Report of Independent Registered Public Accounting Firm

Transcription

1 Report of Independent Registered Public Accounting Firm The Board of Directors of Massachusetts Mutual Life Insurance Company and Contract Owners of Massachusetts Mutual Variable Annuity Separate Account 3: We have audited the accompanying statement of assets and liabilities of Massachusetts Mutual Variable Annuity Separate Account 3 (comprised of the divisions listed in Note 2) (collectively, the Separate Account ) as of December 31, 2016, the related statements of operations and changes in net assets for each of the years or periods in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Separate Account s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the underlying mutual funds or their transfer agent. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Massachusetts Mutual Variable Annuity Separate Account 3 as of December 31, 2016, and the results of its operations and changes in its net assets for each of the years or periods in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Hartford, CT March 3, 2017 LA2058 F-1

2 Massachusetts Mutual Variable Annuity Separate Account 3 STATEMENT OF ASSETS AND LIABILITIES December 31, 2016 Blend Equity Managed Bond U.S. Government Money Market Capital Appreciation Conservative Balanced Core Bond Discovery Mid Cap Growth ASSETS Investments Number of shares... 60,323 70, , , , , ,915 82,079 Identified cost... $ 1,131,144 $ 1,594,662 $ 1,365,077 $ 437,896 $ 8,442,639 $ 1,467,982 $ 856,958 $ 3,883,061 Value... $ 1,299,537 $ 1,980,583 $ 1,304,838 $ 438,137 $ 9,719,905 $ 1,747,690 $ 843,046 $ 5,963,046 Dividends receivable Receivable from Massachusetts Mutual Life Insurance Company Total assets... 1,299,537 1,980,583 1,304, ,138 9,720,489 1,747, ,046 5,963,046 LIABILITIES Annuitant mortality fluctuation reserve , ,204 Payable to Massachusetts Mutual Life Insurance Company Total liabilities , ,237 NET ASSETS $ 1,299,222 $ 1,980,211 $ 1,304,833 $ 438,138 $ 9,718,246 $ 1,746,866 $ 842,107 $ 5,961,809 Net Assets: Accumulation units value... $ 1,289,259 $ 1,968,494 $ 1,304,833 $ 438,138 $ 9,643,483 $ 1,720,861 $ 811,616 $ 5,921,689 Contracts in payout (annuitization) period... 9,963 11, ,763 26,005 30,491 40,120 Net assets... $ 1,299,222 $ 1,980,211 $ 1,304,833 $ 438,138 $ 9,718,246 $ 1,746,866 $ 842,107 $ 5,961,809 Outstanding units Contract owners , , , ,192 2,069, , ,325 1,701,476 UNIT VALUE LifeTrust... $ 3.38 $ 3.47 $ 2.55 $ 1.23 $ 4.70 $ 2.61 $ 1.62 $ 3.50 See Notes to Financial Statements. F-2

3 Massachusetts Mutual Variable Annuity Separate Account 3 STATEMENT OF ASSETS AND LIABILITIES (Continued) December 31, 2016 Strategic Income Government Money Small Cap ASSETS Investments Number of shares ,288 1,008, , ,956 66,951 Identified cost... $ 7,881,829 $ 5,272,786 $ 229,784 $ 9,263,704 $ 1,255,106 Value... $ 9,185,311 $ 4,981,292 $ 229,784 $11,362,759 $ 1,612,182 Dividends receivable Receivable from Massachusetts Mutual Life Insurance Company ,731 - Total assets... 9,185,311 4,981, ,785 11,365,490 1,612,182 LIABILITIES Annuitant mortality fluctuation reserve... 2,417 2, , Payable to Massachusetts Mutual Life Insurance Company Total liabilities... 2,487 2, , NET ASSETS $ 9,182,824 $ 4,979,149 $ 229,585 $11,360,410 $ 1,612,122 Net Assets: Accumulation units - value... $ 9,102,256 $ 4,910,420 $ 223,212 $11,191,065 $ 1,610,383 Contracts in payout (annuitization) period... 80,568 68,729 6, ,345 1,739 Net assets... $ 9,182,824 $ 4,979,149 $ 229,585 $11,360,410 $ 1,612,122 Outstanding units Contract owners... 1,942,248 1,798, ,901 2,582, ,438 UNIT VALUE LifeTrust... $ 4.73 $ 2.77 $ 1.27 $ 4.40 $ 3.41 See Notes to Financial Statements. F-3

