for a fixed amount or a fixed period (including Option 3V described on Page 22) if the payments will be made for at least five years and you agree at the time of settlement that after the first payment is made, you may not revoke or change the settlement option. 2) Options which involve a life income, including Option 4V or 5V described on Page 22. o Ten Percent Free Each Contract Year. In each Contract Year, you may surrender without a Surrender Charge up to 10% of the Accumulated Value existing at the time of your first surrender made in that Contract Year. This "Ten Percent Free" is not cumulative. For example, if you make no surrenders during the first three Contract Years, the percentage of Accumulated Value which you may surrender without charge in the fourth Contract Year is 10%, not 40%. o Total Disability of the Annuitant. There is no surrender charge if the Annuitant is totally disabled (as defined in your contract) on the date of a surrender. Certain surrenders are subject to a 10% Federal tax penalty on the amount of income withdrawn. See Pages 24-26. If surrender charges are not sufficient to cover our sales expenses, we will bear the loss; conversely, if the amount of such charges proves more than enough, we will retain the excess (see "Sufficiency of Charges" below). We do not currently believe that the surrender charges we impose will cover our expected costs of distributing the Contracts. Administrative Charge Your Contract includes an annual administrative charge of $30 to help us cover the expenses we incur in administrating your contract, the Variable Account and the Subaccounts. On each Contract Anniversary prior to and including the Maturity Date, we will determine if this charge will be applied to your contract. We apply the charge only on Contract Anniversaries on which the sum of premiums you have paid less the amount of any Partial Surrenders you have made is less than $5,000 and the Accumulated Value is less than $5,000. We deduct the charge from your Accumulated Value, allocating the deduction among the Subaccounts and the Fixed Account so that all accounts are reduced in value by the same percentage. Any such deduction from a Subaccount is made by selling Accumulation Units of the Subaccount. With our approval, you may specify a different allocation for the administrative charge. Mortality and Expense Risk Charge We assume certain financial risks associated with the contracts. Those risks are of two basic types: o Mortality Risk. This includes our risk that (1) Death Benefits paid before the Maturity Date will be greater than the Accumulated Value available to pay those benefits, and (2) annuitant payments involving life incomes will continue longer than we expected due to lower than expected death rates of the persons receiving them. o Expense Risk. This is the risk that the expenses with respect to the Contracts will exceed Contract charges. As compensation for assuming these risks, we deduct a daily mortality and expense risk charge from the average daily net assets in the Variable Account. The current charge (0.003014% per day) is equal to an annual rate of 1.10% (approximately 0.80% for mortality risk and 0.30% for expense risk) of the average daily net assets of each Subaccount in the Variable Account. We may change this charge in the future, but we guarantee that it will never exceed an annual rate of 1.25% (0.003425% per day). If the mortality and expense risk charge is insufficient to cover the actual cost of the mortality and expense risk assumed by us, we will bear the loss. We will not reduce annuity payments or increase the administrative charge to compensate for the insufficiency. If the mortality and expense risk charge proves more than sufficient, the excess will be profit available to us for any appropriate corporate purpose including, among other things, payment of sales expenses. See "Sufficiency of Charges" below. Expenses of the Funds Because the Variable Account purchases shares of the Funds, the net assets of the Variable Account will reflect the investment advisory fees or other expenses incurred by the Funds. See Pages 4-5 and the accompanying current Prospectuses of the Funds. Taxes Currently, no charge will be made against the Variable Account for Federal income taxes. We may, however, make such a charge in the future if income or gains within the Variable Account will result in any Federal income tax liability to us. Charges for other taxes, if any, attributable to the Variable Account may also be made. See Pages 24-26. Sufficiency of Charges If the amount of all charges assessed in connection with the contracts as described above is not enough to cover all expenses incurred in connection therewith, we will bear the loss. Any such expenses borne by us will be paid out of our general account which may include, among other things, proceeds derived from mortality and expense risk charges deducted from the Variable Account. Conversely, if the amount of such charges proves more than enough, we will retain the excess. Maturity Date The Maturity Date is the date on which we begin paying you your contract's annuity income. This date is based on the maturity age which you specify in your application. You may change the Maturity Date by giving us Written Notice at least 30 days before both the Maturity Date currently in effect and the new Maturity Date. The new date selected must satisfy our requirements for a Maturity Date and any requirements that may be imposed by the state in which your contract was issued. Maturity Proceeds The proceeds available on the Maturity Date will be the amount provided by surrendering your contract's entire Accumulated Value on that date. If the Maturity Date occurs within the first six Contract Years, surrender charges will be deducted from the Accumulated Value if they apply. We will pay you the proceeds at maturity according to the annuity settlement option which you select. However, we will pay the proceeds in a single sum if the Accumulated Value on the Maturity Date is less than $2,000 or if you elect to receive the proceeds in a single sum. If we pay you proceeds in a single sum, your contract will terminate on the Maturity Date. If you have not selected either a settlement option or a single sum payment by the Maturity Date, we will pay proceeds of $2,000 or more using a fixed annuity, life income with 10-year guarantee period. Settlement Options You may elect to have proceeds paid to you under an annuity settlement option or a combination of options. Under each option, you may choose whether annuity payments are to be made on a fixed or variable basis. You may change your choice of settlement option by giving us Written Notice at least 30 days before the Maturity Date. The fixed annuity settlement options available to you are described in your contract but are not summarized here. The variable annuity settlement options which your contract offers are as follows: Option 3V--Income for a Fixed Period. Under this option, we pay an annuity income for a fixed number of years, not to exceed 30. Option 4V--Life Income with Guaranteed Period. Under this option, we pay an annuity income for the lifetime of the payee. If the payee dies during the guaranteed period, payments will be continued to the end of that period and will be paid to the Beneficiary. You may select a guaranteed period of 10 or 20 years. You may not revoke or change the option once annuity payments begin. Option 5V--Joint and Survivor Life Income with Guaranteed Period. Under this option, we pay an annuity income for as long as at least one of two payees is alive. If both payees die during the guaranteed period, payments will be continued to the end of that period and will be paid to the Beneficiary. You may select a guaranteed period of 10 or 20 years. You may not revoke or change the option once annuity payments begin. In addition to these options, proceeds may be paid under any other settlement option which you suggest and to which we agree. Frequency of Annuity Payments Annuity payments under a settlement option will be paid at monthly intervals unless you and we agree to a different payment schedule. If annuity payments would be or become less than $25 ($20 for contracts issued in the state of Texas) if a single settlement option is chosen, or $25 ($20 for contracts issued in the state of Texas) on each basis if a combination of variable and fixed options is chosen, we may change the frequency of payments to intervals that will result in payments of at least $25 ($20 for contracts issued in the state of Texas) each from each option chosen. Amount of Variable Annuity Payments The amount of the first variable annuity payment is determined by applying the proceeds to be paid under a particular settlement option to the annuity table in the contract for that option. The table shows the amount of the initial annuity payment for each $1,000 applied. Subsequent variable annuity payments vary in amount according to the investment experience of the selected Subaccount(s). Assuming annuity payments are based on the unit values of a single Subaccount, the dollar amount of the first annuity payment (as determined above) is divided by the Annuity Unit Value as of the Maturity Date to establish the number of Annuity Units representing each annuity payment. This number of Annuity Units remains fixed during the annuity payment period. The dollar amount of the second and subsequent variable annuity payments is not predetermined and may change from payment to payment. The dollar amount of the second and each subsequent variable annuity payment is determined by multiplying the fixed number of Annuity Units by the Annuity Unit Value (see "Subaccount Annuity Unit Value" below) with respect to such Subaccount at the end of the last Valuation Date of the period with respect to which the payment is due. If the payment is based upon the Annuity Unit Values of more than one Subaccount, the procedure described here is repeated for each applicable Subaccount and the sum of the payments based on each Subaccount is the amount of the annuity payment. The annuity tables in the contracts are based on the mortality table specified in the contract. Under these tables, the longer the life expectancy of the Annuitant under any life annuity option or the duration of any period for which payments are guaranteed under the option, the smaller will be the amount of the first monthly variable annuity payment. We guarantee that the dollar amount of each fixed and variable annuity payment after the first payment will not be affected by variations in expenses or in mortality experience from the mortality assumptions used to determine the first payment. Subaccount Annuity Unit Value A Subaccount's Annuity Unit Value is used to determine the dollar value of annuity payments based on Annuity Units of the Subaccount. Annuity Unit Values may increase or decrease during each Valuation Period. We re-determine the Annuity Unit Value for each Subaccount at the end of each Valuation Period before making any transactions for that period that would affect the number of units held in the Subaccount. Each Subaccount's Annuity Unit Value is equal to (a) times (b) times (c) where: (a) Is that Subaccount's Annuity Unit Value at the end of the immediately preceding Valuation Period. (b) Is that Subaccount's investment factor for the current Valuation Period. (c) Is a discount factor equivalent to an assumed investment earnings rate of 3 1/2% per year. The investment factor used in (b) measures the investment performance of the Subaccount during the Valuation Period. It is equal to the Subaccount's Accumulation Unit Value at the end of the Valuation Period divided by the Subaccount's Accumulation Unit Value at the end of the immediately preceding Valuation Period. The discount factor used in (c) offsets the effect of the assumed investment earnings rate of 3.5% per year that is built into the annuity tables in the contracts. This means that, if the investment factor calculated in (b) were equivalent to an annual rate of 3.5%, (b) times (c) would be equal to one, the Annuity Unit Value would remain constant and the corresponding annuity payments would be level. General Provisions -------------------------------------------------------------------------------------------------------- Postponement of Payments We may defer payment of any surrender, death benefit or annuity payment amounts that are in the Variable Account if: (a) The New York Stock Exchange is closed other than customary weekend and holiday closings, or trading on the New York Stock Exchange is restricted as determined by the SEC, or (b) An emergency exists, as determined by the SEC, as a result of which disposal of securities is not reasonably practicable or it is not reasonably practicable to determine the value of the Variable Account's net assets. Transfers and allocations of Accumulated Value to and from the Subaccounts of the Variable Account may also be postponed under these circumstances. Payment by Check If a payment which we make to you depends on the premiums you pay by check, our payment may be delayed until your check has cleared your bank. Date of Receipt Except as otherwise stated herein, the date of our receipt of any Written Notice, premium payment, telephonic instructions or other communication is the actual date it is received at our office at 625 Fourth Avenue South, Minneapolis, Minnesota 55415 in proper form unless received (1) after the close of the New York Stock Exchange, or (2) on a date which is not a Valuation Date. In either of these two cases, the date of receipt will be deemed to be the next Valuation Date. Reports to Contract Owners At least once each year we will send you a report showing the value of your contract. The report will include the Accumulated Value and any additional information required by law. Values shown will be for a date no more than two months prior to the date we mail the report. Contract Inquiries Inquiries regarding a contract may be made by writing to us at 625 Fourth Avenue South, Minneapolis, Minnesota 55415. Federal Tax Status -------------------------------------------------------------------------------------------------------- Introduction The ultimate effect of Federal income taxes on a Contract's Accumulated Value, on annuity payments and on the economic benefit to the Contract Owner, the Annuitant or the Beneficiary depends upon the tax status of such person, AAL/LB, and, if the Contract is purchased under a retirement plan, upon the type of retirement plan and upon the tax and employment status of the individual concerned. The discussion contained herein is general in nature and is not intended as tax advice. No attempt is made to consider any applicable state or other tax laws. Moreover, the discussion contained herein is based on our understanding of Federal income tax laws as currently interpreted. No representation is made regarding the likelihood of continuation of these interpretations by the Internal Revenue Service. We do not make any guarantee regarding the tax status of any Contract. Each person concerned should consult a qualified tax adviser. Variable Account Tax Status The Internal Revenue Code of 1986, as amended (the "Code") in effect provides that the income and gains and losses from separate account investments are not income to the insurance company issuing the variable contracts so long as the contracts and the separate account meet certain requirements set forth in the Code. Because the Contracts and the Variable Account intend to meet such requirements, we anticipate no tax liability resulting from the Contracts, and consequently no reserve for income taxes is currently charged against, or maintained by us with respect to, the Contracts. We are currently exempt from state and local taxes. If there is a material change in state or local tax laws, charges for such taxes, if any, attributable to the Variable Account may be made. Taxation of Annuities in General Section 72 of the Code governs taxation of annuities in general. Contracts Held by Individuals. An individual Contract Owner is not taxed on increases in the value of a Contract until a distribution occurs, either in the form of a single sum payment or as annuity payments under the settlement option selected. Upon receipt of a single sum payment or of an annuity payment under the Contract, the recipient is taxed on the portion of such payment that exceeds the investment in the Contract. For single sum payments, the taxable portion is generally the amount in excess of the premiums paid under the Contract. Such taxable portion is taxed at ordinary income tax rates. The investment in the Contract is not affected by loans or assignments of the Contract but is increased by any amount included in gross income as a result of the loan or assignment. Payments in partial or full surrender of a Contract generally will be taxed as ordinary income to the extent that the Accumulated Value exceeds the taxpayer's investment in the Contract. An assignment of the Contract (other than a gift to the Contract Owner's spouse or incident to a divorce) or the use of the Contract as collateral for a loan will be treated in the same manner as a surrender. For annuity payments, the taxable portion is generally determined by a formula which establishes the ratio that the investment in the Contract bears to the expected return under the Contract as of the Maturity Date. Where annuity payments are made under certain Qualified Plans, the portion of each payment that is excluded from gross income will generally be equal to the total amount of any investment in the Contract as of the Maturity Date, divided by the number of anticipated payments, which are determined by reference to the age of the Annuitant. The taxable portion is taxed at ordinary income tax rates. For certain types of Qualified Plans there may be no investment in the Contract within the meaning of Section 72 of the Code. In such event, the total payments received may be taxable. Contract Owners, Annuitants and Beneficiaries under such Contracts should seek qualified tax and financial advice about the tax consequences of distributions under the retirement plan in connection with which such Contracts are purchased. Generally, a distribution from a Contract before the taxpayer attains age 59 1/2 will result in an additional tax of 10% of the amount of the distribution which is includable in gross income. The penalty tax will not apply if the distribution is made as follows: (1) in connection with death or disability as described in Section 72(q)(2) of the Code; (2) from certain Qualified Plans; (3) under a qualified funding trust (commonly referred to as structured settlement plans); or (4) it is one of a series of substantially equal periodic annual payments for the life or life expectancy of the taxpayer or the joint lives or joint life expectancies of the taxpayer and the beneficiary; for this purpose, if there is a significant modification of the payment schedule before the taxpayer is age 59 1/2 or before the expiration of five years from the time of the annuity starting date, the taxpayer's income shall be increased by the amount of tax and deferred interest that otherwise would have been incurred. Depending on the type of Qualified Plan, distributions may be subject to a 10% penalty tax. Contracts Held by Other Than Individuals. A Contract held by other than a natural person, such as a corporation, estate or trust, will not be treated as an annuity contract for Federal income tax purposes, and the income on such a Contract will be taxable in the year received or accrued by the Contract Owner. This rule does not apply, however, if the Contract Owner is acting as an agent for an individual, if the Contract Owner is an estate which acquired the Contract as a result of the death of the decedent, if the Contract is held by certain Qualified Plans, if the Contract is held pursuant to a qualified funding trust (commonly referred to as structured settlement plans), if the Contract was purchased by an employer with respect to a terminated Qualified Plan or if the Contract is an immediate annuity. Multiple Contracts. Section 72(e)(11) of the Code provides that for the purposes of determining the amount includable in gross income, all non-qualified annuity contracts entered into on or after October 22, 1988 by the same company with the same contract owner during any calendar year shall be treated as one contract. This section will likely accelerate the recognition of income by a Contract Owner owning multiple contracts and may have the further effect of increasing the portion of income that will be subject to the 10% penalty tax described above. Qualified Plans The Contracts are designed for use with several types of Qualified Plans. When used in Qualified Plans, deferred annuities do not offer additional tax-deferral benefits, and taxation rules for Qualified Plans take precedence over annuity taxation rules. However, annuities offer other product benefits to investors in Qualified Plans. The tax rules applicable to participants in such Qualified Plans vary according to the type of plan and the terms and conditions of the plan. Therefore, no attempt is made herein to provide more than general information about the use of the Contracts with the various types of Qualified Plans. Participants under such Qualified Plans as well as Contract Owners, Annuitants and Beneficiaries are cautioned that the rights of any person to any benefits under such Qualified Plans may be subject to the terms and conditions of the plans themselves regardless of the terms and conditions of the Contracts issued in connection therewith. Following are brief descriptions of the various types of Qualified Plans and of the use of the Contracts in connection therewith. 1035 Exchanges Section 1035(a) of the Code permits the exchange of certain life insurance, endowment and annuity contracts for an annuity contract without a taxable event occurring. Thus, potential purchasers who already own such a contract issued by another insurer are generally able to exchange that contract for a Contract issued by us without a taxable event occurring. There are certain restrictions which apply to such exchanges, including that the contract surrendered must truly be exchanged for the Contract issued by us and not merely surrendered in exchange for cash. Further, the same person or persons must be the obligee or obligees under the Contract received in the exchange as under the original contract surrendered in the exchange. Careful consideration must be given to compliance with the Code provisions and regulations and rulings relating to exchange requirements, and potential purchasers should be sure that they understand any surrender charges or loss of benefits which might arise from terminating a contract they hold. Owners considering such an exchange should consult their tax advisers to insure that the requirements of Section 1035 are met. Diversification Requirements The Code imposes certain diversification standards on the underlying assets of variable annuity contracts. The Code provides that a variable annuity contract shall not be treated as an annuity contract for any period (and any subsequent period) for which the investments are not "adequately diversified". The assets of the Funds are expected to meet the diversification requirements. We will monitor the Contracts and the regulations of the Treasury Department to ensure that the Contract will continue to qualify as a variable annuity contract. Disqualification of the Contract as an annuity contract would result in imposition of Federal income tax on the Contract Owner with respect to earnings allocable to the Contract prior to the receipt of payments under the Contract. Withholding The taxable portion of a distribution to an individual is subject to Federal income tax withholding unless the taxpayer elects not to have withholding. We will provide the Contract Owner with the election form and further information as to withholding prior to the first distribution. Generally, however, amounts are withheld from periodic payments at the same rate as wages and at the rate of 10% from non-periodic payments. For complete information on withholding, a qualified tax adviser should be consulted. Other Considerations Because of the complexity of the law and its application to a specific individual, tax advice may be needed by a person contemplating purchase of a Contract or the exercise of elections under a Contract. The above comments concerning Federal income tax consequences are not exhaustive, and special rules are provided with respect to situations not discussed in this Prospectus. The preceding description is based upon our understanding of current Federal income tax law. We cannot assess the probability that changes in tax laws, particularly affecting annuities, will be made. The preceding comments do not take into account state income or other tax considerations which may be involved in the purchase of a Contract or the exercise of elections under the Contract. For complete information on such Federal and state tax considerations, a qualified tax adviser should be consulted. Employment-Related Benefit Plans -------------------------------------------------------------------------------------------------------- The Contracts described in this Prospectus (except for Contracts issued in the state of Montana) involve settlement option rates that distinguish between men and women. Montana has enacted legislation requiring that optional annuity benefits offered pursuant to Contracts purchased in Montana not vary on the basis of sex. On July 6, 1983, the Supreme Court held 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 on the basis of sex. Because of this decision, the settlement option rates applicable to Contracts purchased under an employment-related insurance or benefit program may in some cases not vary on the basis of sex. Any unisex rates to be provided by us will apply for tax-qualified plans and those plans where an employer believes that the Norris decision applies. Employers and employee organizations should consider, in consultation with legal counsel, the impact of Norris, and Title VII generally, and any comparable state laws that may be applicable, on any employment-related insurance or benefit plan for which a Contract may be purchased. Voting Rights To the extent required by law, we will vote the Funds' shares held in the Variable Account at regular and special shareholder meetings of the Funds in accordance with instructions received from persons having voting interests in the corresponding Subaccounts of the Variable Account. If, however, the 1940 Act or any regulation thereunder should be amended or if the present interpretation thereof should change, and as a result we determine that we are permitted to vote the Funds' shares in our own right, we may elect to do so. Before the Maturity Date, the Contract Owner shall have the voting interest with respect to shares of the Funds attributable to the Contract. On and after the Maturity Date, the person entitled to receive annuity payments shall have the voting interest with respect to such shares, which voting interest will generally decrease during the annuity period. The number of votes which a Contract Owner or person entitled to receive annuity payments has the right to instruct will be calculated separately for each Subaccount. The number of votes which each Contract Owner has the right to instruct will be determined by dividing a Contract's Accumulated Value in a Subaccount by the net asset value per share of the corresponding Portfolio in which the Subaccount invests. The number of votes which each person entitled to receive annuity payments has the right to instruct will be determined by dividing the Contract's reserves in a Subaccount by the net asset value per share of the corresponding Portfolio in which the Subaccount invests. Fractional shares will be counted. The number of votes of the Portfolio which the Contract Owner or person entitled to receive annuity payments has the right to instruct will be determined as of the date coincident with the date established by the Portfolio for determining shareholders eligible to vote at the meeting of the Funds. Voting instructions will be solicited by written communications prior to such meeting in accordance with procedures established by the Funds. Any Portfolio shares held in the Variable Account for which we do not receive timely voting instructions, or which