<PAGE>
Registration No. 333-53909
As filed with the Securities and Exchange Commission on April 23, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 2
TO REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
(Exact Name of Trust)
AMERICAN GENERAL LIFE INSURANCE COMPANY
(Exact Name of Depositor)
2727-A Allen Parkway
Houston, Texas 77019-2191
(Complete Address of Depositor's Principal Executive Offices)
Pauletta P. Cohn, Esq.
Associate General Counsel and Secretary
American General Life Companies
2727 Allen Parkway
Houston, Texas 77019-2191
(Name and Complete Address of Agent for Service)
Title and Amount of Securities Being Registered:
An Indefinite Amount of Units of Interest in
American General Life Insurance Company
Separate Account VL-R
Under Variable Life Insurance Policies
Amount of Filing Fee: None required.
It is proposed that this filing will become effective 60 days after filing
pursuant to paragraph (a)(1) of Rule 485.
Registrant elects to be governed by Rule 6e-3(T)(b)(13)(i)(A) under the
Investment Company Act of 1940, with respect to the Variable Life Insurance
Policies described in the Prospectus.
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
RECONCILIATION AND TIE BETWEEN ITEMS IN FORM
N-8B-2 AND THE PROSPECTUS
(PURSUANT TO INSTRUCTION 4 OF FORM S-6)
CROSS REFERENCE SHEET
ITEM NO. OF FORM N-8B-2* PROSPECTUS CAPTION
- -----------------------------------------------
1 Additional Information: Separate Account VL-R.
2 Additional Information: AGL.
3 Inapplicable.
4 Additional Information: Distribution of Policies.
5, 6 Additional Information: Separate Account VL-R.
7 Inapplicable.**
8 Inapplicable.**
9 Additional Information: Legal Matters.
10(a) Additional Information: Your Beneficiary, Assigning
Your Policy.
10(b) Basic Questions You May Have: How will the value
of my investment in a Policy change over time?
10(c)(d) Basic Questions You May Have: How can I change
my Policy's insurance coverage? How can I access
my investment in a Policy? Can I choose the form
in which AGL pays out any proceeds from my
Policy? Additional Information: Payment of Policy
Proceeds.
10(e) Basic Questions You May Have: Must I invest any
minimum amount in a policy?
10(f) Additional Information: Voting Privileges.
10(g)(1), 10(g)(4),
10(h)(3), 10(h)(2) Basic Questions You May Have: To what extent will
AGL vary the terms and conditions of the Policies
in particular cases? Additional Information:
Voting Privileges; Additional Rights That
We Have.
10(g)(3), 10(g)(4),
10(h)(3), 10(h)(4) Inapplicable.**
10(i) Additional Information: Separate Account VL-R; Tax
Effects.
11 Basic Questions You May Have: How will the value
of my investment in a Policy change over time?
Additional Information: Separate Account VL-R.
12(a) Additional Information: Separate Account VL-R;
Front Cover.
12(b) Inapplicable.**
12(c), 12(d) Inapplicable.**
12(e) Inapplicable, because the Separate Account did not
commence operations until 1998.
13(a) Basic Questions You May Have: What charges will
AGL deduct from my investment in a Policy? What
charges and expenses will the Mutual Funds
deduct from the amounts I invest through my
Policy? Additional Information: More About
Policy Charges.
13(b) Illustrations of Hypothetical Policy Benefits.
13(c) Inapplicable.**
<PAGE>
ITEM NO. OF FORM N-8B-2* PROSPECTUS CAPTION
- -----------------------------------------------
13(d) Basic Questions You May Have: To what extent will
AGL vary the terms and conditions of the Policy
in particular cases?
13(e), 13(f), 13(g) None.
14 Basic Questions You May Have: How can I invest
money in a Policy?
15 Basic Questions You May Have: How can I invest
money in a Policy? How do I communicate with AGL?
16 Basic Questions You May Have: How will the value
of my investment in a Policy change over time?
17(a), 17(b) Captions referenced under Items 10(c), 10(d), and
10(e).
17(c) Inapplicable.**
18(a) Captions referred to under Item 16.
18(b), 18(d) Inapplicable.**
18(c) Additional Information: Separate Account VL-R.
19 Additional Information: Separate Account VL-R;
Our Reports to Policy Owners.
20(a), 20(b), 20(c), 20(d),
20(e), 20(f) Inapplicable.**
21(a), 21(b) Basic Questions You May Have: How can I access
my investment in a Policy? Additional
Information: Payment of Policy Proceeds.
21(c) Inapplicable.**
22 Additional Information: Payment of Policy Proceeds
- Delay to Challenge Coverage.
23 Inapplicable.**
24 Basic Questions You May Have; Additional
Information.
25 Additional Information: AGL.
26 Inapplicable, because the Separate Account did not
commence operations until 1998.
27 Additional Information: AGL.
28 Additional Information: AGL's Management.
29 Additional Information: AGL.
30, 31, 32, 33, 34 Inapplicable, because the Separate Account did not
commence operations until 1998.
35 Inapplicable.**
36 Inapplicable.**
37 None.
38, 39 Additional Information: Distribution of
the Policies.
40 Inapplicable, because the Separate Account did not
commence operations until 1998.
41(a) Additional Information: Distribution of the
Policies.
41(b), 41(c) Inapplicable**
42,43 Inapplicable, because the Separate Account did not
commence operations or issue any securities
until 1998.
44(a)(1), 44(a)(2), 44(a)(3) Basic Questions You May Have: How will the value
of my investment in a Policy change over time?
44(a)(4) Additional Information: Tax Effects--Our taxes.
44(a)(5), 44(a)(6) Basic Questions You May Have: What charges will
AGL deduct from my investment in a Policy?
44(b) Inapplicable.**
44(c) Caption referenced in 13(d) above.
<PAGE>
ITEM NO. OF FORM N-8B-2* PROSPECTUS CAPTION
- -----------------------------------------------
45 Inapplicable, because the Separate Account did not
commence operations until 1998.
46(a) Captions referenced in 44(a) above.
46(b) Inapplicable.**
47, 48, 49 None.
50 Inapplicable.**
51 Inapplicable.**
52(a), 52(c) Basic Questions You May Have: To what extent can
AGL vary the terms and conditions of the Policy
in particular cases? Additional Information:
Additional Rights That We Have.
52(b), 52(d) None.
53(a) Additional Information: Tax Effects--Our taxes.
53(b), 54 Inapplicable.**
55 Illustrations of Hypothetical Policy Benefits.
56-59 Inapplicable.**
* Registrant includes this Reconciliation and Tie in its Registration
Statement in compliance with Instruction 4 as to the Prospectus as set out
in Form S-6. Separate Account VL-R (Account) has previously filed a notice
of registration as an investment company on Form N-8A under the Investment
Company Act of 1940 (Act), and a Form N-8B-2 Registration Statement.
Pursuant to Sections 8 and 30(b)(1) of the Act, Rule 30a-1 under the Act,
and Forms N-8B-2 and N-SAR under that Act, the Account will keep its
Form N-8B-2 Registration Statement current through the filing of periodic
reports required by the Securities and Exchange Commission (Commission).
** Not required pursuant to either Instruction 1(a) as to the Prospectus as set
out in Form S-6 or the administrative practice of the Commission and its
staff of adapting the disclosure requirements of the Commission's
registration statement forms in recognition of the differences between
variable life insurance policies and other periodic payment plan
certificates issued by investment companies and between separate accounts
organized as management companies and unit investment trusts.
<PAGE>
LEGACY PLUS
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY (THE "POLICY") ISSUED BY
AMERICAN GENERAL LIFE INSURANCE COMPANY ("AGL")
HOME OFFICE:
(Express Delivery) (US Mail)
2727-A Allen Parkway Variable Universal Life
Houston, Texas 77019-2191 Administration
PHONE: 1-888-325-9315 P.O. Box 4880
or 1-713-831-3443 Houston, Texas 77210-4880
FAX: 1-713-620-3857
This booklet is called the "prospectus."
Investment options. You may use AGL's Separate Account VL-R ("Separate
Account") to invest in the following variable investment options and change your
selections from time to time:
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________________________
<S> <C> <C> <C>
AIM VARIABLE INSURANCE AMERICAN GENERAL SERIES MFS VARIABLE INSURANCE PUTNAM VARIABLE TRUST
FUNDS, INC. PORTFOLIO COMPANY TRUST . Putnam VT Diversified
. AIM V.I. International . Money Market Fund . MFS Emerging Growth Income Fund
Equity Fund Series . Putnam VT Growth
. AIM V.I. Value Fund The Variable Annuity Life and Income Fund
Insurance Company * Massachusetts Financial
A I M Advisors, Inc.* Services Company* Putnam Management, Inc.*
________________________________________________________________________________________________________________________________
TEMPLETON VARIABLE PRODUCTS MORGAN STANLEY DEAN WITTER OPPENHEIMER VARIABLE BT INSURANCE FUNDS
SERIES FUND UNIVERSAL FUNDS, INC. ACCOUNT FUNDS TRUST
. Franklin Small Cap . Equity Growth . Oppenheimer High . Equity 500 Index
Investments Fund1 Income . EAFE Equity Index
. Templeton Developing Morgan Stanley Dean Witter Oppenheimer Funds, Inc.* Bankers Trust Company*
Markets Fund/2/ Investment Management Inc.*
. Templeton International
Fund/3/
/1/ Franklin Advisers, Inc.*
/2/ Templeton Asset
Management Ltd.*
/3/ Templeton Investment
Counsel, Inc.*
________________________________________________________________________________________________________________________________
ROYCE CAPITAL FUNDS
. Royce Total Return
Royce & Associates, Inc.*
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The Investment Adviser of the investment option
<PAGE>
SEPARATE PROSPECTUSES CONTAIN MORE INFORMATION ABOUT THE MUTUAL FUNDS ("FUNDS"
OR "MUTUAL FUNDS") IN WHICH WE INVEST THE ACCUMULATION VALUE THAT YOU ALLOCATE
TO ANY OF THE ABOVE-LISTED INVESTMENT OPTIONS. THE FORMAL NAME OF EACH SUCH FUND
IS SET FORTH IN THE CHART THAT APPEARS ABOVE. YOUR INVESTMENT RESULTS IN ANY
SUCH OPTION WILL DEPEND ON THOSE OF THE RELATED FUND. YOU SHOULD BE SURE YOU
ALSO READ THE PROSPECTUS OF THE MUTUAL FUND FOR ANY SUCH INVESTMENT OPTION YOU
MAY BE INTERESTED IN. YOU CAN REQUEST FREE COPIES OF ANY OR ALL OF THE MUTUAL
FUND PROSPECTUSES FROM YOUR AGL REPRESENTATIVE OR FROM US AT OUR HOME OFFICE
LISTED ABOVE.
Other choices you have. During the insured person's lifetime, you can (1)
increase (but not decrease) the amount of insurance, (2) borrow or withdraw
amounts you have invested, (3) choose, within limits, when and how much you
invest, and (4) choose whether the amount you have invested under your Policy,
upon the insured person's death, will be added to the insurance proceeds we
otherwise will pay to the beneficiary.
Charges and expenses. We deduct charges and expenses from the amounts you
invest. These are described beginning on page 8.
Right to return. If for any reason you are not satisfied with your Policy, you
may return it to us and we will refund any premiums paid adjusted to reflect
investment experience. (In some states, we will return premiums paid as required
by state law.) To exercise your right to return your Policy, you must mail it
directly to the Home Office address shown on the first page of this prospectus
or return it to the AGL representative through whom you purchased the Policy
within 10 days after you receive it. In a few states, this period may be longer.
Because you have this right, we will invest your initial premium payment in the
money market investment option from the date your investment performance begins
until the first business day that is at least 15 days later. Then we will
automatically allocate your investment among the above-listed investment options
as you have chosen. Any additional premium we receive during the 15-day period
will also be invested in the money market division and allocated to the
investment options at the same time as your initial premium.
We have designed this prospectus to provide you with information that you
should have before investing in the Policies Please read the prospectus
carefully and keep it for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") OR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE POLICIES ARE NOT AVAILABLE IN ALL STATES.
THE POLICIES ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY. THEY ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK AND ARE NOT BANK GUARANTEED. THEY ARE
SUBJECT TO INVESTMENT RISKS AND POSSIBLE LOSS OF PRINCIPAL INVESTED.
This prospectus is dated April 30, 1999.
2
<PAGE>
GUIDE TO THIS PROSPECTUS
This prospectus contains information that you should know before you purchase
a Legacy Plus policy ("Policy") or exercise any of your rights or privileges
under a Policy.
Basic Information. Here are the page numbers in this prospectus where you may
find answers to most of your questions:
PAGE TO
SEE IN THIS
PROSPECTUS
BASIC QUESTIONS YOU MAY HAVE
- ----------------------------
. How can I invest money in a Policy?............................ 5
. How will the value of my investment in a Policy
change over time?............................................ 6
. What is the basic amount of insurance ("death benefit")
that AGL pays when the insured person dies?.................. 7
. What charges will AGL deduct from my investment in a Policy?... 8
. What charges and expenses will the Mutual Funds deduct from
amounts I invest through my Policy?.......................... 10
. Must I invest any minimum amount in a Policy?.................. 11
. How can I change my Policy's investment options?............... 12
. How can I change my Policy's insurance coverage?............... 12
. What additional rider benefits might I select?................. 13
. How can I access my investment in a Policy?.................... 13
. Can I choose the form in which AGL pays out proceeds
from my Policy?.............................................. 14
. To what extent can AGL vary the terms and conditions of
the Policy in particular cases?.............................. 15
. How will my Policy be treated for income tax purposes?......... 16
. How do I communicate with AGL?................................. 16
New Investment Options. This prospectus introduces the following eight new
investment options:
. AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. International Equity Fund
. MFS VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
. PUTNAM VARIABLE TRUST
Putnam VT Diversified Income Fund
Putnam VT Growth and Income Fund
. TEMPLETON VARIABLE PRODUCTS SERIES FUND
Franklin Small Cap Investments Fund
Templeton Developing Markets Fund
Templeton International Fund
. OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer High Income
3
<PAGE>
Illustrations of a hypothetical Policy. Starting on page 18, we have included
some examples of how the values of a sample Policy would change over time, based
on certain assumptions we have made. Because your circumstances may vary
considerably from our assumptions, your AGL representative will also provide you
with a similar sample illustration that is more tailored to your own
circumstances and wishes.
Additional information. You may find the answers to any other questions you
have under "Additional Information" beginning on page 21 or in the form of our
Policy. A table of contents for the "Additional Information" portion of this
prospectus also appears on page 21. You can obtain copies of our Policy form
from (and direct any other questions to) your AGL representative or our Home
Office (shown on the first page of this prospectus).
Financial statements. We have included certain financial statements of AGL
and Separate Account VL-R in this prospectus. These begin on page VL-R-1.
Special words and phrases. If you want more information about any words or
phrases that you read in this prospectus, you may wish to refer to the Index of
Words and Phrases that appears at the back of this prospectus. That index will
tell you on what page you can read more about many of the words and phrases that
we use.
4
<PAGE>
BASIC QUESTIONS YOU MAY HAVE
How can I invest money in a Policy?
Premium payments. We call the investments you make in a Policy "premiums" or
"premium payments." The amount we require as your initial premium varies
depending on the specifics of your Policy and the insured person. We can refuse
to accept a subsequent premium payment that is less than $50. Otherwise, with a
few exceptions mentioned below, you can make premium payments at any time and in
any amount.
Limits on premium payments. In certain circumstances, we may refuse to accept
an additional premium if:
. the insured person does not provide us with adequate evidence that he/she
continues to meet our requirements for issuing insurance; or
. the additional premium would cause the "net amount at risk" to exceed the
Maximum Net Amount at Risk, as set out in your Policy.
The net amount at risk is the difference between:
. the death benefit that would be payable before reduction by policy loans if
the insured person died on that date; and
. the then total accumulation value under the Policy. The term "accumulation
value" is described on page 6.
Additional premium payments may result in an increase in the death benefit. If
the increase in the death benefit exceeds the increase in the accumulation value
due to the alternative basic death benefit calculation, then the net amount at
risk will increase. The resulting increase in the net amount at risk could cause
the net amount at risk to exceed the Maximum Net Amount at Risk. The
"alternative basic death benefit" calculation is described starting on page 7.
The sum of the premiums you pay under your Policy may not exceed the guideline
premium limitation as defined by Section 7702 of the Internal Revenue Code of
1986, as amended. Any portion of any premium you pay which is determined to be
in excess of the limit will be refunded.
Checks and money orders. You must pay premiums by check or money order drawn
on a U.S. bank in U.S. dollars and made payable to "American General Life
Insurance Company," or "AGL." Premiums after the initial premium must be sent
directly to our Home Office.
Other ways to pay premiums. We also accept premium payments by bank draft,
wire, or by exchange from another insurance company. You may obtain further
information about how to make premium
5
<PAGE>
payments by any of these methods from your AGL representative or from our Home
Office shown on the first page of this prospectus.
We have a premium financing program available for certain qualified
applicants. If you intend to make an initial premium payment of at least $50,000
and you have a net worth of at least $3,000,000, you may qualify under this
program. For more information, you may contact your registered representative
or our Home Office at 1-800-677-3311.
Dollar cost averaging. Dollar cost averaging is an investment strategy
designed to reduce the risks that result from market fluctuations. The strategy
spreads the allocation of your accumulation value over a period of time. This
allows you to reduce the risk of investing most of your funds at a time when
prices are high. The success of this strategy depends on market trends and is
not guaranteed.
Under dollar cost averaging, we automatically make transfers of your
accumulation value from the money market investment option to one or more of the
other investment options that you choose. You tell us whether you want these
transfers to be made monthly, quarterly, semi-annually or annually. We make the
transfers as of the end of the valuation period that contains the day of the
month that you select other than the 29th, 30th or 31st day of the month. The
term "valuation period" is described on page 29. You must have at least $100,000
of accumulation value to start dollar cost averaging and each transfer under the
program must be at least $5,000. You cannot participate in dollar cost averaging
while also using automatic rebalancing (discussed below). Dollar cost averaging
ceases upon your request, or if your accumulation value in the money market
option becomes exhausted.
Automatic rebalancing. This feature automatically rebalances the proportion of
your accumulation value in each investment option under your Policy to
correspond to your then current premium allocation designation. You tell us
whether you want us to do the rebalancing quarterly, semi-annually or annually.
The date automatic rebalancing occurs will be based on the date of issue of your
Policy. For example, if your Policy is dated January 17, and you have requested
automatic rebalancing on a quarterly basis, automatic rebalancing will start on
April 17, and will occur quarterly thereafter. Automatic rebalancing will occur
as of the end of the valuation period that contains the date of the month your
Policy was issued. You must have a total accumulation value of at least $100,000
to begin automatic rebalancing. You cannot participate in this program while
also participating in dollar cost averaging (discussed above). Rebalancing ends
upon your request.
HOW WILL THE VALUE OF MY INVESTMENT IN A POLICY CHANGE OVER TIME?
Your accumulation value. From each premium payment you make, we deduct the
charges that we describe on page 8 under "Deductions from each premium
payment." We invest the rest in one or more of the investment options listed on
the first page of this prospectus. We call the amount that is at any time
invested under your Policy (including any loan collateral we are holding for
your Policy loans) your "accumulation value."
Your investment options. We invest the accumulation value that you have
allocated to any investment option in shares of a Mutual Fund that follows
investment practices, policies and objectives that are appropriate to that
option. Over time, your accumulation value in any investment option will
increase or
6
<PAGE>
decrease by the same amount as if you had invested in the related Fund's shares
directly (and reinvested all dividends and distributions from the Fund in
additional Fund shares); except that your accumulation value will be reduced by
certain charges that we deduct. We describe these charges beginning on page 8
under "What charges will AGL deduct from my investment in a Policy?"