4 Massachusetts Mutual Variable Annuity Separate Account 3 STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS For The Year Ended December 31, 2016 Blend Equity Managed Bond U.S. Government Money Market Capital Appreciation Conservative Balanced Core Bond Discovery Mid Cap Growth Investment Income Dividends... $ 27,135 $ 33,209 $ 39,868 $ 1 $ 40,888 $ 45,373 $ 33,386 $ - Expenses Mortality and expense risk fees and administrative expense charges... 17,700 26,598 19,719 10, ,907 26,288 12,627 86,532 Net investment income (loss)... 9,435 6,611 20,149 (10,545) (98,019) 19,085 20,759 (86,532) Net realized and unrealized gain (loss) on investments Realized gain (loss) on sale of fund shares... 44,022 5, ,751 33,711 (28,972) 416,327 Realized gain distribution , ,422 6,605-1,035, ,373 Realized gain (loss) , ,155 6, ,512,728 33,711 (28,972) 897,700 Change in net unrealized appreciation/depreciation of investments (80,639) 65,052 (3,589) 288 (1,824,154) 14,821 25,849 (759,855) Net gain (loss) on investments... 85, ,207 3, (311,426) 48,532 (3,123) 137,845 Net increase (decrease) in net assets resulting from operations... 94, ,818 23,405 (9,789) (409,445) 67,617 17,636 51,313 Capital transactions: Transfer of net premiums ,446 11,251 1,890 69, ,070 Transfers due to death benefits... (27,443) (39,760) (212,786) (24,182) (204,743) (142,577) (28,035) (125,024) Transfers due to annuity benefit payments... (1,533) (1,606) - - (7,807) (5,154) (3,682) (5,483) Transfers due to withdrawal of funds... (90,661) (143,624) (22,763) (609,923) (602,674) (404,967) (35,985) (425,260) Transfers due to administrative charges... (612) (1,078) (389) (533) (5,028) (881) (415) (3,065) Transfers due to net charge (credit) to annuitant mortality fluctuation (6,067) Transfers between divisions and to/from the Fixed Account... 1,000 (28,182) 60, ,146 (54,303) (12,555) (26,474) (94,411) Net increase (decrease) in net assets resulting from capital transactions... (118,999) (211,498) (164,357) (346,602) (810,717) (565,817) (93,880) (650,034) Total increase (decrease)... (24,049) (12,680) (140,952) (356,391) (1,220,162) (498,200) (76,244) (598,721) NET ASSETS, at beginning of the year... 1,323,271 1,992,891 1,445, ,529 10,938,408 2,245, ,351 6,560,530 NET ASSETS, at end of the year... $ 1,299,222 $ 1,980,211 $ 1,304,833 $ 438,138 $ 9,718,246 $ 1,746,866 $ 842,107 $ 5,961,809 See Notes to Financial Statements. F-4