are not attributable to Contract Owners, will be voted by us in proportion to the instructions received from all Contract Owners. Any Portfolio shares held by us or our affiliates in general accounts will, for voting purposes, be allocated to all separate accounts of ours and our affiliates having a voting interest in that Portfolio in proportion to each such separate account's votes. Voting instructions to abstain on any item to be voted upon will be applied on a pro rata basis to reduce the votes eligible to be cast. Each person having a voting interest in a Subaccount will receive proxy materials, reports and other materials relating to the appropriate Portfolio. Sales and Other Agreements -------------------------------------------------------------------------------------------------------- LBSC, 625 Fourth Avenue South, Minneapolis, Minnesota 55415, an indirect subsidiary of ours, acts as the principal underwriter of the Contracts pursuant to a Distribution Agreement to which we and the Variable Account are also parties. The Contracts are sold through our representatives who are licensed by state insurance officials to sell the Contracts. These representatives are also registered representatives of LBSC or AAL CMC, another broker-dealer affiliated with us. The Contracts are offered in all states where we are authorized to sell variable annuities. Commissions and other distribution compensation to be paid to our representatives on the sale of Contracts will be paid by us and will not result in any charge to Contract Owners or to the Variable Account in addition to the charges described in this Prospectus. Our representatives selling the Contracts will be paid a commission of not more than 4% of the premiums paid on the contracts. Further, our representatives may be eligible to receive certain benefits based on the amount of earned commissions. Legal Proceedings -------------------------------------------------------------------------------------------------------- There are no legal proceedings to which the Variable Account is a party or to which the assets of the Variable Account are subject. AAL/LB has been named in civil litigation proceedings relating to life insurance pricing and sales practices, which appear to be substantially similar to claims asserted in class actions brought against many other life insurers. AAL/LB believes it has substantial defenses to these actions. In the opinion of its management, the outcome of this proceeding is not likely to have a material adverse effect upon the Variable Account or upon the ability of AAL/LB to meet its obligations under the Contracts. Legal Matters -------------------------------------------------------------------------------------------------------- Legal matters relating to the federal securities laws and state laws pertaining to the Contracts, including our right to issue the Contracts thereunder, have been passed upon by John C. Bjork, counsel for AAL/LB. Financial Statements and Experts -------------------------------------------------------------------------------------------------------- Financial statements of the Variable Account, AAL/LB (giving retroactive effect to the merger), AAL, and LB are contained in the Statement of Additional Information ("SAI"). The supplemental consolidated financial statements of AAL/LB (giving retroactive effect to the merger) at December 31, 2001 and for the year then ended, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing and incorporated by reference elsewhere herein which, are based in part on the report of PricewaterhouseCoopers LLP, independent accountants. The financial statements referred to above are included in reliance upon such reports given on the authority of such firms as experts in accounting and auditing. The consolidated financial statements of AAL at December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing and incorporated by reference elsewhere herein. The financial statements referred to above are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The consolidated financial statements of LB at December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and the financial statements of LB Variable Annuity Account I at December 31, 2001, and for each of the periods indicated appearing in this Prospectus and Registration Statement have been audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in their reports thereon appearing and incorporated by reference elsewhere herein. The financial statements referred to above are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. Table of Contents Below is a copy of the Table of Contents included in the SAI. To obtain a copy of this document, complete and mail the form below. Page Introduction 2 Distribution of the Contracts 3 Calculation of Performance 3 Money Market Subaccount 3 Other Subaccounts 4 Independent Accountants and Financial Statements 8 Financial Statements of Variable Account 8 Comment on Financial Statements of AAL/LB, AAL and LB 28 Financial Statements of AAL/LB, AAL and LB 28 How To Obtain the INDIVIDUAL FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACT Statement of Additional Information Send this request form to: Aid Association for Lutherans/Lutheran Brotherhood P.O. Box 288 Minneapolis, MN 55440-9041 Please send me a copy of the most recent INDIVIDUAL FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACT SAI. -------------------------------------------------------------------------------------- (Name) (Date) -------------------------------------------------------------------------------------- (Street Address) -------------------------------------------------------------------------------------- (City) (State) (Zip Code) Appendix A Definitions Annuitant. The person(s) named in the Contract whose life is used to determine the duration of annuity payments involving life contingencies. Annuity Unit. A unit of measure which is used in the calculation of the second and each subsequent variable annuity payment. Contract. The individual flexible premium variable annuity contract offered by AAL/LB and described in this Prospectus. Contract Anniversary. The same date in each succeeding year as the Date of Issue. Contract Owner. The person who controls all the rights under the Contract while the Annuitant is alive. The Annuitant is the Contract Owner, unless another owner is named in the Contract application. Contract Year. The period from one Contract Anniversary to the next. The first Contract Year will be the period beginning on the Date of Issue and ending on the first Contract Anniversary. Date of Issue. The date on which the application and the first premium are received by AAL/LB at 625 Fourth Avenue South, Minneapolis, Minnesota 55415. Fixed Account. The Fixed Account is the general account of AAL/LB, which consists of all assets of AAL/LB other than those allocated to a separate account of AAL/LB. Premium payments allocated to the Fixed Account will be paid a fixed rate of interest (which may not be less than 3.0%) declared by AAL/LB at least annually. Amounts accumulated in the Fixed Account are guaranteed by AAL/LB. (See Appendix C.) Funds. AAL Variable Product Series Fund, Inc. and LB Series Fund, Inc., which are described in the accompanying Prospectuses. LBSC. Lutheran Brotherhood Securities Corp., which is an indirect subsidiary of AAL/LB and which acts as the principal underwriter of the Contracts. Portfolio. A Portfolio of the Funds. Each Subaccount invests exclusively in the shares of a corresponding Portfolio of the Funds. Qualified Plan. A retirement plan qualified under Section 401, 403 408 or 408A or similar provisions of the Internal Revenue Code. Subaccount. A subdivision of the Variable Account. Each Subaccount invests exclusively in the shares of a corresponding Portfolio of the Funds. Valuation Day. Each day the New York Stock Exchange is open for trading and any other day on which there is sufficient trading in the securities of a Portfolio of the Funds such that the current net asset value of its shares might be materially affected. Valuation Period. The period commencing at the close of business of a Valuation Date and ending at the close of business of the next Valuation Date. Variable Account. LB Variable Annuity Account I, which is a separate account of AAL/LB. The Subaccounts are subdivisions of the Variable Account. Written Notice. A written request or notice signed by the Contract Owner and received by AAL/LB at 625 Fourth Avenue South, Minneapolis, Minnesota 55415. Appendix B -------------------------------------------------------------------------------------------------------- Condensed Financial Information The following table shows the historical performance of accumulation unit values and number of accumulation units for each of the previous years ending December 31, for which the relevant Subaccount has been in existence. This information is derived from the financial statements of the Variable Account and should be read in conjunction with the financial statements, related notes and other financial information of the Variable Account included in the Statement of Additional Information. Opportunity Growth Subaccount -------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $13.24 $14.25 $11.29 $11.77 $11.79 $10.00(1) End of period 10.74 13.24 14.25 11.29 11.77 11.79 Number of Accumulation Units Outstanding at end of period 18,932,410 18,990,589 16,400,624 16,883,494 15,755,047 8,925,231 -------------------------------------------------------------------------------------------------------- FTI Small Cap Growth Subaccount -------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $10.00(2) End of period 10.54 Number of Accumulation Units Outstanding at end of period 426,759 -------------------------------------------------------------------------------------------------------- MFS Mid Cap Growth Subaccount -------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $10.00(2) End of period 10.59 Number of Accumulation Units Outstanding at end of period 448,117 -------------------------------------------------------------------------------------------------------- Mid Cap Growth Subaccount -------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $18.35 $16.36 $11.05 $10.00(3) End of period 14.56 18.35 16.36 11.05 Number of Accumulation Units Outstanding at end of period 21,999,035 18,256,799 9,407,840 4,916,782 -------------------------------------------------------------------------------------------------------- World Growth Subaccount -------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $14.12 $17.02 $12.83 $11.11 $10.93 $10.00(1) End of period 11.03 14.12 17.02 12.83 11.11 10.93 Number of Accumulation Units Outstanding at end of period 23,248,744 22,301,797 17,359,292 14,890,293 12,470,902 6,809,063 -------------------------------------------------------------------------------------------------------- FI All Cap Subaccount -------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $10.00(2) End of period 10.30 Number of Accumulation Units Outstanding at end of period 502,342 -------------------------------------------------------------------------------------------------------- Growth Subaccount ----------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 1995 1994 ----------------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $64.49 $68.60 $48.27 $38.02 $29.52 $24.38 $17.95 $19.68(4) End of period 51.57 64.49 68.60 48.27 38.02 29.52 24.38 17.95 Number of Accumulation Units Outstanding at end of period 30,408,734 29,904,105 27,300,490 24,210,985 19,279,447 13,809,177 7,742,874 3,142,640 ----------------------------------------------------------------------------------------------------------------- MFS Investors Growth Subaccount -------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $10.00(2) End of period 10.08 Number of Accumulation Units Outstanding at end of period 471,010 -------------------------------------------------------------------------------------------------------- TRP Growth Stock Subaccount -------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $10.00(2) End of period 10.15 Number of Accumulation Units Outstanding at end of period 504,103 -------------------------------------------------------------------------------------------------------- Value Subaccount -------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $10.00(2) End of period 10.13 Number of Accumulation Units Outstanding at end of period 557,003 -------------------------------------------------------------------------------------------------------- High Yield Subaccount ---------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 1995 1994 ---------------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $23.02 $29.28 $26.78 $27.50 $24.35 $22.06 $18.64 $20.41(4) End of period 21.93 23.02 29.28 26.78 27.50 24.35 22.06 18.64 Number of Accumulation Units Outstanding at end of period 21,241,884 21,986,419 21,383,391 20,236,846 15,720,991 10,632,678 5,557,895 2,514,043 ---------------------------------------------------------------------------------------------------------------- Income Subaccount ------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------------------------------------------ Accumulation Unit Value: Beginning of period $23.88 $21.87 $22.57 $20.86 $19.39 $18.98 $16.07 $17.21(4) End of period 25.35 23.88 21.87 22.57 20.86 19.39 18.98 16.07 Number of Accumulation Units Outstanding at end of period 21,672,281 18,874,587 18,690,873 16,424,298 11,878,420 9,066,360 5,274,785 2,264,894 ------------------------------------------------------------------------------------------------------------------ Limited Maturity Bond Subaccount -------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $10.00(2) End of period 9.93 Number of Accumulation Units Outstanding at end of period 1,780,622 Money Market Subaccount ------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------------------------------------------- Accumulation Unit Value: Beginning of period $1.76 $1.67 $1.61 $1.55 $1.48 $1.43 $1.36 $1.33(4) End of period 1.81 1.76 1.67 1.61 1.55 1.48 1.43 1.36 Number of Accumulation Units Outstanding at end of period 128,732,333 86,928,411 88,494,861 57,199,273 34,676,637 31,024,219 15,771,786 5,984,694 ------------------------------------------------------------------------------------------------------------------- (1) Commencing January 18, 1996. (2) Commencing November 30, 2001. (3) Commencing January 30, 1998. (4) Commencing February 3, 1994. The financial statements of AAL/LB, AAL and LB are also contained in the Statement of Additional Information. More Information About the Fixed Account Because of exemptive and exclusionary provisions, interests in the Fixed Account have not been registered under the Securities Act of 1933 ("1933 Act"), nor is the Fixed Account registered as an investment company under the Investment Company Act of 1940 ("1940 Act"). Accordingly neither the Fixed Account nor any interests therein are generally subject to the provisions of the 1933 or 1940 Acts. Disclosures regarding the Fixed Account option and the Fixed Account, however, may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements in prospectuses. We have been advised that the staff of the Securities and Exchange Commission has not reviewed disclosure relating to the Fixed Account. Accumulated Values allocated to the Fixed Account are combined with all of our general assets and are invested in those assets we have chosen and that are allowed by applicable law. We allocate the investment income of the Fixed Account to the Contracts covered by the Fixed Account in the amounts guaranteed in such Contracts. Immediately prior to the Maturity Date, the Accumulated Value of the Contract in the Fixed Account is subject to a reduction for any surrender charge, if applicable. Under the Fixed Account option, we allocate premium payments to the Fixed Account, guarantees the amounts allocated to the Fixed Account, and pays a declared interest rate. The guaranteed minimum interest credited to the Fixed Account will be at the effective rate of 3% per year, compounded daily. We may credit interest at a rate in excess of 3% per year; however, we are not obligated to credit any interest in excess of 3% per year. There is no specific formula for the determination of excess interest credits. Such credits, if any, will be determined by us based on information as to expected investment yields. Some of the factors that we may consider in determining whether to credit interest above 3% to amounts allocated to the Fixed Account, and the amount thereof, are general economic trends, rates of return currently available and anticipated on our investments, regulatory and tax requirements and competitive factors. ANY INTEREST CREDIT TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 3% PER YEAR WILL BE DETERMINED AT OUR SOLE DISCRETION. THE CONTRACT OWNER ASSUMES THE RISK THAT INTEREST CREDITED TO FIXED ACCOUNT ALLOCATIONS MAY NOT EXCEED THE MINIMUM GUARANTEE OF 3% FOR ANY GIVEN YEAR. Nonetheless, for any amount allocated or transferred to the Fixed Account, we guarantee that the initial interest rate will be effective for at least 12 months, and subsequent interest rates will not be changed more often than once every 12 months. To the extent a fixed annuity payment option is selected by the Contract Owner, Accumulated Value at the Maturity Date will be transferred to the Fixed Account, which support our insurance and annuity obligations. Contract Owners have no voting rights in the Variable Account with respect to Fixed Account values.
STATEMENT OF ADDITIONAL INFORMATION Individual Flexible Premium Variable Annuity Contract Issued By Aid Association For Lutherans This Statement of Additional Information ("SAI") is not a prospectus, but should be read in conjunction with the Prospectus dated April 30, 2002 (the "Prospectus") describing an individual flexible premium variable annuity contract (the "Contract") being offered by Aid Association for Lutherans/Lutheran Brotherhood ("AAL/LB"). Purchase payments will be allocated to one or more Subaccounts of LB Variable Annuity Account I (the "Variable Account"), a separate account of AAL/LB and/or to the Fixed Account (which is the general account of AAL, and which pays interest at a guaranteed fixed rate). Much of the information contained in this SAI expands upon subjects discussed in the Prospectus. A copy of the Prospectus may be obtained from AAL/LB, 625 Fourth Avenue South, Minneapolis, Minnesota 55415. Capitalized terms used in this SAI that are not otherwise defined herein shall have the meanings given to them in the Prospectus. -------------------------------------------------- TABLE OF CONTENTS Page Introduction..........................................................................2 Distribution of the Contracts.........................................................3 Calculation of Performance............................................................3 Money Market Subaccount.............................................................3 Other Subaccounts...................................................................4 Independent Accountants and Financial Statements......................................8 Financial Statements of Variable Account..............................................8 Comment on Financial Statements of AAL/LB, AAL and LB................................28 Financial Statements of AAL/LB, AAL and LB...........................................28 -------------------------------------------------- The date of this Statement of Additional Information is April 30, 2002. INTRODUCTION On January 1, 2002, Lutheran Brotherhood ("LB") merged with and into Aid Association for Lutherans ("AAL"). The merged organization intends to begin operating by a new name as soon as possible after the new name is approved by its members and appropriate regulators. In the meantime, it will do business as Aid Association for Lutherans/Lutheran Brotherhood or AAL/LB. The Contracts previously issued by LB are now issued by AAL/LB. AAL/LB, a fraternal benefit society owned and operated for its members, was organized in 1902 under the laws of the State of Wisconsin. AAL/LB is currently licensed to transact life insurance business in all 50 states and the District of Columbia. On December 31, 2001, LB and AAL had combined assets under management of approximately $58.6 billion. The Contract may be sold to or in connection with retirement plans which may or may not qualify for special federal tax treatment under the Internal Revenue Code. Annuity payments under the Contract are deferred until a selected later date. Premiums will be allocated, as designated by the Contract Owner, to one or more Subaccounts of the Variable Account, a separate account of AAL/LB and/or to the Fixed Account (which is the general account of AAL/LB, and which pays interest at a guaranteed fixed rate). The assets of each Subaccount will be invested solely in a corresponding Portfolio of AAL Variable Product Series Fund, Inc. or LB Series Fund, Inc. (each a "Fund", and collectively the "Funds"), which are diversified, open-end management investment companies (commonly known as "mutual funds"). The Prospectuses for the Funds that accompany the Prospectus describes the investment objectives and attendant risks of the following Portfolios of the Funds: AAL Variable Product Series Fund, Inc.: AAL Technology Stock Portfolio AAL Small Cap Stock Portfolio AAL Small Cap Index Portfolio AAL Mid Cap Stock Portfolio AAL Mid Cap Index Portfolio AAL Capital Growth Portfolio AAL Large Company Index Portfolio AAL Balanced Portfolio AAL High Yield Bond Portfolio (subadvised by Pacific Investment Management Company) AAL Bond Index Portfolio LB Series Fund, Inc.: Opportunity Growth Portfolio FTI Small Cap Growth Portfolio (subadvised by Franklin Advisers, Inc.) MFS Mid Cap Growth Portfolio (subadvised by Massachusetts Financial Services Company) Mid Cap Growth Portfolio World Growth Portfolio (subadvised by T. Rowe Price International, Inc.) FI All Cap Portfolio (subadvised by Fidelity Management & Research Company) Growth Portfolio MFS Investors Growth Portfolio (subadvised by Massachusetts Financial Services Company) TRP Growth Stock Portfolio (subadvised by T. Rowe Price Associates, Inc.) Value Portfolio High Yield Portfolio Income Portfolio Limited Maturity Bond Portfolio Money Market Portfolio Additional Subaccounts (together with the related additional Portfolios of the Funds) may be added in the future.The Accumulated Value of the Contract and, except to the extent fixed amount annuity payments are elected by the Contract Owner, the amount of annuity payments will vary, primarily based on the investment experience of the Portfolios whose shares are held in the Subaccounts designated. Premiums allocated to the Fixed Account will accumulate at fixed rates of interest declared by AAL/LB. DISTRIBUTION OF THE CONTRACTS Lutheran Brotherhood Securities Corp. ("LBSC"), an indirect subsidiary of AAL/LB, acts as the principal underwriter of the Contracts pursuant to a Distribution Agreement to which AAL/LB and the Variable Account are also parties. The Contracts are sold through AAL/LB representatives who are licensed by state insurance officials to sell the Contracts. These representatives are also registered representatives of LBSC or AAL Capital Management Corporation, another broker-dealer affiliated with AAL/LB. The Contracts are offered in all states where AAL/LB is authorized to sell variable annuities. The offering of the Contracts is continuous. There are no special purchase plans or exchange privileges not described in the Prospectus (see "THE CONTRACTS--Transfers" in the Prospectus). No charge for sales expense is deducted from premiums at the time premiums are paid. However, a surrender charge, which may be deemed to be a contingent deferred sales charge, is deducted from the Accumulation Value of the Contract in the case where the Contract is surrendered, in whole or in part, before annuity payments begin and, if certain settlement options are selected, at the time annuity payments begin, under the circumstances described in, and in amounts calculated as described in, the Prospectus under the heading "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent Deferred Sales Charge)". CALCULATION OF PERFORMANCE Money Market Subaccount The Prospectus contains information with respect to the yield and effective yield of a hypothetical preexisting account having a balance of one Money Market Portfolio Subaccount Accumulation Unit at the beginning of a specified seven-day period. Such yield quotations have been calculated by determining the net change, exclusive of capital changes, in the value of a hypothetical pre-existing account having a balance of one Accumulation Unit of the Subaccount at the beginning of the period, subtracting a hypothetical charge reflecting deductions from Contract Owner accounts, dividing the net change by the value of the account at the beginning of the period to obtain the base period return, and multiplying the base period return by 365/7. The effective yield has been calculated by compounding the yield quotation for such period by adding 1 and raising the sum to a power equal to 365/7, and subtracting 1 from the result. In determining the net change in the value of the account as described in the preceding paragraph, all deductions that are charged to all Contract Owner accounts have been reflected in proportion to the length of the seven-day base period and the mean (or median) account size under a substantially identical contract issued by an AAL/LB affiliate. Deductions from purchase payments and surrender charges assessed have not been reflected in, and realized gains and losses from the sale of securities and unrealized appreciation and depreciation of the Subaccount and the related portfolio company have been excluded from, the computation of yield. This example illustrates the yield quotation for the Money Market Subaccount for the seven-day period ended December 31, 2001: Value of hypothetical pre-existing account with exactly one Accumulation Unit at the beginning of the period $1.806145 Value of same account (excluding capital changes) at end of the seven-day period $1.806363 Net change in account value $0.000218 Base Period Return: Net change in account value divided by beginning account value $0.000121 Annualized Current Yield [0.000121 x (365/7)] 0.63% Effective Yield (0.000121 + 1)365/7-1 0.63% The annualization of a seven-day average yield is not a representation of future actual yield. Other Subaccounts The Prospectus contains information with respect to yield quotations by Subaccounts other than the Money Market Subaccount. These yield quotations are based on a 30-day (or one month) period computed by dividing the net investment income per accumulation unit earned during the period (the net investment income earned by the Fund portfolio attributable to shares owned by the Subaccount less expenses incurred during the period) by the maximum offering price per Accumulation Unit on the last day of the period, by setting yield equal to two times the difference between the sixth power of one plus the designated ratio and one, where the designated ratio is the difference between the net investment income earned during the period and the expenses accrued for the period (net of reimbursement) divided by the product of the average daily number of Accumulation Units outstanding during the period and the maximum offering price per Accumulation Unit on the last day of the period. For fees that vary with the size of the Contract, a Contract size equal to the mean (or median) contract size has been assumed. The following example illustrates the annualized current yield calculation for the High Yield Subaccount for the 30-day base period ended December 31, 2001: Dividends and interest earned by the High Yield Subaccount during the base period $ 4,391,164 Expenses accrued for the base period $ 580,787 ------------- $ 3,810,377(A) ============ Product of the maximum public offering price on the last day of the base period and the average daily number of Units outstanding during the base period that were entitled to receive dividends ($21.927210 x 21,526,337 Units) = $472,012,512(B) ============ Quotient of dividends and interest earned minus expenses accrued divided by product of maximum public offering price multiplied by average Units outstanding (A divided by B) = 0.008073(C) Adding one and raising total to the 6th