You can review other important information about the Mutual Funds that you can
choose in the separate prospectuses for those Funds. This includes information
about the investment performance that each Fund's investment manager has
achieved. You can request additional free copies of these prospectuses from your
AGL representative or from our Home Office shown on the first page of this
prospectus.
Policies are "non-participating." You will not be entitled to any dividends
from AGL.
WHAT IS THE BASIC AMOUNT OF INSURANCE ("DEATH BENEFIT") THAT AGL PAYS WHEN THE
INSURED PERSON DIES?
Your specified amount of insurance. In your application to buy a Legacy Plus
Policy, you will tell us how much life insurance coverage you want on the life
of the insured person. We call this the "specified amount" of insurance.
Your death benefit. The basic death benefit we will pay is reduced by any
outstanding Policy loans. You also choose whether the basic death benefit we
will pay is
. Option 1--The specified amount on the date of the insured person's death;
or
. Option 2--The specified amount plus the Policy's accumulation value on the
date of death.
Under Option 2, your death benefit will tend to be higher than under Option 1.
However, the monthly insurance charge we deduct will also be higher to
compensate us for our additional risk. Because of this, your accumulation value
will tend to be higher under Option 1 than under Option 2.
We will automatically pay an alternative basic death benefit if it is higher
than the basic Option 1 or Option 2 death benefit (whichever you have selected).
The alternative basic death benefit is computed by multiplying your Policy's
accumulation value on the insured person's date of death by the following
percentages:
7
<PAGE>
TABLE OF ALTERNATIVE BASIC DEATH BENEFITS AS A PERCENTAGE MULTIPLE OF POLICY
ACCUMULATION VALUE
BASED ON GUIDELINE PREMIUM
INSURED'S INSURED'S
AGE ON % OF AGE OF % OF
POLICY ACCUMULATION POLICY ACCUMULATION
ANNIVERSARY VALUE ANNIVERSARY VALUE
----------- ------------ ----------- ------------
0-40 250 60 130
41 243 61 128
42 236 62 126
43 229 63 124
44 222 64 122
45 215 65 120
46 209 66 119
47 203 67 118
48 197 68 117
49 191 69 116
50 185 70 115
51 178 71 113
52 171 72 111
53 164 73 109
54 157 74 107
55 150 75-90 105
56 146 91 104
57 142 92 103
58 138 93 102
59 134 94 101
95+ 100
__________
* Nearest birthday at the beginning of the Policy year in which the insured
person dies.
WHAT CHARGES WILL AGL DEDUCT FROM MY INVESTMENT IN A POLICY?
Deductions from each premium payment. There is currently no deduction from
each premium payment you make. However, we have the right at any time to assess
a charge not to exceed more than 1.5% on all future premium payments for the
costs associated with the issuance of the Policy and administrative services we
perform.
8
<PAGE>
Daily charge. We make a daily deduction at an annual effective rate of .75% of
your accumulation value that is then being invested in any of the investment
options for the costs associated with the mortality and expense risks we assume
under the Policy. After a Policy has been in effect for 10 years, we will reduce
the rate of the charge to a maximum of .50%, and after 20 years, we will further
reduce the charge to a maximum of .25%. Because the Policies were first offered
in 1998, however, this decrease has not yet occurred for any outstanding Policy.
The daily deduction charges, including the current charge of .75%, are the
maximums we may charge; we may charge less, but we can never charge more.
Monthly insurance charge. Every month we will deduct from your accumulation
value a charge based on the cost of insurance rates applicable to your Policy on
the date of the deduction and our "amount at risk" on that date. Our amount at
risk is the difference between (a) the death benefit that would be payable
before reduction by policy loans if the insured person died on that date and (b)
the then total accumulation value under the Policy. For otherwise identical
Policies, a greater amount at risk results in a higher monthly insurance charge.
The current monthly insurance charge has been designed primarily to provide
funds out of which we can make payments of death benefits under the Policy as
insured persons die.
For otherwise identical Policies, a higher cost of insurance rate also results
in a higher monthly insurance charge. Our cost of insurance rates are guaranteed
not to exceed those that will be specified in your Policy.
In general, our cost of insurance rates increase with the insured person's
age. The longer you own your Policy, the higher the cost of insurance rate will
be. Also our cost of insurance rates will generally be lower if the insured
person is a female than if a male (except in Montana where such costs cannot be
based on gender).
Similarly, our current cost of insurance rates are generally lower for non-
smokers than smokers. Insured persons who present particular health,
occupational or non-work related risks may be charged higher cost of insurance
rates and other additional charges based on the specified amount of insurance
coverage under their Policy.
Our cost of insurance rates also are generally higher under a Policy that has
been in force for some period of time than they would be under an otherwise
identical Policy purchased more recently on the same insured person.
Transaction Fee. We will charge a $25 transaction fee for each partial
surrender you make to cover administrative services. This charge will be
deducted from the investment options in the same ratio as the requested
transfer.
Charge for taxes. We can make a charge in the future for taxes we incur or
reserves we set aside for taxes in connection with the Policies. This would
reduce the investment experience of your accumulation value.
For a further discussion regarding the charges we will deduct from your
investment in a Policy, see "More About Policy Charges" on page 28.
9
<PAGE>
Allocation of charges. You may choose from which of your investment options we
deduct all monthly charges. If you do not have enough accumulation value in any
investment option to comply with your selection, we will deduct these charges in
proportion to the amount of accumulation value you then have in each investment
option.
WHAT CHARGES AND EXPENSES WILL THE MUTUAL FUNDS DEDUCT FROM AMOUNTS I INVEST
THROUGH MY POLICY?
Each Mutual Fund pays its investment management fees and other operating
expenses. Because they reduce the investment return of a Fund, these fees and
expenses also will reduce indirectly the return you will earn on any
accumulation value that you have invested in that Fund. These charges and
expenses are as follows:
The Mutual Funds' Annual Expenses (as a percentage of average net assets).
<TABLE>
<CAPTION>
FUND OTHER FUND TOTAL FUND
MANAGEMENT OPERATING OPERATING
FEES AFTER EXPENSES AFTER EXPENSES AFTER
EXPENSE EXPENSE EXPENSE
NAME OF FUND REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------------ ------------- ------------- --------------
<S> <C> <C> <C>
The following funds of
AIM VARIABLE INSURANCE FUNDS, INC.:
AIM V.I. International Equity Fund............... 0.75% 0.16% 0.91%
AIM V.I. Value Fund.............................. 0.61% 0.05% 0.66%
The following fund of
AMERICAN GENERAL SERIES PORTFOLIO COMPANY:
Money Market..................................... 0.50% 0.04% 0.54%
The following fund of
BT INSURANCE FUNDS TRUST:
Equity 500 Index/1/.............................. 0.00% 0.30% 0.30%
EAFE Equity Index/1/............................. 0.00% 0.65% 0.65%
The following fund of
MFS VARIABLE INSURANCE TRUST
MFS Emerging Growth Series....................... 0.75% 0.10% 0.85%
The following fund of
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.:
Equity Growth/1/................................. 0.09% 0.76% 0.85%
The following funds of
PUTNAM VARIABLE TRUST CLASS "IB" FUNDS
Putnam VT Diversified Income Fund................ 0.50% *0.19% 0.69%
Putnam VT Growth and Income Fund................. 0.35% *0.14% 0.49%
*Including 12b-1 fees of .11%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The following funds of
TEMPLETON VARIABLE CLASS "2" SERIES FUNDS
Franklin Small Cap Investments Fund/1/........... 0.15% **1.10% 1.25%
Templeton Developing Markets Fund................ 1.25% **0.66% 1.91%
Templeton International Fund..................... 0.69% **0.42% 1.11%
**Including 12b-1 fees of .25%.
The following fund of
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer High Income.......................... 0.74% 0.04% 0.78%
The following fund of
ROYCE CAPITAL FUND:
Royce Total Return/1/............................ 0% 1.35% 1.35%
</TABLE>
/1/ If certain voluntary expense reimbursements from the investment adviser
were terminated, management fees and other expenses for the fiscal year ended in
1998 would have been as set out in the following table.
OTHER TOTAL
FUND FUND FUND
MANAGEMENT OPERATING OPERATING
NAME OF FUND FEES EXPENSES EXPENSES
------------ ---------- ---------- ----------
Equity 500 Index...................... 0.20% 0.99% 1.19%
EAFE Equity Index..................... 0.45% 1.21% 1.66%
Royce Total Return.................... 1.00% 17.08% 18.08%
Equity Growth......................... 0.55% 0.76% 1.31%
Franklin Small Cap Investments Fund... 0.75% **1.25% 2.00%
**Including 12b-1 fees of .25%.
MUST I INVEST ANY MINIMUM AMOUNT IN A POLICY?
Planned periodic premiums. Page 3 of your Policy will specify a "Planned
Periodic Premium." This is the amount that you (within limits) choose to have us
bill you. Our current practice is to bill quarterly, semi-annually or annually.
However, payment of these or any other specific amounts of premiums is not
mandatory. After payment of your initial premium, you need only invest enough to
ensure your Policy's cash surrender value stays above zero. The less you invest,
the more likely it is that your Policy's cash surrender value could fall to
zero, as a result of the deductions we periodically make from your accumulation
value.
Policy lapse and reinstatement. If your Policy's cash surrender value does
fall to zero, we will notify you and give you a grace period to pay at least the
amount we estimate is necessary to keep your Policy in force for a reasonable
time. If we do not receive your payment by the end of the grace period, your
Policy will end without value and all coverage under your Policy will cease.
Although you can apply to have your Policy "reinstated," you must do this within
5 years (or, if earlier, before the Policy's maturity date), and you must
present evidence that the insured person still meets our requirements for
issuing coverage. Also, you would have to pay certain extra amounts that we
require. In the Policy form itself, you will find additional information about
the values and terms of a Policy after it is reinstated.
11
<PAGE>
HOW CAN I CHANGE MY POLICY'S INVESTMENT OPTIONS?
Future premium payments. You may at any time change the investment options in
which future premiums you pay will be invested. Your allocation must, however,
be in whole percentages that total 100%.
Transfers of existing accumulation value. You may also transfer your existing
accumulation value from one investment option under the Policy to another. You
may make transfers at any time. Unless you are transferring the entire amount
you have in an investment option, each transfer must be at least $5,000. See
"Additional Rights That We Have" on page 33.
Transaction Fee. We will charge a $25 transaction fee for each transfer you
make in excess of 12 per Policy year.
Market Timing. The Policy is not designed for professional market timing
organizations or other entities using programmed and frequent transfers. We
reserve the right at any time and without prior notice to any party to
terminate, suspend, or modify our policies or procedures regarding telephone
requests or to stop permitting telephone requests altogether.
Maximum number of investment options. We can at any time limit the number of
investment options you may use. Our current rule is that you cannot use more
than 18 different options over the life of your Policy.
HOW CAN I CHANGE MY POLICY'S INSURANCE COVERAGE?
Increase in coverage. You may at any time request an increase in the specified
amount of coverage under your Policy. You must, however, provide us with
satisfactory evidence that the insured person continues to meet our requirements
for issuing insurance coverage. You may not request a decrease in the specified
amount of coverage under your Policy.
We treat an increase in specified amount in many respects as if it were the
issuance of a new Policy. For example, the monthly insurance charge for the
increase will be based on the age and risk class of the insured person at the
time of the increase.
Change of death benefit option. You may at any time request us to change your
coverage from death benefit Option 1 to 2 or vice-versa.
. If you change from Option 1 to 2, we also automatically reduce your
Policy's specified amount of insurance by the amount of your Policy's
accumulation value (but not below zero) at the time of the change.
. If you change from Option 2 to 1, we automatically increase your Policy's
specified amount by the amount of your Policy's accumulation value.
12
<PAGE>
Tax consequences of changes in insurance coverage. Please read "Tax Effects"
starting on page 22 of this prospectus to learn about possible tax consequences
of changing your insurance coverage under your Policy.
WHAT ADDITIONAL RIDER BENEFITS MIGHT I SELECT?
Legacy Plus Policies currently have no additional rider benefits available.
HOW CAN I ACCESS MY INVESTMENT IN A POLICY?
Full surrender. You may at any time surrender your Policy in full. If you do,
we will pay you the accumulation value, less any Policy loans. We call this
amount your "cash surrender value."
Partial surrender. You may, at any time after the first Policy year, make a
partial surrender of your Policy's cash surrender value. A partial surrender
must be at least $5,000. If the Option 1 death benefit is then in effect, we
will also automatically reduce your Policy's specified amount of insurance by
the amount of your withdrawal and any related charges. We will not permit a
partial surrender if it would cause your accumulation value to fall below
$100,000 or your death benefit to fall below the minimum specified in your
Policy.
You may choose the investment option or options from which money that you
withdraw will be taken. Otherwise, we will allocate the withdrawal in the same
proportions as then apply for deducting monthly charges under your Policy or, if
that is not possible, in proportion to the amount of accumulation value you then
have in each investment option.
Exchange of Policy in Certain States. Certain states require that a policy
owner be given the right to exchange the Policy for a fixed benefit life
insurance policy, within either 18 or 24 months from the date of issue. This
right is subject to various conditions imposed by the states and us. In such
states, this right has been more fully described in your Policy or related
endorsements to comply with the applicable state requirements.
Transaction Fee. We will charge a $25 transaction fee for each partial
surrender you make. This charge will be deducted from the investment options in
the same ratio as the requested transfer.
Policy loans. You may at any time borrow from us an amount equal to your
Policy's cash surrender value less:
. $100,000;
. our estimate of three months' charges; and
. the interest that will be payable on your loan through your next Policy
anniversary.
This rule is not applicable in all states. The minimum amount of each loan is
$5,000.
13
<PAGE>
We remove from your investment options an amount equal to your loan and hold
that amount as additional collateral for the loan. We will credit your Policy
with interest on this collateral amount at an effective annual rate of 4%
(rather than any amount you could otherwise earn in one of our investment
options), and we will charge you interest on your loan at an effective annual
rate of 4.75%. Loan interest is payable annually, on the Policy anniversary, in
advance, at a rate of 4.54%. Any amount not paid by its due date will
automatically be added to the loan balance as an additional loan. Interest you
pay on Policy loans will not, in most cases, be deductible on your tax returns.
You may choose which of your investment options the loan will be taken from.
If you do not so specify, we will allocate the loan in the same way that charges
under your Policy are being allocated. If this is not possible, we will make the
loan pro-rata from each investment option that you then are using.
You may repay all or part (but not less than $5,000) of your loan at any time
before the death of the Insured while the Policy is in force. You must designate
any loan repayment as such. Otherwise, we will treat it as a premium payment
instead. We will invest any additional loan repayments you make in the
investment options you request. In the absence of such a request we will invest
the repayment in the same proportion as you then have selected for premium
payments that we receive from you. Any unpaid loan will be deducted from the
proceeds we pay following the insured person's death.
Preferred loan interest rate. We will credit a higher interest rate, but not
more than 4.75%, on an amount of the collateral securing Policy loans taken out
after the first 10 Policy years. The maximum amount of new loans that will
receive this preferred loan interest rate for any year is:
. 10% of your Policy's accumulation value (including any loan collateral we
are holding for your Policy loans) at the beginning of the Policy year; or
. if less, your Policy's maximum remaining loan value at that anniversary.
We intend to set the rate of interest we credit to your preferred collateral
amount equal to the loan interest rate you are paying, resulting in a zero net
cost of borrowing for that amount. We have full discretion to vary the preferred
rate, provided that it will always be greater than the rate we are then
crediting in connection with regular Policy loans, and will never be less than
an effective annual rate of 4.5%. Because we first offered the Policies in 1998,
we have not yet applied the preferred loan interest rate to any Policy loan
amounts.
Maturity of your Policy. If the insured person is still living on the
"Maturity Date" shown on page 3 of your Policy, we will automatically pay you
the cash surrender value of the Policy, and the Policy will end. The maturity
date is the Policy anniversary nearest the insured person's 100th birthday.
CAN I CHOOSE THE FORM IN WHICH AGL PAYS OUT THE PROCEEDS FROM MY POLICY?
Choosing a payment option. You may choose to receive the full proceeds from
the Policy as a single sum. This includes proceeds that become payable upon the
death of the insured person, full surrender or the maturity date. Alternatively,
you may elect that all or part of such proceeds be applied to one or more of the
following payment options:
14
<PAGE>
. Option 1--Equal monthly payments for a specified period of time.
. Option 2--Equal monthly payments of a specified amount until all amounts
are paid out.
. Option 3--Equal monthly payments for the payee's life, but with payments
guaranteed for a specified number of years. These payments are based on
annuity rates that are set forth in the Policy or, at the payee's request,
the annuity rates that we then are using.
. Option 4--Proceeds left to accumulate with interest.
Additional payment options may also be available with our consent. We have the
right to veto any payment option, if the payee is a corporation or other entity.
You can read more about each of these options in our Policy form and in the
separate form of payment contract that we issue when any such option takes
effect.
Within 60 days after the insured person's death, any payee entitled to receive
proceeds as a single sum may elect one or more payment options.
Interest rates that we credit under each option will be at least 3%.
Change of payment option. You may change any payment option you have elected
at any time while the Policy is in force and before the start date of the
payment option.
Tax impact. If a payment option is chosen, you or your beneficiary may have
tax consequences. You should consult with a qualified tax adviser before
deciding whether to elect one or more payment options.
TO WHAT EXTENT CAN AGL VARY THE TERMS AND CONDITIONS OF THE POLICY IN PARTICULAR
CASES?
Listed below are some variations we may make in the terms of a Policy. Any
variations will be made only in accordance with uniform rules that we establish.
Policies purchased through "internal rollovers." We maintain published rules
that describe the procedures necessary to replace the other life insurance we
issue with a Policy. Not all types of other insurance we issue are eligible to
be replaced with a Policy. Our published rules may be changed from time to time,
but are evenly applied to all our customers.
Policies purchased through term life conversions. We maintain rules about how
to convert term insurance to a Legacy Plus Policy. This is referred to as a term
conversion. Term conversions are available to owners of term life insurance we
have issued. Any right to a term conversion is stated in the term life insurance
policy. Again, our published rules about term conversions may be changed from
time to time, but are evenly applied to all our customers.
State law requirements. AGL is subject to the insurance laws and regulations
in every jurisdiction in which Legacy Plus Policies are sold. As a result,
various time periods and other terms and conditions
15
<PAGE>
described in this prospectus may vary depending on where you reside. These
variations will be reflected in your Policy and related endorsements.
Variations in expenses or risks. AGL may vary the charges and other terms of
the Policy where special circumstances result in sales, administrative or other
expenses, mortality risks or other risks that are different from those normally
associated with the Policy.
HOW WILL MY POLICY BE TREATED FOR INCOME TAX PURPOSES?
Generally, death benefits paid under a Policy are not subject to income tax,
and earnings on your accumulation value are not subject to income tax as long as
we do not pay them out to you. If we do pay any amount of your Policy's
accumulation value upon surrender, partial surrender, or maturity of your
Policy, all or part of that distribution may be treated as a return of the
premiums you paid, which is not subject to income tax.
Amounts you receive as Policy loans are not taxable to you, unless you have
paid such a large amount of premiums that your Policy becomes what the tax law
calls a "modified endowment contract." In that case, the loan will be taxed as
if it were a partial surrender. Furthermore, loans, partial surrenders and other
distributions from a modified endowment contract may require you to pay
additional taxes and penalties that otherwise would not apply.
For further information about the tax consequences of owning a Policy, please
read "Tax Effects" starting on page 22.
HOW DO I COMMUNICATE WITH AGL?
When we refer to "you," we mean the person who is authorized to take any
action with respect to a Policy. Generally, this is the owner named in the
Policy. Where a Policy has more than one owner, each owner generally must join
in any requested action, except for transfers and changes in the allocation of
future premiums or changes among the investment options.
General. You should mail or express checks and money orders for premium
payments and loan repayments directly to our Home Office.