5 Massachusetts Mutual Variable Annuity Separate Account 3 STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued) For The Year Ended December 31, 2016 Strategic Income Government Money Small Cap Investment Income Dividends... $ 96,251 $ 254,333 $ 67 $ 123,518 $ 7,349 Expenses Mortality and expense risk fees and administrative expense charges ,407 71,222 8, ,866 20,037 Net investment income (loss)... (30,156) 183,111 (8,906) (31,348) (12,688) Net realized and unrealized gain (loss) on investments Realized gain (loss) on sale of fund shares... 25,690 (52,336) - 427,249 39,005 Realized gain distribution , ,312,913 54,483 Realized gain (loss) ,790 (52,336) - 1,740,162 93,488 Change in net unrealized appreciation/depreciation of investments... (758,849) 121,117 - (645,557) 146,719 Net gain (loss) on investments... (123,059) 68,781-1,094, ,207 Net increase (decrease) in net assets resulting from operations (153,215) 251,892 (8,906) 1,063, ,519 Capital transactions: Transfer of net premiums... 7,637 2,986-14,252 - Transfers due to death benefits... (119,625) (151,372) (589,178) (143,763) (11,457) Transfers due to annuity benefit payments... (10,394) (10,724) (355) (11,914) (270) Transfers due to withdrawal of funds... (345,109) (288,081) (301,729) (679,640) (29,910) Transfers due to administrative charges... (4,024) (1,772) (647) (5,072) (543) Transfers due to net charge (credit) to annuitant mortality fluctuation ,230 (2,003) (26,079) 38 Transfers between divisions and to/from the Fixed Account... (71,749) (2,434) 119,445 (204,720) 3,401 Net increase (decrease) in net assets resulting from capital transactions... (542,800) (450,167) (774,467) (1,056,936) (38,741) Total increase (decrease)... (696,015) (198,275) (783,373) 6, ,778 NET ASSETS, at beginning of the year... 9,878,839 5,177,424 1,012,958 11,354,089 1,423,344 NET ASSETS, at end of the year... $ 9,182,824 $ 4,979,149 $ 229,585 $11,360,410 $ 1,612,122 See Notes to Financial Statements. F-5

6 Massachusetts Mutual Variable Annuity Separate Account 3 STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS For The Year Ended December 31, 2015 Blend Equity Managed Bond Money Market Capital Appreciation Conservative Balanced Core Bond Discovery Mid Cap Growth Investment Income Dividends... $ 32,373 $ 44,872 $ 42,250 $ 36 $ 10,458 $ 54,185 $ 39,142 $ - Expenses Mortality and expense risk fees and administrative expense charges... 21,264 30,453 20,758 10, ,055 33,638 13,494 98,242 Net investment income (loss)... 11,109 14,419 21,492 (10,614) (148,597) 20,547 25,648 (98,242) Net realized and unrealized gain (loss) on investments Realized gain (loss) on sale of fund shares... 39,409 24, (10) 629,825 (21,981) (40,287) 438,848 Realized gain distribution ,528 98,009 6, ,001, ,118 Realized gain (loss) , ,981 6,959 (9) 2,631,698 (21,981) (40,287) 1,059,966 Change in net unrealized appreciation/depreciation of investments... (184,714) (238,124) (59,904) (18) (2,235,518) (9,368) 10,819 (600,533) Net gain (loss) on investments... (29,777) (115,143) (52,945) (27) 396,180 (31,349) (29,468) 459,433 Net increase (decrease) in net assets resulting from operations... (18,668) (100,724) (31,453) (10,641) 247,583 (10,802) (3,820) 361,191 Capital transactions: Transfer of net premiums ,912 11,583 1, , ,186 Transfers due to death benefits... (1,987) (13,395) (205) (239) (92,212) (50,988) (827) (64,057) Transfers due to annuity benefit payments... (1,574) (1,702) - - (7,640) (5,301) (3,400) (5,681) Transfers due to withdrawal of funds... (216,381) (185,711) (22,355) (184,110) (834,584) (200,835) (55,813) (577,950) Transfers due to administrative charges... (650) (1,188) (420) (598) (5,552) (1,000) (463) (3,344) Transfers due to net charge (credit) to annuitant mortality fluctuation (887) (1,790) (7,180) (895) Transfers between divisions and to/from the Fixed Account... (11,681) (27,371) ,568 (25,117) (6,404) - (26,592) Net increase (decrease) in net assets resulting from capital transactions... (231,946) (224,127) (11,012) 31,999 (848,675) (266,318) (67,683) (673,333) Total increase (decrease)... (250,614) (324,851) (42,465) 21,358 (601,092) (277,120) (71,503) (312,142) NET ASSETS, at beginning of the year... 1,573,885 2,317,742 1,488, ,171 11,539,500 2,522, ,854 6,872,672 NET ASSETS, at end of the year... $ 1,323,271 $ 1,992,891 $ 1,445,785 $ 794,529 $10,938,408 $ 2,245,066 $ 918,351 $ 6,560,530 See Notes to Financial Statements. F-6