power (C + 1)6= 1.049424(D) Annualized current yield [2(D - 1) x 100] = 9.88% The following example illustrates the annualized current yield calculation for the Income Subaccount for the 30-day base period ended December 31, 2001: Dividends and interest earned by the Income Subaccount during the base period $ 2,699,389 Expenses accrued for the base period $ 681,489 ------------- $ 2,017,900(A) ============ Product of the maximum public offering price on the last day of the base period and the average daily number of Units outstanding during the base period that were entitled to receive dividends ($25.354488 x 21,884,887 Units) = $554,880,105(B) Quotient of dividends and interest earned minus expenses accrued divided by product of maximum public offering price multiplied by average Units outstanding (A divided by B) = 0.003637(C) Adding one and raising total to the 6th power (C + 1)6 = 1.022019(D) Annualized current yield [2(D-1) x 100] = 4.40% Annualized current yield of any specific base period is not a representation of future actual yield. The Prospectus contains information with respect to performance data relating to the Contracts. Such performance data includes average annual total return quotations for the 1-year, 5-year and since inception periods computed by finding the average annual compounded rates of return over the 1-year, 5-year and since inception periods that would equate the initial amount invested to the ending redeemable value, by equating the ending redeemable value to the product of a hypothetical initial payment of $1,000, and one plus the average annual total return raised to a power equal to the applicable number of years. For some subaccounts, average annual total return figures also are provided for a 10-year period based on a hypothetical Contract assumed to have been invested in a Portfolio of the Fund when that Portfolio was first available for investment under a variable annuity contract issued by an AAL/LB affiliate, Lutheran Brotherhood Variable Insurance Products Company. Such performance data assumes that any applicable charges have been deducted from the initial $1,000 payment and includes all recurring fees that are charged to all Contract Owners. If recurring fees charged to Contract Owners are paid other than by redemption of Accumulation Units, such fees will be appropriately reflected. The performance data does not include the administrative charge of $30 deducted from any Contract for which the total of premiums paid under such Contract minus all prior surrenders is less than $5,000 and the Accumulated Value is less than $5,000. Inclusion of the administrative charge would reduce the total return figures shown below. Average annual total return for any specific period is not a representation of future actual results. Average annual total return assumes a steady rate of growth. Actual performance fluctuates and will vary from the quoted results for periods of time within the quoted periods. The following example illustrates the average annual total return for the Growth Subaccount of a hypothetical Contract invested in the Growth Portfolio of the Fund from the date the Portfolio was first available for investment under a contract issued by AAL/LB through December 31, 2001: Hypothetical $1,000 initial investment on February 3, 1994 $ 1,000 Ending redeemable value of the investment on December 31, 2001 (after deferred sales charge) $ 2,621 Total return for the period is the difference between the ending redeemable value and the hypothetical $1,000 initial investment divided by the hypothetical $1,000 initial investment; the result is expressed in terms of a percentage (For example, 2 equals 200%) 162.05% Average annual total return from inception through December 31, 2001 is the sum of the total return calculated above plus one; such sum is raised to the power of 1/n where n is expressed as seven years and 11 months; the result is reduced by one and is expressed in terms of a percentage (For example, 0.2 equals 20%) 12.95% The following example illustrates the average annual total return for the High Yield Subaccount of a hypothetical Contract invested in the High Yield Portfolio of the Fund from the date the Portfolio was first available for investment under a contract issued by AAL/LB through December 31, 2001: Hypothetical $1,000 initial investment on February 3, 1994 $ 1,000 Ending redeemable value of the investment on December 31, 2001 (after deferred sales charge) $ 1,074 Total return for the period is the difference between the ending redeemable value and the hypothetical $1,000 initial investment divided by the hypothetical $1,000 initial investment; the result is expressed in terms of a percentage (For example, 2 equals 200%) 7.43% Average annual total return from inception through December 31, 2001 is the sum of the total return calculated above plus one; such sum is raised to the power of 1/n where n is expressed as seven years and 11 months; the result is reduced by one and is expressed in terms of a percentage (For example, 0.2 equals 20%) 0.91% The following example illustrates the average annual total return for the Income Subaccount of a hypothetical Contract invested in the Income Portfolio of the Fund from the date the Portfolio was first available for investment under a contract issued by AAL/LB through December 31, 2001: Hypothetical $1,000 initial investment on February 3, 1994 $ 1,000 Ending redeemable value of the investment on December 31, 2001 (after deferred sales charge) $ 1,473 Total return for the period is the difference between the ending redeemable value and the hypothetical $1,000 initial investment divided by the hypothetical $1,000 initial investment; the result is expressed in terms of a percentage (For example, 2 equals 200%) 47.29% Average annual total return from inception through December 31, 2001 is the sum of the total return calculated above plus one; such sum is raised to the power of 1/n where n is expressed as seven years and 11 months; the result is reduced by one and is expressed in terms of a percentage (For example, 0.2 equals 20%) 5.02% The following example illustrates the average annual total return for the Money Market Subaccount of a hypothetical Contract invested in the Money Market Portfolio of the Fund from the date the Portfolio was first available for investment under a contract issued by AAL/LB through December 31, 2001 Hypothetical $1,000 initial investment on February 3, 1994 $ 1,000 Ending redeemable value of the investment on December 31, 2001 (after deferred sales charge) $ 1,360 Total return for the period is the difference between the ending redeemable value and the hypothetical $1,000 initial investment divided by the hypothetical $1,000 initial investment; the result is expressed in terms of a percentage (For example, 2 equals 200%) 36.04% Average annual total return from inception through December 31, 2001 is the sum of the total return calculated above plus one; such sum is raised to the power of 1/n where n is expressed as seven years and 11 months; the result is reduced by one and is expressed in terms of a percentage (For example, 0.2 equals 20%) 3.97% The following example illustrates the average annual total return for the Opportunity Growth Subaccount from the date of inception through the period ended December 31, 2001: Hypothetical $1,000 initial investment on January 18, 1996 $ 1,000 Ending redeemable value of the investment on December 31, 2001 (after deferred sales charge) $ 1,064 Total return for the period is the difference between the ending redeemable value and the hypothetical $1,000 initial investment divided by the hypothetical $1,000 initial investment; the result is expressed in terms of a percentage (For example, 2 equals 200%) 6.39% Average annual total return from inception through December 31, 2001 is the sum of the total return calculated above plus one; such sum is raised to the power of 1/n where n is expressed as five years and 347 days; the result is reduced by one and is expressed in terms of a percentage (For example, 0.2 equals 20%) 1.05% The following example illustrates the average annual total return for the World Growth Subaccount from the date of inception through December 31, 2001: Hypothetical $1,000 initial investment on January 18, 1996 $ 1,000 Ending redeemable value of the investment on December 31, 2001 (after deferred sales charge) $ 1,093 Total return for the period is the difference between the ending redeemable value and the hypothetical $1,000 initial investment divided by the hypothetical $1,000 initial investment; the result is expressed in terms of a percentage (For example, 2 equals 200%) 9.29% Average annual total return from inception through December 31, 2001 is the sum of the total return calculated above plus one; such sum is raised to the power of 1/n where n is expressed as five years and 347 days; the result is reduced by one and is expressed in terms of a percentage (For example, 0.2 equals 20%) 1.50% The following example illustrates the average annual total return for the Mid Cap Growth Subaccount from the date of inception through December 31, 2001: Hypothetical $1,000 initial investment on January 30, 1998 $ 1,000 Ending redeemable value of the investment on December 31, 2001 (after deferred sales charge) $ 1,417 Total return for the period is the difference between the ending redeemable value and the hypothetical $1,000 initial investment divided by the hypothetical $1,000 initial investment; the result is expressed in terms of a percentage (For example, 2 equals 200%) 41.67% Average annual total return from inception through December 31, 2001 is the sum of the total return calculated above plus one; such sum is raised to the power of 1/n where n is expressed as three years and 335 days; the result is reduced by one and is expressed in terms of a percentage (For example, 0.2 equals 20%) 9.29% INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS The supplemental consolidated financial statements of AAL/LB (giving retroactive effect to the merger) at December 31, 2001 and for the year then ended, appearing in this SAI and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing and incorporated by reference elsewhere herein which, are based in part on the report of PricewaterhouseCoopers LLP, independent accountants. The financial statements referred to above are included in reliance upon such reports given on the authority of such firms as experts in accounting and auditing. The consolidated financial statements of AAL at December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, appearing in this SAI and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing and incorporated by reference elsewhere herein. The financial statements referred to above are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The consolidated financial statements of LB at December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and the financial statements of LB Variable Annuity Account I at December 31, 2001, and for each of the periods indicated appearing in this SAI and Registration Statement have been audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in their reports thereon appearing and incorporated by reference elsewhere herein. The financial statements referred to above are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. FINANCIAL STATEMENTS OF VARIABLE ACCOUNT Set forth on the following pages are the audited financial statements of the Variable Account. [GRAPHIC OMITTED] PricewaterhouseCoopers LLP 650 Third Avenue South Suite 1300 Minneapolis MN 55402-4333 Telephone (612) 596 6000 Facsimile (612) 373 7160 Report of Independent Accountants To the Board of Directors of Lutheran Brotherhood and Contract Owners of LB Variable Annuity Account I In our opinion, the accompanying statements of assets and liabilities and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of the Opportunity Growth, FTI Small Cap Growth, MFS Mid Cap Growth, Mid Cap Growth, World Growth, FI All Cap, Growth, MFS Investors Growth, TRP Growth Stock, Value, High Yield, Income, Limited Maturity Bond, and Money Market subaccounts of LB Variable Annuity Account I at December 31, 2001, and the results of each of their operations and the changes in each of their net assets for the periods indicated in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Lutheran Brotherhood's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in Note 1 to the financial statements, on January 1, 2002, Lutheran Brotherhood merged with and into Aid Association for Lutherans. /s/ PricewaterhouseCoopers LLP March 29, 2002 LB VARIABLE ANNUITY ACCOUNT I OPPORTUNITY GROWTH SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 Year Ended December 31, 2001 ASSETS: Investment in LB Series Fund, Inc. - Opportunity Growth INVESTMENT INCOME: Portfolio 20,108,353 shares at net asset value of Dividend income $ 687,010 $10.21 per share (cost $237,784,660) $ 205,236,839 Mortality and expense risk charge (2,321,449) Receivable from LB for units issued 79,484 Net investment loss (1,634,439) Receivable from LB for annuity reserve adjustment 52,512 REALIZED AND UNREALIZED GAIN Total assets 205,368,835 (LOSS) ON INVESTMENTS: Net realized gain on investments 10,850,437 LIABILITIES: Net change in unrealized appreciation Payable to LB for mortality and expense or depreciation of investments (57,913,776) risk charge 189,066 Net loss on investments (47,063,339) Total liabilities 189,066 Net change in net assets resulting NET ASSETS $ 205,179,769 from operations ($ 48,697,778) NET ASSETS APPLICABLE TO ANNUITY CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 18,932,410 $ 203,257,548 Reserves for contracts in annuity payment period (note 2) 1,922,221 NET ASSETS $ 205,179,769 Unit Value (accumulation net assets divided by accumulation units outstanding) $10.74 Statement of Changes in Net Assets Years Ended December 31, 2001 and 2000 2001 2000 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 1,634,439) ($ 2,807,254) Net realized gain on investments 10,850,437 492,287 Net change in unrealized appreciation or depreciation of investments (57,913,776) (17,418,537) Net change in net assets resulting from operations (48,697,778) (19,733,504) UNIT TRANSACTIONS: Proceeds from units issued 21,642,445 45,712,896 Net asset value of units redeemed (12,551,683) (15,348,966) Annuity benefit payments (161,889) (112,667) Adjustments to annuity reserves 33,996 10,984 Transfers from other subaccounts 16,071,348 38,123,647 Transfers to other subaccounts (23,627,899) (29,403,199) Transfers from fixed account 78,506 223,821 Transfers to fixed account (933,801) (360,340) Net increase in net assets from unit transactions 551,023 38,846,176 Net change in net assets (48,146,755) 19,112,672 NET ASSETS: Beginning of period 253,326,524 234,213,852 End of period $ 205,179,769 $ 253,326,524 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I FTI SMALL CAP GROWTH SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 For the period from November 30, 2001 ASSETS: (effective date) to December 31, 2001 Investment in LB Series Fund, Inc. - FTI Small Cap Growth Portfolio 424,669 shares at net asset value of INVESTMENT INCOME: $10.55 per share (cost $4,259,918) $ 4,480,074 Mortality and expense risk charge (3,934) Receivable from LB for units issued 21,822 Net investment loss (3,934) Total assets 4,501,896 LIABILITIES: REALIZED AND UNREALIZED GAIN Payable to LB for mortality and expense (LOSS) ON INVESTMENTS: risk charge 3,934 Net change in unrealized appreciation Total liabilities 3,934 or depreciation of investments 220,156 NET ASSETS $4 ,497,962 Net loss on investments 220,156 Net change in net assets resulting NET ASSETS APPLICABLE TO ANNUITY from operations $ 216,222 CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 426,759 $ 4,497,962 NET ASSETS $ 4,497,962 Unit Value (accumulation net assets divided by accumulation units outstanding) $10.54 Statement of Changes in Net Assets For the period from November 30, 2001 (effective date) to December 31, 2001 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 3,934) Net change in unrealized appreciation or depreciation of investments 220,156 Net change in net assets resulting from operations 216,222 UNIT TRANSACTIONS: Proceeds from units issued 4,029,810 Net asset value of units redeemed (116) Transfers from other subaccounts 377,747 Transfers to other subaccounts (130,113) Transfers from fixed account 4,412 Net increase in net assets from unit transactions 4,281,740 Net change in net assets 4,497,962 NET ASSETS: Beginning of period - End of period $ 4,497,962 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I MFS MID CAP GROWTH SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 For the period from November 30, 2001 ASSETS: (effective date) to December 31, 2001 Investment in LB Series Fund, Inc. - MFS Mid Cap Growth Portfolio 438,497 shares at net asset value of INVESTMENT INCOME: $10.60 per share (cost $4,408,669) $ 4,647,729 Mortality and expense risk charge($ 3,941) Receivable from LB for units issued 101,564 Net investment loss (3,941) Total assets 4,749,293 LIABILITIES: REALIZED AND UNREALIZED GAIN Payable to LB for mortality and expense (LOSS) ON INVESTMENTS: risk charge 3,941 Net change in unrealized appreciation Total liabilities 3,941 or depreciation of investments 239,060 NET ASSETS $ 4,745,352 Net loss on investments 239,060 Net change in net assets resulting NET ASSETS APPLICABLE TO ANNUITY from operations $ 235,119 CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 448,117 $ 4,745,352 NET ASSETS $ 4,745,352 Unit Value (accumulation net assets divided by accumulation units outstanding) $10.59 Statement of Changes in Net Assets For the period from November 30, 2001 (effective date) to December 31, 2001 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 3,941) Net change in unrealized appreciation or depreciation of investments 239,060 Net change in net assets resulting from operations 235,119 UNIT TRANSACTIONS: Proceeds from units issued 4,016,024 Net asset value of units redeemed (116) Transfers from other subaccounts 543,620 Transfers to other subaccounts (63,804) Transfers from fixed account 21,556 Transfers to fixed account (7,047) Net increase in net assets from unit transactions 4,510,233 Net change in net assets 4,745,352 NET ASSETS: Beginning of period - End of period $ 4,745,352 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I MID CAP GROWTH SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 Year Ended December 31, 2001 ASSETS: Investment in LB Series Fund, Inc. - Mid Cap Growth INVESTMENT INCOME: Portfolio 24,751,232 shares at net asset value of Dividend income $ 1,326,883 $13.04 per share (cost $362,655,625) $ 322,729,366 Mortality and expense risk charge (3,380,233) Receivable from LB for units issued 302,874 Net investment loss (2,053,350) Receivable from LB for annuity reserve adjustment 71,280 REALIZED AND UNREALIZED GAIN Total assets 323,103,520 (LOSS) ON INVESTMENTS: LIABILITIES: Net realized gain on investments 20,733,285 Payable to LB for mortality and expense Net change in unrealized appreciation risk charge 295,968 or depreciation of investments (92,348,402) Total liabilities 295,968 Net loss on investments (71,615,117) NET ASSETS $ 322,807,552 Net change in net assets resulting from operations ($ 73,668,467) NET ASSETS APPLICABLE TO ANNUITY CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 21,999,035 $ 320,298,434 Reserves for contracts in annuity payment period (note 2) 2,509,118 NET ASSETS $ 322,807,552 Unit Value (accumulation net assets divided by accumulation units outstanding) $14.56 Statement of Changes in Net Assets Years Ended December 31, 2001 and 2000 2001 2000 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 2,053,350) ($ 2,880,934) Net realized gain on investments 20,733,285 14,537,660 Net change in unrealized appreciation or depreciation of investments (92,348,402) 5,510,848 Net change in net assets resulting from operations (73,668,467) 17,167,574 UNIT TRANSACTIONS: Proceeds from units issued 59,946,993 102,001,158 Net asset value of units redeemed (17,325,198) (12,451,823) Annuity benefit payments (224,886) (107,181) Adjustments to annuity reserves 40,669 28,776 Transfers from other subaccounts 62,850,627 110,884,877 Transfers to other subaccounts (44,578,620) (35,089,702) Transfers from fixed account 471,386 856,589 Transfers to fixed account (1,775,844) (514,231) Net increase in net assets from unit transactions 59,405,127 165,608,463 Net change in net assets (14,263,340) 182,776,037 NET ASSETS: Beginning of period 337,070,892 154,294,855 End of period $ 322,807,552 $ 337,070,892 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I WORLD GROWTH SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 Year Ended December 31, 2001 ASSETS: Investment in LB Series Fund, Inc. - World Growth INVESTMENT INCOME: Portfolio 25,843,253 shares at net asset value of Dividend income $ 1,051,950 $10.02 per share (cost $317,862,924) $ 258,859,981 Mortality and expense risk charge(3,019,482) Receivable from LB for units issued 178,531 Net investment loss (1,967,532) Receivable from LB for annuity reserve adjustment 67,818 REALIZED AND UNREALIZED GAIN Total assets 259,106,330 (LOSS) ON INVESTMENTS: LIABILITIES: Net realized gain on investments 21,447,216 Payable to LB for mortality and expense Net change in unrealized appreciation risk charge 236,876 or depreciation of investments (90,586,218) Total liabilities 236,876 Net loss on investments (69,139,002) NET ASSETS $ 258,869,454 Net change in net assets resulting from operations ($ 71,106,534) NET ASSETS APPLICABLE TO ANNUITY CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 23,248,744 $256,394,325 Reserves for contracts in annuity payment period (note 2) 2,475,129 NET ASSETS $258,869,454 Unit Value (accumulation net assets divided by accumulation units outstanding) $11.03 Statement of Changes in Net Assets Years Ended December 31, 2001 and 2000 2001 2000 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 1,967,532) ($ 3,453,810) Net realized gain on investments 21,447,216 8,251,499 Net change in unrealized appreciation or depreciation of investments (90,586,218) (63,915,149) Net change in net assets resulting from operations (71,106,534) (59,117,460) UNIT TRANSACTIONS: Proceeds from units issued 38,347,734 77,758,113 Net asset value of units redeemed (16,100,983) (17,456,319) Annuity benefit payments (211,306) (170,248) Adjustments to annuity reserves 26,912 23,997 Transfers from other subaccounts 25,959,117 52,144,547 Transfers to other subaccounts (33,953,884) (31,912,132) Transfers from fixed account 160,169 367,121 Transfers to fixed account (1,868,100) (568,160) Net increase in net assets from unit transactions 12,359,660 80,186,919 Net change in net assets (58,746,874) 21,069,459 NET ASSETS: Beginning of period 317,616,328 296,546,869 End of period $ 258,869,454 $ 317,616,328 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I FI ALL CAP SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 For the period from November 30, 2001 ASSETS: (effective date) to December 31, 2001 Investment in LB Series Fund, Inc. - FI All Cap Growth Portfolio 482,065 shares at net asset value of INVESTMENT INCOME: $10.30 per share (cost $4,847,727) $ 4,970,041 Mortality and expense risk charge ($ 3,967) Receivable from LB for units issued 208,223 Net investment loss (3,967) Total assets 5,178,264 LIABILITIES: REALIZED AND UNREALIZED GAIN Payable to LB for mortality and expense (LOSS) ON INVESTMENTS: risk charge 3,967 Net change in unrealized appreciation Total liabilities 3,967 or depreciation of investments 122,314 NET ASSETS $ 5,174,297 Net loss on investments 122,314 Net change in net assets resulting NET ASSETS APPLICABLE TO ANNUITY from operations $ 118,347 CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 502,342 $ 5,174,297 NET ASSETS $ 5,174,297 Unit Value (accumulation net assets divided by accumulation units outstanding) $10.30 Statement of Changes in Net Assets For the period from November 30, 2001 (effective date) to December 31, 2001 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 3,967) Net change in unrealized appreciation or depreciation of investments 122,314 Net change in net assets resulting from operations 118,347 UNIT TRANSACTIONS: Proceeds from units issued 4,061,860 Net asset value of units redeemed (617) Transfers from other subaccounts 1,277,704 Transfers to other subaccounts (310,453) Transfers from fixed account 28,554 Transfers to fixed account (1,098) Net increase in net assets from unit transactions 5,055,950 Net change in net assets 5,174,297 NET ASSETS: Beginning of period - End of period $ 5,174,297 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I GROWTH SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 Year Ended December 31, 2001 ASSETS: Investment in LB Series Fund, Inc. - Growth INVESTMENT INCOME: Portfolio 104,145,058 shares at net asset value of Dividend income $ 3,756,235 $15.25 per share (cost $2,105,122,465) $ 1,588,166,399 Mortality and expense risk charge(18,530,470) Receivable from LB for units issued 747,796 Net investment loss (14,774,235) Receivable from LB for annuity reserve adjustment 547,785 REALIZED AND UNREALIZED GAIN Total assets 1,589,461,980 (LOSS) ON INVESTMENTS: LIABILITIES: Net realized gain on investments 363,624,378 Payable to LB for mortality and expense Net change in unrealized appreciation risk charge 1,477,632 or depreciation of investments (744,880,128) Total liabilities 1,477,632 Net loss on investments (381,255,750) NET ASSETS $ 1,587,984,348 Net change in net assets resulting from operations ($ 396,029,985) NET ASSETS APPLICABLE TO ANNUITY CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 30,408,734 $ 1,568,149,964 Reserves for contracts in annuity payment period (note 2) 19,834,384 NET ASSETS $ 1,587,984,348 Unit Value (accumulation net assets divided by accumulation units outstanding) $51.57 Statement of Changes in Net Assets Years Ended December 31, 2001 and 2000 2001 2000 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 14,774,235) ($ 16,107,999) Net realized gain on investments 363,624,378 323,799,950 Net change in unrealized appreciation or depreciation of investments (744,880,128) (436,636,351) Net change in net assets resulting from operations (396,029,985) (128,944,400) UNIT TRANSACTIONS: Proceeds from units issued 187,556,447 316,384,037 Net asset value of units redeemed (115,460,100) (133,889,195) Annuity benefit payments (2,000,718) (1,946,840) Adjustments to annuity reserves 171,359 206,723 Transfers from other subaccounts 142,261,896 190,769,565 Transfers to other subaccounts (167,601,616) (172,514,583) Transfers from fixed account 999,397 1,870,444 Transfers to fixed account (10,210,142) (5,075,660) Net increase in net assets from unit transactions 35,716,522 195,804,491 Net change in net assets (360,313,463) 66,860,091 NET ASSETS: Beginning of period 1,948,297,811 1,881,437,720 End of period $ 1,587,984,348 $ 1,948,297,811 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I MFS INVESTORS GROWTH SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 For the period from November 30, 2001 ASSETS: (effective date) to December 31, 2001 Investment in LB Series Fund, Inc. - MFS Investors Growth Portfolio 461,014 shares at net asset value of INVESTMENT INCOME: $10.08 per share (cost $4,616,950) $ 4,651,113 Mortality and expense risk charge ($ 3,845) Receivable from LB for units issued 100,281 Net investment loss (3,845) Total assets 4,751,394 LIABILITIES: REALIZED AND UNREALIZED GAIN Payable to LB for mortality and expense (LOSS) ON INVESTMENTS: risk charge 3,845 Net change in unrealized appreciation Total liabilities 3,845 or depreciation of investments 34,163 NET ASSETS $ 4,747,549 Net loss on investments 34,163 Net change in net assets resulting NET ASSETS APPLICABLE TO ANNUITY from operations $ 30,318 CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 471,010 $ 4,747,549 NET ASSETS $ 4,747,549 Unit Value (accumulation net assets divided by accumulation units outstanding) $10.08 Statement of Changes in Net Assets For the period from November 30, 2001 (effective date) to December 31, 2001 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 3,845) Net change in unrealized appreciation or depreciation of investments 34,163 Net change in net assets resulting from operations 30,318 UNIT TRANSACTIONS: Proceeds from units issued 4,055,276 Net asset value of units redeemed (111) Transfers from other subaccounts 811,091 Transfers to other subaccounts (154,025) Transfers from fixed account 5,000 Net increase in net assets from unit transactions 4,717,231 Net change in net assets 4,747,549 NET ASSETS: Beginning of period - End of period $ 4,747,549 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I TRP GROWTH STOCK SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 For the period from November 30, 2001 ASSETS: (effective date) to December 31, 2001 Investment in LB Series Fund, Inc. - TRP Growth Stock Portfolio 489,089 shares at net asset value of INVESTMENT INCOME: $10.16 per share (cost $4,907,469) $ 4,970,722 Mortality and expense risk charge($ 3,893) Receivable from LB for units issued 151,748 Net investment loss (3,893) Total assets 5,122,470 LIABILITIES: REALIZED AND UNREALIZED GAIN Payable to LB for mortality and expense (LOSS) ON INVESTMENTS: risk charge 3,893 Net change in unrealized appreciation Total liabilities 3,893 or depreciation of investments 63,253 NET ASSETS $ 5,118,577 Net loss on investments 63,253 Net change in net assets resulting NET ASSETS APPLICABLE TO ANNUITY from operations $ 59,360 CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 504,103 $ 5,118,577 NET ASSETS $ 5,118,577 Unit Value (accumulation net assets divided by accumulation units outstanding) $10.15 Statement of Changes in Net Assets For the period from November 30, 2001 (effective date) to December 31, 2001 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 3,893) Net change in unrealized appreciation or depreciation of investments 63,253 Net change in net assets resulting from operations 59,360 UNIT TRANSACTIONS: Proceeds from units issued 4,010,100 Net asset value of units redeemed (2,978) Transfers from other subaccounts 1,137,793 Transfers to other subaccounts (85,698) Net increase in net assets from unit transactions 5,059,217 Net change in net assets 5,118,577 NET ASSETS: Beginning of period - End of period $ 5,118,577 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I VALUE SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 For the period from November 30, 2001 ASSETS: (effective date) to December 31, 2001 Investment in LB Series Fund, Inc. - Value Portfolio 531,491 shares at net asset value of INVESTMENT INCOME: $10.14 per share (cost $5,334,367) $ 5,391,591 Mortality and expense risk charge($ 3,958) Receivable from LB for units issued 257,533 Net investment loss (3,958) Total assets 5,649,124 LIABILITIES: REALIZED AND UNREALIZED GAIN Payable to LB for mortality and expense (LOSS) ON INVESTMENTS: risk charge 3,958 Net change in unrealized appreciation Total liabilities 3,958 or depreciation of investments 57,224 NET ASSETS $ 5,645,166 Net loss on investments 57,224 Net change in net assets resulting NET ASSETS APPLICABLE TO ANNUITY from operations $ 53,266 CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 557,003 $ 5,645,166 NET ASSETS $ 5,645,166 Unit Value (accumulation net assets divided by accumulation units outstanding) $10.13 Statement of Changes in Net Assets For the period from November 30, 2001 (effective date) to December 31, 2001 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($ 3,958) Net change in unrealized appreciation or depreciation of investments 57,224 Net change in net assets resulting from operations 53,266 UNIT TRANSACTIONS: Proceeds from units issued 4,167,693 Net asset value of units redeemed (5,385) Transfers from other subaccounts 1,799,279 Transfers to other subaccounts (369,687) Net increase in net assets from unit transactions 5,591,900 Net change in net assets 5,645,166 NET ASSETS: Beginning of period - End of period $ 5,645,166 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I HIGH YIELD SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 Year Ended December 31, 2001 ASSETS: Investment in LB Series Fund, Inc. - High Yield INVESTMENT INCOME: Portfolio 87,335,741 shares at net asset value of Dividend income $ 65,221,455 $5.41 per share (cost $794,595,983) $ 472,387,475 Mortality and expense risk charge(5,563,742) Receivable from LB for units issued 289,858 Net investment loss 59,657,713 Receivable from LB for annuity reserve adjustment 240,226 REALIZED AND UNREALIZED GAIN Total assets 472,917,559 (LOSS) ON INVESTMENTS: LIABILITIES: Net realized gain on investments (20,300,689) Payable to LB for mortality and expense Net change in unrealized appreciation risk charge 439,975 or depreciation of investments (64,225,963) Total liabilities 439,975 Net loss on investments (84,526,652) NET ASSETS $ 472,477,584 Net change in net assets resulting from operations ($ 24,868,939) NET ASSETS APPLICABLE TO ANNUITY CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 21,241,884 $ 465,775,248 Reserves for contracts in annuity payment period (note 2) 6,702,336 NET ASSETS $ 472,477,584 Unit Value (accumulation net assets divided by accumulation units outstanding) $21.93 Statement of Changes in Net Assets Years Ended December 31, 2001 and 2000 2001 2000 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss $ 59,657,713 $ 67,516,105 Net realized gain on investments (20,300,689) (4,187,567) Net change in unrealized appreciation or depreciation of investments (64,225,963) (202,162,776) Net change in net assets resulting from operations (24,868,939) (138,834,238) UNIT TRANSACTIONS: Proceeds from units issued 55,933,405 99,715,061 Net asset value of units redeemed (43,387,862) (47,807,940) Annuity benefit payments (746,632) (587,765) Adjustments to annuity reserves 60,408 107,607 Transfers from other subaccounts 36,509,147 49,524,964 Transfers to other subaccounts (58,882,474) (77,376,487) Transfers from fixed account 250,186 492,827 Transfers to fixed account (4,298,059) (2,832,983) Net increase in net assets from unit transactions (14,561,881) 21,235,284 Net change in net assets (39,430,820) (117,598,954) NET ASSETS: Beginning of period 511,908,404 629,507,358 End of period $ 472,477,584 $ 511,908,404 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I INCOME SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 Year Ended December 31, 2001 ASSETS: Investment in LB Series Fund, Inc. - Income INVESTMENT INCOME: Portfolio 56,843,321 shares at net asset value of Dividend income $ 31,306,914 $9.80 per share (cost $556,180,582) $ 556,999,723 Mortality and expense risk charge (5,661,706) Receivable from LB for units issued 485,058 Net investment loss 25,645,208 Receivable from LB for annuity reserve adjustment 153,869 REALIZED AND UNREALIZED GAIN Total assets 557,638,650 (LOSS) ON INVESTMENTS: LIABILITIES: Net realized gain on investments 67,201 Payable to LB for mortality and expense Net change in unrealized appreciation risk charge 516,240 or depreciation of investments 3,602,579 Total liabilities 516,240 Net loss on investments 3,669,780 NET ASSETS $ 557,122,410 Net change in net assets resulting from operations $ 29,314,988 NET ASSETS APPLICABLE TO ANNUITY CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 21,672,281 $ 549,489,571 Reserves for contracts in annuity payment period (note 2) 7,632,839 NET ASSETS $ 557,122,410 Unit Value (accumulation net assets divided by accumulation units outstanding) $25.35 Statement of Changes in Net Assets Years Ended December 31, 2001 and 2000 2001 2000 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss $ 25,645,208 $ 24,109,882 Net realized gain on investments 67,201 (881,057) Net change in unrealized appreciation or depreciation of investments 3,602,579 14,451,270 Net change in net assets resulting from operations 29,314,988 37,680,095 UNIT TRANSACTIONS: Proceeds from units issued 80,936,043 63,980,805 Net asset value of units redeemed (48,745,776) (36,217,784) Annuity benefit payments (748,172) (302,284) Adjustments to annuity reserves 60,593 59,252 Transfers from other subaccounts 106,039,038 37,365,577 Transfers to other subaccounts (61,072,360) (55,167,174) Transfers from fixed account 867,951 469,714 Transfers to fixed account (5,197,569) (2,971,832) Net increase in net assets from unit transactions 72,139,748 7,216,274 Net change in net assets 101,454,736 44,896,369 NET ASSETS: Beginning of period 455,667,674 410,771,305 End of period $ 557,122,410 $ 455,667,674 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I LIMITED MATURITY BOND SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 For the period from November 30, 2001 ASSETS: (effective date) to December 31, 2001 Investment in LB Series Fund, Inc. - Limited Maturity Bond Portfolio 1,704,368 shares at net asset value of INVESTMENT INCOME: $9.91 per share (cost $17,030,497) $ 16,894,059 Dividend income $ 43,970 Receivable from LB for units issued 802,854 Mortality and expense risk charge (14,968) Total assets 17,696,913 Net investment loss 29,002 LIABILITIES: Payable to LB for mortality and expense REALIZED AND UNREALIZED GAIN risk charge 14,968 (LOSS) ON INVESTMENTS: Total liabilities 14,968 Net change in unrealized appreciation NET ASSETS $ 17,681,945 or depreciation of investments (136,438) Net loss on investments (136,438) NET ASSETS APPLICABLE TO ANNUITY Net change in net assets resulting CONTRACT OWNERS: from operations ($ 107,436) Contracts in accumulation period, accumulation units outstanding of 1,780,622 $ 17,681,945 NET ASSETS $ 17,681,945 Unit Value (accumulation net assets divided by accumulation units outstanding) $9.93 Statement of Changes in Net Assets For the period from November 30, 2001 (effective date) to December 31, 2001 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss $ 29,002 Net change in unrealized appreciation or depreciation of investments (136,438) Net change in net assets resulting from operations (107,436) UNIT TRANSACTIONS: Proceeds from units issued 16,094,960 Net asset value of units redeemed (4,250) Transfers from other subaccounts 2,540,137 Transfers to other subaccounts (871,153) Transfers from fixed account 29,687 Net increase in net assets from unit transactions 17,789,381 Net change in net assets 17,681,945 NET ASSETS: Beginning of period - End of period $ 17,681,945 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I MONEY MARKET SUBACCOUNT Statement of Assets and Liabilities Statement of Operations December 31, 2001 Year Ended December 31, 2001 ASSETS: Investment in LB Series Fund, Inc. - Money Market INVESTMENT INCOME: Portfolio 234,107,290 shares at net asset value of Dividend income $ 7,664,206 $1.00 per share (cost $234,107,290) $ 234,107,290 Mortality and expense risk charge (2,273,256) Receivable from LB for annuity reserve Net investment income $ 5,390,950 adjustment 36,889 Total assets 234,144,179 LIABILITIES: Payable to LB for units redeemed 142,378 Payable to LB for mortality and expense risk charge 219,010 Total liabilities 361,388 NET ASSETS $ 233,782,791 NET ASSETS APPLICABLE TO ANNUITY CONTRACT OWNERS: Contracts in accumulation period, accumulation units outstanding of 128,732,333 $ 232,537,325 Reserves for contracts in annuity payment period (note 2) 1,245,466 NET ASSETS $ 233,782,791 Unit Value (accumulation net assets divided by accumulation units outstanding) $1.81 Statement of Changes in Net Assets Years Ended December 31, 2001 and 2000 2001 2000 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 5,390,950 $ 6,957,650 UNIT TRANSACTIONS: Proceeds from units issued 113,213,664 98,437,487 Net asset value of units redeemed (30,436,882) (18,004,362) Annuity benefit payments (184,394) (59,294) Adjustments to annuity reserves 10,369 22,570 Transfers from other subaccounts 145,552,290 89,143,281 Transfers to other subaccounts (143,978,591) (166,128,110) Transfers from fixed account 1,913,432 4,673,849 Transfers to fixed account (11,303,895) (9,703,345) Net increase in net assets from unit transactions 74,785,994 (1,617,924) Net change in net assets 80,176,944 5,339,726 NET ASSETS: Beginning of period 153,605,847 148,266,121 End of period $ 233,782,791 $ 153,605,847 The accompanying notes are an integral part of these financial statements. LB VARIABLE ANNUITY ACCOUNT I Notes to Financial Statements (1) ORGANIZATION The LB Variable Annuity Account I (the Variable Account), is registered as a unit investment trust under the Investment Company Act of 1940, and is a separate account of Lutheran Brotherhood (LB). LB offers financial services to Lutherans and is a fraternal benefit society owned by and operated for its members. The Variable Account contains fourteen subaccounts - Opportunity Growth, FTI Small Cap Growth, MFS Mid Cap Growth, Mid Cap Growth, World Growth, FI All Cap, Growth, MFS Investors Growth, TRP Growth Stock, Value, High Yield, Income, Limited Maturity Bond and Money Market - each of which invests in a corresponding portfolio of the LB Series Fund, Inc. (the Fund). The Fund is registered under the Investment Company Act of 1940 as a diversified open-end investment company. Effective January 1, 2002, LB has merged with and into Aid Association for Lutherans (AAL). The Variable Account operates as a separate account of the merged organization. The Variable Account is used to fund only flexible premium deferred variable annuity contracts issued by LB. Under applicable insurance law, the assets and liabilities of the Variable Account are clearly identified and distinguished from the other assets and liabilities of LB. The assets of the Variable Account will not be charged with any liabilities arising out of any other business conducted by LB. (2) SIGNIFICANT ACCOUNTING POLICIES Investments The investments in shares of the Fund are stated at the net asset value of the Fund. The cost of shares sold and redeemed is determined on the average cost method. Dividend distributions received from the Fund are reinvested in additional shares of the Fund and recorded as income by the Variable Account on the ex-dividend date. Federal Income Taxes LB qualifies as a tax-exempt organization under the Internal Revenue Code. Accordingly, no provision for income taxes has been charged against the Variable Account. LB reserves the right to charge for taxes in the future. Annuity Reserves Annuity reserves are computed for currently payable contracts according to the 1983 Table A mortality table and the 2000 IAM mortality table. The assumed interest is 3.5 percent. Changes to annuity reserves are based on actual mortality and risk experience. If the reserves required are less than the original estimated reserve amount held in the Variable Account, the excess is reimbursed to LB. If additional reserves are required, LB reimburses the Variable Account. Other The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 income and expenses during the reporting period. Actual results could differ from those estimates. (3) RELATED PARTY TRANSACTIONS Proceeds received by the Variable Account for units issued represent gross contract premiums received by LB. No charge for sales distribution expense is deducted from premiums received. A surrender charge is deducted by LB if a contract is surrendered in whole or in part during the first six years the contract is in force. The surrender charge is 6% during the first contract year, and decreases by 1% each subsequent contract year. For purposes of the surrender charge calculation, up to 10% of a contract's accumulated value may be excluded from the calculation each year. Surrender charges of $2,679,913, $2,548,133 and $2,145,939 were deducted in 2001, 2000 and 1999, respectively. An annual administrative charge of $30 is deducted on each contract anniversary from the accumulated value of the contract to compensate LB for administrative expenses relating to the contract and the Variable Account. This charge is deducted by redeeming units of the subaccounts of the Variable Account. No such charge is deducted from contracts for which total premiums paid, less surrenders, equals or exceeds $5,000. No administrative charge is payable during the annuity period. Administrative charges of $582,779, $399,546 and $404,492 were deducted in 2001, 2000 and 1999, respectively. A daily charge is deducted from the value of the net assets of the Variable Account to compensate LB for mortality and expense risks assumed in connection with the contract and is equivalent to an annual rate of 1.1% of the average daily net assets of the Variable Account. Mortality and expense risk charges of $40,788,844, $44,323,843 and $33,343,836 were deducted in 2001, 2000 and 1999, respectively. A fixed account investment option is available for Contract Owners of the flexible premium deferred variable annuity. Assets of the fixed account are combined with the general assets of LB and invested by LB as allowed by applicable law. Accordingly, the fixed account assets are not included in the Variable Account financial statements. The asset value of net transfers (to) from the fixed account was ($30,765,319), ($13,072,186) and ($4,931,386) in 2001, 2000 and 1999, respectively. (4) UNIT ACTIVITY Transactions in units (including transfers among subaccounts) were as follows: Subaccounts Opportunity FTI Small Cap MFS Mid Mid Cap World FI All Growth Growth Cap Growth Growth Growth Cap Growth Units outstanding at December 31, 1999 16,400,624 - - 9,407,840 17,359,292 - 27,300,490 Units issued 5,953,840 - - 11,749,504 8,437,919 - 7,360,398 Units redeemed (3,363,875) - - (2,900,545) (3,495,414) - (4,756,783) Units outstanding at December 31, 2000 18,990,589 - - 18,256,799 22,301,797 - 29,904,105 Units issued 3,509,384 440,238 455,982 8,298,179 5,560,662 532,364 6,204,248 Units redeemed (3,567,563) (13,479) (7,865) (4,555,943) (4,613,715) (30,022) (5,699,619) Units outstanding at December 31, 2001 18,932,410 426,759 448,117 21,999,035 23,248,744 502,342 30,408,734 Subaccounts MFS Investors TRP Growth High Limited Money Growth Stock Value Yield Income Maturity Bond Market Units outstanding at December 31, 1999 - - - 21,383,391 18,690,873 - 88,494,861 Units issued - - - 5,487,037 4,636,537 - 114,340,246 Units redeemed - - - (4,884,009) (4,452,823) - (115,906,696) Units outstanding at December 31, 2000 - - - 21,986,419 18,874,587 - 86,928,411 Units issued 488,753 512,764 598,993 4,188,830 7,646,584 1,869,146 149,128,429 Units redeemed (17,743) (8,661) (41,989) (4,933,365) (4,848,890) (88,524) (107,324,507) Units outstanding at December 31, 2001 471,010 504,103 557,003 21,241,884 21,672,281 1,780,622 128,732,333 (5) PURCHASES AND SALES OF INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments in the LB Series Fund, Inc. were as follows: Subaccounts Opportunity FTI Small Cap MFS Mid Cap Mid Cap World FI All Growth Growth Growth Growth Growth Cap Growth For the year ended December 31, 2000 Purchases $39,322,547 $ - $ - $178,314,167 $86,410,688 - $519,310,445 Sales 3,137,307 - - 209,846 1,715,849 - 20,855,278 For the year ended December 31, 2001 Purchases $21,475,479 $4,259,918 $4,408,669 $85,840,058 $44,675,108 $4,847,727 $459,747,601 Sales 9,776,035 - - 6,323,017 10,620,594 - 57,733,255 Subaccounts MFS Investors TRP Growth High Limited Money Growth Stock Value Yield Income Maturity Bond Market For the year ended December 31, 2000 Purchases $ - $ - $ - $106,727,852 $52,490,500 $ - $55,468,874 Sales - - - 18,356,394 21,381,691 - 49,555,022 For the year ended December 31, 2001 Purchases $4,616,950 $4,907,476 $5,334,367 $78,411,611 $107,316,440 $17,030,497 $113,794,635 Sales - 8 - 33,157,371 9,515,170 - 33,022,806 (6) UNIT VALUES A summary of unit values outstanding for variable annuity contracts and the expense ratios, excluding expenses of the underlying fund portfolios, for the year or period ended December 31, 2001, follows. Subaccounts Opportunity FTI Small Cap MFS Mid Cap Mid Cap World FI All Growth Growth Growth Growth Growth Cap Growth Units 18,932,410 426,759 448,117 21,999,035 23,248,744 502,342 30,408,734 Beginning Unit Value $13.24 $10.00(a) $10.00(a) $18.35 $14.12 $10.00(a) $64.49 Ending Unit Value $10.74 $10.54 $10.59 $14.56 $11.03 $10.30 $51.57 Net Assets (in $millions) $205.2 $4.5 $4.7 $322.8 $258.9 $5.2 $1,588.0 Expenses as a % of Average Net Assets (b) 1.10% 1.10%(c) 1.10%(c) 1.10% 1.10% 1.10%(c) 1.10% Total Return (18.93)% 5.40% 5.90% (20.63)% (21.91)% 3.00% (20.03)% Subaccounts MFS Investors TRP Growth High Limited Money Growth Stock Value Yield Income Maturity Bond Market Units 471,010 504,103 557,003 21,241,884 21,672,281 1,780,622 128,732,333 Beginning Unit Value $10.00(a) $10.00(a) $10.00(a) $23.02 $23.88 $10.00(a) $1.76 Ending Unit Value $10.08 $10.15 $10.13 $21.93 $25.35 $9.93 $1.81 Net Assets (in $millions) $4.7 $5.1 $5.6 $472.5 $557.1 $17.7 $233.8 Expenses as a % of Average Net Assets (b) 1.10%(c) 1.10%(c) 1.10%(c) 1.10% 1.10% 1.10%(c) 1.10% Total Return 0.80% 1.54% 1.35% (4.66)% 6.20% (0.70)% 2.86% (a) Commenced operations on November 30, 2001 (b) For the year or period ending December 31, excluding the effect of the expenses of the underlying fund portfolios and charges made directly to contract holder accounts through the redemptionof units. (c) Annualized Comment on Financial Statements of AAL/LB, AAL and LB ------------------------------------------------------------------------------------------ On January 1, 2002, LB merged with and into AAL. The following pages include the audited supplemental consolidated financial statements of AAL/LB as of and for the one-year period ended December 31, 2001, in accordance with accounting principles generally accepted in the United States of America, giving retroactive effect to the merger. Also included are the separate financial statements of AAL and LB as of and for the three years in the period ending December 31, 2001. We represent that there would be no need for a significant adjustment if we were to instead show those separate financial statements as combined financial statements for the same period based on a pooling of interests basis. The financial statements of AAL and LB included in this Prospectus should be considered as bearing only upon the ability of AAL to meet its obligations under the Contracts. The value of the interests of owners and beneficiaries under the Contracts are affected primarily by the investment results of the Subaccounts of the Variable Account. Financial Statements of AAL/LB, AAL and LB -------------------------------------------------------------------------------------------- Set forth on the following pages are the audited financial statements of AAL/LB, AAL and LB.
Aid Association for Lutherans/Lutheran Brotherhood
Supplemental Consolidated Financial Statements
Year Ended December 31, 2001
Report of Independent Auditors
The Board of Directors
Aid Association for Lutherans/Lutheran Brotherhood
We have audited the supplemental consolidated balance sheet of Aid Association for Lutherans/Lutheran Brotherhood (AAL/LB) (formed as
a result of the merger of Lutheran Brotherhood (LB) with and into Aid Association for Lutherans (AAL)) as of December 31, 2001, and
the related supplemental consolidated statement of income, changes in members' equity and cash flows for the year then ended. The
supplemental consolidated financial statements give retroactive effect to the merger of LB with and into AAL on January 1, 2002,
which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated
financial statements. These supplemental financial statements are the responsibility of the management of AAL/LB. Our
responsibility is to express an opinion on these supplemental financial statements based on our audits. We did not audit the
financial statements of LB which statements reflect total assets constituting 49% for 2001 of the related supplemental consolidated
financial statement totals, which reflect total revenues constituting 44% of the related supplemental consolidated financial
statement totals for the year then ended, and which reflect net income constituting approximately (3)% of the related supplemental
consolidated financial statement totals for the year then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included for LB, is based solely on the report of the other
auditors.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the supplemental financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AAL/LB at December 31, 2001, and the consolidated results of
its operations and its cash flows for the year then ended, after giving retroactive effect to the merger of LB with and into AAL as
described in the notes to the supplemental consolidated financial statements, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
Milwaukee, Wisconsin
March 1, 2002
Aid Association for Lutherans/Lutheran Brotherhood Supplemental Consolidated Balance Sheet December 31, 2001 (In millions) Assets Investments: Securities available for sale, at fair value Fixed maturities $ 21,101 Equity securities 1,584 Fixed maturities held to maturity, at amortized cost 1,757 Mortgage loans 5,698 Real estate 121 Certificate loans 1,276 Short-term investments 325 Other invested assets 414 --------- Total investments 32,276 Cash and cash equivalents 1,303 Accrued investment income 346 Deferred acquisition costs 1,934 Assets held in separate accounts 9,777 Other assets 261 --------- Total Assets $ 45,897 ========= Liabilities and Members' Equity Certificate liabilities and accruals: Future certificate benefits $ 10,047 Unpaid claims and claim expenses 167 --------- Total certificate liabilities and accruals 10,214 Certificateholder funds 19,339 Amounts due to brokers 662 Liabilities related to separate accounts 9,726 Other liabilities 609 --------- Total Liabilities 40,550 Members' Equity Retained earnings 5,142 Accumulated other comprehensive income 205 --------- Total Members' Equity 5,347 --------- Total Liabilities and Members' Equity $ 45,897 ========= See accompanying notes. Aid Association for Lutherans/Lutheran Brotherhood Supplemental Consolidated Statement of Income Year Ended December 31, 2001 (In millions) Revenue Insurance premiums $ 1,266 Insurance charges 544 Net investment income 2,136 Net realized investment gains 16 Mutual fund and other revenue 188 --------- Total revenue 4,150 Benefits and expenses Certificate claims and other benefits 865 Increase in certificate reserves 778 Interest credited 1,113 Surplus refunds 344 --------- Total benefits 3,100 Underwriting, acquisition and insurance expenses 546 Amortization of deferred acquisition costs 168 Fraternal benefits and expenses 201 --------- Total expenses 915 --------- Total benefits and expenses 4,015 --------- Net income $ 135 ========= See accompanying notes. Aid Association for Lutherans/Lutheran Brotherhood Supplemental Consolidated Statement of Changes in Members' Equity Year Ended December 31, 2001 (In millions) Accumulated other Total Retained comprehensive members' earnings income Equity ---------- ------------- ----------- Balance at January 1, 2001 $ 5,007 $ 69 $ 5,076 Comprehensive income Net income 135 - 135 Change in unrealized gains/losses on securities available for sale - 136 136 ----------- Total comprehensive income 271 ---------- ------------- ----------- Balance at December 31, 2001 $ 5,142 $ 205 $ 5,347 ========== ============= =========== See accompanying notes. Aid Association for Lutherans/Lutheran Brotherhood Supplemental Consolidated Statement of Cash Flows Year Ended December 31, 2001 (In millions) Operating Activities: Net Income $ 135 Adjustments to reconcile net income to net cash provided by operating activities: Increase in certificate liabilities and accruals 717 Increase in certificateholder funds 965 Increase in deferred acquisition costs (64) Realized gains on investments (16) Provisions for amortization 39 Changes in other assets and liabilities 69 --------- Net cash provided by operating activities 1,845 Investing Activities: Securities available for sale: Purchases - fixed maturities (21,159) Sales, maturities and calls - fixed maturities 20,139 Purchases - equities (1,274) Sales - equities 1,029 Securities held to maturity: Purchases (185) Maturities and calls 382 Mortgage loans funded (926) Mortgage loans repaid 564 Certificate loans, net (27) Other (105) --------- Net cash used in investing activities (1,562) Financing Activities: Universal life and investment contract receipts 1,437 Universal life and investment contract withdrawals (1,366) --------- Net cash provided by financing activities 71 --------- Net increase in cash and cash equivalents 354 Cash and cash equivalents, beginning of year 949 --------- Cash and cash equivalents, end of year $ 1,303 ========= See accompanying notes.
Aid Association for Lutherans/Lutheran Brotherhood
Notes to Supplemental Consolidated Financial Statements
December 31, 2001
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
On January 1, 2002, Lutheran Brotherhood (LB) completed a merger with and into Aid Association for Lutherans (AAL).