The following requests must be made in writing and signed by you:
. transfer of accumulation value;
. loan;
. full surrender;
. partial surrender;
. change of beneficiary or contingent beneficiary;
16
<PAGE>
. change of allocation percentages for premium payments;
. loan repayments or charges;
. change of death benefit option or manner of death benefit payment;
. increase in specified insurance amount;
. addition or cancellation of, or other action with respect to, election of a
payment option for Policy proceeds;
. tax withholding elections; and
. telephone transaction privileges.
You should mail or express these requests to our Home Office at the appropriate
address shown on the first page of this prospectus. You should also communicate
notice of the insured person's death, and related documentation, to our Home
Office.
We have special forms which should be used for loans, assignments, partial and
full surrenders, changes of owner or beneficiary, and all other contractual
changes. You will be asked to return your Policy when you request a full
surrender. You may obtain these forms from our Home Office or from your AGL
representative. Each communication must include your name, Policy number and, if
you are not the insured person, that person's name. We cannot process any
requested action that does not include all required information.
Telephone transactions. If you have a completed telephone authorization form
on file with us, you may make transfers, or change the allocation of future
premium payments or deduction of charges, by telephone, subject to the terms of
the form. We will honor telephone instructions from any person who provides the
correct information, so there is a risk of possible loss to you if unauthorized
persons use this service in your name. Our current procedure is that only the
owner or your AGL representative may make a transfer request by phone. We are
not liable for any acts or omissions based upon instructions that we reasonably
believe to be genuine. Our procedures include verification of the Policy number,
the identity of the caller, both the insured person's and owner's names, and a
form of personal identification from the caller. We will mail you a prompt
written confirmation of the transaction. If (a) many people seek to make
telephone requests at or about the same time, or (b) our recording equipment
malfunctions, it may be impossible for you to make a telephone request at the
time you wish. You should submit a written request if you cannot make a
telephone transfer. Also, if, due to malfunction or other circumstances, the
recording of your telephone request is incomplete or not fully comprehensible,
we will not process the transaction. The phone number for telephone requests is
1-888-325-9315.
17
<PAGE>
ILLUSTRATIONS OF HYPOTHETICAL POLICY BENEFITS
To help explain how our Policy works, we have prepared the following tables:
PAGE TO
SEE IN THIS
TABLE PROSPECTUS
----- ------------
Death Benefit Option 1--Current Charges................... 19
Guaranteed Maximum Charges............................. 20
The tables show how death benefits, accumulation values, and cash surrender
values ("Policy benefits") under a sample Legacy Plus Policy would change over
time if the investment options had constant hypothetical gross annual investment
returns of 0%, 6% or 12% over the years covered by each table. The tables are
for a 45 year-old male non-tobacco user. A single premium payment of $250,000
for an initial $1,110,551 of specified amount of coverage is assumed to be paid
at issue. The illustrations assume no Policy loan has been taken. As
illustrated, this Policy would be classified as a modified endowment contract
(See "Tax Effects" in Additional Information for further discussion).
Although the tables below do not include an example of a Policy with an
Option 2 death benefit, such a Policy would have higher death benefits and lower
cash surrender values.
Separate tables are included to show both current and guaranteed maximum
charges.
. The charges assumed in the current charge tables include a daily charge at
an annual effective rate of .75% for the first 10 Policy years, .50% for
Policy years 11--20, and .25% thereafter and current monthly insurance
charges.
. The guaranteed maximum charge tables assume that these charges will include
a daily charge at an annual effective rate of .75% for the first 10 Policy
years, .50% for Policy years 11--20, and .25% thereafter, and an additional
charge of 1.5% of every premium and guaranteed maximum insurance charges.
The charges assumed by both the current and guaranteed maximum charge tables
also include 0.94% for expenses of the Mutual Funds, which is the arithmetic
average of the advisory fees payable with respect to each Mutual Fund, after all
reimbursements, plus the arithmetic average of all other operating expenses of
each such Fund after all reimbursements, as reflected on pages 10 and 11 of this
prospectus.
Individual illustrations. On request, we will furnish you with a comparable
illustration based on your Policy's characteristics. If you request
illustrations more than once in any Policy year, we may charge $25 for the
illustration.
18
<PAGE>
<TABLE>
<CAPTION>
LEGACY PLUS
SINGLE PREMIUM $250,000 INITIAL SPECIFIED AMOUNT $1,110,551
DEATH BENEFIT OPTION 1
MALE AGE 45
NONSMOKER
ASSUMING CURRENT CHARGES
Death Benefit Accumulation Value Cash Surrender Value
End of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,110,551 1,110,551 1,110,551 244,198 259,047 273,897 244,198 259,047 273,897
2 1,110,551 1,110,551 1,110,551 238,020 268,032 299,820 238,020 268,032 299,820
3 1,110,551 1,110,551 1,110,551 232,097 277,588 328,625 232,097 277,588 328,625
4 1,110,551 1,110,551 1,110,551 225,916 287,240 360,128 225,916 287,240 360,128
5 1,110,551 1,110,551 1,110,551 219,532 297,054 394,687 219,532 297,054 394,687
6 1,110,551 1,110,551 1,110,551 212,984 307,082 432,684 212,984 307,082 432,684
7 1,110,551 1,110,551 1,110,551 206,293 317,359 474,523 206,293 317,359 474,523
8 1,110,551 1,110,551 1,110,551 199,438 327,886 520,619 199,438 327,886 520,619
9 1,110,551 1,110,551 1,110,551 192,369 338,637 571,422 192,369 338,637 571,422
10 1,110,551 1,110,551 1,110,551 184,957 349,522 627,395 184,957 349,522 627,395
15 1,110,551 1,110,551 1,110,551 145,209 412,385 1,019,874 145,209 412,385 1,019,874
20 1,110,551 1,110,551 1,110,551 92,682 482,202 1,661,717 92,682 482,202 1,661,717
</TABLE>
THE VALUES WILL CHANGE IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR
FREQUENCIES.
THE INVESTMENT RESULTS ARE AN EXAMPLE ONLY AND ARE NOT A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS
THAN THOSE SHOWN.
19
<PAGE>
<TABLE>
<CAPTION>
LEGACY PLUS
SINGLE PREMIUM $250,000 INITIAL SPECIFIED AMOUNT $1,110,551
DEATH BENEFIT OPTION 1
MALE AGE 45
NONSMOKER
ASSUMING GUARANTEED CHARGES
Death Benefit Accumulation Value Cash Surrender Value
End of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,110,551 1,110,551 1,110,551 241,894 252,758 267,330 241,894 252,758 267,330
2 1,110,551 1,110,551 1,110,551 233,576 259,261 290,355 233,576 259,261 290,355
3 1,110,551 1,110,551 1,110,551 225,042 265,761 315,553 225,042 265,761 315,553
4 1,110,551 1,110,551 1,110,551 216,183 272,161 343,078 216,183 272,161 343,078
5 1,110,551 1,110,551 1,110,551 206,994 278,461 373,212 206,994 278,461 373,212
6 1,110,551 1,110,551 1,110,551 197,470 284,663 406,269 197,470 284,663 406,269
7 1,110,551 1,110,551 1,110,551 187,496 290,668 442,517 187,496 290,668 442,517
8 1,110,551 1,110,551 1,110,551 176,953 296,371 482,271 176,953 296,371 482,271
9 1,110,551 1,110,551 1,110,551 165,831 301,765 525,981 165,831 301,765 525,981
10 1,110,551 1,110,551 1,110,551 154,006 306,744 574,085 154,006 306,744 574,085
15 1,110,551 1,110,551 1,110,551 82,615 327,146 913,836 82,615 327,146 913,836
20 0 1,110,551 1,110,551 0 322,916 1,468,476 0 322,916 1,468,476
</TABLE>
THE VALUES WILL CHANGE IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE INVESTMENT RESULTS ARE AN EXAMPLE ONLY AND ARE NOT A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN
THOSE SHOWN.
20
<PAGE>
ADDITIONAL INFORMATION
A general overview of the Policy appears at pages 1 - 20. The additional
information that follows gives more details, but generally does not repeat what
is set forth above.
PAGE TO
SEE IN THIS
CONTENTS OF ADDITIONAL INFORMATION PROSPECTUS
- ----------------------------------- -----------
AGL........................................................ 21
Separate Account VL-R...................................... 22
Tax Effects................................................ 22
Voting Privileges.......................................... 27
Your Beneficiary........................................... 27
Assigning Your Policy...................................... 28
More About Policy Charges.................................. 28
Effective Date of Policy and Related Transactions.......... 29
Distribution of the Policies............................... 31
Payment of Policy Proceeds................................. 32
Adjustments to Death Benefit............................... 33
Additional Rights That We Have............................. 33
Performance Information.................................... 34
Our Reports to Policy Owners............................... 35
AGL's Management........................................... 35
Principal Underwriter's Management......................... 38
Legal Matters.............................................. 39
Independent Auditors....................................... 39
Actuarial Expert........................................... 40
Services Agreement......................................... 40
Certain Potential Conflicts................................ 40
Year 2000.................................................. 40
Special words and phrases. If you want more information about any words or
phrases that you read in this prospectus, you may wish to refer to the Index of
Words and Phrases that appears at the end of this prospectus (page 43, which
follows all of the financial pages). That index will tell you on what page you
can read more about many of the words and phrases that we use.
AGL
We are American General Life Insurance Company ("AGL"). AGL is a stock life
insurance company organized under the laws of Texas. AGL is a successor in
interest to a company originally organized under the laws of Delaware on January
10, 1917. AGL is an indirect, wholly-owned subsidiary of American General
Corporation (formerly American General Insurance Company), a diversified
financial services
21
<PAGE>
holding company engaged primarily in the insurance business. The commitments
under the Policies are AGL's, and American General Corporation has no legal
obligation to back those commitments.
During 1998, AGL received $ 10,693 in total premium payments from policy
holders. From such premium payments, AGL received mortality and expense fees of
$9.34 and $321.81 for cost of insurance charges.
SEPARATE ACCOUNT VL-R
We hold the Mutual Fund shares in which any of your accumulation value is
invested in Separate Account VL-R. Separate Account VL-R is a "separate
account," as defined by the SEC and is registered as a unit investment trust
with the SEC under the Investment Company Act of 1940, as amended. We created
the separate account on May 6, 1997 under Texas law.
For record keeping and financial reporting purposes, Separate Account VL-R is
divided into 24 separate "divisions," 14 of which correspond to one of the 14
available investment options. The remaining 10 divisions represent investment
options available under another variable life policy we offer. We hold the
Mutual Fund shares in which we invest your accumulation value for an investment
option in the division that corresponds to that investment option.
The assets in Separate Account VL-R are our property. The assets in Separate
Account VL-R would be available only to satisfy the claims of owners of the
Policies, to the extent they have allocated their accumulation value to Separate
Account VL-R. Our other creditors could reach only those Separate Account VL-R
assets (if any) that are in excess of the amount of our reserves and other
contract liabilities under the Policies with respect to Separate Account VL-R.
TAX EFFECTS
This discussion is based on current federal income tax law and interpretations.
It assumes that the policy owner is a natural person who is a U.S. citizen and
resident. The tax effects on corporate taxpayers, non-U.S. residents or non-U.S.
citizens, may be different. This discussion is general in nature, and should not
be considered tax advice, for which you should consult a qualified tax adviser.
General. A Legacy Plus Policy will be treated as "life insurance" for federal
income tax purposes (a) if it meets the definition of life insurance under
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code") and
(b) for as long as the investments made by the underlying Mutual Funds satisfy
certain investment diversification requirements under Section 817(h) of the
Code. We believe that the Policy will meet these requirements and that:
. the death benefit received by the beneficiary under your Policy will not be
subject to federal income tax; and
. increases in your Policy's accumulation value as a result of interest or
investment experience will not be subject to federal income tax unless and
until there is a distribution from your Policy, such as a surrender or a
partial surrender.
22
<PAGE>
The federal income tax consequences of a distribution from your Policy can be
affected by whether your Policy is determined to be a "modified endowment
contract" (which is discussed below). In all cases, however, the character of
all income that is described below as taxable to the payee will be ordinary
income (as opposed to capital gain).
Testing for modified endowment contract status. Your Policy will be a
"modified endowment contract" if, at any time during the first seven Policy
years, you have paid a cumulative amount of premiums that exceeds the premiums
that would have been paid by that time under a similar fixed-benefit insurance
policy that was designed (based on certain assumptions mandated under the Code)
to provide for paid-up future benefits after the payment of seven level annual
premiums. This is called the "seven-pay" test.
Whenever there is a "material change" under a policy, the policy will
generally be (a) treated as a new contract for purposes of determining whether
the policy is a modified endowment contract and (b) subjected to a new seven-pay
period and a new seven-pay limit. The new seven-pay limit would be determined
taking into account, under a prescribed formula, the accumulation value of the
policy at the time of such change. A materially changed policy would be
considered a modified endowment contract if it failed to satisfy the new seven-
pay limit. A material change for these purposes could occur as a result of a
change in death benefit option. A material change will occur as a result of an
increase in your Policy's specified amount of coverage, and certain other
changes.
If your Policy's benefits are reduced during the first seven Policy years (or
within seven years after a material change), the calculated seven-pay premium
limit will be redetermined based on the reduced level of benefits and applied
retroactively for purposes of the seven-pay test. (Such a reduction in benefits
could include, for example, a decrease in the specified amount resulting from a
partial surrender). If the premiums previously paid are greater than the
recalculated seven-payment premium level limit, the Policy will become a
modified endowment contract. A life insurance policy that is received in
exchange for a modified endowment contract will also be considered a modified
endowment contract.
Other effects of Policy changes. Changes made to your Policy (for example, a
decrease in benefits or a lapse or reinstatement of your Policy) may also have
other effects on your Policy. Such effects may include impacting the maximum
amount of premiums that can be paid under your Policy, as well as the maximum
amount of accumulation value that may be maintained under your Policy.
Taxation of pre-death distributions if your Policy is not a modified endowment
contract. As long as your Policy remains in force during the insured person's
lifetime, as a non-modified endowment contract, a Policy loan will be treated as
indebtedness, and no part of the loan proceeds will be subject to current
federal income tax. Interest on the loan generally will not be tax deductible.
After the first 15 Policy years, the proceeds from a partial surrender will
not be subject to federal income tax except to the extent such proceeds exceed
your "basis" in your Policy. (Your basis generally will equal the premiums you
have paid, less the amount of any previous distributions from your Policy that
were not taxable.) During the first 15 Policy years, the proceeds from a partial
surrender could be subject to federal income tax, under a complex formula, to
the extent that your accumulation value exceeds your basis in your Policy.
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On the maturity date or upon full surrender, any excess in the amount of
proceeds we pay (including amounts we use to discharge any Policy loan) over
your basis in the Policy, will be subject to federal income tax. In addition, if
a Policy ends after a grace period while there is a policy loan, the
cancellation of such loan and accrued loan interest will be treated as a
distribution and could be subject to tax under the above rules. Finally, if you
make an assignment of rights or benefits under your Policy you may be deemed to
have received a distribution from your Policy, all or part of which may be
taxable.
Taxation of pre-death distributions if your Policy is a modified endowment
contract. If your Policy is a modified endowment contract, any distribution from
your Policy during the insured person's lifetime will be taxed on an "income-
first" basis. Distributions for this purpose include a loan (including any
increase in the loan amount to pay interest on an existing loan or an assignment
or a pledge to secure a loan) or partial surrender. Any such distributions will
be considered taxable income to you to the extent your accumulation value
exceeds your basis in the Policy. For modified endowment contracts, your basis
is similar to the basis described above for other policies, except that it also
would be increased by the amount of any prior loan under your Policy that was
considered taxable income to you. For purposes of determining the taxable
portion of any distribution, all modified endowment contracts issued by the same
insurer (or its affiliate) to the same owner (excluding certain qualified plans)
during any calendar year are aggregated. The Treasury Department has authority
to prescribe additional rules to prevent avoidance of "income-first" taxation on
distributions from modified endowment contracts.
A 10% penalty tax also will apply to the taxable portion of most distributions
from a policy that is a modified endowment contract. The penalty tax will not,
however, apply to distributions:
. to taxpayers 59 1/2 years of age or older;
. in the case of a disability (as defined in the Code); or
. received as part of a series of substantially equal periodic annuity
payments for the life (or life expectancy) of the taxpayer or the joint
lives (or joint life expectancies) of the taxpayer and his or her
beneficiary.
If your Policy ends after a grace period while there is a Policy loan, the
cancellation of the loan will be treated as a distribution to the extent not
previously treated as such and could be subject to tax, including the 10%
penalty tax, as described above. In addition, on the maturity date or upon a
full surrender, any excess of the proceeds we pay (including any amounts we use
to discharge any loan) over your basis in the Policy, will be subject to federal
income tax and, unless an exception applies, the 10% penalty tax.
Distributions that occur during a Policy year in which your Policy becomes a
modified endowment contract, and during any subsequent Policy years, will be
taxed as described in the two preceding paragraphs. In addition, distributions
from a policy within two years before it becomes a modified endowment contract
also will be subject to tax in this manner. This means that a distribution made
from a policy that is not a modified endowment contract could later become
taxable as a distribution from a modified endowment contract. The Treasury
Department has been authorized to prescribe rules which would treat similarly
other distributions made in anticipation of a policy becoming a modified
endowment contract.
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Policy lapses and reinstatements. A Policy which has lapsed may have the tax
consequences described above, even though you may be able to reinstate that
Policy. For tax purposes, some reinstatements may be treated as the purchase of
a new insurance contract.
Diversification. Under Section 817(h) of the Code, the Treasury Department has
issued regulations that implement investment diversification requirements. Our
failure to comply with these regulations would disqualify your Policy as a life
insurance policy under Section 7702 of the Code. If this were to occur, you
would be subject to federal income tax on the income under the Policy for the
period of the disqualification and for subsequent periods. Also, if the insured
died during such period of disqualification or subsequent periods, a portion of
the death benefit proceeds would be taxable to the beneficiary. Separate
Account VL-R, through the Mutual Funds, intends to comply with these
requirements. Although we do not have direct control over the investments or
activities of the Mutual Funds, we will enter into agreements with them
requiring the Mutual Funds to comply with the diversification requirements of
the Section 817(h) Treasury Regulations.
In connection with the issuance of then temporary diversification regulations,
the Treasury Department stated that it anticipated the issuance of guidelines
prescribing the circumstances in which the ability of a policy owner to direct
his or her investment to particular Mutual Funds within Separate Account VL-R
may cause the policy owner, rather than the insurance company, to be treated as
the owner of the assets in the account. If you were considered the owner of the
assets of Separate Account VL-R, income and gains from the account would be
included in your gross income for federal income tax purposes. Under current
law, however, we believe that AGL, and not the owner of a Policy, would be
considered the owner of the assets of Separate Account VL-R.
Estate and generation skipping taxes. If the insured person is the Policy's
owner, the death benefit under a Legacy Plus Policy will generally be includable
in the owner's estate for purposes of federal estate tax. If the owner is not
the insured person, under certain conditions, only an amount approximately equal
to the cash surrender value of the Policy would be includable. Federal estate
tax is integrated with federal gift tax under a unified rate schedule. In
general, estates less than $650,000 (or larger amounts specified in the Code to
commence in certain future years) will not incur a federal estate tax liability.
In addition, an unlimited marital deduction may be available for federal estate
tax purposes.
As a general rule, if a "transfer" is made to a person two or more generations
younger than the Policy's owner, a generation skipping tax may be payable at
rates similar to the maximum estate tax rate in effect at the time. The
generation skipping tax provisions generally apply to "transfers" that would be
subject to the gift and estate tax rules. Individuals are generally allowed an
aggregate generation skipping tax exemption of $1 million. Because these rules
are complex, you should consult with a qualified tax adviser for specific
information, especially where benefits are passing to younger generations.