7 Massachusetts Mutual Variable Annuity Separate Account 3 STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued) For The Year Ended December 31, 2015 Strategic Income Money Small Cap Investment Income Dividends... $ 138,447 $ 334,919 $ 108 $ 110,689 $ 13,917 Expenses Mortality and expense risk fees and administrative expense charges ,063 79,992 14, ,167 22,014 Net investment income (loss)... (11,616) 254,927 (14,365) (56,478) (8,097) Net realized and unrealized gain (loss) on investments Realized gain (loss) on sale of fund shares ,841 (23,821) - 615,094 83,899 Realized gain distribution , ,807, ,708 Realized gain (loss) ,053 (23,821) - 2,422, ,607 Change in net unrealized appreciation/depreciation of investments... (596,687) (428,652) - (2,139,882) (414,855) Net gain (loss) on investments ,366 (452,473) - 282,565 (101,248) Net increase (decrease) in net assets resulting from operations ,750 (197,546) (14,365) 226,087 (109,345) Capital transactions: Transfer of net premiums... 22,889 21,644-8, Transfers due to death benefits... (52,010) (39,925) (1,909) (137,901) (420) Transfers due to annuity benefit payments... (9,480) (9,669) - (8,368) (293) Transfers due to withdrawal of funds... (918,823) (428,883) (103,852) (873,215) (119,820) Transfers due to administrative charges... (4,491) (2,122) (757) (5,331) (603) Transfers due to net charge (credit) to annuitant mortality fluctuation... (9,006) (14,721) - (11,843) 67 Transfers between divisions and to/from the Fixed Account... (53,976) (74,266) 73,563 (185,328) 808 Net increase (decrease) in net assets resulting from capital transactions... (1,024,897) (547,942) (32,955) (1,213,777) (119,811) Total increase (decrease)... (727,147) (745,488) (47,320) (987,690) (229,156) NET ASSETS, at beginning of the year... 10,605,986 5,922,912 1,060,278 12,341,779 1,652,500 NET ASSETS, at end of the year... $ 9,878,839 $ 5,177,424 $ 1,012,958 $11,354,089 $ 1,423,344 See Notes to Financial Statements. F-7

8 Massachusetts Mutual Variable Annuity Separate Account 3 Notes To Financial Statements 1. ORGANIZATION Massachusetts Mutual Variable Annuity Separate Account 3 ( the Separate Account ) is a separate investment account of Massachusetts Mutual Life Insurance Company ( MassMutual ) established on January 12, The Separate Account is registered as a unit investment trust under the Investment Company Act of 1940 ( the 1940 Act ). The assets and liabilities of the Separate Account are clearly identified and distinguished from MassMutual s other assets and liabilities. The Separate Account s assets are not chargeable with liabilities arising from any other MassMutual business. 2. INVESTMENT OF THE SEPARATE ACCOUNT S ASSETS As of December 31, 2016, the Separate Account consists of thirteen divisions which invest in the following mutual funds: The division listed in the first column s invests in the fund in this column Blend Blend Fund 1 Equity Equity Fund 1 Managed Bond Managed Bond Fund 1 U.S. Government Money Market 3 U.S. Government Money Market Fund 1 Capital Appreciation Capital Appreciation Fund/VA 2 Conservative Balanced Conservative Balanced Fund/VA 2 Core Bond Core Bond Fund/VA 2 Discovery Mid Cap Growth Discovery Mid Cap Growth Fund/VA 2 Fund/VA 2 Strategic Income Strategic Income Fund/VA 2 Government Money 4 Government Money Fund/VA 2 Fund /VA 2 Small Cap Small Cap Fund /VA In addition to the thirteen divisions, some contract owners may also allocate funds to the Fixed Interest Account ( FIA ), which is part of MassMutual s general investment account ( General Account ). Because of exemptive and exclusionary provisions in the securities law, interests in the FIA are not registered under the Securities Act of 1933, and the General Account and the FIA are not registered as an investment company under the 1940 Act. 1 Investment Advisors, LLC is the investment adviser to the listed II Trust Funds pursuant to an investment management agreement. 2 OFI Asset Management, Inc. serves as the investment adviser to the listed Funds. 3 U.S. Government Money Market was formerly known as Money Market. 4 Government Money was formerly known as Money. 3. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Separate Account in preparation of the financial statements in conformity with generally accepted accounting principles. Separate Account Massachusetts Mutual Variable Annuity Separate Account 3 follows the accounting and reporting guidance in FASB Accounting Standards Codification 946. A. Investment Valuation Investments in the investment divisions are valued at the closing net asset value of each of the respective underlying funds, which value their investment securities at fair value. F-8