The merged organization will begin operating by a new name as soon as possible after the new name is approved by its
members and appropriate regulators. In the meantime, the legal name of the organization is AAL, although it does
business by the trade name Aid Association for Lutherans/Lutheran Brotherhood (AAL/LB). AAL/LB provides its members
with life insurance and retirement products (both fixed and variable), disability income and long-term care
insurance nationwide as well as Medicare supplement insurance in most states. AAL/LB members are served by district
representatives across the country and are offered ancillary services through various AAL/LB subsidiaries and
affiliates.
Basis of Presentation
The accompanying supplemental consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). The merger has been accounted for as a pooling of
interests transaction, and as such the supplemental consolidated financial statements include AAL's and LB's
financial information as if LB had always been part of AAL. The supplemental consolidated financial statements give
retroactive effect to the merger of LB with and into AAL and will become the historical financial statements upon
issuance of financial statements for the period that includes the date of the merger.
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of AAL, its wholly-owned subsidiary, AAL
Holdings Inc., which is the parent company of a broker-dealer, bank, and a real estate development company, as well
as the accounts of LB, its wholly-owned subsidiary, Lutheran Brotherhood Financial Corporation, which is the parent
company of Lutheran Brotherhood Variable Insurance Products Company, a stock life insurance company; an investment
adviser; a broker-dealer; a property and casualty insurance agency; a federal savings bank holding company; and a
federal savings bank. All significant intercompany transactions have been eliminated.
The significant accounting practices used in preparation of the supplemental consolidated financial statements are
summarized as follows:
Investments
Investments in fixed maturities are classified as available for sale or held to maturity according to the holder's
intent. Securities classified in the available for sale category are carried at fair value and consist of those
securities which AAL/LB intends to hold for an indefinite period of time but not necessarily to maturity.
Securities in the held to maturity category are carried at amortized cost and consist of those which AAL/LB has both
the ability and the positive intent to hold to maturity.
On January 1, 2001, AAL/LB adopted Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No. 133 requires AAL/LB to recognize all derivative
instruments on the balance sheet at fair value. Because of AAL/LB's minimal involvement with derivative instruments,
Statement No. 133 did not have a material effect on the net income or retained earnings of AAL/LB. However, as
allowed by Statement No. 133, as of January 1, 2001, AAL/LB transferred $871,000,000 of its held to maturity
securities to the available for sale category. The effect of this transfer on accumulated other comprehensive income
is described in Note 2.
Changes in fair values of available for sale securities, after adjustment of deferred acquisition costs (DAC), are
reported as unrealized gains or losses directly in members' equity as comprehensive income and, accordingly, have no
effect on net income. The DAC offsets to the unrealized gains or losses represent valuation adjustments of DAC that
would have been required as a charge or credit to operations had such unrealized amounts been realized.
The cost of fixed maturity investments classified as available for sale and as held to maturity is adjusted for
amortization of premiums and accretion of discounts calculated using the effective interest method. That
amortization or accretion is included in net investment income.
Mortgage loans generally are stated at their outstanding unpaid principal balances. Interest income is accrued on
the unpaid principal balance. Discounts and premiums are amortized to income using the effective interest method.
Investment real estate is valued at original cost plus capital expenditures less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful life of the property. Real estate
expected to be disposed of is carried at the lower of cost or fair value, less estimated costs to sell.
Certificate loans are generally valued at the aggregate unpaid balances. Other investments, consisting primarily of
real estate joint ventures, are valued on the equity basis.
All investments are carried net of allowances for declines in value that are other than temporary; the changes in
those reserves are reported as realized gains or losses on investments.
Realized gains and losses on the sale of investments and declines in value considered to be other than temporary are
recognized in the Supplemental Consolidated Statement of Income.
Securities loaned under AAL/LB's securities lending agreement are stated in the Supplemental Consolidated Balance
Sheet at amortized cost or fair market value, consistent with AAL/LB's classifications of such securities as held to
maturity or available for sale. AAL/LB measures the fair value of securities loaned against the collateral received
on a daily basis. Additional collateral is obtained as necessary to ensure such transactions are adequately
collateralized.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and include all highly liquid investments purchased with an original maturity of three
months or less.
Deferred Acquisition Costs
Costs which vary with and are primarily attributable to the production of new business have been deferred to the
extent such costs are deemed recoverable from future profits. Such costs include commissions, selling, selection and
certificate issue expenses. For interest sensitive life, participating life and investment products, these costs are
amortized in proportion to estimated margins from interest, mortality and other factors under the contracts.
Amortization of acquisition costs for other certificates is charged to expense in proportion to premium revenue
recognized.
Certificate Liabilities and Accruals
Reserves for future certificate benefits for participating life insurance are net level reserves computed using the
same interest and mortality assumptions as used to compute cash values. Reserves for future certificate benefits for
non-participating life insurance are also net level reserves, computed using assumptions as to mortality, interest
and withdrawal, with a provision for adverse deviation.
Reserves for future certificate benefits for universal life insurance and deferred annuities consist of certificate
account balances before applicable surrender charges.
Reserves for health certificates are generally computed using current pricing assumptions. For Medicare supplement,
disability income and long term care certificates, reserves are computed on a net level basis using realistic
assumptions, with provision for adverse deviation.
Claim reserves are established for future payments not yet due on claims already incurred, relating primarily to
health certificates. These reserves are based on past experience and applicable morbidity tables. Reserves are
continuously reviewed and updated, with any resulting adjustments reflected in current operations.
Separate Accounts
Separate account assets and liabilities reported in the accompanying Supplemental Consolidated Balance Sheet
represent funds that are separately administered for variable annuity, variable immediate annuity and variable
universal life contracts, and for which the certificateholder, rather than AAL/LB, bears the investment risk. Fees
charged on separate account certificateholder deposits are included in insurance charges. Separate account assets,
which are stated at fair value based on quoted market prices, and separate account liabilities are shown separately
in the Supplemental Consolidated Balance Sheet. Operating results of the separate accounts are not included in the
Supplemental Consolidated Statement of Income.
Insurance Premiums and Charges
For life and some annuity contracts other than universal life or investment contracts, premiums are recognized as
revenues over the premium paying period, with reserves for future benefits established on a prorated basis from such
premiums.
Revenues for universal life and investment contracts consist of policy charges for the cost of insurance, policy
administration and surrender charges assessed during the period. Expenses include interest credited to certificate
account balances and benefits incurred in excess of certificate account balances. Certain profits on limited
payment certificates are deferred and recognized over the certificate term.
For health certificates, gross premiums are prorated over the contract term of the certificates with the unearned premium included in
the certificate reserves.
Surplus Refunds
Surplus refunds are recognized over the certificate year and are reflected in the Supplemental Consolidated
Statement of Income. The majority of life insurance certificates, except for universal life and term certificates,
begin to receive surplus refunds at the end of the second certificate year. Surplus refunds are not currently being
paid on interest-sensitive and health insurance certificates. Surplus refund scales are approved annually by
AAL/LB's Board of Directors.
Fraternal Benefits
Fraternal benefits and expenses include all fraternal activities as well as expenses incurred to provide or
administer fraternal benefits, and expenses related to AAL/LB's fraternal character. This includes items such as
benevolences to help meet the needs of people, educational benefits to raise community and family awareness of
issues, as well as various programs and church grants. Expenses, such as those necessary to maintain the branch
system, are also included.
Mutual Fund and Other Revenue
Mutual fund and other revenue consists primarily of concessions and investment advisory fees of AAL/LB's
broker-dealer and investment advisor subsidiaries.
Income Taxes
AAL/LB, a fraternal benefit society, qualifies as a tax-exempt organization under the Internal Revenue Code. Accordingly, income
earned by AAL/LB is generally exempt from taxation. AAL/LB's wholly-owned subsidiary and its subsidiaries are subject to federal and
state taxation; however, the resulting income taxes are not material to AAL/LB's supplemental consolidated financial statements.
Note 2. Investments
AAL/LB's investments in available for sale securities and held to maturity securities are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- (In Millions) Available for sale securities at December 31, 2001: Fixed maturity securities: Loan-backed obligations of U.S. Government corporations and agencies $ 5,334 $ 57 $ (19) $ 5,372 U.S. Treasury securities and non- Loan-backed obligations of U.S. Government corporations and Agencies 670 28 (2) 696 Corporate and other bonds 11,888 318 (204) 12,043 Mortgage & asset-backed securities 2,965 84 (18) 2,990 --------- --------- --------- --------- Total fixed maturity securities 20,857 487 (243) 21,101 Equity securities 1,554 242 (212) 1,584 --------- --------- --------- --------- Total $ 22,411 $ 729 $ (455) $ 22,685 ========= ========= ========= ========= Held to maturity securities at December 31, 2001: Fixed maturity securities: U.S. Treasury securities and non-loan-backed obligations of U.S. Government Corporations and agencies $ 16 $ 1 $ - $ 17 Corporate bonds 1,741 52 (8) 1,785 --------- --------- --------- --------- Total $ 1,757 $ 53 $ (8) $ 1,802 ========= ========= ========= ========= Note 2. Investments (Continued) The amortized cost and estimated fair value of fixed maturity securities at December 31, 2001, 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. Available for Sale Held to Maturity --------------------- -------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- (In Millions) Due in one year or less $ 714 $ 727 $ 108 $ 111 Due after one year through five years 5,234 5,336 771 781 Due after five years through ten years 4,579 4,622 587 611 Due after ten years 2,031 2,054 291 299 --------- --------- --------- --------- Total fixed maturity securities excluding mortgage and asset-backed bonds 12,558 12,739 1,757 1,802 Loan-backed obligations of U.S. Government corporations and agencies 5,334 5,372 - - Mortgage and asset-backed securities 2,965 2,990 - - --------- --------- --------- --------- Total fixed maturity securities $ 20,857 $21,101 $ 1,757 $ 1,802 ========= ========= ========= ========= Major categories of AAL/LB's investment income for the year ended December 31, 2001, are summarized as follows (in millions): Fixed maturity securities $ 1,487 Equity securities 29 Mortgage loans 446 Investment real estate 32 Certificate loans 86 Other invested assets 114 -------- Gross investment income 2,194 Investment expenses 58 -------- Net investment income $ 2,136 ======== Note 2. Investments (Continued) AAL/LB's realized gains and losses on investments for the year ended December 31, 2001, are summarized as follows (in millions): Securities available for sale: Fixed maturity securities: Gross realized gains $ 210 Gross realized losses (221) Equity securities: Gross realized gains 134 Gross realized losses (134) Other investments, net 27 -------- Net realized investment gains $ 16 ======== Net unrealized gains/losses on securities available for sale credited directly to members' equity as accumulated other comprehensive income at December 31, 2001, were as follows (in millions): Fair value adjustment to available for sale securities $ 271 Decrease in deferred acquisition costs (66) -------- Net unrealized gains on available for sale securities $ 205 ======== The change in accumulated other comprehensive income due to unrealized gains/losses on securities available for sale for the year ended December 31, 2001, is as follows (in millions): Fixed maturity securities available for sale $ 396 Effect of transfer of held to maturity securities to available for sale (Note 1) 18 Equity securities available for sale (203) Deferred acquisition costs (75) -------- $ 136 ======== The net change in unrealized gains/losses on securities available for sale is reported net of the reclassification adjustment for the year ended December 31, 2001, as follows (in millions): Unrealized gains/losses on securities available for sale $ 187 Less: reclassification adjustment for realized gains included in net income 51 -------- Change in unrealized gains/losses on securities available for sale $ 136 ======== Note 2. Investments (Continued) AAL/LB invests in mortgage loans, principally involving commercial real estate. Such investments consist of first mortgage liens on completed income producing properties. AAL/LB manages its investments in mortgage loans to limit credit risk by diversifying among various geographic regions and property types. The carrying values of mortgage loans were as follows as of December 31, 2001 (in millions): Mortgage loans: Residential and commercial $ 5,097 Loans to Lutheran Churches 683 -------- Total mortgage loans $ 5,780 ======== The following table presents changes in the allowance for credit losses for the year ended December 31, 2001 (in millions): Balance at beginning of year $ 89 Provisions for credit losses (credit) (7) -------- Balance at end of year $ 82 ======== AAL/LB's investment in mortgage loans includes $96,000,000 of loans that are considered to be impaired at December 31, 2001, for which the related allowance for credit losses are $15,000,000 at December 31, 2001. The average recorded investment in impaired loans during the year ended December 31, 2001, was $103,000,000. AAL/LB recorded interest income, using the accrual method, on impaired loans of $7,000,000 for 2001. Note 3. Deferred Acquisition Costs The changes in deferred acquisition costs for the year ended December 31, 2001, are as follows (in millions): Balance at beginning of year $ 1,945 Capitalization of acquisition costs 232 Acquisition costs amortized (168) Change in unrealized investment gains/losses (75) -------- Balance at end of year $ 1,934 ======== Note 4. Retirement and Savings Plans and Postretirement Benefits Other Than Pensions AAL/LB offers noncontributory defined retirement plans to substantially all home office and field employees. Additionally, AAL/LB provides postretirement benefits in the form of health and life insurance for substantially all retired home office and field personnel. The following tables set forth the amounts recognized in the supplemental consolidated financial statements and the plans' funding status at December 31, 2001 (in millions): Retirement Plans Other Benefits ----------------- -------------- Projected benefit obligation for services rendered to date $ 478 $ 67 Plan assets at fair value 453 - -------- -------- Funded (unfunded) status of the plan $ (25) $ (67) ======== ======== Accrued liability included in consolidated balance sheets $ 7 $ 56 The following summarizes certain assumptions included in the preceding schedules for the year ended December 31, 2001: Retirement Plans Other Benefits ----------------- -------------- Discount rate 7.0-7.5% 7.5% Expected return on plan assets 8.5-9.0% - Rate of compensation increase 5.0% - Health care trend rate - 6.0% Retirement Plans Other Benefits ----------------- -------------- (In millions) Benefit cost $ 6 $ 8 Employer contributions 3 2 Employee contributions - 1 Benefits paid 19 3
At December 31, 2001, $151,000,000 of the retirement plans assets were held on deposit with AAL/LB and invested
primarily in corporate bonds and mortgage loans through a deposit administration fund, which is part of the general
assets of AAL/LB. The related retirement liability of $156,000,000 at December 31, 2001 is included in future
certificate benefits in the Supplemental Consolidated Balance Sheet.
AAL/LB also has noncontributory defined contribution retirement plans (as defined under Internal Revenue Code
section 401(k)) which cover substantially all home office and field employees and a noncontributory non-qualified
deferred compensation plan which covers certain of it general agents.
Note 4. Retirement and Savings Plans and Postretirement Benefits Other Than Pensions (Continued)
At December 31, 2001, approximately $152,000,000 of the defined contribution retirement plans' assets were held by
AAL/LB and the remaining plan assets were held in separate trusts. An accrued liability of $152,000,000 was included
in future certificate benefits at December 31, 2001 for the portion of plan assets held by AAL/LB. Expenses related
to the defined contribution retirement plans for the year ended December 31, 2001 were $15,000,000. Accumulated
vested deferred compensation benefits at December 31, 2001 totaled $71,000,000, and are included in other
liabilities.
Note 5. Synopsis of Statutory Financial Results
The accompanying financial statements differ from those prepared in accordance with statutory accounting practices
prescribed or permitted by regulatory authorities. Effective January 1, 2001, the National Association of Insurance
Commissioner's (NAIC) adopted a revised Accounting Practices and Procedures Manual. Wisconsin and Minnesota
insurance laws and regulations define the NAIC manual as the prescribed method of accounting. The synopsis of
statutory financial results is included to satisfy certain state reporting requirements for fraternals.
The more significant differences in the GAAP-basis financial statements from the statutory-basis financial
statements are as follows: (a) investments in bonds are reported at amortized cost or at fair value with unrealized
holding gains and losses reported as a separate component of members' equity, depending on their designation at
purchase as held to maturity or available for sale, respectively, rather than being valued based on the bond's NAIC
rating; (b) certain acquisition costs of new business are deferred and amortized rather than being charged to
operations as incurred; (c) the liabilities for future certificate benefits and expenses are based on reasonably
conservative estimates of expected mortality, interest, withdrawals and future maintenance and settlement expenses
rather than using statutory rates for mortality and interest; (d) certain assets, principally costs in excess of net
assets acquired, furniture, equipment and agents' debit balances are reported as assets rather than being charged to
members' equity and excluded from the balance sheets; (e) the interest maintenance reserve and asset valuation
reserve are reported as part of members' equity rather than as a liability; and (f) revenues for universal life and
investment-type contracts include mortality, expense and surrender charges levied against the certificateholders'
accounts rather than including as revenues the premiums received on these certificates. Expenses include interest
added to the certificateholders' accounts rather than reserve changes related to the investment portion of these
policies.
Summarized separate company statutory-basis financial information for AAL and LB on an unconsolidated basis is as
follows (in millions):
December 31, 2001 AAL LB --------- ---------- Assets $ 22,435 $ 16,821 ========= ========== Liabilities $ 20,565 $ 15,697 Unassigned funds 1,870 1,124 --------- ---------- Total liabilities and unassigned funds $ 22,435 $ 16,821 ========= ========== Note 5. Synopsis of Statutory Financial Results (Continued) Year ended December 31, 2001 AAL LB --------- ---------- Gain (loss) from operations before net realized capital losses $ 101 $ (61) Net realized capital (losses) (36) (19) --------- ---------- Net gain (loss) from operations 65 (80) Total other changes (11) (14) --------- ---------- Net change in unassigned surplus $ 54 $ (94) ========= ========== AAL and LB are in compliance with the statutory surplus requirements of all states.
Note 6. Fair Value of Financial Instruments
The following methods and assumptions were used in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the accompanying Supplemental Consolidated Balance Sheet for these instruments
approximate their fair values.
Investment Securities
Fair values for fixed maturity securities are based on quoted market prices where available, or are estimated using
values obtained from independent pricing services. All fixed maturity issues are individually priced based on
year-end market conditions, the credit quality of the issuing company, the interest rate and the maturity of the
issue. The fair values for investments in equity securities are based on quoted market prices.
Mortgage Loans
The fair values for mortgage loans are estimated using discounted cash flow analyses, based on interest rates
currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Certificate Loans
The carrying amounts reported in the accompanying Supplemental Consolidated Balance Sheet for these loans are
considered to be reasonable estimates of their fair value.
Separate Accounts
The carrying amounts reported for separate account assets and liabilities approximate their respective fair values.
Financial Liabilities
The fair values for AAL/LB's liabilities under investment-type contracts, such as deferred annuities, variable
annuities, and other liabilities, including supplementary contracts without life contingencies, deferred income
settlement options and refunds on deposit, are estimated to be the cash surrender value payable upon immediate
withdrawal. These amounts are included in certificateholder funds in the accompanying Supplemental Consolidated
Balance Sheet.
Note 6. Fair Value of Financial Instruments (Continued)
The carrying value and estimated fair value of AAL/LB's financial instruments at December 31, 2001, are as follows
(in millions):
Carrying Estimated Value Fair Value --------- ---------- Financial Assets: Fixed maturities $ 22,858 $ 22,903 Equity securities 1,584 1,584 Mortgage loans 5,698 5,968 Cash and cash equivalents 1,303 1,303 Certificate loans 1,276 1,276 Separate account assets 9,777 9,777 Financial Liabilities: Deferred annuities 10,175 10,119 Separate account liabilities 9,726 9,726 Other 1,408 1,404
Note 7. Commitments and Contingent Liabilities
AAL/LB is involved in various lawsuits and contingencies that have arisen from the normal conduct of business. Also,
AAL/LB has been named in civil litigation proceedings alleging inappropriate life insurance sales practices by
AAL/LB, which appear to be similar to claims asserted in class actions brought against many other life insurers.
These matters are sometimes referred to as market conduct lawsuits. AAL/LB believes it has substantial defenses to
these actions and intends to assert them in the courts where the actions were filed. While the ultimate resolution
of such litigation cannot be predicted with certainty at this time, in the opinion of management such matters will
not have a material adverse effect on the financial position or results of AAL/LB.
Contingent liabilities arising from litigation, tax and other matters are not considered material in relation to the
financial position of AAL/LB. AAL/LB has not made any provision in the consolidated financial statements for
liabilities, if any, that might ultimately result from these contingencies.
Under terms of guarantee of a letter of credit issued by local banks, AAL/LB is obligated to advance a maximum of
$45,000,000 if a local civic organization is unable to make timely payments on its debt secured by a letter of
credit from the local banks. AAL/LB's guarantee is secured by the civic organization's assets which include all
funds held by the organization to support the debt and the organization's building. AAL/LB would acquire these
assets in the event of default.
Aid Association for Lutherans
Consolidated Financial Statements
Years ended December 31, 2001, 2000 and 1999
Report of Independent Auditors
The Board of Directors
Aid Association for Lutherans/Lutheran Brotherhood
We have audited the accompanying consolidated balance sheets of Aid Association for Lutherans (AAL) as of December 31, 2001 and 2000,
and the related consolidated statements of income, changes in certificateholders' surplus and cash flows for each of the three years
in the period ended December 31, 2001. These financial statements are the responsibility of AAL's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 consolidated financial
position of AAL at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/Ernst & Young
Milwaukee, Wisconsin
January 23, 2002
Aid Association for Lutherans Consolidated Balance Sheets December 31 2001 2000 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Assets Investments: Securities available for sale, at fair value Fixed maturities $ 13,177 $ 11,281 Equity securities 916 825 Fixed maturities held to maturity, at amortized cost 1,757 2,810 Mortgage loans 3,445 3,092 Real estate 31 45 Certificate loans 510 501 Other invested assets 58 67 --------------------------------------------------------------------------------------------------------------------------------------- Total investments 19,894 18,621 Cash and cash equivalents 350 200 Accrued investment income 211 222 Deferred acquisition costs 755 764 Assets held in separate accounts 2,132 2,164 Other assets 136 141 --------------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 23,478 $ 22,112 ======================================================================================================================================= Liabilities and Certificateholders' Surplus Certificate liabilities and accruals: Future certificate benefits $ 3,447 $ 3,210 Unpaid claims and claim expenses 100 119 --------------------------------------------------------------------------------------------------------------------------------------- Total certificate liabilities and accruals 3,547 3,329 Certificateholder funds 14,755 13,819 Liabilities related to separate accounts 2,132 2,164 Other liabilities 179 176 --------------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 20,613 19,488 Certificateholders' Surplus Accumulated surplus 2,730 2,591 Accumulated other comprehensive income 135 33 --------------------------------------------------------------------------------------------------------------------------------------- Total Certificateholders' Surplus 2,865 2,624 Total Liabilities and Certificateholders' Surplus $ 23,478 $ 22,112 ======================================================================================================================================= See accompanying notes. Aid Association for Lutherans Consolidated Statements of Income Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Revenue Insurance premiums $ 503 $ 470 $ 419 Insurance charges 330 318 307 Net investment income 1,353 1,330 1,266 Net realized investment gains 24 94 103 Mutual fund and other revenue 98 110 96 --------------------------------------------------------------------------------------------------------------------------------------- Total revenue 2,308 2,322 2,191 Benefits and expenses Certificate claims and other benefits 453 431 383 Increase in certificate reserves 240 197 184 Interest credited 859 840 809 Surplus refunds 114 120 115 --------------------------------------------------------------------------------------------------------------------------------------- Total benefits 1,666 1,588 1,491 Underwriting, acquisition and insurance expenses 314 282 269 Amortization of deferred acquisition costs 70 96 86 Fraternal benefits and expenses 119 128 119 --------------------------------------------------------------------------------------------------------------------------------------- Total expenses 503 506 474 Total benefits and expenses 2,169 2,094 1,965 Net income $ 139 $ 228 $ 226 ======================================================================================================================================= See accompanying notes. Aid Association for Lutherans Consolidated Statements of Changes in Certificateholders' Surplus Accumulated other Total Accumulated comprehensive certificateholders' surplus income (loss) surplus --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Balance at January 1, 1999 $ 2,137 $ 411 $ 2,548 Comprehensive loss Net income 226 - 226 Change in unrealized gains/losses on securities available for sale* - (420) (420) Total comprehensive loss (194) --------------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 2,363 (9) 2,354 Comprehensive income Net income 228 - 228 Change in unrealized gains/losses on securities available for sale* - 42 42 Total comprehensive income 270 --------------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 2,591 33 2,624 Comprehensive income Net income 139 - 139 Change in unrealized gains/losses on securities available for sale* - 102 102 Total comprehensive income 241 --------------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 2,730 $ 135 $ 2,865 ======================================================================================================================================= * Net change in unrealized gains/losses on securities available for sale is reported net of reclassification adjustment calculated as follows: 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- Unrealized gains/losses on securities available for sale $ 161 $ 214 $ (237) Less: reclassification adjustment for realized gains included in net income 59 172 183 --------------------------------------------------------------------------------------------------------------------------------------- Change in unrealized gains/losses on securities available for sale $ 102 $ 42 $ (420) ======================================================================================================================================= See accompanying notes. Aid Association for Lutherans Consolidated Statements of Cash Flows Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Operating Activities: Net Income $ 139 $ 228 $ 226 Adjustments to reconcile net income to net cash provided by operating activities: Increase in certificate liabilities and accruals 218 221 157 Increase in certificateholder funds 773 505 487 Increase in deferred acquisition costs (41) (17) (24) Realized gains on investments (24) (94) (103) Provisions for amortization 15 18 19 Changes in other assets and liabilities 10 (12) (1) --------------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,090 849 761 Investing Activities: Securities available for sale: Purchases - fixed maturities (6,733) (3,518) (3,839) Sales - fixed maturities 4,339 1,625 1,449 Maturities and calls - fixed maturities 1,621 790 972 Purchases - equities (948) (768) (580) Sales - equities 743 732 636 Securities held to maturity: Purchases (185) (156) (82) Maturities and calls 382 616 730 Mortgage loans funded (613) (184) (249) Mortgage loans repaid 267 266 266 Certificate loans, net (9) (7) 6 Other 33 (74) (41) --------------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,103) (678) (732) Financing Activities: Universal life and investment contract receipts 1,220 1,045 1,028 Universal life and investment contract withdrawals (1,057) (1,259) (1,046) --------------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 163 (214) (18) Net increase (decrease) in cash and cash equivalents 150 (43) 11 Cash and cash equivalents, beginning of year 200 243 232 --------------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 350 $ 200 $ 243 ======================================================================================================================================= See accompanying notes.