The particular situation of each policy owner, insured person or beneficiary
will determine how ownership or receipt of Policy proceeds will be treated for
purposes of federal estate and generation skipping taxes, as well as state and
local estate, inheritance and other taxes.
Pension and profit-sharing plans. If a life insurance policy is purchased by a
trust or other entity that forms part of a pension or profit-sharing plan
qualified under Section 401(a) of the Code for the benefit
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of participants covered under the plan, the federal income tax treatment of such
policies will be somewhat different from that described above.
The reasonable net premium cost for such amount of insurance that is purchased
as part of a pension or profit-sharing plan is required to be included annually
in the plan participant's gross income. This cost (generally referred to as the
"P.S. 58" cost) is reported to the participant annually. If the plan participant
dies while covered by the plan and the policy proceeds are paid to the
participant's beneficiary, then the excess of the death benefit over the
policy's accumulation value will not be subject to federal income tax. However,
the policy's accumulation value will generally be taxable to the extent it
exceeds the participant's cost basis in the policy. The participant's cost basis
will generally include the costs of insurance previously reported as income to
the participant. Special rules may apply if the participant had borrowed from
the policy or was an owner-employee under the plan.
There are limits on the amounts of life insurance that may be purchased on
behalf of a participant in a pension or profit-sharing plan. Complex rules, in
addition to those discussed above, apply whenever life insurance is purchased by
a tax qualified plan. You should consult a qualified tax adviser.
Other employee benefit programs. Complex rules may also apply when a policy is
held by an employer or a trust, or acquired by an employee, in connection with
the provision of other employee benefits. These policy owners must consider
whether the policy was applied for by or issued to a person having an insurable
interest under applicable state law and with the insured person's consent. The
lack of an insurable interest or consent may, among other things, affect the
qualification of the policy as life insurance for federal income tax purposes
and the right of the beneficiary to receive a death benefit.
ERISA. Employers and employer-created trusts may be subject to reporting,
disclosure and fiduciary obligations under the Employee Retirement Income
Security Act of 1974, as amended. You should consult a qualified legal adviser.
Our taxes. We report the operations of Separate Account VL-R in our federal
income tax return, but we currently pay no income tax on Separate Account VL-R's
investment income and capital gains, because these items are, for tax purposes,
reflected in our variable life insurance policy reserves. We currently make no
charge to any Separate Account VL-R division for taxes. We reserve the right to
make a charge in the future for taxes incurred; for example, a charge to
Separate Account VL-R for income taxes we incur that are allocable to the
Policy.
We may have to pay state, local or other taxes in addition to applicable taxes
based on premiums. At present, these taxes are not substantial. If they
increase, we may make charges for such taxes when they are attributable to
Separate Account VL-R or allocable to the Policy.
Certain Mutual Funds in which your accumulation value is invested may elect to
pass through to AGL taxes withheld by foreign taxing jurisdictions on foreign
source income. Such an election will result in additional taxable income and
income tax to AGL. The amount of additional income tax, however, may be more
than offset by credits for the foreign taxes withheld which are also passed
through. These credits may provide a benefit to AGL.
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When we withhold income taxes. Generally, unless you provide us with an
election to the contrary before we make the distribution, we are required to
withhold income tax from any proceeds we distribute as part of a taxable
transaction under your Policy. In some cases, where generation skipping taxes
may apply, we may also be required to withhold for such taxes unless we are
provided satisfactory written notification that no such taxes are due.
Tax changes. The U.S. Congress frequently considers legislation that, if
enacted, could change the tax treatment of life insurance policies. In addition,
the Treasury Department may amend existing regulations, issue regulations on the
qualification of life insurance and modified endowment contracts, or adopt new
interpretations of existing law. State and local tax law or, if you are not a
U.S. citizen and resident, foreign tax law, may also affect the tax consequences
to you, the insured person or your beneficiary, and are subject to change. Any
changes in federal, state, local or foreign tax law or interpretation could have
a retroactive effect. We suggest you consult a qualified tax adviser.
VOTING PRIVILEGES
We are the legal owner of the Funds' shares held in Separate Account VL-R.
However, you may be asked to instruct us how to vote the Fund shares held in the
various Mutual Funds and attributable to your Policy at meetings of shareholders
of the Funds. The number of votes for which you may give directions will be
determined as of the record date for the meeting. The number of votes that you
may direct related to a particular Fund is equal to (a) your accumulation value
invested in that Fund divided by (b) the net asset value of one share of that
Fund. Fractional votes will be recognized.
We will vote all shares of each Fund that we hold of record, including any
shares we own on our own behalf, in the same proportions as those shares for
which we have received instructions from owners participating in that Fund
through Separate Account VL-R.
If you are asked to give us voting instructions, we will send you the proxy
material and a form for providing such instructions. Should we determine that we
are no longer required to send the owner such materials, we will vote the shares
as we determine in our sole discretion.
In certain cases, we may disregard instructions relating to changes in a
Fund's investment manager or its investment policies. We will advise you if we
do and explain the reasons in our next report to policy owners. AGL reserves the
right to modify these procedures in any manner that the laws in effect from time
to time allow.
YOUR BENEFICIARY
You name your beneficiary when you apply for a Policy. The beneficiary is
entitled to the insurance benefits of the Policy. You may change the beneficiary
during the insured person's lifetime. We also require the consent of any
irrevocably named beneficiary. A new beneficiary designation is effective as of
the date you sign it, but will not affect any payments we may make before we
receive it. If no beneficiary is living when the insured person dies, we will
pay the insurance proceeds to the owner or the owner's estate.
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ASSIGNING YOUR POLICY
You may assign (transfer) your rights in a Policy to someone else as
collateral for a loan or for some other reason. We will not be bound by an
assignment unless it is received in writing. You must provide us with two copies
of the assignment. We are not responsible for any payment we make or any action
taken before we receive a complete notice of the assignment in good order. We
are also not responsible for the validity of the assignment. An absolute
assignment is a change of ownership. Because there may be unfavorable tax
consequences, including recognition of taxable income and the loss of income
tax-free treatment for any death benefit payable to the beneficiary, you should
consult a qualified tax adviser before making an assignment.
MORE ABOUT POLICY CHARGES
Purpose of our charges. The charges under the Policy are designed to cover, in
total, our direct and indirect costs of selling, administering and providing
benefits under the Policy. They are also designed, in total, to compensate us
for the risks we assume and services that we provide under the Policy. These
include:
. mortality risks (such as the risk that insured persons will, on average,
die before we expect, thereby increasing the amount of claims we must pay);
. investment risks (such as the risk that adverse investment performance will
make it more difficult for us to reduce the amount of our daily charge for
revenues below what we anticipate);
. sales risks (such as the risk that the number of Policies we sell and the
premiums we receive net of withdrawals, are less than we expect, thereby
depriving us of expected economies of scale);
. regulatory risks (such as the risk that tax or other regulations may be
changed in ways adverse to issuers of variable life insurance policies);
and
. expense risks (such as the risk that the costs of administrative services
that the Policy requires us to provide will exceed what we currently
project).
If the charges that we collect from the Policy exceed our total costs in
connection with the Policy, we will earn a profit. Otherwise we will incur a
loss.
The current monthly insurance charge has been designed primarily to provide
funds out of which we can make payments of death benefits under the Policy as
insured persons die.
Any excess from the charges discussed above is primarily intended to:
. offset other expenses in connection with the Policies (such as the costs of
processing applications for Policies and other unreimbursed administrative
expenses, costs of paying marketing and distribution expenses for the
Policies, and costs of paying death claims if the mortality experience of
insured persons is worse than we expect);
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. compensate us for the risk we assume under the Policies; or
. otherwise be retained by us as profit.
Although the paragraphs above describe the primary purposes for which charges
under the Policies have been designed, these purposes are subject to
considerable change over the life of a Policy. We can retain or use the revenues
from any charge or charge increase for any purpose.
Change of tobacco use. If the person insured under your Policy is a tobacco
user, you may apply to us for an improved risk class if the insured person meets
our then applicable requirements for demonstrating that he or she has stopped
tobacco use for a sufficient period.
Gender neutral Policy. Our cost of insurance charge rates in Montana will not
be greater than the comparable male rates illustrated in this prospectus.
Congress and the legislatures of various states have from time to time
considered legislation that would require insurance rates to be the same for
males and females of the same age, rating class and tobacco user status. In
addition, employers and employee organizations should consider, in consultation
with counsel, the impact of Title VII of the Civil Rights Act of 1964 on the
purchase of life insurance policies in connection with an employment-related
insurance or benefit plan. In a 1983 decision, the United States Supreme Court
held that, under Title VII, optional annuity benefits under a deferred
compensation plan could not vary on the basis of sex.
Cost of insurance rates. Because of specified amount increases, different cost
of insurance rates may apply to different increments of specified amount under
your Policy. If so, we attribute your accumulation value first to the oldest
increments of specified amount to compute our net amount at risk at each cost of
insurance rate. See "Monthly Insurance Charge" beginning on page 9.
Miscellaneous. Each of the distributors or advisers of the Mutual Funds listed
on page 1 of this prospectus reimburses us, on a quarterly basis, for certain
administrative, Policy, and policy owner support expenses. These reimbursements
will be reasonable for the services performed and are not designed to result in
a profit. These reimbursements are paid by the distributors or the advisers, and
will not be paid by the Mutual Funds, the divisions or the owners. No payments
have yet been made under these arrangements, because the number of Policies
issued does not require a payment.
EFFECTIVE DATE OF POLICY AND RELATED TRANSACTIONS
Valuation dates, times, and periods. We generally compute values under a
Policy on each day that we are open for business except, with respect to any
investment option, days on which the related Mutual Fund does not value its
shares. We call each such day a "valuation date."
We compute policy values as of 3:00 p.m., Central time, on each valuation
date. We call this our "close of business." We call the time from the close of
business on one valuation date to the close of business of the next valuation
date a "valuation period."
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Date of receipt. Generally we consider that we have received a premium payment
or another communication from you on the day we actually receive it in full and
proper order at our Home Office. If we receive it after the close of business on
any valuation date, however, we consider that we have received it on the day
following that valuation date.
Commencement of insurance coverage. After you apply for a Policy, it can
sometimes take up to several weeks for us to gather and evaluate all the
information we need to decide whether to issue a Policy to you and, if so, what
the insured person's insurance rate class should be. We will not pay a death
benefit under a Policy unless (a) it has been delivered to and accepted by the
owner and at least the initial premium has been paid, and (b) at the time of
such delivery and payment, there have been no adverse developments in the
insured person's health or risk of death. However, if you pay at least the
minimum first premium payment with your application for a Policy, we will
provide temporary coverage of up to $300,000 provided the insured person meets
certain medical and risk requirements. The terms and conditions of this
coverage are described in our "Limited Temporary Life Insurance Agreement." You
can obtain a copy from our Home Office by writing to the address shown on the
first page of this prospectus or from your AGL representative.
Date of issue; Policy months and years. We prepare the Policy only after we
approve an application for a Policy and assign an appropriate insurance rate
class. The day we begin to deduct charges will appear on page 3 (refers to
Policy page) of your Policy and is called the "date of issue." Policy months and
years are measured from the date of issue. To preserve a younger age at issue
for the insured person, we may assign a date of issue to a Policy that is up to
6 months earlier than otherwise would apply.
Monthly deduction days. Each charge that we deduct monthly is assessed against
your accumulation value at the close of business on the date of issue and at the
end of each subsequent valuation period that includes the first day of a Policy
month. We call these "monthly deduction days."
Commencement of investment performance. We begin to credit an investment
return to the accumulation value resulting from your initial premium payment on
the later of (a) the date of issue, or (b) the date all requirements needed to
place the Policy in force have been satisfied, including underwriting approval
and receipt in the Home Office of the necessary premium. In the case of a back-
dated Policy, we do not credit an investment return to the accumulation value
resulting from your initial premium payment until the date stated in (b) above.
Effective date of other premium payments and requests that you make. Premium
payments (after the first) and transactions made in response to your requests
and elections are generally effected at the end of the valuation period in which
we receive the payment, request or election and based on prices and values
computed as of that same time. Exceptions to this general rule are as follows:
. Increases you request in the specified amount of insurance, and
reinstatements of a Policy that has lapsed take effect on the Policy's
monthly deduction day on or next following our approval of the transaction;
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. We may return premium payments if we determine that such premiums would
cause your Policy to become a modified endowment contract or to cease to
qualify as life insurance under federal income tax law or exceed the
maximum net amount at risk;
. If you exercise the right to return your Policy described on the first page
of this prospectus, your coverage will end when you mail us your Policy or
deliver it to your AGL representative; and
. If you pay a premium in connection with a request which requires our
approval, your payment will be applied when received rather than following
the effective date of the change requested so long as your coverage is in
force and the amount paid will not cause you to exceed premium limitations
under the Code. If we do not approve your request, no premium will be
refunded to you except to the extent necessary to cure any violation of the
maximum premium limitations under the Code. We will not apply this
procedure to premiums you pay in connection with reinstatement requests.
DISTRIBUTION OF THE POLICIES
American General Securities Incorporated ("AGSI") is the principal underwriter
of the Policies. AGSI is a wholly-owned subsidiary of AGL. AGL, in turn, is a
wholly-owned subsidiary of American General Corporation ("American General").
AGSI's principal office is at 2727 Allen Parkway, Houston, Texas 77019. AGSI
was organized as a Texas corporation on March 8, 1983 and is a registered
broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act") and is a member of the National Association of Securities Dealers, Inc.
("NASD"). AGSI is also the principal underwriter for AGL's Separate Accounts A
and D, and Separate Account E of American General Life Insurance Company of New
York, which is a wholly-owned subsidiary of AGL. These separate accounts are
registered investment companies. AGSI, as the principal underwriter, is not
paid any fees on the Policies.
We and AGSI have sales agreements with various broker-dealers and banks under
which the Policies will be sold by registered representatives of the broker-
dealers or employees of the banks. These registered representatives and
employees are also required to be authorized under applicable state regulations
as life insurance agents to sell variable life insurance. The broker-dealers
are ordinarily required to be registered with the SEC and must be members of the
NASD.
We pay compensation directly to broker-dealers and banks for promotion and
sales of the Policies. AGSI also has its own registered representatives who
will sell the Policies, and we will pay compensation to AGSI for these sales.
The compensation payable to broker-dealers or banks for the sales of the
Policies may vary with the sales agreement, but is generally not expected to
exceed, for the Policies:
. 2.5% of the Policy's accumulation value (reduced by any outstanding
loan) in Policy year 1;
. 1.0% annually of the Policy's accumulation value (reduced by any
outstanding loan) in Policy years 2 through 10;
. 0.50% annually of the Policy's accumulation value (reduced by any
outstanding loan) in Policy years 11 through 20; and
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. 0.25% annually of the Policy's accumulation value (reduced by any
outstanding loan) after Policy year 20.
The maximum value of any alternative amounts we may pay for sales of the
Policies is expected to be equivalent over time to the amounts described above.
For example, we may pay a broker-dealer compensation in a lump sum which will
not exceed the aggregate compensation described above.
We pay a comparable amount of compensation to the broker-dealers or banks with
respect to any increase in the specified amount of coverage that you request.
In addition, we may pay the broker-dealers or banks expense allowances, bonuses,
wholesaler fees and training allowances.
We pay the compensation directly to AGSI or any other selling broker-dealer
firm or bank. We pay the compensation from our own resources which does not
result in any additional charge to you that is not described on page 8 of the
prospectus. Each broker-dealer firm or bank, in turn, may compensate its
registered representative or employee who acts as agent in selling you a Policy.
PAYMENT OF POLICY PROCEEDS
General. We will pay any death benefit, maturity benefit, cash surrender value
or loan proceeds within seven days after we receive the last required form or
request (and any other documents that may be required for payment of a death
benefit). If we do not have information about the desired manner of payment
within 60 days after the date of notification of the insured person's death, we
will pay the proceeds as a single sum, normally within seven days thereafter.
Delay for check clearance. We reserve the right to defer payment of that
portion of your accumulation value that is attributable to a premium payment
made by check for a reasonable period of time (not to exceed 15 days) to allow
the check to clear the banking system.
Delay of Separate Account VL-R proceeds. We reserve the right to defer payment
of any death benefit, loan or other distribution that comes from that portion of
your accumulation value that is allocated to Separate Account VL-R, if:
. the New York Stock Exchange is closed other than customary weekend and
holiday closings, or trading on the New York Stock Exchange is restricted;
. an emergency exists, as a result of which disposal of securities is not
reasonably practicable or it is not reasonably practicable to fairly
determine the accumulation value; or
. the SEC by order permits the delay for the protection of owners.
Transfers and allocations of accumulation value among the investment options may
also be postponed under these circumstances. If we need to defer calculation of
Separate Account VL-R values for any of the foregoing reasons, all delayed
transactions will be processed at the next values that we do compute.
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Delay to challenge coverage. We may challenge the validity of your insurance
Policy based on any material misstatements in your application and any
application for a change in coverage. However,
. We cannot challenge the Policy after it has been in effect, during the
insured person's lifetime, for two years from the date the Policy was
issued or restored after termination. (Some states may require that we
measure this time in some other way.)
. We cannot challenge any Policy change that requires evidence of
insurability (such as an increase in specified amount) after the change has
been in effect for two years during the insured person's lifetime
ADJUSTMENTS TO DEATH BENEFIT
Suicide. If the insured person commits suicide within two years after the date
on which the Policy was issued, the death benefit will be limited to the total
of all premiums that have been paid to the time of death minus any outstanding
Policy loans and any partial surrenders. If the insured person commits suicide
within two years after the effective date of an increase in specified amount
that you requested, we will pay the death benefit based on the specified amount
which was in effect before the increase, plus the monthly insurance deductions
for the increase. Some states require that we compute differently these periods
for non-contestability following a suicide.
Wrong age or gender. If the age or gender of the insured person was misstated
on your application for a Policy (or for any increase in benefits), we will
adjust any death benefit to be what the monthly insurance charge deducted for
the current month would have purchased based on the correct information.
Death during grace period. If the insured person dies during the Policy's
grace period, we will deduct any overdue monthly charges from the insurance
proceeds.
ADDITIONAL RIGHTS THAT WE HAVE
We have the right at any time to:
. transfer the entire balance in an investment option in accordance with any
transfer request you make that would reduce your accumulation value for
that option to below $5,000;
. transfer the entire balance in proportion to any other investment options
you then are using, if the accumulation value in an investment option is
below $5,000 for any other reason;
. end the automatic rebalancing feature if your accumulation value falls
below $100,000;
. change the underlying Mutual Fund that any investment option uses;
. add or delete investment options, combine two or more investment options,
or withdraw assets relating to Legacy Plus from one investment option and
put them into another;
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. operate Separate Account VL-R under the direction of a committee or
discharge such a committee at any time;
. operate Separate Account VL-R, or one or more investment options, in any
other form the law allows, including a form that allows us to make direct
investments. Separate Account VL-R may be charged an advisory fee if its
investments are made directly rather than through another investment
company. In that case, we may make any legal investments we wish; or
. make other changes in the Policy that in our judgment are necessary or
appropriate to ensure that the Policy continues to qualify for tax
treatment as life insurance, or that do not reduce any cash surrender
value, death benefit, accumulation value, or other accrued rights or
benefits.
You will be notified as required by law if there are any material changes in
the underlying investments of an investment option that you are using. We intend
to comply with all applicable laws in making any changes and, if necessary, we
will seek policy owner approval.
PERFORMANCE INFORMATION
From time to time, we may quote performance information for the divisions of
Separate Account VL-R in advertisements, sales literature, or reports to owners
or prospective investors.
We may quote performance information in any manner permitted under applicable
law. We may, for example, present such information as a change in a hypothetical
owner's cash value or death benefit. We also may present the yield or total
return of the division based on a hypothetical investment in a Policy. The
performance information shown may cover various periods of time, including
periods beginning with the commencement of the operations of the division or the
Mutual Funds in which it invests. The performance information shown may reflect
the deduction of one or more charges, such as the premium charge, and we
generally expect to exclude costs of insurance charges because of the individual
nature of these charges.