9 Notes To Financial Statements (Continued) B. Accounting for Investments Investment transactions are accounted for on a trade-date basis and identified cost is the basis followed in determining the cost of investments sold for financial statement purposes. Dividend income and gains from realized gain distributions are recorded on the ex-distribution date, and they are generally reinvested in the underlying investment divisions. C. Federal Income Taxes MassMutual is taxed under federal law as a life insurance company under the provisions of the 1986 Internal Revenue Code, as amended. Under existing federal law, no taxes are payable on net investment income and net realized capital gains attributable to contracts which depend on the Separate Account s investment performance. Accordingly, no provision for federal income tax has been made. MassMutual may, however, make such a charge in the future if an unanticipated change of current law results in a company tax liability attributable to the Separate Account. D. Contract Charges See Note 8B for charges associated with the contracts E. Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F. Annuitant Mortality Fluctuation The Separate Account maintains a reserve as required by regulatory authorities to provide for mortality losses incurred. The reserve is adjusted quarterly for mortality losses and gains and its proportionate share of changes in value. Transfers to or from MassMutual are then made quarterly to adjust the Separate Account. Net transfers from the Separate Account to MassMutual totaled $27,721 for the year ended December 31, Net transfers from the Separate Account to MassMutual totaled $43,297 for the year ended December 31, The reserve is subject to a maximum of 3% of the Separate Account s annuity reserves. Any mortality losses in excess of this reserve will be borne by MassMutual. The reserve is not available to owners of the contracts except to the extent necessary to cover mortality losses under the contracts. G. Annuity Reserves Annuity reserves are developed by using accepted actuarial methods and are computed using the 1994 MGDB table. 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The Separate Account defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Separate Account generally uses the market approach as the valuation technique due to the nature of the mutual fund investments offered in the Separate Account. This technique maximizes the use of observable inputs and minimizes the use of unobservable inputs. Investments in mutual funds are valued at the mutual fund s closing net asset value per share on the day of valuation. Valuation Inputs: Various inputs are used to determine the value of the Separate Account s investments. These inputs are summarized in the three broad levels listed below: Level 1 quoted prices in active markets for identical securities Level 2 observable inputs other than Level 1 quoted prices (including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds and credit risk) Level 3 unobservable inputs The net assets of the Separate Account are measured at fair value. All the net assets are categorized as Level 1 as of December 31, There have been no transfers between levels for the year ended December 31, F-9