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
On January 1, 2002, Aid Association for Lutherans (AAL) completed a merger with Lutheran Brotherhood, a Minnesota-domiciled fraternal
benefit society (see Note 8). AAL provides its members with life insurance and retirement products (both fixed and variable),
disability income and long-term care insurance nationwide as well as Medicare supplement insurance in most states. AAL members are
served by district representatives across the country and are offered ancillary services through various AAL subsidiaries and
affiliates. Mutual funds are offered to members by AAL Capital Management Corporation (CMC), and banking and trust services are
available to members and the general public by AAL Bank & Trust, FSB (AALBT). CMC and AALBT are wholly-owned by AAL Holdings Inc.,
AAL's wholly-owned subsidiary.
Basis of Presentation
The accompanying consolidated financial statements of AAL and its wholly-owned subsidiary have been prepared in accordance with
accounting principles generally accepted in the United States ("GAAP").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of AAL, its wholly-owned subsidiary, AAL Holdings Inc., and its
wholly-owned subsidiaries, including CMC, AALBT and North Meadows Investment Ltd. All significant intercompany transactions have
been eliminated.
The significant accounting practices used in preparation of the consolidated financial statements are summarized as follows:
Investments
Investments in fixed maturities are classified as available for sale or held to maturity according to the holder's intent.
Securities classified in the available for sale category are carried at fair value and consist of those securities which AAL intends
to hold for an indefinite period of time but not necessarily to maturity. Securities in the held to maturity category are carried at
amortized cost and consist of those which AAL has both the ability and the positive intent to hold to maturity.
On January 1, 2001, AAL adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities". Statement No. 133 requires AAL to recognize all derivative instruments on the balance sheet at fair value.
Because of AAL's minimal involvement with derivative instruments, Statement No. 133 did not have a material effect on the net income
or accumulated surplus of AAL. However, as allowed by Statement No. 133, as of January 1, 2001, AAL transferred $871,000,000 of its
held to maturity securities to the available for sale category. The effect of this transfer on accumulated other comprehensive
income is described in Note 2.
Note 1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
Changes in fair values of available for sale securities, after adjustment of deferred acquisition costs (DAC), are reported as
unrealized gains or losses directly in certificateholders' surplus as comprehensive income and, accordingly, have no effect on net
income. The DAC offsets to the unrealized gains or losses represent valuation adjustments of DAC that would have been required as a
charge or credit to operations had such unrealized amounts been realized.
The cost of fixed maturity investments classified as available for sale and as held to maturity is adjusted for amortization of
premiums and accretion of discounts calculated using the effective interest method. That amortization or accretion is included in net
investment income.
Mortgage loans generally are stated at their outstanding unpaid principal balances. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to income using the effective interest method.
Investment real estate is valued at original cost plus capital expenditures less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful life of the property. Real estate expected to be disposed of is carried at
the lower of cost or fair value, less estimated costs to sell.
Certificate loans are generally valued at the aggregate unpaid balances. Other investments, consisting of limited partnerships, are
valued on the equity basis.
All investments are carried net of allowances for declines in value that are other than temporary; the changes in those reserves are
reported as realized gains or losses on investments.
Realized gains and losses on the sale of investments and declines in value considered to be other than temporary are recognized in
the Consolidated Statements of Income on the specific identification basis.
Securities loaned under AAL's securities lending agreement are stated in the Consolidated Balance Sheets at amortized cost or fair
market value, consistent with AAL's classifications of such securities as held to maturity or available for sale. AAL measures the
fair value of securities loaned against the collateral received on a daily basis. Additional collateral is obtained as necessary to
ensure such transactions are adequately collateralized.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and include all highly liquid investments purchased with an original maturity of three
months or less.
Deferred Acquisition Costs
Costs which vary with and are primarily attributable to the production of new business have been deferred to the extent such costs
are deemed recoverable from future profits. Such costs include commissions, selling, selection and certificate issue expenses. For
interest sensitive life, participating life and investment products, these costs are amortized in proportion to estimated margins
from interest, mortality and other factors under the contracts. Amortization of acquisition costs for other certificates is charged
to expense in proportion to premium revenue recognized.
Note 1. Nature of Operations and Significant Accounting Policies (continued)
Certificate Liabilities and Accruals
Reserves for future certificate benefits for participating life insurance are net level reserves computed using the same interest and
mortality assumptions as used to compute cash values. Reserves for future certificate benefits for non-participating life insurance
are also net level reserves, computed using assumptions as to mortality, interest and withdrawal, with a provision for adverse
deviation. Interest assumptions generally range from 2.5% to 4.0% for participating life insurance and from 7.5% to 9.6% for
non-participating life insurance.
Reserves for future certificate benefits for universal life insurance and deferred annuities consist of certificate account balances
before applicable surrender charges. The average interest rate credited to account balances in 2001 was 7.0% for universal life, 5.5%
for portfolio-average deferred annuities, and ranged from 4.6% to 6.9% for investment generation deferred annuities.
Reserves for health certificates are generally computed using current pricing assumptions. For Medicare supplement, disability income
and long term care certificates, reserves are computed on a net level basis using realistic assumptions, with provision for adverse
deviation.
Claim reserves are established for future payments not yet due on claims already incurred, relating primarily to health
certificates. These reserves are based on past experience and applicable morbidity tables. Reserves are continuously reviewed and
updated, with any resulting adjustments reflected in current operations.
Separate Accounts
Separate account assets and liabilities reported in the accompanying Consolidated Balance Sheets represent funds that are separately
administered for variable annuity, variable immediate annuity and variable universal life contracts, and for which the
certificateholder, rather than AAL, bears the investment risk. Fees charged on separate account certificateholder deposits are
included in insurance charges. Separate account assets, which are stated at fair value based on quoted market prices, and separate
account liabilities are shown separately in the Consolidated Balance Sheets. Operating results of the separate accounts are not
included in the Consolidated Statements of Income.
Insurance Premiums and Charges
For life and some annuity contracts other than universal life or investment contracts, premiums are recognized as revenues over the
premium paying period, with reserves for future benefits established on a prorated basis from such premiums.
Revenues for universal life and investment contracts consist of policy charges for the cost of insurance, policy administration and
surrender charges assessed during the period. Expenses include interest credited to certificate account balances and benefits
incurred in excess of certificate account balances. Certain profits on limited payment certificates are deferred and recognized over
the certificate term.
For health certificates, gross premiums are prorated over the contract term of the certificates with the unearned premium included in
the certificate reserves.
Note 1. Nature of Operations and Significant Accounting Policies (continued)
Surplus Refunds
Surplus refunds are recognized over the certificate year and are reflected in the Consolidated Statements of Income. The majority of
life insurance certificates, except for universal life and term certificates, begin to receive surplus refunds at the end of the
second certificate year. Surplus refunds are not currently being paid on interest-sensitive and health insurance certificates.
Surplus refund scales are approved annually by AAL's Board of Directors.
Fraternal Benefits
Fraternal benefits and expenses include all fraternal activities as well as expenses incurred to provide or administer fraternal
benefits, and expenses related to AAL's fraternal character. This includes items such as benevolences to help meet the needs of
people, educational benefits to raise community and family awareness of issues, as well as various programs and church grants.
Expenses, such as those necessary to maintain the branch system, are also included.
Mutual Fund and Other Revenue
Mutual fund and other revenue consists primarily of concessions and investment advisory fees of CMC.
Income Taxes
AAL, a fraternal benefit society, qualifies as a tax-exempt organization under the Internal Revenue Code. Accordingly, income earned
by AAL is generally exempt from taxation. AAL's wholly-owned subsidiary and its subsidiaries are subject to federal and state
taxation; however, the resulting income taxes are not material to AAL's consolidated financial statements.
Reclassifications
Certain 2000 and 1999 amounts have been reclassified to conform with their 2001 presentation.
Note 2. Investments
AAL's investments in available for sale securities and held to maturity securities are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Available for sale securities at December 31, 2001: Fixed maturity securities: Loan-backed obligations of U.S. Government corporations and agencies $ 3,253 $ 25 $ (14) $ 3,264 Obligations of other governments, states and political subdivisions 43 3 - 46 Corporate bonds 7,434 169 (90) 7,513 Mortgage & asset-backed securities 2,303 66 (15) 2,354 --------------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities 13,033 263 (119) 13,177 Equity securities 896 146 (126) 916 --------------------------------------------------------------------------------------------------------------------------------------- Total $ 13,929 $ 409 $ (245) $ 14,093 ======================================================================================================================================= Held to maturity securities at December 31, 2001: Fixed maturity securities: U.S. Treasury securities and non-loan-backed obligations of U.S. Government corporations and agencies $ 16 $ 1 $ - $ 17 Corporate bonds 1,741 52 (8) 1,785 --------------------------------------------------------------------------------------------------------------------------------------- Total $ 1,757 $ 53 $ (8) $ 1,802 ======================================================================================================================================= Note 2. Investments (continued) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Available for sale securities at December 31, 2000: Fixed maturity securities: Loan-backed obligations of U.S. Government corporations and agencies $ 2,431 $ 14 $ (23) $ 2,422 Obligations of other governments, states and political subdivisions 17 - - 17 Corporate bonds 7,216 91 (224) 7,083 Mortgage & asset-backed securities 1,734 31 (6) 1,759 --------------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities 11,398 136 (253) 11,281 Equity securities 696 175 (46) 825 --------------------------------------------------------------------------------------------------------------------------------------- Total $12,094 $ 311 $ (299) $ 12,106 ======================================================================================================================================= Held to maturity securities at December 31, 2000: Fixed maturity securities: U.S. Treasury securities and non-loan-backed obligations of U.S. Government corporations and agencies $ 143 $ 7 $ - $ 150 Loan-backed obligations of U.S. Government corporations and agencies 107 2 - 109 Obligations of other governments, states and political subdivisions 39 - - 39 Corporate bonds 2,214 53 (21) 2,246 Mortgage & asset-backed securities 307 6 (1) 312 --------------------------------------------------------------------------------------------------------------------------------------- Total $ 2,810 $ 68 $ (22) $ 2,856 ======================================================================================================================================= Note 2. Investments (continued) The amortized cost and estimated fair value of fixed maturity securities at December 31, 2001, 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. Available for Sale Held to Maturity --------------------------------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Due in one year or less $ 572 $ 580 $ 108 $ 111 Due after one year through five years 3,899 3,959 771 781 Due after five years through ten years 2,668 2,679 587 611 Due after ten years 338 341 291 299 --------------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities excluding mortgage and asset-backed bonds 7,477 7,559 1,757 1,802 Loan-backed obligations of U.S. Government corporations and agencies 3,253 3,264 - - Mortgage and asset-backed securities 2,303 2,354 - - --------------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities $13,033 $13,177 $ 1,757 $ 1,802 ======================================================================================================================================= Major categories of AAL's investment income are summarized as follows: Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Fixed maturity securities $ 998 $ 1,001 $ 942 Equity securities 13 21 13 Mortgage loans 265 259 270 Investment real estate 8 10 11 Certificate loans 36 35 35 Other invested assets 41 13 5 --------------------------------------------------------------------------------------------------------------------------------------- Gross investment income 1,361 1,339 1,276 Investment expenses 8 9 10 --------------------------------------------------------------------------------------------------------------------------------------- Net investment income $ 1,353 $ 1,330 $ 1,266 ======================================================================================================================================= Note 2. Investments (continued) AAL's realized gains and losses on investments are summarized as follows: Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Securities available for sale: Fixed maturity securities: Gross realized gains $ 96 $ 17 $ 14 Gross realized losses (90) (45) (18) Equity securities: Gross realized gains 101 171 152 Gross realized losses (102) (76) (62) Other investments, net 19 27 17 --------------------------------------------------------------------------------------------------------------------------------------- Net realized investment gains $ 24 $ 94 $ 103 ======================================================================================================================================= Net unrealized gains/losses on securities available for sale credited directly to certificateholders' surplus as accumulated other comprehensive income (loss) were as follows: December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Fair value adjustment to available for sale securities $ 164 $ 12 $ (90) Increase (decrease) in deferred acquisition costs (29) 21 81 --------------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on available for sale securities $ 135 $ 33 $ (9) ======================================================================================================================================= The change in accumulated other comprehensive income (loss) due to unrealized gains/losses on securities available for sale is as follows: Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Fixed maturity securities available for sale $ 243 $ 257 $ (527) Effect of transfer of held to maturity securities to available for sale (Note 1) 18 - - Equity securities available for sale (109) (155) (9) Deferred acquisition costs (50) (60) 116 --------------------------------------------------------------------------------------------------------------------------------------- $ 102 $ 42 $ (420) ======================================================================================================================================= Note 2. Investments (continued) AAL invests in mortgage loans, principally involving commercial real estate. Such investments consist of first mortgage liens on completed income producing properties. AAL manages its investments in mortgage loans to limit credit risk by diversifying among various geographic regions and property types as follows as of December 31, 2001: Principal Percent --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Geographic Region: South Atlantic $ 1,091 30.9 Pacific 1,018 28.8 Midwest 813 23.1 Other 605 17.2 --------------------------------------------------------------------------------------------------------------------------------------- Total Mortgage Loans $ 3,527 100.0 ======================================================================================================================================= Property Type: Industrial $ 1,062 30.1 Office 799 22.7 Retail 452 12.8 Residential 340 9.6 Church 288 8.2 Other 586 16.6 --------------------------------------------------------------------------------------------------------------------------------------- Total Mortgage Loans $ 3,527 100.0 ======================================================================================================================================= The following table presents changes in the allowance for credit losses: Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Balance at January 1 $ 89 $ 107 $ 118 Provisions for credit losses (credit) (7) (18) (11) --------------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 $ 82 $ 89 $ 107 ======================================================================================================================================= AAL's investment in mortgage loans includes $96,000,000 and $109,000,000 of loans that are considered to be impaired at December 31, 2001 and 2000, respectively, for which the related allowance for credit losses are $15,000,000 and $16,000,000 at December 31, 2001 and 2000, respectively. The average recorded investment in impaired loans during the years ended December 31, 2001, 2000, and 1999, was $103,000,000, $134,000,000, and $192,000,000, respectively. AAL recorded interest income, using the accrual method, on impaired loans of $7,000,000, $8,000,000 and $14,000,000 for 2001, 2000 and 1999, respectively. Note 3. Deferred Acquisition Costs The changes in deferred acquisition costs are as follows: Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Balance at beginning of year $ 764 $ 807 $ 667 Acquisition costs deferred: Commissions 79 83 81 Other costs 32 30 29 --------------------------------------------------------------------------------------------------------------------------------------- Total deferred 111 113 110 Acquisition costs amortized (70) (96) (86) --------------------------------------------------------------------------------------------------------------------------------------- Increase in deferred acquisition costs 41 17 24 Change related to unrealized gains/losses on fixed maturity investments recorded directly to certificateholders' surplus as comprehensive income (loss) (50) (60) 116 --------------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) (9) (43) 140 Balance at end of year $ 755 $ 764 $ 807 ======================================================================================================================================= Note 4. Retirement and Savings Plans and Postretirement Benefits Other Than Pensions AAL offers a noncontributory defined retirement plan and a contributory savings plan to substantially all home office and field employees. The savings plan is defined under the Internal Revenue Code section 401(k) as a profit sharing plan that allows participant contributions on a before-tax basis as well as an after-tax basis. AAL also provides postretirement benefits in the form of health and life insurance for substantially all retired home office and field personnel. The following tables set forth the amounts recognized in AAL's financial statements and the plans' funding status. Retirement Plans Other Benefits December 31 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Projected benefit obligation for services rendered to date $ 317 $ 298 $ 67 $ 63 Plan assets at fair value 302 330 - - --------------------------------------------------------------------------------------------------------------------------------------- Funded (unfunded) status of the plan $ (15) $ 32 $ (67) $ (63) ======================================================================================================================================= Accrued liability included in consolidated balance sheets $ 12 $ 10 $ 56 $ 50 Note 4. Retirement and Savings Plans and Postretirement Benefits Other Than Pensions (continued) The following summarizes certain assumptions included in the preceding schedule: Retirement Plans Other Benefits ---------------------- --------------------- Years Ended December 31 2001 2000 1999 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- Discount rate 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Expected return on plan assets 9.0 9.0 9.0 - - - Rate of compensation increase 5.0 5.0 5.0 - - - Health care trend rate - - - 6.0 6.0 6.0 Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Savings Plan Benefit cost $ - $ - $ - Employer contributions 6 5 5 Employee contributions 20 19 18 Benefits paid 17 25 18 Retirement Plans Benefit cost $ 2 $ - $ 4 Employer contributions - - - Employee contributions - - - Benefits paid 13 11 11 Other Benefits Benefit cost $ 8 $ 9 $ 4 Employer contributions 2 3 - Employee contributions 1 1 - Benefits paid 3 4 2
Note 5. Synopsis of Statutory Financial Results
The accompanying financial statements differ from those prepared in accordance with statutory accounting practices prescribed or
permitted by regulatory authorities. Prior to January 1, 2001, "prescribed" statutory accounting practices were interspersed
throughout state insurance laws and regulations, the National Association of Insurance Commissioner's ("NAIC") Accounting Practices
and Procedures Manual and a variety of other NAIC publications. "Permitted" statutory accounting practices encompassed all
accounting practices that were not prescribed. Effective January 1, 2001, the NAIC adopted a revised Accounting Practices and
Procedures Manual that was updated in a process referred to as Codification. Wisconsin insurance laws and regulations define the NAIC
manual as the prescribed method of accounting. The revised NAIC manual has changed, to some extent, prescribed statutory accounting
practices and resulted in changes to the accounting practices that AAL uses to prepare its statutory-basis financial statements. The
cumulative effect of changes in accounting principles due to Codification on AAL's statutory-basis capital and surplus as of January
1, 2001, was an increase of $25,000,000.
The more significant differences in the GAAP-basis financial statements from the statutory-basis financial statements are as
follows: (a) investments in bonds are reported at amortized cost or at fair value with unrealized holding gains and losses reported
as a separate component of certificateholders' surplus, depending on their designation at purchase as held to maturity or available
for sale, respectively, rather than being valued based on the bond's NAIC rating; (b) certain acquisition costs of new business are
deferred and amortized rather than being charged to operations as incurred; (c) the liabilities for future certificate benefits and
expenses are based on reasonably conservative estimates of expected mortality, interest, withdrawals and future maintenance and
settlement expenses rather than using statutory rates for mortality and interest; (d) certain assets, principally costs in excess of
net assets acquired, furniture, equipment and agents' debit balances are reported as assets rather than being charged to
certificateholders' surplus and excluded from the balance sheets; (e) the interest maintenance reserve and asset valuation reserve
are reported as part of certificateholders' surplus rather than as a liability; and (f) revenues for universal life and
investment-type contracts include mortality, expense and surrender charges levied against the certificateholders' accounts rather
than including as revenues the premiums received on these certificates. Expenses include interest added to the certificateholders'
accounts rather than reserve changes related to the investment portion of these policies. Summarized statutory-basis financial
information for AAL on an unconsolidated basis is as follows:
December 31 2001 2000 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Assets $ 22,435 $ 21,502 ======================================================================================================================================= Liabilities $ 20,565 $ 19,685 Unassigned funds 1,870 1,817 --------------------------------------------------------------------------------------------------------------------------------------- Total liabilities and unassigned funds $ 22,435 $ 21,502 ======================================================================================================================================= Note 5. Synopsis of Statutory Financial Results (continued) Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Premium income and certificate proceeds $ 1,719 $ 1,639 $ 1,651 Net investment income 1,335 1,321 1,256 Other income 59 66 66 --------------------------------------------------------------------------------------------------------------------------------------- Total income 3,113 3,026 2,973 Certificateholders' benefits 1,393 1,566 1,292 Reserve increase 887 503 583 Interest & adjustments on certificates and deposit-type contracts 68 42 37 Surplus refunds 112 121 117 Commissions and operating costs 418 411 402 Other 134 280 374 --------------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 3,012 2,923 2,805 Net gain from operations 101 103 168 Net realized capital gains (losses) (36) 66 88 --------------------------------------------------------------------------------------------------------------------------------------- Net income $ 65 $ 169 $ 256 ======================================================================================================================================= AAL is in compliance with the statutory surplus requirements of all states.
Note 6. Fair Value of Financial Instruments
The following methods and assumptions were used in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the accompanying Consolidated Balance Sheets for these instruments approximate their fair values.
Investment Securities
Fair values for fixed maturity securities are based on quoted market prices where available, or are estimated using values obtained
from independent pricing services. All fixed maturity issues are individually priced based on year-end market conditions, the credit
quality of the issuing company, the interest rate and the maturity of the issue. The fair values for investments in equity securities
are based on quoted market prices.
Mortgage Loans
The fair values for mortgage loans are estimated using discounted cash flow analyses, based on interest rates currently being offered
for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the
calculations.
Note 6. Fair Value of Financial Instruments (continued)
Certificate Loans
The carrying amounts reported in the accompanying Consolidated Balance Sheets for these loans are considered to be reasonable
estimates of their fair value.
Separate Accounts
The fair values for separate account assets are based on quoted market prices.
Financial Liabilities
The fair values for AAL's liabilities under investment-type contracts, such as deferred annuities, variable annuities, and other
liabilities, including supplementary contracts without life contingencies, deferred income settlement options and refunds on deposit,
are estimated to be the cash surrender value payable upon immediate withdrawal. These amounts are included in certificateholder funds
in the accompanying Consolidated Balance Sheets.