We may compare a division's performance to that of other variable life
separate accounts or investment products, as well as to generally accepted
indices or analyses, such as those provided by research firms and rating
services. In addition, we may use performance ratings that may be reported
periodically in financial publications, such as Money Magazine, Forbes, Business
Week, Fortune, Financial Planning and The Wall Street Journal. We also may
advertise ratings of AGL's financial strength or claims-paying ability as
determined by firms that analyze and rate insurance companies and by nationally
recognized statistical rating organizations.
Performance information for any division reflects the performance of a
hypothetical Policy and are not illustrative of how actual investment
performance would affect the benefits under your Policy. You should not consider
such performance information to be an estimate or guarantee of future
performance.
34
<PAGE>
OUR REPORTS TO POLICY OWNERS
Shortly after the end of each Policy year, we will mail you a report that
includes information about your Policy's current death benefit, accumulation
value, cash surrender value and policy loans. We will send you notices to
confirm premium payments, transfers and certain other Policy transactions. We
will mail to you at your last known address of record, these and any other
reports and communications required by law. You should give us prompt written
notice of any address change.
AGL's MANAGEMENT
The directors, executive officers, and (to the extent responsible for variable
life operations) the other principal officers of AGL are listed below.
NAME BUSINESS EXPERIENCE WITHIN PAST FIVE YEARS
- --------------------------------------------------------------------------------
Jon P. Newton Director and Vice Chairman of American General Life
Insurance Company since February 1996. Director of
American General Corporation since October 1995 and Vice
Chairman since April 1997; Vice Chairman and General
Counsel (October 1995-April 1997). Director of other
American General affiliates since October 1994. Prior
thereto, Partner with Clark, Thomas, Winter & Newton,
Austin, Texas (February 1979-February 1993).
Directorships with Houston Museum of Natural Science
Board of Trustees since 1997; University of Texas Law
School Foundation Board of Trustees, Austin, Texas since
1997; University of Texas-Houston Health Science Center
Development Board, Houston, Texas since 1996; Texas
Commerce Bancshares, Houston, Texas (1985-1993); Texas
Commerce Bank, Austin, Texas (1979-1993); Lomas Financial
Corporation, Dallas, Texas (1983-1993); Vista Properties,
Inc., Dallas, Texas (1992-1993).
Rodney O. Martin, Jr. Chairman of the Board of American General Life Insurance
Company since July, 1998 and a Director since August
1996. President and CEO (August 1996-July 1998).
President of American General Life Insurance Company of
New York (November 1995-August 1996). Vice President
Agencies, with Connecticut Mutual Life Insurance Company
(1990-1995).
Ronald H. Ridlehuber Director, President and Chief Executive Officer of
American General Life Insurance Company since July, 1998.
Senior Vice President and Chief Marketing Officer of
Jefferson-Pilot Life Insurance Company in Greensboro,
North Carolina (1993-1998). Before 1993 held various
positions with Southland Life Insurance Company in
Dallas, Texas and Atlanta, Georgia including Vice
President, Sales.
35
<PAGE>
David A. Fravel Director and Senior Vice President of American General
Life Insurance Company since November 1996. Elected
Executive Vice President in April, 1998. Senior Vice
President Massachusetts Mutual, Springfield, Missouri
(March 1996-June 1996); Vice President, New Business,
Connecticut Mutual Life, Hartford, Connecticut (December
1978-March 1996).
Robert F. Herbert, Jr. Director, Senior Vice President and Treasurer of American
General Life Insurance Company since May 1996, and
Controller and Actuary from June 1988 to May 1996.
Royce G. Imhoff, II Director, Senior Vice President and Chief Marketing
Officer for American General Life Insurance Company since
November 1997, Vice President (August 1996-August 1997),
and Regional Director (1992-1996).
John V. LaGrasse Director, Senior Vice President and Chief Systems Officer
of American General Life Insurance Company since August
1996. Elected Executive Vice President in July, 1998.
Prior thereto, Director of Citicorp Insurance Services,
Inc., Dover, Delaware (1986-1996).
Gary D. Reddick Executive Vice President of American General Life
Insurance Company since April 1998 and Director since
October 1998. Vice Chairman since July 1997 and Executive
Vice President-Administration of The Franklin Life
Insurance Company since February 1995. Senior Vice
President-Administration of American General Corporation
(October 1994-February 1995). Senior Vice President for
American General Life Insurance Company (September 1986-
October 1994).
Philip K. Polkinghorn Director of American General Life Insurance Company since
February 1997. Executive Vice President and Chief
Financial Officer since December 1998. Senior Vice
President-Product Development Center since April, 1998.
Senior Vice President and Chief Marketing Officer
(December 1996-September 1997). Prior thereto, Chief
Financial Officer, Connecticut Mutual Life Insurance
Company (March 1995-March 1996); Senior Vice President
First Colony Life Insurance Company, Lynchburg, Virginia
(March 1996-December 1996), and Chief Marketing Officer,
Allmerica Financial, Worcester, MA (March 1993-April
1994).
Wayne A. Barnard Senior Vice President and Chief Actuary of American
General Life Insurance Company since November 1997 and
Vice President since February, 1991 and Chief Actuary
since February, 1993.
Rebecca G. Campbell In December 1998 named as Senior Vice President -
Organization Development and Change Management for
American General Life
36
<PAGE>
Insurance Company. Various positions with American
General Life Insurance Company since 1983, including
Director of Human Resources in 1993 and Vice President-
Human Resources in 1996.
Ross D. Friend In July 1998 named as Senior Vice President and Chief
Compliance Officer of American General Life Insurance
Company. Senior Vice President and General Counsel of The
Franklin Life Insurance Company, Springfield, Illinois
(August 1996-July 1998). Attorney-in-Charge for The
Prudential Insurance Company, Jacksonville, Florida (July
1995-August 1996). Chief Legal Officer for
Confederation Life Insurance, Atlanta, Georgia (1982-
June 1995).
F. Paul Kovach, Jr. Senior Vice President-Broker Dealers and FIMG for
American General Life Insurance Company since August
1997. Since October 1994, President and Director of
American General Securities Incorporated. Vice President
of Chubb Securities Corporation, Concord, New Hampshire,
(February 1990-October 1994).
Simon J. Leech In July 1997 named as Senior Vice President-Houston
Service Center for American General Life Insurance
Company. Various positions with American General Life
Insurance Company since 1981, including Director of POS
in 1993, and Vice President-Policy Administration in
1995.
Brian D. Murphy In April 1998 named as Senior Vice President-Insurance
Operations of American General Life Insurance Company.
Vice President-Sales, Phoenix Home Life, Hartford, CT
(January 1997-April 1998). Vice President of Underwriting
and Issue, Phoenix Home Life (July 1994-January 1997).
Various positions with Mutual of New York, Syracuse, NY,
including Agent, Agency Manager, Marketing Life and
Disability Income Underwriting Management, (1978-July
1994).
JoAnn Waddell In October 1998 named as Senior Vice President - Human
Resources for American General Life Insurance Company.
Vice President-Human Resources for American General
Corporation (1995-October 1998) and Director, Corporate
Personnel of American General Corporation (1993-1995).
Don M. Ward In February 1998 named as Senior Vice President-Variable
Products-Marketing of American General Life Insurance
Company. Vice President of Pacific Life Insurance
Company, Newport Beach, CA (1991-February 1998).
37
<PAGE>
Thomas M. Zurek In December 1998 named as Senior Vice President and
General Counsel of American General Life Insurance
Company. In February 1998 named as Senior Vice President
and Deputy General Counsel of American General
Corporation. Attorney Shareholder with Nyemaster, Goode,
Voigts, West, Hansell & O'Brien, Des Moines, Iowa (June
1992 - February 1998).
Larry M. Robinson In April 1998 named as Vice President-Variable Products-
Marketing of American General Life Insurance Company.
From July 1996 Vice President of American General Life
Insurance Company. Vice President of Business Development
of Allmerica Financial, Worcester, MA (1994-1996). Vice
President of Life Marketing at Nationwide Insurance
Enterprise, Columbus, Ohio (1991-1994).
The principal business address of each person listed above is our Home
Office; except that the street number for Messrs. Newton, Fravel, LaGrasse,
Martin, Polkinghorn, Reddick and Zurek and Ms. Campbell is 2929 Allen Parkway,
and the street number for Mr. Kovach is 2727 Allen Parkway.
PRINCIPAL UNDERWRITER'S MANAGEMENT
The directors and principal officers of the principal underwriter are:
Position and Offices
with Underwriter,
Name and Principal American General
Business Address Securities Incorporated
- ------------------- ------------------------
F. Paul Kovach, Jr. Director and Chairman,
American General Securities Incorporated President and Chief Executive
Officer
2727 Allen Parkway
Houston, TX 77019
Royce G. Imhoff, II Director
American General Life Companies
2727-A Allen Parkway
Houston, Texas 77019
Rodney O. Martin, Jr. Director and Vice Chairman
American General Life Companies
2929 Allen Parkway
Houston, TX 77019
38
<PAGE>
John A. Kalbaugh Vice President -
American General Life Companies Chief Marketing Officer
2727 Allen Parkway
Houston, TX 77019
Robert M. Roth Vice President -
American General Securities Incorporated Administration and Compliance,
2727 Allen Parkway Treasurer and Secretary
Houston, TX 77019
Pauletta P. Cohn Assistant Secretary
American General Life Companies
2727 Allen Parkway
Houston, TX 77019
Robert F. Herbert Assistant Treasurer
American General Life Companies
2727-A Allen Parkway
Houston, Texas 77019
K. David Nunley Assistant Associate Tax Officer
2727-A Allen Parkway
Houston, TX 77019
LEGAL MATTERS
We are not involved in any legal proceedings that would be considered material
with respect to a policy owner's interest in Separate Account VL-R. Pauletta P.
Cohn, Esquire, Associate General Counsel of the American General Life Companies,
an affiliate of AGL, has opined as to the validity of the Policies. Mayer, Brown
& Platt has advised AGL about certain federal securities and tax law matters in
connection with the Policies.
INDEPENDENT AUDITORS
The financial statements of AGL and Separate Account VL-R included in this
prospectus have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports appearing elsewhere in this prospectus. Such financial
statements have been included in this prospectus in reliance upon the reports of
Ernst & Young LLP given upon the authority of such firm as experts in accounting
and auditing. Ernst & Young LLP is located at One Houston Center, 1221 McKinney,
Suite 2400, Houston, Texas 77010-2007.
39
<PAGE>
ACTUARIAL EXPERT
Actuarial matters have been examined by Wayne A. Barnard, who is Senior Vice
President and Chief Actuary of AGL. His opinion on actuarial matters is filed as
an exhibit to the registration statement we have filed with the SEC in
connection with the Policies.
SERVICES AGREEMENT
American General Life Companies ("AGLC") is party to an existing general
services agreement with AGL. AGLC, an affiliate of AGL, is a corporation
incorporated in Delaware on November 24, 1997. Pursuant to this agreement, AGLC
provides services to AGL, including most of the administrative, data processing,
systems, customer services, product development, actuarial, auditing, accounting
and legal services for AGL and the Legacy Plus Policies.
CERTAIN POTENTIAL CONFLICTS
The Mutual Funds sell shares to separate accounts of insurance companies, both
affiliated and not affiliated with AGL. We currently do not foresee any
disadvantages to you arising out of such sales. Differences in treatment under
tax and other laws, as well as other considerations, could cause the interests
of various owners to conflict. For example, violation of the federal tax laws by
one separate account investing in the Funds could cause the contracts funded
through another separate account to lose their tax-deferred status, unless
remedial action were taken. However, each Mutual Fund has advised us that its
board of trustees (or directors) intends to monitor events to identify any
material irreconcilable conflicts that possibly may arise and to determine what
action, if any, should be taken in response. If we believe that a Fund's
response to any such event insufficiently protects our policy owners, we will
see to it that appropriate action is taken to do so. If it becomes necessary for
any separate account to replace shares of any Mutual Fund in which it invests,
that Fund may have to liquidate securities in its portfolio on a disadvantageous
basis.
YEAR 2000 CONSIDERATIONS
Internal Systems. AGL's ultimate parent, American General Corporation ("AGC"),
has numerous technology systems that are managed on a decentralized basis.
AGC's Year 2000 readiness efforts are being undertaken by its key business units
with centralized oversight. Each business unit, including AGL, has developed
and is implementing a plan to minimize the risk of a significant negative impact
on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of our information technology and non-
information technology systems; (2) assess which items in the inventory may
expose us to business interruptions due to Year 2000 issues; (3) reprogram or
replace systems that are not Year 2000 ready; (4) test systems to prove that
they will function into the next century as they do currently; and (5) return
the systems to operations. As of December 31, 1998, substantially all
40
<PAGE>
of our critical systems are Year 2000 ready and have been returned to
operations. However, activities (3) through (5) for certain systems are ongoing,
with vendor upgrades expected to be received during the first half of 1999.
Third Party Relationships. We have relationships with various third parties
who must also be Year 2000 ready. These third parties provide (or receive)
resources and services to (or from) AGL and include organizations with which we
exchange information. Third parties include vendors of hardware, software, and
information services; providers of infrastructure services such as voice and
data communications and utilities for office facilities; investors; customers;
distribution channels; and joint venture partners. Third parties differ from
internal systems in that we exercise less, or no, control over Year 2000
readiness. We developed a plan to assess and attempt to reduce the risks
associated with the potential failure of third parties to achieve Year 2000
readiness. The plan includes the following activities: (1) identify and
classify third party dependencies; (2) research, analyze, and document Year 2000
readiness for critical third parties; and (3) test critical hardware and
software products and electronic interfaces. As of December 31, 1998, AGC has
identified and assessed approximately 700 critical third party dependencies,
including those relating to AGL. A more detailed evaluation will be completed
during first quarter 1999 as part of our contingency planning efforts. Due to
the various stages of third parties' Year 2000 readiness, our testing activities
will extend through 1999.
Contingency Plans. AGL and its affiliates have commenced contingency planning
to reduce the risk of Year 2000-related business failures. The contingency
plans, which address both internal systems and third party relationships,
include the following activities: (1) evaluate the consequences of failure of
business processes with significant exposure to Year 2000 risk; (2) determine
the probability of a Year 2000-related failure for those processes that have a
high consequence of failure; (3) develop an action plan to complete contingency
plans for those processes that rank high in consequence and probability of
failure; and (4) complete the applicable action plans. We are currently
developing contingency plans and expect to substantially complete all
contingency planning activities during the second quarter of 1999.
Risks and Uncertainties. Based on our plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, we believe that we will experience at most isolated and
minor disruptions of business processes following the turn of the century. Such
disruptions are not expected to have a material effect on AGL's future results
of operations, liquidity, or financial condition. However, due to the size and
complexity of this project, risks and uncertainties exist, and we cannot predict
a most reasonably likely worst case scenario. If conversion of our internal
systems is not completed on a timely basis (due to non-performance by
significant third-party vendors, lack of qualified personnel to perform the Year
2000 work, or other unforeseen circumstances in completing our plans), or if
critical third parties fail to achieve Year 2000 readiness on a timely basis,
the Year 2000 issues could have a material adverse impact on our operations
following the turn of the century.
Costs. Through December 31, 1998, AGL has incurred, and anticipates that it
will continue to incur, costs for internal staff, third-party vendors, and other
expenses to achieve Year 2000 readiness. The cost of activities related to Year
2000 readiness has not had a material adverse effect on our results of
operations or financial condition. In addition, we have elected to accelerate
the planned replacement of certain systems as part of the Year 2000 plans.
Costs of the replacement systems are not passed to Divisions of the Separate
Account.
41
<PAGE>
FINANCIAL STATEMENTS
The financial statements of AGL contained in this prospectus should be
considered to bear only upon the ability of AGL to meet its obligations under
the Legacy Plus Policies. They should not be considered as bearing upon the
investment experience of Separate Account VL-R. The financial statements of
Separate Account VL-R are limited to 1998 because Separate Account VL-R
commenced operations in 1998.
PAGE TO
SEE IN THIS
FINANCIAL STATEMENTS OF SEPARATE ACCOUNT VL-R PROSPECTUS
- ---------------------------------------------- -----------
Report of Ernst & Young LLP, Independent Auditors............... VL-R-1
Statement of Net Assets as of December 31, 1998................. VL-R-2
Statement of Operations for the twelve months
ended December 31, 1998....................................... VL-R-2
Statement of Changes in Net Assets for the twelve months
ended December 31, 1998....................................... VL-R-3
Notes to Financial Statements................................... VL-R-4
PAGE TO
CONSOLIDATED FINANCIAL STATEMENTS OF SEE IN THIS
AMERICAN GENERAL LIFE INSURANCE COMPANY PROSPECTUS
- --------------------------------------- -----------
Report of Ernst & Young, LLP Independent Auditors............... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997.... F-2
Consolidated Income Statements for the years ended
December 31, 1998, 1997 and 1996.............................. F-3
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1998, 1997, and 1996.......... F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996....................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996........................ F-6
Notes to Consolidated Financial Statements...................... F-7
42
<PAGE>
[ERNST & YOUNG LLP LOGO] . One Houston Center . Phone: 713 750-1500
Suite 2400 Fax: 713 750-1501
1221 McKinney
Houston, Texas 77010-2007
Report of Independent Auditors
Board of Directors
American General Life Insurance Company
and
Policy Owners
American General Life Insurance Company
Legacy Plus Divisions
of Separate Account VL-R
We have audited the accompanying statement of net assets of the Legacy Plus
Divisions of American General Life Insurance Company (the "Company") Separate
Account VL-R as of December 31, 1998, and the related statements of operations
and changes in net assets for the period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence with
the transfer agents. 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 provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Legacy Plus Divisions of
American General Life Insurance Company Separate Account VL-R at December 31,
1998, and the results of its operations and changes in its net assets for the
period then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
---------------------
February 10, 1999
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
VL-R-1
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
LEGACY PLUS DIVISIONS
SEPARATE ACCOUNT VL-R
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
ASSETS:
Investment securities - at market (cost $10,588) $ 10,850
Due to American General Life Insurance Company (128)
---------
NET ASSETS FOR VARIABLE LIFE INSURANCE POLICIES $ 10,722
=========
STATEMENT OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1998
INVESTMENT INCOME:
Dividends from mutual funds $ 66
EXPENSES:
Expense and mortality fees (9)
---------
NET INVESTMENT INCOME 57
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 0
Capital gain distributions from mutual funds 32
Net unrealized gain on investments 262
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 294
---------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 351
=========
SEE ACCOMPANYING NOTES.
VL-R-2
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
LEGACY PLUS DIVISIONS
SEPARATE ACCOUNT VL-R
STATEMENT OF CHANGES IN NET ASSETS
Period Ended December 31, 1998
OPERATIONS:
Net investment income $ 57
Net realized gain on investments 0
Capital gain distributions from mutual funds 32
Net unrealized gain on investments 262
---------
Increase in net assets resulting from operations 351
---------
PRINCIPAL TRANSACTIONS:
Premiums 4,800
Purchase payments from internal rollover transactions 5,893
Cost of insurance expenses (322)
Payments to contract owners:
Terminations and withdrawals 0
---------
Increase in net assets resulting from principal transactions 10,371
---------
TOTAL INCREASE IN NET ASSETS 10,722
NET ASSETS:
Beginning of period 0
---------
End of period $ 10,722
=========
See accompanying notes.
VL-R-3
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGACY PLUS DIVISIONS
SEPARATE ACCOUNT VL-R
NOTE A - ORGANIZATION
The Legacy Plus Divisions (the "Divisions") of American General Life
Insurance Company Separate Account VL-R (the "Separate Account") received their
first deposits in November, 1998. The Separate Account was established by
resolution of the Board of Directors of American General Life Insurance Company
(the "Company") on May 6, 1997. The Separate Account is registered under the
Investment Company Act of 1940 as a unit investment trust and consists of twenty
investment divisions at December 31, 1998.