10 Notes To Financial Statements (Continued) 5. RELATED PARTY TRANSACTIONS A. Sales Agreements Pursuant to separate underwriting agreements with MassMutual and the Separate Account, Investors Services, LLC ( IS ) serves as principal underwriter of the contracts sold by its registered representatives and Strategic Distributors, LLC ( MSD ) serves as principal underwriter of the contracts sold by registered representatives of other broker-dealers who have entered into distribution agreements with MSD. Both IS and MSD are registered with the Securities and Exchange Commission (the SEC ) as broker-dealers under the Securities Exchange Act of 1934 and are members of the Financial Industry Regulatory Authority ( FINRA ). Commissions for sales of contracts by IS registered representatives are paid on behalf of IS to its registered representatives. Commissions for sales of contracts by registered representatives of other broker-dealers are paid on behalf of MSD to those broker-dealers. IS and MSD also receive compensation for their actions as principal underwriters of the contracts. The contracts are no longer offered for sale to the public. Contract owners may continue, however, to make purchase payments under existing contracts. B. Receivable from/payable to MassMutual Certain fees such as cost of insurance fees and mortality and expense risk fees are charges paid between the General Account and the Separate Account. 6. PURCHASES AND SALES OF INVESTMENTS The cost of purchases and proceeds from sales of investments for the year ended December 31, 2016 were as follows: Blend Equity Managed Bond U.S. Government Money Market Capital Appreciation Cost of purchases... $ 150,103 $ 171,799 $ 117,064 $ 316,926 $ 1,172,027 Proceeds from sales... (245,983) (260,246) (254,725) (674,110) (1,047,386) Conservative Balanced Core Bond Discovery Mid Cap Growth Strategic Income Cost of purchases... $ 45,373 $ 33,434 $ 488,463 $ 728,656 $ 284,739 Proceeds from sales... (592,298) (106,660) (751,765) (805,444) (596,605) Government Money Small Cap Cost of purchases... $ 158,907 $ 1,559,075 $ 72,145 Proceeds from sales... (971,707) (1,380,491) (69,137) F-10

11 Notes To Financial Statements (Continued) 7. NET INCREASE (DECREASE) IN OUTSTANDING UNITS The changes in outstanding units for the two years ended December 31, 2016 were as follows: 2016 Blend Equity Managed Bond U.S. Government Money Market Capital Appreciation Units purchased ,362 1,524 22,217 Units withdrawn... (38,455) (60,276) (91,015) (512,430) (187,619) Units transferred between divisions and to/from the Fixed Account (7,639) 23, ,229 (11,545) Net increase (decrease)... (38,069) (67,014) (62,791) (280,677) (176,947) 2016 (continued) Conservative Balanced Core Bond Discovery Mid Cap Growth Strategic Income Units purchased ,808 2,958 1,612 Units withdrawn... (218,402) (41,633) (162,433) (107,320) (166,141) Units transferred between divisions and to/from the Fixed Account... (5,082) (16,352) (27,391) (15,565) (1,620) Net increase (decrease)... (223,348) (57,538) (188,016) (119,926) (166,149) 2016 (continued) Government Money Small Cap Units purchased... 6,865 32, Units withdrawn... (707,024) (240,548) (14,100) Units transferred between divisions and to/from the Fixed Account... 93,891 (50,719) 904 Net increase (decrease)... (606,268) (258,486) (13,180) 2015 Blend Equity Managed Bond Money Market Capital Appreciation Units purchased ,600 4,526 1,091 23,766 Units withdrawn... (69,915) (61,865) (8,951) (146,815) (191,553) Units transferred between divisions and to/from the Fixed Account... (3,673) (8,279) ,401 (5,522) Net increase (decrease)... (73,450) (68,544) (4,278) 25,677 (173,308) 2015 (continued) Conservative Balanced Core Bond Discovery Mid Cap Growth Strategic Income Units purchased ,082 1,507 12,585 28,187 Units withdrawn... (101,910) (61,322) (184,813) (208,198) (202,427) Units transferred between divisions and to/from the Fixed Account... (2,476) - (8,018) (11,500) (27,285) Net increase (decrease)... (104,386) (42,240) (191,323) (207,113) (201,525) 2015 (continued) Money Small Cap Units purchased , Units withdrawn... (82,261) (271,037) (38,064) Units transferred between divisions and to/from the Fixed Account... 56,853 (48,143) 283 Net increase (decrease)... (25,408) (305,579) (37,626) F-11