The carrying value and estimated fair value of AAL's financial instruments are as follows:
2001 2000 --------------------------------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------------------------------------------------------------------------------------------------------------------------------- (In Millions) Financial Assets: Fixed maturities $ 14,934 $ 14,979 $ 14,091 $ 14,137 Equity securities 916 916 825 825 Mortgage loans 3,445 3,529 3,092 3,393 Cash and cash equivalents 350 350 200 200 Certificate loans 510 510 501 501 Separate account assets 2,132 2,132 2,164 2,164 Financial Liabilities: Deferred annuities 7,718 7,699 7,398 7,368 Separate account liabilities 2,132 2,132 2,164 2,164 Other 795 791 723 719
Note 7. Contingent Liabilities
AAL is involved in various lawsuits and contingencies that have arisen from the normal conduct of business. Contingent liabilities
arising from litigation, tax and other matters are not considered material in relation to the financial position of AAL. AAL has not
made any provision in the consolidated financial statements for liabilities, if any, that might ultimately result from these
contingencies.
Under terms of guarantee of a letter of credit issued by local banks, AAL is obligated to advance a maximum of $45,000,000 if a local
civic organization is unable to make timely payments on its debt secured by a letter of credit from the local banks. AALguarantee is
secured by the civic organization's assets which include all funds held by the organization to support the debt and the
organization's building. AAL would acquire these assets in the event of default.
Note 8. Subsequent Event
On January 1, 2002, AAL completed a merger with Lutheran Brotherhood, a Minnesota-domiciled fraternal benefit society, pursuant to an
agreement and plan of merger dated June 27, 2001. The merger will be accounted for as a pooling of interests transaction, and as
such, future consolidated financial statements will include Lutheran Brotherhood's financial data as if Lutheran Brotherhood had
always been part of AAL.
The following unaudited pro forma combined financial data is presented for informational purposes only. It is not necessarily
indicative of the results of operations or of the financial position that would have occurred had the merger been completed during
the periods or as of the date for which the pro forma data is presented. It is also not necessarily indicative of the combined
company's future results of operations or financial position.
Unaudited Pro forma Combined Statements of Income Data (in millions):
Years ended December 31 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------------- Revenue $ 4,150 $ 4,144 $ 3,944 Net income 135 356 373 Unaudited Pro forma Combined Balance Sheet Data (in millions): December 31 2001 2000 --------------------------------------------------------------------------------------------------------------------------------------- Total assets $ 45,895 $ 44,835 Total certificateholders' surplus 5,343 5,076 --------------------------------------------------------------------------------------------------------------------------------------
[PricewaterhouseCoopers LLP Logo]
PricewaterhouseCoopers LLP
650 Third Avenue South
Suite 1300
Minneapolis MN 55402-4333
Telephone (612) 596 6000
Facsimile (612) 373 7160
Report of Independent Accountants
To the Board of Directors and Members of
Aid Association for Lutherans/Lutheran Brotherhood:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of members' equity
and of cash flows present fairly, in all material respects, the financial position of Lutheran Brotherhood (the Society) and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Society's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
As described more fully in Note 14 to the financial statements, on January 1, 2002, Lutheran Brotherhood merged with and into Aid
Association for Lutherans.
/s/PricewaterhouseCoopers LLP
March 1, 2002
Lutheran Brotherhood Consolidated Balance Sheet December 31, 2001 and 2000 (Dollars in millions) Assets 2001 2000 Investments: Fixed income securities available for sale, at fair value $ 7,924 $ 7,374 Equity securities available for sale, at fair value 668 722 Mortgage loans 2,253 2,236 Real estate 90 65 Loans to contractholders 766 748 Short-term investments 325 290 Other invested assets 330 223 -------- -------- Total investments 12,356 11,658 Cash and cash equivalents 953 749 Deferred policy acquisition costs 1,179 1,181 Investment income due and accrued 135 137 Other assets 151 156 Separate account assets 7,645 8,842 -------- -------- Total assets $ 22,419 $ 22,723 -------- -------- Liabilities and Members' Equity Liabilities: Contract reserves $ 6,489 $ 5,988 Contractholder funds 4,584 4,484 Benefits in the process of payment 67 63 Dividends payable 111 117 Amounts due to brokers 660 413 Other liabilities 432 364 Separate account liabilities 7,594 8,842 -------- -------- Total liabilities 19,937 20,271 -------- -------- Members' equity: Accumulated other comprehensive income 70 36 Retained earnings 2,412 2,416 -------- -------- Total members' equity 2,482 2,452 -------- -------- Total liabilities and members' equity $22,419 $22,723 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. Lutheran Brotherhood Consolidated Statement of Operations For the years ended December 31, 2001, 2000 and 1999 (Dollars in millions) 2001 2000 1999 Revenues: Premiums $ 724 $ 667 $ 618 Net investment income 783 799 748 Net realized investment (losses) gains (8) 16 87 Contract charges 214 211 189 Annuity considerations and other income 129 129 111 -------- -------- -------- Total revenues 1,842 1,822 1,753 Benefits and other deductions: Net additions to contract reserves 538 462 420 Contractholder benefits 666 643 612 Dividends 230 230 217 Commissions and operating expenses 236 223 213 Amortization of deferred policy acquisition costs 98 48 66 Fraternal activities 82 79 77 -------- -------- -------- Total benefits and other deductions 1,850 1,685 1,605 -------- -------- -------- Income (loss) before income taxes (8) 137 148 Provision for (Benefit from) income taxes (4) 9 1 -------- -------- -------- Net income (loss) $ (4) $ 128 $ 147 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. Lutheran Brotherhood Consolidated Statement of Members' Equity For the years ended December 31, 2001, 2000 and 1999 (Dollars in millions) Accumulated Other Comprehensive Income (Loss) --------------------------- Unrealized Unrealized Gains/Losses Total Comprehensive Gains/Losses Acquisition Retained Members' Income Investments Costs Earnings Equity Balance at December 31, 1998 $ 479 $ (110) $ 2,141 $ 2,510 Comprehensive income: Net income $ 147 - - 147 147 Other comprehensive income (loss) (353) (527) 174 - (353) -------- -------- -------- -------- -------- Total comprehensive loss $ (206) ======== Balance at December 31, 1999 (48) 64 2,288 2,304 Comprehensive income: Net income $ 128 - - 128 128 Other comprehensive income (loss) 20 96 (76) - 20 -------- -------- -------- -------- -------- Total comprehensive income $ 148 ======== Balance at December 31, 2000 48 (12) 2,416 2,452 Comprehensive income: Net loss $ (4) - - (4) (4) Other comprehensive income (loss) 34 59 (25) - 34 -------- -------- -------- -------- -------- Total comprehensive income $ 30 ======== Balance at December 31, 2001 $ 107 $ (37) $ 2,412 $ 2,482 ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. Lutheran Brotherhood Consolidated Statement of Cash Flows For the years ended December 31, 2001, 2000 and 1999 (Dollars in millions) 2001 2000 1999 Cash flows from operating activities: Net income (loss) $ (4) $ 128 $ 147 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 17 10 3 Deferred policy acquisition costs (23) (98) (64) Equity in earnings of other invested assets 7 (8) (5) Net realized investment losses (gains) 8 (16) (87) Change in operating assets and liabilities: Loans to contractholders (18) (27) (22) Other assets (9) (31) (58) Contract reserves and contractholder funds 601 382 371 Other liabilities 66 63 73 -------- -------- -------- Total adjustments 649 275 211 -------- -------- -------- Net cash provided by operating activities 645 403 358 -------- -------- -------- Cash flows from investing activities: Proceeds from investments sold, matured or repaid: Fixed income securities available for sale 14,179 7,252 9,768 Equity securities available for sale 286 430 564 Mortgage loans 297 184 228 Short-term investments 678 523 799 Other invested assets 24 376 133 Costs of investments acquired: Fixed income securities available for sale (14,426) (8,076) (9,869) Equity securities available for sale (326) (320) (514) Mortgage loans (313) (317) (358) Short-term investments (707) (598) (599) Other invested assets (83) (109) (64) Investment in separate accounts (50) - - -------- -------- -------- Net cash (used in) provided by investing activities (441) (655) 88 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 204 (252) 446 Cash and cash equivalents, beginning of year 749 1,001 555 -------- -------- -------- Cash and cash equivalents, end of year $ 953 $ 749 $ 1,001 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
Lutheran Brotherhood
Notes to Consolidated Financial Statements
(Dollars in millions)
Nature of Operations and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Lutheran Brotherhood (the Society), a fraternal
benefit organization offering life insurance and related financial service products as well as fraternal benefits for Lutherans
throughout the United States. Also included in the accounts of the Society are its wholly owned subsidiary, Lutheran Brotherhood
Financial Corporation (LBFC), which is the parent company of Lutheran Brotherhood Variable Insurance Products Company (LBVIP), a
stock life insurance company; an investment adviser; a broker-dealer; a property and casualty insurance agency; a federal savings
bank holding company; and a federal savings bank.
The Society's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.
Effective January 1, 2002, the Society has merged with and into Aid Association for Lutherans (AAL). Refer to Note 14 for further
details.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain 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 revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Financial Statement Presentation
Certain prior year amounts in the financial statements and notes to the financial statements have been reclassified to conform to
the 2001 financial statement presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and other debt issues with an original maturity of 90
days or less.
Investments
See disclosures regarding the determination of fair value of financial instruments at Note 10.
Carrying value of investments is determined as follows:
Fixed income securities Fair value Equity securities Fair value Mortgage loans on real estate Amortized cost less impairment allowance Investment real estate Cost less accumulated depreciation and impairment allowance Real estate joint ventures Equity accounting method Real estate acquired through foreclosure Lower of cost or fair value less estimated cost to sell Loans to contractholders Unpaid principal balance Short-term investments Amortized cost Other invested assets Equity accounting method
Fixed income securities which may be sold prior to maturity and equity securities (common stock and nonredeemable preferred
stock) are classified as available for sale.
Realized investment gains and losses on sales of securities are determined on a first-in, first-out method for fixed income
securities and the average cost method for equity securities and are reported in the Consolidated Statement of Operations. Unrealized
investment gains and losses on fixed income and equity securities classified as available for sale, net of the impact of unrealized
investment gains and losses on deferred acquisition costs and net applicable deferred taxes, are reported as other comprehensive
income.
The investment portfolio is reviewed for investments that may have experienced a decline in fair value considered to be other
than temporary. Mortgage loans are considered impaired when it is probable that the Society will be unable to collect all amounts
according to the contractual terms of the loan agreement. Real estate is considered impaired when the carrying value exceeds the
fair value. In cases where impairment is present, valuation allowances are established and netted against the asset categories to
which they apply and changes in the valuation allowances are included in realized investment gains or losses.
Deferred Policy Acquisition Costs
Those costs of acquiring new business, which vary with and are primarily related to the production of new business, are deferred.
Such costs include commissions, certain costs of contract issuance and underwriting, and certain variable agency expenses.
Deferred policy acquisition costs are subject to recoverability testing at the time of contract issue and loss recognition
testing at the end of each accounting period. Deferred policy acquisition costs are adjusted for the impact of unrealized gains
or losses on investments as if those gains or losses had been realized, with corresponding credits or charges included in other
comprehensive income.
For participating-type long duration contracts, deferred acquisition costs are amortized over the expected average life of the
contracts in proportion to estimated gross margins. The effects of revisions to experience on previous amortization of deferred
acquisition costs are reflected in earnings and change in unrealized investment gains (losses) in the period estimated gross
margins are revised.
For universal life-type and investment-type contracts, deferred acquisition costs are amortized over the average expected life of
the contracts in proportion to estimated gross profits from mortality, investment, and expense margins and surrender charges. The
effects of revisions to experience on previous amortization of deferred acquisition costs are reflected in earnings and change in
unrealized investment gains (losses) in the period estimated gross profits are revised.
For health insurance and certain term life insurance contracts, deferred acquisition costs are amortized over the average
expected premium paying period, in proportion to expected premium revenues at the time of issue.
Separate Accounts
Separate account assets include segregated funds invested by the Society for the benefit of variable life insurance and variable
annuity contract owners. The assets (principally investments) and liabilities (principally to contractholders) of each account
are clearly identifiable and distinguishable from other assets and liabilities of the Society. The assets of the variable
accounts will not be applied to the liabilities arising out of any other business conducted by the Society. Assets are valued at
fair value. The investment income, gains and losses of these accounts generally accrue to the contractholders, and, therefore,
are not included in the Society's consolidated net (loss) income.
Derivative Financial Instruments
The Society's current utilization of derivative financial instruments is not significant. Most of the Society's derivative
transactions are used to reduce or modify interest rate risk and to replicate assets in certain markets. These strategies use
future contracts, option contracts, interest rate swaps, foreign currency swaps and structured securities. The Society does not
use derivative instruments for speculative purposes. The effect of derivative transactions is not significant to the Society's
results of operations or financial position.
Effective January 1, 2001, the Society adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, which requires that the Society recognize all
derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Given the Society's
limited use of derivative instruments, the adoption of SFAS No. 133 did not have a significant impact on the financial position
or results of operations of the Society.
Other Assets
Other assets include property and equipment reported at depreciated cost. The Society provides for depreciation of property and
equipment using the straight-line method over the useful lives of the assets which are three to ten years for equipment and forty
years for property.
Contract Reserves and Contractholder Funds
Liabilities for future contract benefits on participating-type long duration contracts are the net level premium reserve for
death benefits. Liabilities are calculated using dividend fund interest rates and mortality rates guaranteed in calculating cash
surrender values.
Liabilities for future contract benefits on universal life-type and investment-type contracts are based on the contract account
balance.
Liabilities for future contract benefits on health insurance and certain term life insurance contracts are calculated using the
net level premium method and assumptions as to investment yields, mortality, morbidity and withdrawals. The assumptions, made at
the time of issue, are based on best estimates of expected experience and include provision for possible adverse deviation.
Liabilities for future contract benefits on limited-payment contracts are determined using appropriate assumptions for investment
yields, mortality, morbidity and expenses, including a provision for the risk of adverse deviation.
Use of these actuarial tables and methods involves estimation of future mortality and morbidity based on past experience. Actual
future experience could differ from these estimates.
Premium Revenue and Benefits to Contractholders
Recognition of Certain Participating-Type Contract Revenue and Benefits to Contractholders
Participating-type contracts are long-duration contracts with expected dividends to contractholders based on actual experience,
paid in proportion to the contractholder's contribution to surplus. Premiums are recognized as revenues when due. Death and
surrender benefits are reported as expenses when incurred.
Recognition of Universal Life-Type Contract Revenue and Benefits to Contractholders
Universal life-type contracts are insurance contracts with terms that are not fixed and guaranteed. The terms that may be changed
could include one or more of the amounts assessed the contractholder, premiums paid by the contractholder or interest accrued to
contractholder balances. Amounts received as payments for such contracts are not reported as premium revenues.
Revenues for universal life-type contracts consist of investment income, charges assessed against contract account values for
deferred contract loading, the cost of insurance and contract administration. Contract benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in the period in excess of related contract account
balances.
Recognition of Investment Contract Revenue and Benefits to Contractholders
Contracts that do not subject the Society to risks arising from contractholder mortality or morbidity are referred to as
investment contracts. Certain deferred annuities, immediate annuities and supplementary contracts are considered investment
contracts. Amounts received as payments for such contracts are not reported as premium revenues.
Revenues for investment contracts consist of investment income and contract administration charges. Contract benefits that are
charged to expense include benefit claims incurred in the period in excess of related contract balances, and interest credited to
contract balances.
Recognition of Limited-Payment Contract Revenue and Benefits to Contractholders
Limited-payment contracts subject the Society to contractholder mortality and morbidity risks over a period that extends beyond the
premium paying period. Certain annuities and supplementary contracts with life contingencies are considered limited-payment
contracts. Considerations are recognized as revenue when due. Benefits and expenses are associated with earned premiums so as to
result in recognition of profits over the life of the contracts. This association is accomplished by means of the provision for
liabilities for future contract benefits and the amortization of deferred policy acquisition costs.
Recognition of Term Life and Health Revenue and Benefits to Contractholders
Products with fixed and guaranteed premiums and benefits consist principally of health insurance contracts and certain term life
contracts. Premiums are recognized as revenue when due. Benefits and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contracts. This association is accomplished by means of the provision for
liabilities for future contract benefits and the amortization of deferred policy acquisition costs.
Dividends
The dividend scale, approved annually by the Board of Directors, seeks to achieve equity among contractholders. Dividends charged
to operations represent an estimation of those incurred during the current year.
Income Taxes
Lutheran Brotherhood qualifies as a tax-exempt organization under the Internal Revenue Code. Accordingly, no provision for income
taxes has been made. Lutheran Brotherhood's subsidiary, Lutheran Brotherhood Financial Corporation (LBFC) is a taxable entity.
LBFC and its subsidiaries file a consolidated federal income tax return. Federal income taxes are charged or credited to
operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year.
Deferred income tax assets and liabilities are recognized based on the temporary differences between financial statement carrying
amounts and income tax bases of assets and liabilities using enacted income tax rates and laws.
The provision for income taxes reflected on the Consolidated Statement of Operations consisted of federal and state income tax
expense (benefit) of $(4), $9 and $1 for the years ended December 31, 2001, 2000 and 1999, respectively. At December 31, 2001 and
2000, LBFC had recorded a net deferred federal income tax liability of $40 and $41, respectively. The deferred tax liability
arises from the temporary differences related primarily to reserves held for future benefits and deferred acquisitions costs as
computed for financial statement and tax return purposes.
Fixed Income Securities
Investments in fixed income securities at December 31, 2001 and 2000 follow:
Available for Sale (Carried at Fair Value) December 31, 2001 ------------------------------------------------ Amortized Unrealized Unrealized Fair Cost Gains Losses Value Fixed income securities: U.S. government $ 760 $ 30 $ (2) $ 788 Mortgage-backed securities 2,404 38 (7) 2,435 Non-investment grade bonds 740 15 (70) 685 Corporate and other bonds 3,920 140 (44) 4,016 -------- -------- -------- -------- Total available for sale $ 7,824 $ 223 $ (123) $ 7,924 ======== ======== ======== ======== Available for Sale (Carried at Fair Value) December 31, 2000 ------------------------------------------------ Amortized Unrealized Unrealized Fair Cost Gains Losses Value Fixed income securities: U.S. government $ 771 $ 36 $ (1) $ 806 Mortgage-backed securities 2,224 26 (14) 2,236 Non-investment grade bonds 725 5 (106) 624 Corporate and other bonds 3,710 90 (92) 3,708 -------- -------- -------- -------- Total available for sale $ 7,430 $ 157 $ (213) $ 7,374 ======== ======== ======== ======== The amortized cost and fair value of fixed income securities available for sale as of December 31, 2001 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid. Amortized Fair Cost Value One year or less $ 142 $ 145 After one year through five years 1,420 1,454 After five years through ten years 2,061 2,085 After ten years 1,797 1,805 Mortgage-backed securities 2,404 2,435 -------- -------- Total available for sale $ 7,824 $ 7,924 ======== ======== Equity Securities Investments in equity securities and preferred stock at December 31, 2001 and 2000 are as follows: 2001 2000 Cost $ 658 $ 618 Gross unrealized gains 96 171 Gross unrealized losses (86) (67) -------- -------- Carrying value $ 668 $ 722 ======== ======== Mortgage Loans and Real Estate The Society's mortgage loans and real estate investments are diversified by property type and location and, for mortgage loans, borrower and loan size. At December 31, the carrying values of mortgage loans and real estate investments were as follows: 2001 2000 Mortgage loans: Residential and commercial $ 1,858 $ 1,865 Loans to Lutheran Churches 395 371 -------- -------- Total mortgage loans $ 2,253 $ 2,236 ======== ======== Real estate: To be disposed of $ - $ 1 To be held and used 90 64 -------- -------- Total real estate $ 90 $ 65
Derivative Instruments
At December 31, 2001, the Society's derivative instruments, as defined by SFAS No. 133, included one foreign currency swap and
warrants on equity securities. In addition, certain convertible bonds held by the Society are characterized as hybrid instruments
containing embedded derivatives (i.e., equity conversion options). The fair value of all such instruments of $91 at December 31,
2001, was determined using quoted market prices, where available, and internal valuation models. Changes in fair value are
reported currently in net realized investment gains (losses).
For the year ended December 31, investment income summarized by type of investment was as follows:
2001 2000 1999 Fixed income securities $ 489 $ 483 $ 466 Equity securities 16 23 20 Mortgage loans 181 173 167 Real estate 24 20 17 Loans to contractholders 50 48 47 Short-term investments 54 75 54 Other invested assets 19 21 18 -------- -------- -------- Gross investment income 833 843 789 Investment expenses (50) (44) (41) -------- -------- -------- Net investment income $ 783 $ 799 $ 748 ======== ======== ======== For the year ended December 31, gross realized investment gains and losses on sales of all types of investments are as follows: 2001 2000 1999 Fixed income securities: Realized gains $ 114 $ 60 $ 87 Realized losses (131) (98) (99) Equity securities: Realized gains 33 87 115 Realized losses (32) (38) (22) Other investments: Realized gains 8 6 6 Realized losses - (1) - -------- -------- -------- Total net realized investment (losses) gains $ (8) $ 16 $ 87 ======== ======== ========
The balances of and changes in deferred policy acquisition costs as and for the years ended December 31 are as follows:
2001 2000 1999 Balance, beginning of year $ 1,181 $ 1,159 $ 921 Capitalization of acquisition costs 121 146 130 Amortization (98) (48) (66) Change in unrealized investment gains (25) (76) 174 -------- -------- -------- Balance, end of year $ 1,179 $ 1,181 $ 1,159 -------- -------- --------
Separate account assets include segregated funds invested by the Society for the benefit of variable life insurance and variable
annuity contract owners. A portion of the contract owner's premium payments are invested by the Society into the LB Variable
Insurance Account I, the LB Variable Annuity Account I, the LBVIP Variable Insurance Account, the LBVIP Variable Insurance
Account II, or the LBVIP Variable Annuity Account I (the Variable Accounts). The Variable Accounts are unit investment trusts
registered under the Investment Company Act of 1940. Each Variable Account has 14 subaccounts, each of which invests only in a
corresponding portfolio of LB Series Fund, Inc. (the Fund). The Fund is an open-end management investment company registered
under the Investment Company Act of 1940. The shares of the Fund are carried in the Variable Accounts' financial statements at
the net asset value of the Fund. The Society serves as the investment adviser of the Fund and is compensated through a daily
investment advisory fee based on the average daily net assets of each portfolio. For the years ended December 31, 2001, 2000 and
1999, advisory fee income of $32, $37 and $29, respectively, is included in the Consolidated Statement of Operations.
The Society records premium payments from contractholders as assets in the separate accounts. Separate account liabilities
represent reserves held related to the separate account business. The excess of separate account assets over separate account
liabilities at December 31, 2001 represents the Society's investment of $50 to the Fund made in November 2001 upon introducing
seven new variable annuity subaccounts.
A fixed account is also included as an investment option for variable annuity contract owners. Net premiums allocated to the
fixed account are invested in the assets of the Society.
The Society assumes the mortality and expense risk associated with these contracts for which it is compensated by the separate
accounts. The charges to the separate accounts, shown below for the years ended December 31, are based on the average daily net
assets at specified annual rates:
2001 2000 1999 Rate Charges Charges Charges LB Variable Insurance Account I 0.6% $ 1 $ 1 $ 1 LB Variable Annuity Account I 1.1% 41 44 34 LBVIP Variable Insurance Account 0.6% 1 2 1 LBVIP Variable Insurance Account II 2.3% - - - LBVIP Variable Annuity Account I 1.1% 43 53 46 -------- -------- -------- $ 86 $ 100 $ 82 ======== ======== ======== Income from these charges is included in the Consolidated Statement of Operations. In addition, the Society deducts certain amounts from the cash value of the accounts invested in the separate accounts for surrender charges, annual administrative charges and cost of insurance charges. For the years ended December 31, amounts are as follows: 2001 2000 1999 LB Variable Insurance Account I $ 15 $ 12 $ 10 LB Variable Annuity Account I 3 3 3 LBVIP Variable Insurance Account 12 11 11 LBVIP Variable Insurance Account II - - - LBVIP Variable Annuity Account I 1 1 1 -------- -------- -------- $ 31 $ 27 $ 25 -------- -------- --------
Pension Plans
Defined Benefit
Lutheran Brotherhood has noncontributory defined benefit plans which cover substantially all employees. The Society's policy is
to fund all defined benefit pension costs using the aggregate level value method. In comparison to other acceptable methods, the
annual contributions under the aggregate level method are generally higher in the earlier years and decrease over time.