The Divisions, funded by series of independently managed mutual fund
portfolios ("Funds") which are available through Legacy Plus Variable Life
Insurance Policies offered by the Company are as follows:
BT INSURANCE FUNDS TRUST: ROYCE CAPITAL FUND:
Equity 500 Index Fund Royce Total Return Portfolio
EAFE Equity Index Fund
AMERICAN GENERAL SERIES PORTFOLIO COMPANY:
AIM VARIABLE INSURANCE FUNDS, INC.: Money Market Fund
AIM V. I. Value Fund
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.:
Equity Growth Portfolio
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The accompanying financial statements of the Divisions of the Separate
Account have been prepared on the basis of generally accepted accounting
principles ("GAAP"). The accounting principles followed by the Divisions and the
methods of applying those principles are presented below or in the footnotes
which follow.
SECURITY VALUATION - The investments in shares of the Funds listed above,
are valued at the closing net asset value (market) per share as determined by
the fund on the day of measurement.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions
are accounted for on the date the order to buy or sell is executed (trade date).
Dividend income and distributions of capital gains are recorded on the ex-
dividend date and reinvested upon receipt. Realized gains and losses from
security transactions are determined on the basis of identified cost.
VL-R-4
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION -
CONTINUED
CHARGES AND EXPENSES
Separate Account and other charges. Currently, daily charges at an annual
effective rate of .75% on the daily net asset value of the Divisions are paid to
the Company. These charges are made in return for the Company's assumption of
mortality and expense risks associated with the policies issued.
For each policy, a reduction in the current daily charge by .25% will occur
after policy year 10, and a further reduction of .25% will occur after policy
year 20. Because the policies were first offered in 1998, this decrease has not
yet occurred for any outstanding policy.
The Funds pay their respective investment advisers a monthly fee based on
the fund's average net asset value.
Other charges paid to the Company include: deductions for the monthly cost
of insurance charge, and transaction fee charges for partial surrenders.
Since determination of both the insurance rate and the Company's net amount
at risk depends upon several factors, the cost of insurance deduction may vary
from month to month. Policy accumulation value, specified amount of insurance
and certain characteristics of the insured person, are among the variables
included in the calculation for the cost of insurance deduction.
A transaction fee of $25 is deducted for each partial surrender made. No
surrender charges or transaction fees were collected for the period ended
December 31, 1998.
NOTE C - FEDERAL INCOME TAXES
The Company is taxed as a life insurance company under the Internal Revenue
Code and includes the operations of the Separate Account in determining its
federal income tax liability. Under existing federal income tax law, the
investment income and capital gains from sales of investments realized by the
Separate Account are not taxable. Therefore, no federal income tax provision has
been made.
Note D - Year 2000 Contingency (Unaudited)
Internal Systems. The Company's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
decentralized basis. AGL's Year 2000 readiness efforts are therefore being
undertaken by its key business units with centralized oversight. Each business
unit, including the Company, has developed and is implementing a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of the Company's information technology and
non-information technology systems; (2) assess which items in the inventory may
expose the company to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, substantially all
of the Company's critical systems are Year 2000 ready and have been returned to
operations. However, activities (3) through (5) for certain systems are ongoing,
with vendor upgrades expected to be received during the first half of 1999.
VL-R-5
<PAGE>
SEPARATE ACCOUNT VL-R - LEGACY PLUS DIVISIONS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Third Party Relationships. The Company has relationships with various third
parties who must also be Year 2000 ready. These third parties provide (or
receive) resources and services to (or from) the Company and include
organizations with which the company exchanges information. Third parties
include vendors of hardware, software, and information services; providers of
infrastructure services such as voice and data communications and utilities for
office facilities; investors; customers; distribution channels; and joint
venture partners. Third parties differ from internal systems in that the Company
exercises less, or no, control over Year 2000 readiness. The Company has
developed a plan to assess and attempt to mitigate the risks associated with the
potential failure of third parties to achieve Year 2000 readiness. The plan
includes the following activities: (1) identify and classify third party
dependencies; (2) research, analyze, and document Year 2000 readiness for
critical third parties; and (3) test critical hardware and software products and
electronic interfaces. As of December 31, 1998, AGC has identified and assessed
approximately 700 critical third party dependencies, including those relating to
the Company. A more detailed evaluation will be completed during first quarter
1999 as part of the Company's contingency planning efforts. Due to the various
stages of third parties' Year 2000 readiness, the Company's testing activities
will extend through 1999.
Contingency Plans. The Company has commenced contingency planning to reduce
the risk of Year 2000-related business failures. The contingency plans, which
address both internal systems and third party relationships, include the
following activities: (1) evaluate the consequences of failure of business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a Year 2000-related failure for those processes that have a high
consequence of failure; (3) develop an action plan to complete contingency plans
for those processes that rank high in consequence and probability of failure;
and (4) complete the applicable action plans. The Company is currently
developing contingency plans and expects to substantially complete all
contingency planning activities by April 30, 1999.
Risks and Uncertainties. Based on its plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, the Company believes that it will experience at most
isolated and minor disruptions of business processes following the turn of the
century. Such disruptions are not expected to have a material effect on the
Company's future results of operations, liquidity, or financial condition.
However, due to the magnitude and complexity of this project, risks and
uncertainties exist and the Company is not able to predict a most reasonably
likely worst case scenario. If conversion of the Company's internal systems is
not completed on a timely basis (due to non-performance by significant third-
party vendors, lack of qualified personnel to perform the Year 2000 work, or
other unforeseen circumstances in completing the Company's plans), or if
critical third parties fail to achieve Year 2000 readiness on a timely basis,
the Year 2000 issues could have a material adverse impact on the Company's
operations following the turn of the century.
Costs. Through December 31, 1998, the Company has incurred, and anticipates
that it will continue to incur, costs for internal staff, third-party vendors,
and other expenses to achieve Year 2000 readiness. The cost of activities
related to Year 2000 readiness has not had a material adverse effect on the
Company's results of operations or financial condition. In addition, the Company
has elected to accelerate the planned replacement of certain systems as part of
the Year 2000 plans. Costs of the replacement systems are being capitalized and
amortized over their useful lives, in accordance with the Company's normal
accounting policies. These costs are not passed to Divisions of the Separate
Account.
VL-R-6
<PAGE>
Note E - Investments
Fund shares are purchased at net asset value with net policy transactions
(net premium payments less surrenders and amounts payable to the Company for
administrative, insurance and surrender charges) and reinvestment of
distributions made by the funds. The following is a summary of fund shares owned
as of December 31, 1998.
<TABLE>
<CAPTION>
Net Value of
Asset Shares at Cost of Unrealized
Fund Shares Value Market Shares Held Appreciation
<S> <C> <C> <C> <C> <C>
BT Insurance Funds Trust:
Equity 500 Index Fund 0.000 12.73 $ 0 $ 0 $ 0
EAFE Equity Index Fund 239.184 11.18 2,674 2,637 37
-------- -------- ------
2,674 2,637 37
AIM Variable Insurance Funds, Inc.:
AIM V. I. Value Fund 0.000 26.25 0 0 0
Morgan Stanley Dean Witter Universal Funds, Inc.:
Equity Growth Portfolio 294.385 15.10 4,445 4,221 224
Royce Capital Fund:
Royce Total Return Portfolio 735.890 5.07 3,731 3,730 1
American General Series Portfolio Company:
Money Market Fund 0.000 1.00 0 0 0
-------- -------- ------
Total $ 10,850 $ 10,588 $ 262
======== ======== ======
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments for
the period ended December 31, 1998 were $21,346 and $10,758, respectively. The
cost of total investments owned at December 31, 1998 was the same for both
financial reporting and federal income tax purposes.
VL-R-7
<PAGE>
SEPARATE ACCOUNT VL-R - Legacy Plus Divisions
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - SUMMARY OF CHANGES IN UNITS
SUMMARY OF CHANGES IN UNITS FOR THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Morgan Stanley
Dean Witter
BT Equity 500 BT EAFE Equity AIM V. I. Equity Growth
Index Fund Index Fund Value Fund Portfolio
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0.000 0.000 0.000 0.000
Purchase payments 0.000 0.000 0.000 0.000
Transfers between funds 0.000 263.849 0.000 422.157
COI and administration charges 0.000 (3.938) 0.000 (6.299)
Surrenders 0.000 0.000 0.000 0.000
-------- --------- ------- --------
Outstanding at end of period 0.000 259.911 0.000 415.858
======== ========= ======= ========
Royce Total AGSPC Money Market
Return Portfolio Fund
Outstanding at beginning of period 0.000 0.000
Purchase payments 0.000 1,069.330
Transfers between funds 369.388 (1,053.670)
COI and administration charges (5.527) (15.660)
Surrenders 0.000 0.000
-------- ---------
Outstanding at end of period 363.861 0.000
======== =========
NOTE G - NET ASSETS REPRESENTED BY:
December 31, 1998
UNITS OUTSTANDING: Units Unit Value Amount
BT Insurance Funds Trust:
Equity 500 Index Fund 0.000 $ 10.000000 $ 0
EAFE Equity Index Fund 259.911 10.289287 2,674
2,674
---------
AIM Variable Insurance Funds, Inc.:
AIM V. I. Value Fund 0.000 10.000000 0
---------
Morgan Stanley Dean Witter Universal Funds, Inc. :
Equity Growth Portfolio 415.858 10.521886 4,376
---------
Royce Capital Fund :
Royce Total Return Portfolio 363.861 10.092804 3,672
---------
American General Series Portfolio Company :
Money Market Fund 0.000 10.008655 0
VALUE OF UNITS OUTSTANDING AT DECEMBER 31, 1998 $ 10,722
=========
</TABLE>
VL-R-8
<PAGE>
[ERNST & YOUNG LLP LETTERHEAD] . One Houston Center . Phone: 713 750 1500
Suite 2400 Fax: 713 750 1501
1221 McKinney
Houston, Texas 77010-2007
Report of Independent Auditors
Board of Directors and Stockholder
American General Life Insurance Company
We have audited the accompanying consolidated balance sheets of American General
Life Insurance Company (an indirectly wholly owned subsidiary of American
General Corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholder's
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure 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 American General
Life Insurance Company and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/S/ ERNST & YOUNG LLP
---------------------
February 16, 1999
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-1
<PAGE>
American General Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------------------
<S> <C> <C>
(In Thousands)
ASSETS
Investments:
Fixed maturity securities, at fair value (amortized cost-
$27,425,605 in 1998 and $26,131,207 in 1997) $28,906,261 $27,386,715
Equity securities, at fair value (cost - $193,368 in 1998
and $19,208 in 1997) 211,684 21,114
Mortgage loans on real estate 1,557,268 1,659,921
Policy loans 1,170,686 1,093,694
Investment real estate 119,520 129,364
Other long-term investments 86,194 55,118
Short-term investments 222,949 100,061
---------------------------------
Total investments 32,274,562 30,445,987
Cash 117,675 99,284
Investment in Parent Company (cost - $8,597 in 1998
and 1997) 54,570 37,823
Indebtedness from affiliates 161,096 96,519
Accrued investment income 459,961 433,111
Accounts receivable 196,596 208,209
Deferred policy acquisition costs 1,087,718 835,031
Property and equipment 66,197 33,827
Other assets 206,318 132,659
Assets held in separate accounts 15,616,020 11,242,270
---------------------------------
Total assets $50,240,713 $43,564,720
=================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $29,353,022 $27,849,893
Other policy claims and benefits payable 54,278 42,677
Other policyholders' funds 398,587 398,314
Federal income taxes 677,315 543,379
Indebtedness to affiliates 18,173 4,712
Other liabilities 554,783 421,861
Liabilities related to separate accounts 15,616,020 11,242,270
---------------------------------
Total liabilities 46,672,178 40,503,106
Shareholder's equity:
Common stock, $10 par value, 600,000 shares
authorized, issued, and outstanding 6,000 6,000
Preferred stock, $100 par value, 8,500 shares authorized,
issued, and outstanding 850 850
Additional paid-in capital 1,368,089 1,184,743
Accumulated other comprehensive income 679,107 427,526
Retained earnings 1,514,489 1,442,495
---------------------------------
Total shareholder's equity 3,568,535 3,061,614
---------------------------------
Total liabilities and shareholder's equity $50,240,713 $43,564,720
=================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
American General Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Revenues:
Premiums and other considerations $ 470,238 $ 428,721 $ 382,923
Net investment income 2,316,933 2,198,623 2,095,072
Net realized investment gains (losses) (33,785) 29,865 28,502
Other 69,602 53,370 41,968
----------------------------------------------------------
Total revenues 2,822,988 2,710,579 2,548,465
Benefits and expenses:
Benefits 1,788,417 1,757,504 1,689,011
Operating costs and expenses 467,067 379,012 347,369
Interest expense 15 782 830
Litigation settlement 97,096 - -
----------------------------------------------------------
Total benefits and expenses 2,352,595 2,137,298 2,037,210
----------------------------------------------------------
Income before income tax expense 470,393 573,281 511,255
Income tax expense 153,719 198,724 176,660
----------------------------------------------------------
Net income $ 316,674 $ 374,557 $ 334,595
==========================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
American General Life Insurance Company
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Net income $316,674 $374,557 $ 334,595
Other comprehensive income:
Gross change in unrealized gains (losses)
on securities (pretax: $341,000;
$318,700; ($404,900)) 222,245 207,124 (263,181)
Less: gains (losses) realized in net income (29,336) (1,251) 11,262
--------------------------------------------------------
Change in net unrealized gains (losses) on
securities (pretax: $387,000; $320,600;
($422,200) 251,581 208,375 (274,443)
-------------------------------------------------------
Comprehensive income $568,255 $582,932 $ 60,152
========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
American General Life Insurance Company
Consolidated Statements of Shareholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Common stock:
Balance at beginning of year $ 6,000 $ 6,000 $ 6,000
Change during year - - -
----------------------------------------------------------
Balance at end of year 6,000 6,000 6,000
Preferred stock:
Balance at beginning of year 850 850 850
Change during year - - -
----------------------------------------------------------
Balance at end of year 850 850 850
Additional paid-in capital:
Balance at beginning of year 1,184,743 933,342 858,075
Capital contribution from Parent
Company 182,284 250,000 75,000
Other changes during year 1,062 1,401 267
----------------------------------------------------------
Balance at end of year 1,368,089 1,184,743 933,342
Accumulated other comprehensive income:
Balance at beginning of year 427,526 219,151 493,594
Change in unrealized gains (losses) on
securities 251,581 208,375 (274,443)
----------------------------------------------------------
Balance at end of year 679,107 427,526 219,151
Retained earnings:
Balance at beginning of year 1,442,495 1,469,618 1,324,703
Net income 316,674 374,557 334,595
Dividends paid (244,680) (401,680) (189,680)
----------------------------------------------------------
Balance at end of year 1,514,489 1,442,495 1,469,618
----------------------------------------------------------
Total shareholder's equity $3,568,535 $3,061,614 $2,628,961
==========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
American General Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
OPERATING ACTIVITIES
Net income $ 316,674 $ 374,557 $ 334,595
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts receivable 11,613 (37,752) 3,846
Change in future policy benefits and other policy
claims (866,428) (1,143,736) (543,193)
Amortization of policy acquisition costs 125,062 115,467 102,189
Policy acquisition costs deferred (244,196) (219,339) (188,001)
Change in other policyholders' funds 273 21,639 (69,126)
Provision for deferred income tax expense 15,872 13,264 12,388
Depreciation 19,418 16,893 16,993
Amortization (26,775) (28,276) (30,758)
Change in indebtedness to/from affiliates (51,116) (8,695) 4,432
Change in amounts payable to brokers (894) 31,769 (25,260)
Net (gain) loss on sale of investments 37,016 (29,865) (28,502)
Other, net 57,307 30,409 32,111
--------------------------------------------------------------------
Net cash used in operating activities (606,174) (863,665) (378,286)
INVESTING ACTIVITIES
Purchases of investments and loans made (28,231,615) (29,638,861) (27,245,453)
Sales or maturities of investments and receipts from
repayment of loans 26,656,897 28,300,238 25,889,422
Sales and purchases of property, equipment, and
software, net (105,907) (9,230) (8,057)
--------------------------------------------------------------------
Net cash used in investing activities (1,680,625) (1,347,853) (1,364,088)
FINANCING ACTIVITIES
Policyholder account deposits 4,688,831 4,187,191 3,593,380
Policyholder account withdrawals (2,322,307) (1,759,660) (1,746,987)
Dividends paid (244,680) (401,680) (189,680)
Capital contribution from Parent 182,284 250,000 75,000
Other 1,062 1,401 267
--------------------------------------------------------------------
Net cash provided by financing activities 2,305,190 2,277,252 1,731,980
--------------------------------------------------------------------
Increase (decrease) in cash 18,391 65,734 (10,394)
Cash at beginning of year 99,284 33,550 43,944
--------------------------------------------------------------------
Cash at end of year $ 117,675 $ 99,284 $ 33,550
====================================================================
</TABLE>
Interest paid amounted to approximately $420,000, $1,004,000, and $1,080,000 in
1998, 1997, and 1996, respectively.
See accompanying notes.
F-6
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1998
NATURE OF OPERATIONS
American General Life Insurance Company (the "Company") is a wholly owned
subsidiary of AGC Life Insurance Company, which is a wholly owned subsidiary of
American General Corporation (the "Parent Company"). The Company's wholly owned
life insurance subsidiaries are American General Life Insurance Company of New
York ("AGNY") and The Variable Annuity Life Insurance Company ("VALIC"). During
1998, the Company formed a new wholly owned subsidiary, American General Life
Companies (AGLC), to provide management services to certain life insurance
subsidiaries of the Parent Company.
The Company offers a complete portfolio of the standard forms of universal life,
variable universal life, interest-sensitive whole life, term life, structured
settlements, and fixed and variable annuities throughout the United States. In
addition, a variety of equity products is sold through its wholly owned
broker/dealer, American General Securities, Inc. The Company serves the estate
planning needs of middle- and upper-income households and the insurance needs of
small- to medium-sized businesses. AGNY offers a broad array of traditional and
interest-sensitive insurance, in addition to individual annuity products. VALIC
provides tax-deferred retirement annuities and employer-sponsored retirement
plans to employees of health care, educational, public sector, and other not-
for-profit organizations throughout the United States.
1. ACCOUNTING POLICIES
1.1 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company and its wholly owned subsidiaries. Transactions with the Parent
Company and other subsidiaries of the Parent Company are not eliminated from the
financial statements of the Company. All other material intercompany
transactions have been eliminated in consolidation.
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
disclosures of contingent assets and liabilities. Ultimate results could differ
from those estimates.
F-7
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.2 STATUTORY ACCOUNTING
The Company and its wholly owned life insurance subsidiaries are required to
file financial statements with state regulatory authorities. State insurance
laws and regulations prescribe accounting practices for calculating statutory
net income and equity. In addition, state regulators may permit statutory
accounting practices that differ from prescribed practices. The use of such
permitted practices by the Company and its wholly owned life insurance
subsidiaries did not have a material effect on statutory equity at December 31,
1998.