12 Notes To Financial Statements (Continued) 8. FINANCIAL HIGHLIGHTS A. A summary of units outstanding, unit values, net assets, investment income ratios, expense ratios (excluding expenses of the underlying funds) and total return ratios for each of the five years in the period ended December 31, 2016 follows: At December 31, For the Years Ended December 31, Net Assets Investment Income Units Unit Value Amount Ratio 1 Expense Ratio 2 Total Return 3 Blend ,590 $3.38 $ 1,299, % 1.40% 7.90% , ,323, (1.31) , ,573, , ,686, , ,494, Equity , ,980, , ,992, (4.77) , ,317, , ,472, , ,046, Managed Bond , ,304, , ,445, (2.13) , ,488, , ,779, (3.01) , ,052, U.S. Government Money Market , , (1.28) , , (1.39) , , (1.39) , , (1.39) , ,128, (1.39) Capital Appreciation ,069, ,718, (3.56) ,246, ,938, ,419, ,539, ,782, ,661, ,226, ,568, Conservative Balanced , ,746, , ,245, (0.57) , ,522, ,162, ,756, ,348, ,867, Core Bond , , , , (0.44) , , , ,089, (1.49) ,053, ,613, F-12

13 Notes To Financial Statements (Continued) At December 31, For the Years Ended December 31, Net Assets Investment Income Units Unit Value Amount Ratio 1 Expense Ratio 2 Total Return 3 Discovery Mid Cap Growth ,701,476 $3.50 $ 5,961,809 -% 1.40% 0.92% ,889, ,560, ,080, ,872, ,308, ,310, ,719, ,421, ,942, ,182, (1.31) ,062, ,878, ,269, ,605, ,533, ,740, ,894, ,684, Strategic Income ,798, ,979, ,964, ,177, (3.62) ,166, ,922, ,795, ,539, (1.52) ,404, ,321, Government Money , , (1.38) , ,012, (1.38) , ,060, (1.38) , ,178, (1.38) , ,250, (1.38) High Income ,582, ,360, ,841, ,354, ,146, ,341, ,451, ,401, ,202, ,620, Small Cap , ,612, , ,423, (7.21) , ,652, , ,962, , ,571, The investment income ratios represent the dividends, excluding distributions of capital gains, received by the division from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that are assessed against contract owner accounts either through reductions in the unit values or the redemption of units. The recognition of investment income by the division is affected by the timing of the declaration of dividends by the underlying fund in which the division invests. 2 The expense ratios represent the annualized contract expenses of the Separate Account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction of unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund have been excluded. 3 The total returns are for the periods indicated, including changes in the value of the underlying fund, and the expenses assessed through the reduction of unit values. These ratios do not include any expenses assessed through the redemption of units. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for each period indicated or from the effective date through the end of the reporting period. 4 For the period January 1, 2012 through October 26, Effective October 26, 2012, High Income merged into Strategic Income. F-13

14 Notes To Financial Statements (Continued) 8. FINANCIAL HIGHLIGHTS (Continued) B. The Separate Account assesses charges associated with the contract. These charges are either assessed as a direct reduction in unit values or through a redemption of units for all contracts contained within the Separate Account. Mortality and Expense Risk Charge This charge is assessed through reduction of unit values. Administrative Expense Charge This charge is assessed through reduction of unit values. Death Benefit Charge This charge is assessed through reduction of unit values. Administrative Charge This charge is assessed through the redemption of units. This charge is equal, on an annual basis, to 1.15% of the daily value of the assets invested in each fund. This charge is equal, on an annual basis, to 0.15% of the daily value of the assets invested in each fund. This charge is equal, on an annual basis, to 0.10% of the daily value of the assets invested in each fund. $30 per contract, annually. These charges are not applicable to contracts with values of $50,000 or more. Contingent Deferred Sales Charge 0%-7% This charge is assessed through the redemption of units. 9. SUBSEQUENT EVENTS The Separate Account s management has reviewed events occurring through March 3, 2017 the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure. F-14

15

16 LA2058