Components of net pension cost for the years ended December 31 were as follows:
2001 2000 1999 Service cost - benefits earned during the year $ 6 $ 5 $ 5 Interest cost on projected benefit obligations 10 9 8 Expected return on assets (12) (8) (8) -------- -------- -------- Net pension cost $ 4 $ 6 $ 5 ======== ======== ======== The following rates were used in computing the pension cost for each of the three years in the period ended December 31: 2001 2000 1999 Discount rates used to determine expense 7.00% 7.00% 7.00% Assumed rates of compensation increases 5.00% 5.00% 5.00% Expected long-term rates of return 8.50% 7.00% 7.00% The following tables summarize the reconciliation of funded status as of December 31 of the pension plan, including the change in benefit obligation and the change in plan assets: 2001 2000 Change in benefit obligation ---------------------------- Projected benefit obligation at beginning of year $ 140 $ 124 Service cost 6 5 Interest cost 10 9 Plan amendment 1 - Transfers from defined contribution 3 - Actuarial loss 7 7 Benefits paid (6) (5) -------- -------- Projected benefit obligation at end of year $ 161 $ 140 ======== ======== Change in plan assets --------------------- Fair value of plan assets at beginning of year $ 139 $ 124 Actual return on plan assets 12 15 Employer contribution 3 5 Transfers from defined contribution 3 - Benefits paid (6) (5) -------- -------- Fair value of plan assets at end of year $ 151 $ 139 2001 2000 Funded status ------------- Funded status $ (10) $ (1) Unrecognized prior service cost 1 - Unrecognized actuarial loss (gain) 3 (4) Unrecognized transition amount 1 1 -------- -------- Accrued benefit cost $ (5) $ (4) ======== ======== Plan assets are held on deposit with the Society and invested primarily in corporate bonds and mortgage loans. Plan contributions are accumulated in a deposit administration fund, which is a part of the general assets of the Society. The accrued retirement liability at December 31, 2001 of $156 is included in contract reserves and other liabilities. The following rates were used in computation of the funded status for the plan at December 31: 2001 2000 Discount rates used for obligations 7.00% 7.00% Assumed rates of compensation increases 5.00% 5.00%
Defined Contribution
The Society has noncontributory defined contribution retirement plans which cover substantially all employees and field
representatives and a noncontributory non-qualified deferred compensation plan which covers substantially all of its general
agents. As of January 1, 2001, approximately $139 of the defined contribution retirement plans' assets were held by the Society
and the remaining $151 were held in a separate trust. The accrued retirement liability at December 31, 2001 of $152 is included
in contract reserves. Expenses related to the retirement plan for the years ended December 31, 2001, 2000 and 1999 were $9, $11
and $12, respectively. Accumulated vested deferred compensation benefits at December 31, 2001 and 2000 total $71 and $66,
respectively, and are included in other liabilities.
The Society has established contributory 401(k) defined contribution plans which cover substantially all employees and field
representatives. Participants are immediately vested in their contributions plus investment earnings thereon.
Postretirement Benefits Other Than Pensions
The Society has a postretirement medical benefit plan which provides for a minor subsidy of certain medical benefits for eligible
early retirees until age 65. The Society's obligation for post-retirement medical benefits under the plan is not significant.
In the normal course of business, the Society seeks to limit its exposure to loss on any single insured and to recover a portion
of benefits paid by ceding business to other insurance enterprises or reinsurers under reinsurance contracts. As of December 31,
2001, total life insurance inforce approximated $52 billion, of which approximately $1 billion had been ceded to various
reinsurers. The Society retains a maximum of $2 of coverage per individual life. Premiums ceded to other companies of $7 are
reported as a reduction in premium income and benefits were reduced by $4 for reinsurance recoverable for the year ended December
31, 2001.
Reinsurance contracts do not relieve the Society from its obligations to contractholders. Failure of reinsurers to honor their
obligations could result in losses to the Society; consequently, allowances are established for amounts deemed uncollectible. The
amount of the allowance for uncollectible reinsurance receivables was immaterial at December 31, 2001.
The following methods and assumptions were used in estimating fair value disclosures for financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
Fixed Income Securities: Fair values for fixed income securities are based on quoted market prices, where available. For fixed
income securities not actively traded in the market, fair values are estimated using market quotes from brokers or internally
developed pricing methods.
Equity Securities: Fair values for equity securities are based on quoted market prices, where available. For equity securities
not actively traded in the market, fair values are estimated using market quotes from brokers or internally developed pricing
methods.
Mortgage Loans: The fair values for mortgage loans are estimated using discounted cash flow analyses, using interest rates
currently being offered in the marketplace for similar loans to borrowers with similar credit ratings.
Loans to Contractholders: The carrying amount reported in the balance sheet approximates fair value since loans on insurance
contracts reduce the amount payable at death or at surrender of the contract.
Cash and Cash Equivalents, Short-Term Investments: The carrying amounts for these assets approximate the assets' fair values.
Separate Account Assets and Liabilities: The carrying amounts reported for separate account assets and liabilities approximate
their respective fair values.
Other Financial Instruments Recorded as Assets: The carrying amounts for these financial instruments (primarily loans receivable
and other investments), approximate those assets' fair values.
Investment Contract Liabilities: The fair value for deferred annuities was estimated to be the amount payable on demand at the
reporting date as those investment contracts have no defined maturity and are similar to a deposit liability. The amount payable
at the reporting date was calculated as the account balance less applicable surrender charges.
For supplementary contracts and immediate annuities without life contingencies, the carrying amounts approximate those
liabilities' fair value.
The carrying amounts reported for other investment contracts, which include participating pension contracts and retirement plan
deposits, approximate those liabilities' fair value.
Other Deposit Liabilities: The carrying amounts for dividend accumulations and premium deposit funds approximate the liabilities'
fair value.
Other Financial Instruments Recorded as Liabilities: The carrying amounts for these financial instruments (primarily deposits and
advances payable) approximate those liabilities' fair values.
The carrying amounts and estimated fair values of the Society's financial instruments at December 31 are as follows:
2001 2000 ---------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value Financial instruments recorded as assets Fixed income securities $ 7,924 $ 7,924 $ 7,374 $ 7,374 Equity securities 668 668 722 722 Mortgage loans: Residential and commercial 1,858 2,021 1,865 2,007 Loans to Lutheran churches 395 418 371 376 Loans to contractholders 766 766 748 748 Cash and cash equivalents 953 953 749 749 Short-term investments 325 325 290 290 Separate account assets 7,645 7,645 8,842 8,842 Other financial instruments recorded as assets 97 97 85 85 Financial instruments recorded as liabilities Investment contracts: Deferred annuities $ 2,457 $ 2,420 $ 2,465 $ 2,427 Supplementary contracts and immediate annuities 485 485 433 433 Other deposit liabilities: Dividend accumulations 36 36 35 35 Premium deposit funds 1 1 1 1 Separate account liabilities 7,594 7,594 8,842 8,842 Other financial instruments recorded as liabilities 91 91 79 79
Accounting practices used to prepare statutory financial statements for regulatory filing of fraternal life insurance companies differ from accounting principles generally accepted in the United States of America (GAAP). Statutory financial statements are prepared in accordance with the NAIC Accounting Practices and Procedures manual -Version effective January 1, 2001. The following reconciles the Society's statutory net change in surplus and statutory surplus determined in accordance with accounting practices prescribed or permitted by the Department of Commerce of the State of Minnesota with net income (loss) and members' equity on a GAAP basis.
Year Ended December 31, ----------------- 2001 2000 Net change in statutory surplus $ (94) $ (59) Change in asset valuation reserves (31) (45) -------- -------- Net change in statutory surplus and asset valuation reserves (125) (104) Adjustments: Future contract benefits and contractholders' account balances 75 56 Deferred acquisition costs 23 98 Investment gains 35 33 Other, net (12) 45 -------- -------- Consolidated net income (loss) $ (4) $ 128 ======== ======== Statutory surplus $ 1,124 $ 1,218 Asset valuation reserves 217 248 -------- -------- Statutory surplus and asset valuation reserves 1,341 1,466 Adjustments: Future contract benefits and contractholders' account balances (327) (388) Deferred acquisition costs 1,179 1,181 Interest maintenance reserves 53 78 Valuation of investments 97 (43) Dividend liability 111 117 Other, net 28 41 -------- -------- Consolidated members' equity $ 2,482 $ 2,452 ======== ========
Following is a condensed synopsis of statutory financial information of the Society (excluding affiliated subsidiaries) at December 31, 2001 and 2000. This information is included to satisfy certain state reporting requirements for fraternals.
December 31, ----------------- 2001 2000 Invested and other admitted assets $ 12,958 $ 12,260 Assets held in separate accounts 3,863 4,165 -------- -------- Total assets $ 16,821 $ 16,425 ======== ======== Contract reserves $ 10,499 $ 9,903 Liabilities related to separate accounts 3,721 4,031 Other liabilities and asset reserves 1,477 1,273 -------- -------- Total liabilities and asset reserves 15,697 15,207 -------- -------- Unassigned surplus 1,124 1,218 -------- -------- Total liabilities, asset reserves and surplus $ 16,821 $ 16,425 ======== ======== (Loss) savings from operations before net realized capital gains $ (61) $ 32 Net realized capital gains (losses) (19) 44 -------- -------- Net (loss) savings from operations (80) 76 Total other changes (14) (135) -------- -------- Net change in unassigned surplus $ (94) $ (59) -------- --------
The Society is involved in various pending or threatened legal proceedings arising out of the normal course of business. Also, the Society has been named in civil litigation proceedings alleging inappropriate life insurance sales practices by the Society, which appear to be similar to claims asserted in class actions brought against many other life insurers. These matters are sometimes referred to as market conduct lawsuits. The Society believes it has substantial defenses to these actions and intends to assert them in the courts where the actions were filed. While the ultimate resolution of such litigation cannot be predicted with certainty at this time, in the opinion of management such matters will not have a material adverse effect on the financial position or results of operations of the Society.
On January 1, 2002, the Society merged with and into AAL, a Wisconsin-domiciled fraternal benefit society, pursuant to an
agreement and plan of merger dated June 27, 2001. The merger will be accounted for as a pooling of interests transaction, and as
such, future consolidated financial statements of AAL will include the Society's financial information as if the Society had
always been part of AAL.
The following unaudited pro forma combined financial data is presented for informational purposes only. It is not necessarily
indicative of the results of operations or of the financial position that would have occurred had the merger been completed
during the periods or as of the date for which the pro forma data is presented. It is also not necessarily indicative of the
combined company's future results of operations or financial position.
Unaudited pro forma combined statements of income data (in millions):
Year Ended December 31, ----------------- 2001 2000 Revenue $ 4,150 $ 4,144 Net income 135 356 Unaudited pro forma combined balance sheet data (in millions): Year Ended December 31, ----------------- 2001 2000 Total assets $ 45,897 $ 44,835 Total certificateholders' surplus 5,347 5,076
Item 24. Financial Statements and Exhibits
(a) Financial Statements: Part A: None. Part B: Financial Statements of Depositor. (4) Financial Statements of LB Variable Annuity Account I. (4) (b) Exhibits: 1. Resolution of the Board of Directors of Lutheran Brotherhood authorizing the establishment of LB Variable Annuity Account I ("Registrant"). (1) 2. Not Applicable. 3.(a) Form of Distribution Agreement between Depositor and Lutheran Brotherhood Securities Corp. ("LBSC"). (3) (b) Form of Selling Agreement between LBSC and AAL Capital Management Corporation. (3) (c) Forms of General Agent's Agreement and Selected Registered Representative Agreement between LBSC and agents with respect to the sale of Contracts. (1) 4. Form of Contract. (1) 5. Contract Application Form. (1) 6. Articles of Incorporation and Bylaws of Depositor. (2) 7. Not Applicable. 8. Not Applicable. 9. Opinion of counsel as to the legality of the securities being registered (including written consent). (3) 10. (a) Consent of PricewaterhouseCoopers LLP. (4) (b) Consent of Ernst & Young LLP. (4) 11. Not Applicable. 12. Not Applicable. 13. Computations of Performance Data. (1) 15. Powers of Attorney for Richard E. Beumer, Dr. Addie J. Butler, Elizabeth A. Duda, John O. Gilbert, Gary J. Greenfield, Robert H. Hoffman, James M. Hushagen, Richard C. Kessler, Richard C. Lundell, John P. McDaniel, Paul W. Middeke, Bruce J. Nicholson, Robert B. Peregrine, Paul D. Schrage, Dr. Kurt M. Senske, Dr. Albert K. Siu, Roger G. Wheeler, and Thomas R. Zehnder. (3) Power of Attorney for Randall L. Boushek. (4) 16. Consent of Counsel. (4) ________________________________
(1) Incorporated by reference from Post-Effective Amendment No. 8 to the registration statement of LB Variable Annuity Account I, file no. 33- 67012, filed April 30, 1998.
(2) Incorporated by reference from Post-Effective Amendment No. 8 to the registration statement of AAL Variable Annuity Account I, file no. 33- 82054, filed April 20, 2000.
(3) Incorporated by reference from the initial registration statement of LB Variable Annuity Account I, file no. 333-76154, filed January 2, 2002.
(4) Filed herewith.
Item 25. Directors and Officers of the Depositor
The directors and senior officers and their principal occupations and addresses of Depositor are:
DIRECTORS
Richard E. Beumer
Vice Chairman
Jacobs Engineering Group, Inc.
501 North Broadway
St. Louis, Missouri
Dr. Addie J. Butler
Assistant to the Vice President
Community College of Philadelphia
1700 Spring Garden Street
Philadelphia, Pennsylvania
Elizabeth A. Duda
Self-Employed
2450 Mikler Road
Oviedo, Florida
John O. Gilbert
Chairman of the Board
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin
Gary J. Greenfield
President
Wisconsin Lutheran College
8800 W. Bluemound Road
Milwaukee, Wisconsin
Robert H. Hoffman
Group Vice President - Communication Division
Taylor Corporation
1725 Roe Crest Drive
PO Box 37208
North Mankato, Minnesota
James M. Hushagen
Partner
Eisenhower & Carlson, PLLC
1201 Pacific Avenue, Suite 1200
Tacoma, Washington
Richard C. Kessler
President and CEO
The Kessler Enterprise, Inc.
7380 Sand Lake Road, Suite 120
Orlando, Florida
Richard C. Lundell
President
Lundell Financial Group
7341 Dogwood Lane
Excelsior, Minnesota
John P. McDaniel
Chief Executive Officer
MedStar Health
5565 Sterett Place
Columbia, Maryland
Paul W. Middeke
Retired
55 Forest Valley Court
St. Charles, Missouri
Bruce J. Nicholson
President and Chief Executive Officer
Aid Association for Lutherans
625 Fourth Avenue South
Minneapolis, Minnesota
Robert B. Peregrine
Partner
Peregrine & Roth, S.C.
633 W. Wisconsin Avenue, Suite 1300
Milwaukee, Wisconsin
Paul D. Schrage
Retired
180 East Person, Apt. 4504 (S)
Chicago, Illinois
Dr. Kurt M. Senske
President and Chief Executive Officer
Lutheran Social Services
408 West 45th Street
Austin, Texas
Dr. Albert K. Siu
Chief Learning Officer
AT&T
Room 31A19
55 Corporate Drive
Bridgewater, New Jersey
Roger G. Wheeler
President
Wheeler-Air, Inc.
6109 West 104th Street
Bloomington, Minnesota
Thomas R. Zehnder
Retired
6308 Chiswick Park
Williamsburg, Virginia
OFFICERS
John O. Gilbert
Chairman of the Board
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin
Bruce J. Nicholson
President and Chief Executive Officer
Aid Association for Lutherans
625 Fourth Avenue South
Minneapolis, Minnesota
Jon M. Stellmacher
Executive Vice President, Financial Services Operations
4321 North Ballard Road
Appleton, Wisconsin
Lawrence W. Stranghoener
Executive Vice President and Chief Financial Officer
Aid Association for Lutherans
625 Fourth Avenue South
Minneapolis, Minnesota
Woodrow E. Eno
Senior Vice President, General Counsel and Secretary
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin
Otis Haarmeyer
Senior Vice President, Field Operations
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin
Jennifer H. Martin
Senior Vice President, Corporate Administration
Aid Association for Lutherans
625 Fourth Avenue South
Minneapolis, Minnesota
Pamela J. Moret
Senior Vice President, Marketing and Products
Aid Association for Lutherans
625 Fourth Avenue South
Minneapolis, Minnesota
Frederick A. Ohlde
Senior Vice President, Fraternal Operations
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin
Walter S. Rugland
Senior Vice President
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin
James A. Thomsen
Senior Vice President, Field Operations
Aid Association for Lutherans
625 Fourth Avenue South
Minneapolis, Minnesota
James H. Abitz
Senior Vice President, Investments
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin
Randall L. Boushek
Senior Vice President and Treasurer, Finance
Aid Association for Lutherans
625 Fourth Avenue South
Minneapolis, Minnesota
Item 26. Persons Controlled by or Under Common Control with Depositor or Registrant
Registrant is a separate account of Depositor. Depositor is a fraternal insurance society organized under the laws of the state of Wisconsin and is owned by and operated for its members. It has no stockholders nor is it subject to the control of any affiliated persons. Depositor controls the following wholly owned direct and indirect subsidiaries: (a) AAL Holdings, Inc., a Delaware corporation that is a holding company that has no independent operations; (b) AAL Capital Management Corporation (AAL CMC), a Delaware corporation that is a registered broker-dealer and investment adviser; (c) North Meadows Investment, Ltd., a Wisconsin corporation organized for the purpose of holding and investing in real estate; (d) AAL Trust Company, FSB, a federally chartered bank. (e) Lutheran Brotherhood Variable Insurance Products Company ("LBVIP"), a Minnesota corporation organized as a stock life insurance company; (f) LBSC, a Pennsylvania corporation which is a registered broker-dealer; (h) Lutheran Brotherhood Research Corp., a Minnesota corporation which is a licensed investment adviser; and (i) Lutheran Brotherhood Property & Casualty Insurance Agency, Inc., a Minnesota corporation, which is a property and casualty insurance agency.
Item 27. Number of Contract Owners
There were 123,984 Contract Owners as of March 31, 2002.
Item 28. Indemnification
Reference is hereby made to Section 33 of Depositor's Bylaws, filed as an Exhibit to this Registration Statement, and to Section 5 of LBSC's By-Laws, which mandate indemnification by Depositor and LBSC of directors, officers and certain others under certain conditions. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Depositor or LBSC, pursuant to the foregoing provisions or otherwise, Depositor and LBSC have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Depositor or LBSC of expenses incurred or paid by a director or officer or controlling person of Depositor or LBSC in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person of Depositor or LBSC in connection with the securities being registered, Depositor or LBSC will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
An insurance company blanket bond is maintained providing $10 million coverage for officers, employees, and agents of AAL/LB, LBVIP and LBSC.
Item 29. Principal Underwriter
John O. Gilbert Chairman Bruce J. Nicholson Director Woodrow E. Eno Director Lawrence W. Stranghoener Director Pamela J. Moret Director James A. Thomsen Director and President Jon M. Stellmacher Director David K. Stewart Treasurer John C. Bjork Secretary Colleen Both Vice President and Chief Compliance Officer J. Keith Both Vice President David J. Christianson Vice President Douglas B. Miller Vice President Richard B. Ruckdashel Vice President Thomas C. Schinke Vice President
The principal business address of each of the foregoing officers is 625 Fourth Avenue South, Minneapolis, Minnesota 55415.
Item 30. Location of Accounts and Records
The accounts and records of Registrant are located at the office of Depositor at 625 Fourth Avenue South, Minneapolis, Minnesota 55415.
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Registrant will file a post-effective amendment to this Registration Statement as frequently as is necessary to ensure that the audited financial statements in this Registration Statement are never more than 16 months old for so long as payments under the Contracts may be accepted.
Registrant will 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.
Registrant will deliver any Statement of Additional Information and any financial statements required to be made available under this form promptly upon written or oral request.
Registrant understands that the restrictions imposed by Section 403(b)(11) of the Internal Revenue Code conflict with certain sections of the Investment Company Act of 1940 that are applicable to the Contracts. In this regard, Registrant is relying on a no-action letter issued on November 28, 1988 by the Office of Insurance Product and Legal Compliance of the SEC, and the requirements for such reliance have been complied with by Registrant.
Aid Association for Lutherans hereby represents that, as to the individual flexible premium variable annuity contracts that are the subject of this registration statement, File Number 333-76154, that the fees and charges deducted under the contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by Aid Association for Lutherans.
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements for effectiveness of this Amendment to the Registration Statement purusant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and State of Minnesota on the 30th day of April, 2002.
LB VARIABLE ANNUITY ACCOUNT I (Registrant) By AID ASSOCIATION FOR LUTHERANS (Depositor) By * --------------------------------------- Bruce J. Nicholson, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Depositor has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and State of Minnesota on the 30th day of April, 2002.
AID ASSOCIATION FOR LUTHERANS (Depositor) By * ---------------------------------------- Bruce J. Nicholson, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed on the 30th day of April, 2002 by the following directors and officers of Depositor in the capacities indicated:
* President and Chief Executive Officer --------------------------- (Principal Executive Officer) Bruce J. Nicholson * Executive Vice President, Chief Financial Officer ---------------------------- (Principal Financial Officer) Lawrence W. Stranghoener * Senior Vice President and Treasurer, Finance ---------------------------- (Principal Accounting Officer) Randall L. Boushek A Majority of the Board of Directors:* Richard E. Beumer John P. McDaniel Dr. Addie J. Butler Paul W. Middeke Elizabeth A. Duda Bruce J. Nicholson John O. Gilbert Robert B. Peregrine Gary J. Greenfield Paul D. Schrage Robert H. Hoffman Dr. Kurt M. Senske James M. Hushagen Dr. Albert K. Siu Richard C. Kessler Roger G. Wheeler Richard C. Lundell Thomas R. Zehnder
* John C. Bjork, by signing his name hereto, does hereby sign this document on behalf of each of the above-named directors and officers of Aid Association for Lutherans pursuant to a power of attorney duly executed by such persons and filed with the initial registration statement of LB Variable Annuity Account I, file no. 333-76154, filed January 2, 2002 and herewith.
By: /s/ John C. Bjork -------------------------------- John C. Bjork, Attorney-in-Fact
EXHIBIT NO.
Ex-23 Consent of Counsel. Ex-23 Consent of PricewaterhouseCoopers LLP. Ex-23 Consent of Ernst & Young LLP. Ex-24 Power of Attorney for Randall L. Boushek.
This ‘485BPOS’ Filing | Date | Other Filings | ||
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Filed on / Effective on: | 4/30/02 | |||
3/31/02 | ||||
3/29/02 | ||||
3/1/02 | ||||
1/23/02 | ||||
1/2/02 | N-4 | |||
1/1/02 | ||||
12/31/01 | 24F-2NT, NSAR-U | |||
11/30/01 | 485BPOS | |||
6/27/01 | ||||
1/1/01 | ||||
12/31/00 | 24F-2NT, NSAR-U | |||
4/20/00 | ||||
12/31/99 | 24F-2NT, NSAR-U, NSAR-U/A | |||
1/1/99 | ||||
12/31/98 | 24F-2NT, NSAR-U | |||
4/30/98 | 485BPOS | |||
1/30/98 | ||||
1/18/96 | ||||
2/3/94 | ||||
List all Filings |