Statutory financial statements differ from GAAP. Significant differences were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Net income:
Statutory net income (1998 balance is
unaudited) $ 259,903 $ 327,813 $ 284,070
Deferred policy acquisition costs and cost
of insurance purchased 116,597 103,872 85,812
Deferred income taxes (53,358) (13,264) (12,388)
Adjustments to policy reserves 52,445 (30,162) (19,954)
Goodwill amortization (2,033) (2,067) (2,169)
Net realized gain on investments 41,488 20,139 14,140
Litigation settlement (63,112) -- --
Other, net (35,256) (31,774) (14,916)
-------------------------------------------------------
GAAP net income $ 316,674 $ 374,557 $ 334,595
=======================================================
Shareholders' equity:
Statutory capital and surplus (1998 balance
is unaudited) $1,670,412 $1,636,327 $1,441,768
Deferred policy acquisition costs 1,109,831 835,031 1,042,783
Deferred income taxes (698,350) (535,703) (410,007)
Adjustments to policy reserves (274,532) (319,680) (297,434)
Acquisition-related goodwill 54,754 51,424 55,626
Asset valuation reserve ("AVR") 310,564 255,975 291,205
Interest maintenance reserve ("IMR") 27,323 9,596 63
Investment valuation differences 1,487,658 1,272,339 643,289
Surplus from separate accounts (174,447) (150,928) (106,026)
Other, net 55,322 7,233 (32,306)
-------------------------------------------------------
Total GAAP shareholders' equity $3,568,535 $3,061,614 $2,628,961
=======================================================
</TABLE>
F-8
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.2 STATUTORY ACCOUNTING (CONTINUED)
The more significant differences between GAAP and statutory accounting
principles are that under GAAP: (a) acquisition costs related to acquiring new
business are deferred and amortized (generally in proportion to the present
value of expected gross profits from surrender charges and investment,
mortality, and expense margins), rather than being charged to operations as
incurred; (b) future policy benefits are based on estimates of mortality,
interest, and withdrawals generally representing the Company's experience, which
may differ from those based on statutory mortality and interest requirements
without consideration of withdrawals; (c) deferred tax assets and liabilities
are established for temporary differences between the financial reporting basis
and the tax basis of assets and liabilities, at the enacted tax rates expected
to be in effect when the temporary differences reverse; (d) certain assets
(principally furniture and equipment, agents' debit balances, computer software,
and certain other receivables) are reported as assets rather than being charged
to retained earnings; (e) acquisitions are accounted for using the purchase
method of accounting rather than being accounted for as equity investments; and
(f) fixed maturity investments are carried at fair value rather than amortized
cost. In addition, statutory accounting principles require life insurance
companies to establish an AVR and an IMR. The AVR is designed to address the
credit-related risk for bonds, preferred stocks, derivative instruments, and
mortgages and market risk for common stocks, real estate, and other invested
assets. The IMR is composed of investment- and liability-related realized gains
and losses that result from interest rate fluctuations. These realized gains and
losses, net of tax, are amortized into income over the expected remaining life
of the asset sold or the liability released.
1.3 INSURANCE CONTRACTS
The insurance contracts accounted for in these financial statements include
primarily long-duration contracts. Long-duration contracts include traditional
whole life, endowment, guaranteed renewable term life, universal life, limited
payment, and investment contracts. Long-duration contracts generally require the
performance of various functions and services over a period of more than one
year. The contract provisions generally cannot be changed or canceled by the
insurer during the contract period; however, most new contracts written by the
Company allow the insurer to revise certain elements used in determining premium
rates or policy benefits, subject to guarantees stated in the contracts.
F-9
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
All fixed maturity and equity securities were classified as available-for-sale
and recorded at fair value at December 31, 1998, 1997, and 1996. After adjusting
related balance sheet accounts as if the unrealized gains (losses) had been
realized, the net adjustment is recorded in accumulated other comprehensive
income within shareholders' equity. If the fair value of a security classified
as available-for-sale declines below its cost and this decline is considered to
be other than temporary, the security is reduced to its fair value, and the
reduction is recorded as a realized loss.
During 1998, the Company maintained a trading portfolio of certain fixed
maturity securities. Trading securities are recorded at fair value. Unrealized
gains (losses), as well as realized gains (losses), are included in net
investment income. The Company held no trading securities at December 31, 1998,
and trading securities did not have a material effect on net investment income
in 1998.
MORTGAGE LOANS
Mortgage loans are reported at amortized cost, net of an allowance for losses.
The allowance for losses covers all non-performing loans and loans for which
management has a concern based on its assessment of risk factors, such as
potential non-payment or non-monetary default. The allowance is based on a loan-
specific review and a formula that reflects past results and current trends.
Loans for which the Company determines that collection of all amounts due under
the contractual terms is not probable are considered to be impaired. The Company
generally looks to the underlying collateral for repayment of impaired loans.
Therefore, impaired loans are considered to be collateral dependent and are
reported at the lower of amortized cost or fair value of the underlying
collateral, less estimated cost to sell.
POLICY LOANS
Policy loans are reported at unpaid principal balance.
F-10
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.4 INVESTMENTS (CONTINUED)
INVESTMENT REAL ESTATE
Investment real estate is classified as held for investment or available for
sale, based on management's intent. Real estate held for investment is carried
at cost, less accumulated depreciation and impairment write-downs. Real estate
available for sale is carried at the lower of cost (less accumulated
depreciation, if applicable) or fair value less cost to sell.
INVESTMENT INCOME
Interest on fixed maturity securities and performing and restructured mortgage
loans is recorded as income when earned and is adjusted for any amortization of
premium or discount. Interest on delinquent mortgage loans is recorded as income
when received. Dividends are recorded as income on ex-dividend dates.
REALIZED INVESTMENT GAINS
Realized investment gains (losses) are recognized using the specific-
identification method.
1.5 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain contracts,
principally annuities; for which the investment risk lies solely with the
contract holder. Therefore, the Company's liability for these accounts equals
the value of the account assets. Investment income, realized investment gains
(losses), and policyholder account deposits and withdrawals related to separate
accounts are excluded from the consolidated statements of income, comprehensive
income, and cash flows. Assets held in Separate Accounts are primarily shares in
mutual funds, which are carried at fair value based on the quoted net asset
value per share.
F-11
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.6 DEFERRED POLICY ACQUISITION COSTS ("DPAC") AND COST OF INSURANCE PURCHASED
("CIP")
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
CIP represents the cost assigned to insurance contracts in force that are
acquired through the purchase of a block of business. At December 31, 1998, CIP
of $22.1 million was reported within other assets.
DPAC and CIP associated with interest-sensitive life contracts, insurance
investment contracts, and participating life insurance contracts is charged to
expense in relation to the estimated gross profits of those contracts. DPAC and
CIP associated with all other insurance contracts is charged to expense over the
premium-paying period or as the premiums are earned over the life of the
contract.
DPAC and CIP are adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the balance
sheet date. The impact of this adjustment is included in accumulated other
comprehensive income within shareholder's equity.
The Company reviews the carrying amount of DPAC and CIP on at least an annual
basis. Management considers estimated future gross profits or future premiums,
expected mortality, interest earned and credited rates, persistency, and
expenses in determining whether the carrying amount is recoverable.
1.7 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance policies are
classified as deposits instead of revenue. Revenues for these contracts consist
of mortality, expense, and surrender charges. Policy charges that compensate the
Company for future services are deferred and recognized in income over the
period earned, using the same assumptions used to amortize DPAC (see Note 1.6).
For limited-payment contracts, net premiums are recorded as revenue, and the
difference between the gross premium received and the net premium is deferred
and recognized in a constant relationship to insurance in force. For all other
contracts, premiums are recognized when due.
F-12
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.8 OTHER ASSETS
Acquisition-related goodwill, which is included in other assets, is charged to
expense in equal amounts over 40 years. The carrying value of goodwill is
regularly reviewed by management for indicators of impairment in value. If facts
and circumstances suggest that goodwill is impaired, other than temporarily, the
Company assesses the fair value of the underlying assets and reduces goodwill
accordingly.
1.9 POLICY AND CONTRACT CLAIMS RESERVES
Substantially all of the Company's insurance and annuity liabilities relate to
long-duration contracts. The contracts normally cannot be changed or canceled by
the Company during the contract period.
For interest-sensitive life and insurance investment contracts, reserves equal
the sum of the policy account balance and deferred revenue charges. Reserves for
other contracts are based on estimates of the cost of future policy benefits.
Reserves are determined using the net level premium method. Interest assumptions
used to compute reserves ranged from 2.5% to 13.5% at December 31, 1998.
1.10 REINSURANCE
The Company limits its exposure to loss on any single insured to $2.5 million by
ceding additional risks through reinsurance contracts with other insurers. The
Company diversifies its risk of reinsurance loss by using a number of reinsurers
that have strong claims-paying ability ratings. If the reinsurer could not meet
its obligations, the Company would reassume the liability. The likelihood of a
material reinsurance liability being reassumed by the Company is considered to
be remote.
A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $63 million, $25 million, and $24 million during
1998, 1997, and 1996, respectively. The cost of reinsurance is recognized over
the life of the reinsured policies using assumptions consistent with those used
to account for the underlying policies.
F-13
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.10 REINSURANCE
Benefits paid and future policy benefits related to ceded insurance contracts
are recorded as reinsurance receivables. The cost of reinsurance is recognized
over the life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies.
1.11 PARTICIPATING POLICY CONTRACTS
Participating life insurance accounted for approximately 2% of life insurance in
force at December 31, 1998 and 1997.
The portion of earnings allocated to participating policyholders that cannot be
expected to inure to shareholders is excluded from net income and shareholder's
equity. Dividends to be paid on participating life insurance contracts are
determined annually based on estimates of the contracts' earnings. Policyholder
dividends were $4.9 million in 1998.
1.12 INCOME TAXES
The Company and its life insurance subsidiaries, together with certain other
life insurance subsidiaries of the Parent Company, are included in a life/non-
life consolidated tax return with the Parent Company and its noninsurance
subsidiaries. The Company participates in a tax sharing agreement with other
companies included in the consolidated tax return. Under this agreement, tax
payments are made to the Parent Company as if the companies filed separate tax
returns; and companies incurring operating and/or capital losses are reimbursed
for the use of these losses by the consolidated return group.
Deferred tax assets and liabilities are established for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities, at the enacted tax rates expected to be in effect when the
temporary differences reverse. The effect of a tax rate change is recognized in
income in the period of enactment. State income taxes are included in income tax
expense.
F-14
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.12 INCOME TAXES (CONTINUED)
A valuation allowance for deferred tax assets is provided if it is more likely
than not that some portion of the deferred tax asset will not be realized. An
increase or decrease in a valuation allowance that results from a change in
circumstances that causes a change in judgment about the realizability of the
related deferred tax asset is included in income. Changes related to
fluctuations in fair value of available-for-sale securities are included in the
consolidated statements of comprehensive income and accumulated other
comprehensive income in shareholder's equity.
1.13 ACCOUNTING CHANGES
During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) 130, Reporting Comprehensive Income, which establishes standards for
reporting and displaying comprehensive income and its components in the
financial statements. The Company elected to report comprehensive income and its
components in a separate statement of comprehensive income. Adoption of this
statement did not change recognition or measurement of net income and,
therefore, did not impact the Company's consolidated results of operations or
financial position.
Effective December 31, 1998, the Company adopted SFAS 131, Disclosures about
Segments of an Enterprise and Related Information, which changes the way
companies report segment information. With the adoption of SFAS 131, the Company
reports division earnings exclusive of goodwill amortization, net realized
investment gains, and nonrecurring items. This methodology is consistent with
the manner in which management reviews division results. Adoption of this
statement did not impact the Company's consolidated results of operations or
financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, which requires all
derivative instruments to be recognized at fair value as either assets or
liabilities in the balance sheet. Changes in the fair value of a derivative
instrument are to be reported as earnings or other comprehensive income,
depending upon the intended use of the derivative instrument. This statement is
effective for years beginning after June 15, 1999. Adoption of SFAS 133 is not
expected to have a material impact on the Company's consolidated results of
operations or financial position.
F-15
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS
2.1 INVESTMENT INCOME
Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Investment income:
Fixed maturities $2,101,730 $1,966,528 $1,846,549
Equity securities 1,813 1,067 1,842
Mortgage loans on real estate 148,447 157,035 175,833
Investment real estate 23,139 22,157 22,752
Policy loans 66,573 62,939 58,211
Other long-term investments 3,837 3,135 2,328
Short-term investments 15,492 8,626 9,280
Investment income from affiliates 10,536 11,094 11,502
----------------------------------------------------------
Gross investment income 2,371,567 2,232,581 2,128,297
Investment expenses 54,634 33,958 33,225
----------------------------------------------------------
Net investment income $2,316,933 $2,198,623 $2,095,072
==========================================================
</TABLE>
The carrying value of investments that produced no investment income during 1998
was less than 0.2% of total invested assets. The ultimate disposition of these
investments is not expected to have a material effect on the Company's results
of operations and financial position.
F-16
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.2 NET REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) by type of investment were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 20,109 $ 42,966 $ 46,498
Gross losses (62,657) (34,456) (47,293)
--------------------------------------------------------
Total fixed maturities (42,548) 8,510 (795)
Equity securities 645 1,971 18,304
Other investments 8,118 19,384 10,993
--------------------------------------------------------
Net realized investment gains (losses)
before tax (33,785) 29,865 28,502
Income tax expense (benefit) (11,826) 10,452 9,976
--------------------------------------------------------
Net realized investment gains (losses)
after tax $(21,959) $ 19,413 $ 18,526
========================================================
</TABLE>
F-17
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
All fixed maturity and equity securities are classified as available-for-sale
and reported at fair value (see Note 1.4). Amortized cost and fair value at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Fixed maturity securities:
Corporate securities:
Investment-grade $18,800,553 $1,129,504 $(26,353) $19,903,703
Below investment-grade 1,409,198 33,910 (45,789) 1,397,320
Mortgage-backed securities* 6,359,242 294,331 (870) 6,652,703
U.S. government obligations 417,822 69,321 (178) 486,965
Foreign governments 331,699 24,625 (2,437) 353,887
State and political subdivisions 86,778 4,796 (187) 91,387
Redeemable preferred stocks 20,313 - (17) 20,296
------------------------------------------------------------------------------
Total fixed maturity securities $27,425,605 $1,556,487 $(75,831) $28,906,261
==============================================================================
Equity securities $ 193,368 $ 19,426 $ (1,110) $ 211,684
==============================================================================
Investment in Parent Company $ 8,597 $ 45,973 $ - $ 54,570
==============================================================================
</TABLE>
* Primarily include pass-through securities guaranteed by and mortgage
obligations ("CMOs") collateralized by the U.S. government and government
agencies.
F-18
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturity securities:
Corporate securities:
Investment-grade $17,913,942 $ 906,235 $(17,551) $18,802,626
Below investment-grade 950,438 34,290 (4,032) 980,696
Mortgage-backed securities* 6,614,704 278,143 (4,260) 6,888,587
U.S. government obligations 289,406 46,529 (74) 335,861
Foreign governments 318,212 18,076 (3,534) 332,754
State and political subdivisions 44,505 1,686 -- 46,191
------------------------------------------------------------------------------
Total fixed maturity securities $26,131,207 $1,284,959 $(29,451) $27,386,715
==============================================================================
Equity securities $ 19,208 $ 2,145 $ (239) $ 21,114
==============================================================================
Investment in Parent Company $ 8,597 $ 29,226 $ -- $ 37,823
==============================================================================
</TABLE>
* Primarily include pass-through securities guaranteed by and mortgage
obligations ("CMOs") collateralized by the U.S. government and government
agencies.
F-19
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Net unrealized gains (losses) on securities included in accumulated
comprehensive income in shareholders' equity at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------
(In Thousands)
<S> <C> <C>
Gross unrealized gains $1,621,886 $1,316,330
Gross unrealized losses (76,941) (29,690)
DPAC and other fair value adjustments (488,120) (621,867)
Deferred federal income taxes (377,718) (237,247)
--------------------------------------------
Net unrealized gains on securities $ 679,107 $ 427,526
============================================
</TABLE>
The contractual maturities of fixed maturity securities at December 31, 1998
were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
-----------------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities,
excluding mortgage-
backed securities:
Due in one year or less $ 531,496 $ 536,264 $ 205,719 $ 207,364
Due after one year
through five years 5,550,665 5,812,581 5,008,933 5,216,174
Due after five years
through ten years 9,229,980 9,747,761 9,163,681 9,604,447
Due after ten years 5,754,220 6,156,950 5,138,169 5,470,143
Mortgage-backed securities 6,359,244 6,652,705 6,614,705 6,888,587
-----------------------------------------------------------------------------
Total fixed maturity securities $27,425,605 $28,906,261 $26,131,207 $27,386,715
=============================================================================
</TABLE>
Actual maturities may differ from contractual maturities, since borrowers may
have the right to call or prepay obligations. In addition, corporate
requirements and investment strategies may result in the sale of investments
before maturity. Proceeds from sales of fixed maturities were $5.4 billion,
$14.8 billion, and $16.2 billion during 1998, 1997, and 1996, respectively.
F-20
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.4 MORTGAGE LOANS ON REAL ESTATE
Diversification of the geographic location and type of property collateralizing
mortgage loans reduces the concentration of credit risk. For new loans, the
Company requires loan-to-value ratios of 75% or less, based on management's
credit assessment of the borrower. The mortgage loan portfolio was distributed
as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
DECEMBER 31, 1998
Geographic distribution:
South Atlantic $ 429 27.6% 0.2%
Pacific 320 20.6 10.4
Mid-Atlantic 326 20.9 4.1
East North Central 178 11.4 -
Mountain 95 6.1 -
West South Central 118 7.5 -
East South Central 46 3.0 -
West North Central 33 2.1 -
New England 25 1.6 -
Allowance for losses (13) (0.8) -
-------------------------------------
Total $ 1,557 100.00% 3.1%
=====================================
Property type:
Office $ 593 38.1% 7.0%
Retail 423 27.1 0.2
Industrial 292 18.8 -
Apartments 178 11.4 2.9
Hotel/motel 38 2.4 -
Other 46 3.0 -
Allowance for losses (13) (0.8) -
-------------------------------------
Total $ 1,557 100% 3.1%
=====================================
</TABLE>
F-21
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.4 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
DECEMBER 31, 1997
Geographic distribution:
South Atlantic $ 456 27.5% 1.8%
Pacific 340 20.5 14.4
Mid-Atlantic 288 17.3 -
East North Central 186 11.2 -
Mountain 151 9.1 2.7
West South Central 132 7.9 .1
East South Central 94 5.7 -
West North Central 19 1.1 -
New England 17 1.1 -
Allowance for losses (23) (1.4) -
-------------------------------------
Total $1,660 100.0% 3.6%
=====================================
Property type:
Office $ 622 37.5% 4.6%
Retail 463 27.9 3.0
Industrial 324 19.5 1.8
Apartments 223 13.4 6.1
Hotel/motel 40 2.4 -
Other 11 .7 -
Allowance for losses (23) (1.4) -
-------------------------------------
Total $1,660 100.0% 3.6%
=====================================
</TABLE>
F-22
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.4 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
Impaired mortgage loans on real estate and related interest income were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------------------------
(In Millions)
<S> <C> <C>
Impaired loans:
With allowance* $ 13 $ 35
Without allowance - -
-----------------------------------------
Total impaired loans $ 13 $ 35
=========================================
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of $1.8
million and $10 million, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Average investment $ 24 $ 48 $ 72
Interest income earned $ - $ 3 $ 6
Interest income - cash basis $ - $ - $ 6
</TABLE>
F-23
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.5 INVESTMENT SUMMARY
Investments of the Company were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------------
CARRYING CARRYING
COST FAIR VALUE AMOUNT COST FAIR VALUE AMOUNT
--------------------------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
United States government
and government agencies
and authorities $ 417,822 $ 486,965 $ 486,965 $ 289,406 $ 335,861 $ 335,861
States, municipalities,
and political subdivisions 86,778 91,387 91,387 44,505 46,191 46,191
Foreign governments 331,699 353,887 353,887 318,212 332,754 332,754
Public utilities 1,777,172 1,895,326 1,895,326 1,848,546 1,952,724 1,952,724
Mortgage-backed securities 6,359,242 6,652,703 6,652,703 6,614,704 6,888,587 6,888,587
All other corporate bonds 18,432,579 19,405,697 19,405,697 17,015,834 17,830,598 17,830,598
Redeemable preferred stocks 20,313 20,296 20,296 - - -
--------------------------------------------------------------------------------------------------------
Total fixed maturities 27,425,605 28,906,261 28,906,261 26,131,207 27,386,715 27,386,715
Equity securities:
Common stocks:
Banks, trust, and insurance
companies - - - - - -
Industrial, miscellaneous,
and other 176,321 211,684 211,684 5,604 5,785 5,785
Nonredeemable preferred
stocks 17,047 - - 13,604 15,329 15,329
--------------------------------------------------------------------------------------------------------
Total equity securities 193,368 211,684 211,684 19,208 21,114 21,114
Mortgage loans on real
estate* 1,557,268 - 1,557,268 1,659,921 - 1,659,921
Investment real estate 119,520 - 119,520 129,364 - 129,364
Policy loans 1,170,686 - 1,170,686 1,093,694 - 1,093,694
Other long-term investments 86,194 - 86,194 55,118 - 55,118
Short-term investments 222,949 - 222,949 100,061 - 100,061
--------------------------------------------------------------------------------------------------------
Total investments $30,775,590 $ - $32,274,562 $29,188,573 $ - $30,445,987
========================================================================================================
</TABLE>
* Amount is net of allowance for losses of $13 million and $23 million at
December 31, 1996 and 1997, respectively.
F-24
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. DEFERRED POLICY ACQUISITION COSTS
The balance of DPAC at December 31 and the components of the change reported in
operating costs and expenses for the years then ended were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at January 1 $ 835,031 $1,042,783 $ 605,501
Capitalization 244,196 219,339 188,001
Amortization (125,062) (115,467) (102,189)
Effect of unrealized gains (losses) on
securities 133,553 (311,624) 351,470
----------------------------------------------------------
Balance at December 31 $1,087,718 $ 835,031 $1,042,783
==========================================================
</TABLE>
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
(In Thousands)
<S> <C> <C>
Goodwill $ 54,754 $ 51,424
American General Corporation CBO (Collateralized Bond
Obligation) 98-1 Ltd. 9,740 -
Cost of insurance purchased ("CIP") 22,113 -
Other 119,711 81,235
------------------------------------
Total other assets $206,318 $132,659
====================================
</TABLE>
F-25
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. OTHER ASSETS (CONTINUED)
A rollforward of CIP for the year ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
1998
--------------------
(In Thousands)
<S> <C>
Balance at January 1 $ --
Acquisition of business 23,915
Accretion of interest at 5.88% 733
Amortization (2,535)
--------------------
Balance at December 31 $ 22,113
====================
</TABLE>
5. FEDERAL INCOME TAXES
5.1 TAX LIABILITIES
Income tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------------
(In Thousands)
<S> <C> <C>
Current tax (receivable) payable $ (21,035) $ 7,676
Deferred tax liabilities, applicable to:
Net income 320,632 298,456
Net unrealized investment gains 377,718 237,247
-----------------------------------------
Total deferred tax liabilities 698,350 535,703
-----------------------------------------
Total current and deferred tax liabilities $ 677,315 $ 543,379
=========================================
</TABLE>
F-26
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.1 TAX LIABILITIES (CONTINUED)
Components of deferred tax liabilities and assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities applicable to:
Deferred policy acquisition costs $ 307,025 $ 226,653
Basis differential of investments 590,661 486,194
Other 150,189 139,298
------------------------------------------
Total deferred tax liabilities 1,047,875 852,145
Deferred tax assets applicable to:
Policy reserves (212,459) (232,539)
Other (137,066) (83,903)
------------------------------------------
Total deferred tax assets before valuation
allowance (349,525) (316,442)
Valuation allowance - -
------------------------------------------
Total deferred tax assets, net of valuation
allowance (349,525) (316,442)
------------------------------------------
Net deferred tax liabilities $ 698,350 $ 535,703
==========================================
</TABLE>
A portion of life insurance income earned prior to 1984 is not taxable unless it
exceeds certain statutory limitations, is distributed as dividends, or unless
the income tax deferred status of such amount is modified by future tax
legislation. Such income, accumulated in policyholders' surplus accounts,
totaled $87.1 million at December 31, 1998. At current corporate rates, the
maximum amount of tax on such income is approximately $30.5 million. Deferred
income taxes on these accumulations are not required because no distributions
are expected.
F-27
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.2 TAX EXPENSE
Components of income tax expense for the years were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current expense $134,344 $185,460 $164,272
Deferred expense (benefit):
Deferred policy acquisition cost 33,230 27,644 21,628
Policy reserves 2,189 (27,496) (27,460)
Basis differential of investments 11,969 3,769 4,129
Litigation settlement (33,983) -- --
Year 2000 (9,653) -- --
Other, net 15,623 9,347 14,091
--------------------------------------------------------
Total deferred expense 19,375 13,264 12,388
--------------------------------------------------------
Income tax expense $153,719 $198,724 $176,660
========================================================
</TABLE>
A reconciliation between the income tax expense computed by applying the federal
income tax rate (35%) to income before taxes and the income tax expense reported
in the financial statement is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Income tax at statutory percentage of GAAP
pretax income $164,638 $200,649 $178,939
Tax-exempt investment income (11,278) (9,493) (9,347)
Goodwill 712 723 759
Other (353) 6,845 6,309
--------------------------------------------------------
Income tax expense $153,719 $198,724 $176,660
========================================================
</TABLE>
F-28
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.3 TAXES PAID
Income taxes paid amounted to approximately $159 million, $168 million, and $182
million in 1998, 1997, and 1996, respectively.
5.4 TAX RETURN EXAMINATIONS
The Parent Company and the majority of its subsidiaries file a consolidated
federal income tax return. The Internal Revenue Service ("IRS") has completed
examinations of the Parent Company's tax returns through 1988. The IRS is
currently examining tax returns for 1989 through 1996. In addition, the tax
returns of companies recently acquired are also being examined. Although the
final outcome of any issues raised in examination is uncertain, the Parent
Company believes that the ultimate liability, including interest, will not
materially exceed amounts recorded in the consolidated financial statements.
6. TRANSACTIONS WITH AFFILIATES
Affiliated notes and accounts receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------------------------------------
PAR VALUE BOOK VALUE PAR VALUE BOOK VALUE
------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
American General Corporation,
9-3/8%, due 2008 $ 4,725 $ 3,345 $ 4,725 $ 3,288
American General Corporation,
Promissory notes, due 2004 14,679 14,679 17,125 17,125
American General Corporation,
Restricted Subordinated
Note, 13-1/2%, due 2002 29,435 29,435 31,494 31,494
------------------------------------------------------------------------
Total notes receivable from
affiliates 48,839 47,459 53,344 51,907
Accounts receivable from
affiliates - 113,637 - 44,612
------------------------------------------------------------------------
Indebtedness from affiliates $48,839 $161,096 $53,344 $96,519
========================================================================
</TABLE>
F-29
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Various American General companies provide services to the Company, principally
mortgage servicing and investment management services, provided by American
General Investment Management Corporation on a fee basis. The Company paid
approximately $46,921,000, $33,916,000, and $22,083,000 for such services in
1998, 1997, and 1996, respectively. Accounts payable for such services at
December 31, 1998 and 1997 were not material. The Company rents facilities and
provides services on an allocated cost basis to various American General
companies. Beginning in 1998, amounts received by the Company from affiliates
include amounts received by its wholly-owned, non-life insurance subsidiary,
American General Life Companies (AGLC). AGLC provides shared services, including
technology and Year 2000-readiness, to a number of American General
Corporation's life insurance subsidiaries. The Company received approximately
$66,550,000, $6,455,000, and $1,255,000 for such services and rent in 1998,
1997, and 1996, respectively. Accounts receivable for rent and services at
December 31, 1998 and 1997 were not material.
The Company has 8,500 shares of $100 par value cumulative preferred stock
authorized and outstanding with an $80 dividend rate, redeemable at $1,000 per
share after December 31, 2000. The holder of this stock, The Franklin Life
Insurance Company ("Franklin"), an affiliated company, is entitled to one vote
per share, voting together with the holders of common stock.
During 1996, the Company's residential mortgage loan portfolio of $42 million
was sold to American General Finance, Inc., at carrying value plus accrued
interest.
7. STOCK-BASED COMPENSATION
Certain officers of the Company participate in American General Corporation's
stock and incentive plans which provide for the award of stock options,
restricted stock awards, performance awards, and incentive awards to key
employees. Stock options constitute the majority of such awards. Expense related
to stock options is measured as the excess of the market price of the stock at
the measurement date over the exercise price. The measurement date is the first
date on which both the number of shares that the employee is entitled to receive
and the exercise price are known. Under the stock option plans, no expense is
recognized, since the market price equals the exercise price at the measurement
date.
F-30
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
Under an alternative accounting method, compensation expense arising from stock
options would be measured at the estimated fair value of the options at the date
of grant. Had compensation expense for the stock options been determined using
this method, net income would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net income as reported $316,674 $374,557 $334,595
Net income pro forma $315,078 $373,328 $334,029
</TABLE>
The average fair values of the options granted during 1998, 1997, and 1996 were
$15.38, $10.33, and $7.07, respectively. The fair value of each option was
estimated at the date of grant using a Black-Scholes option pricing model. The
weighted average assumptions used to estimate the fair value of the stock
options were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.5% 3.0% 4.0%
Expected volatility 23.0% 22.0% 22.3%
Risk-free interest rate 5.76% 6.4% 6.2%
Expected life 6 YEARS 6 years 6 years
</TABLE>
8. BENEFIT PLANS
8.1 PENSION PLANS
The Company has non-contributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's compensation and
length of credited service.
Equity and fixed maturity securities were 56% and 30%, respectively, of the
plans' assets at the plans' most recent balance sheet dates. Additionally, 1% of
plan assets were invested in general investment accounts of the Parent Company's
subsidiaries through deposit administration insurance contracts.
F-31
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The benefit plans have purchased annuity contracts from American General
Corporation's subsidiaries to provide benefits for certain retirees. These
contracts are expected to provide future annual benefits to certain retirees of
American General Corporation and its subsidiaries of approximately $52 million.
The components of pension expense and underlying assumptions were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost (benefits earned) $ 3,693 $ 1,891 $ 1,826
Interest cost 6,289 2,929 2,660
Expected return on plan assets (9,322) (5,469) (5,027)
Amortization (557) 195 4
--------------------------------------------------------
Pension (income) expense $ 103 $ (454) $ (537)
========================================================
Discount rate on benefit obligation 7.00% 7.25% 7.50%
Rate of increase in compensation levels 4.25% 4.00% 4.00%
Expected long-term rate of return on plan
assets 10.25% 10.00% 10.00%
</TABLE>
The Company's funding policy is to contribute annually no more than the maximum
deductible for federal income tax purposes. The funded status of the plans and
the prepaid pension expense included in other assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
(In Thousands)
<S> <C> <C>
Projected benefit obligation (PBO) $ 96,554 $ 43,393
Plan assets at fair value 120,898 80,102
Plan assets at fair value in excess of PBO 24,344 36,709
Other unrecognized items, net (10,176) (23,470)
-----------------------------------
Prepaid pension expense $ 14,168 $ 13,239
===================================
</TABLE>
F-32
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The change in PBO was as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
(In Thousands)
<S> <C> <C>
PBO at January 1 $43,393 $37,389
Service and interest costs 9,982 4,820
Benefits paid (1,954) (673)
Actuarial loss 17,089 1,810
Amendments, transfers, and acquisitions 28,044 47
---------------------------------
PBO at December 31 $96,554 $43,393
=================================
</TABLE>
The change in the fair value of plan assets was as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
(In Thousands)
<S> <C> <C>
Fair value of plan assets at January 1 $ 80,102 $65,158
Actual return on plan assets 12,269 14,990
Benefits paid (1,954) (673)
Acquisitions and other 30,481 627
----------------------------------
Fair value of plan assets at December 31 $120,898 $80,102
==================================
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has life, medical, supplemental major medical, and dental plans for
certain retired employees and agents. Most plans are contributory, which retiree
contributions adjusted annually to limit employer contributions to predetermined
amounts. The Company has reserved the right to change or eliminate these
benefits at any time.
F-33
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The life plans are insured through December 31, 1999. A portion of the retiree
medical and dental plans is funded through a voluntary employees' beneficiary
association (VEBA); the remainder is unfunded and self-insured. All of the
retiree medical and dental plans' assets held in the VEBA were invested in
readily marketable securities at its most recent balance sheet date.
Postretirement benefit expense in 1998, 1997, and 1996 was $60,000, $601,000,
and $844,000, respectively. The accrued liability for postretirement benefits
was $19.2 million and $3.8 million at December 31, 1998 and 1997, respectively.
These liabilities were discounted at the same rates used for the pension plans.
9. DERIVATIVE FINANCIAL INSTRUMENTS
9.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company's use of derivative financial instruments is generally limited to
reducing its exposure to interest rate and currency exchange risk by utilizing
interest rate and currency swap agreements, and options to enter into interest
rate swap agreements (called swaptions). The Company accounts for these
derivative and financial instruments as hedges. Hedge accounting requires a high
correlation between changes in fair values or cash flows of the derivative
financial instrument and the specific item being hedged, both at inception and
throughout the life of the hedge.
9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS
Interest rate swap agreements are used to convert specific investment securities
from a floating to a fixed rate basis, or vice versa, and to hedge against the
risk of declining interest rates on anticipated security purchases. Interest
rate swap agreements are also used to convert a portion of floating-rate
borrowings to a fixed rate and to hedge against the risk of rising interest
rates on anticipated debt issuances.
Currency swap agreements are used to convert cash flows from specific investment
securities denominated in foreign currencies into U.S. dollars at specific
exchange rates, and to hedge against currency rate fluctuation on anticipated
security purchases.
F-34
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED)
The difference between amounts paid and received on swap agreements is recorded
on an accrual basis as an adjustment to net investment income or interest
expense, as appropriate, over the periods covered by the agreements. The related
amount payable to or receivable from counterparties is included in other
liabilities or assets.
The fair values of swap agreements are recognized in the consolidated balance
sheet if the hedge investments are carried at fair value or if they hedge
anticipated purchases of such investments. In this event, changes in the fair
value of a swap agreement are reported in net unrealized gains on securities
included in other accumulated comprehensive income in shareholders' equity,
consistent with the treatment of the related investment security. The fair
values of swap agreements hedging debt are not recognized in the consolidated
balance sheet.
For swap agreements hedging anticipated investment purchases or debt issuances,
the net swap settlement amount or unrealized gain or loss is deferred and
included in the measurement of the anticipated transaction when it occurs.
Swap agreements generally have terms of two to ten years. Any gain or loss from
early termination of a swap agreement is deferred and amortized into income over
the remaining term of the related investment or debt. If the underlying
investment or debt is extinguished or sold, any related gain or loss on swap
agreements is recognized in income.
F-35
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED)
Interest rate and currency swap agreements related to investment securities at
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
(Dollars in Millions)
<S> <C> <C>
Interest rate swap agreements to pay fixed rate:
Notional amount $ - $ 15
Average receive rate - 6.74%
Average pay rate - 6.48%
Interest rate swap agreements to receive fixed rate:
Notional amount $ 369 $ 144
Average receive rate 6.06% 6.89%
Average pay rate 5.48% 6.37%
Currency swap agreements (receive U.S. dollars/pay
Canadian dollars):
Notional amount (in U.S. dollars) $ 124 $ 139
Average exchange rate 1.50 1.50
</TABLE>
9.3 CALL SWAPTIONS
Options to enter into interest rate swap agreements are used to limit the
Company's exposure to reduced spreads between investment yields and interest
crediting rates should interest rates decline significantly over prolonged
periods. During such periods, the spread between investment yields and interest
crediting rates may be reduced as a result of certain limitations on the
Company's ability to manage interest crediting rates. Call swaptions allow the
Company to enter into interest rate swap agreements to receive fixed rates and
pay lower floating rates, effectively increasing the spread between investment
yields and interest crediting rates.
Premiums paid to purchase call swaptions are included in investments and are
amortized to net investment income over the exercise period of the swaptions. If
a call swaption is terminated, any gain is deferred and amortized to insurance
and annuity benefits over the expected life of the insurance and annuity
contracts and any unamortized premium is charged to income. If a call swaption
ceases to be an effective hedge, any related gain or loss is recognized in
income.
F-36
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.3 CALL SWAPTIONS (CONTINUED)
Swaptions at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
(Dollars in Billions)
<S> <C> <C>
Call swaptions:
Notional amount $1.76 $1.35
Average strike rate 3.97% 4.81%
Put swaptions:
Notional amount $1.05 $ -
Average strike rate 8.33% -
</TABLE>
9.4 CREDIT AND MARKET RISK
Derivative financial instruments expose the Company to credit risk in the event
of non-performance by counterparties. The Company limits this exposure by
entering into agreements with counterparties having high credit ratings and by
regularly monitoring the ratings. The Company does not expect any counterparty
to fail to meet its obligation; however, non-performance would not have a
material impact on the Company's consolidated results of operations or financial
position.
The Company's exposure to market risk is mitigated by the offsetting effects of
changes in the value of the agreements and the related items being hedged.
F-37
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and fair values for certain of the Company's financial
instruments at December 31 are presented below. Care should be exercised in
drawing conclusions based on fair value, since (1) the fair values presented do
not include the value associated with all the Company's assets and liabilities,
and (2) the reporting of investments at fair value without a corresponding
evaluation of related policyholders liabilities can be misinterpreted.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
--------------------------------------------------------------------------------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities * $29,118 $29,118 $27,408 $27,408
Mortgage loans on real
estate $ 1,608 $ 1,557 $ 1,702 $ 1,660
Policy loans $ 1,252 $ 1,171 $ 1,127 $ 1,094
Investment in parent
company $ 55 $ 55 $ 38 $ 38
Indebtedness from
affiliates $ 161 $ 161 $ 97 $ 97
Liabilities:
Insurance investment
contracts $25,852 $25,675 $24,011 $24,497
</TABLE>
* Includes derivative financial instruments with negative fair values of $1.0
million and $4.2 million and positive fair values of $24.3 million and $7.2
million at December 31, 1998 and 1997, respectively.
F-38
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value of
financial instruments:
FIXED MATURITY AND EQUITY SECURITIES
Fair values of fixed maturity and equity securities were based on quoted
market prices, where available. For investments not actively traded, fair
values were estimated using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using a current market rate applicable to yield,
credit quality, and average life of investments.
MORTGAGE LOANS ON REAL ESTATE
Fair value of mortgage loans was estimated primarily using discounted cash
flows, based on contractual maturities and risk-adjusted discount rates.
POLICY LOANS
Fair value of policy loans was estimated using discounted cash flows and
actuarially determined assumptions, incorporating market rates.
INVESTMENT IN PARENT COMPANY
The fair value of the investment in Parent Company is based on quoted
market prices of American General Corporation common stock.
INSURANCE INVESTMENT CONTRACTS
Fair value of insurance investment contracts was estimated using cash flows
discounted at market interest rates.
F-39
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INDEBTEDNESS FROM AFFILIATES
Indebtedness from affiliates is composed of accounts receivable and notes
receivable from affiliates. Due to the short-term nature of accounts
receivable, fair value is assumed to equal carrying value. Fair value of
notes receivable was estimated using discounted cash flows based on
contractual maturities and discount rates that were based on U.S. Treasury
rates for similar maturity ranges.
11. DIVIDENDS PAID
American General Life Insurance Company paid $244 million, $401 million, and
$189 million in dividends on common stock to AGC Life Insurance Company in 1998,
1997, and 1996, respectively. The Company also paid $680 thousand per year in
dividends on preferred stock to an affiliate, The Franklin Life Insurance
Company, in 1998, 1997, and 1996.
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES
The Company and its insurance subsidiaries are restricted by state insurance
laws as to the amounts they may pay as dividends without prior approval from
their respective state insurance departments. At December 31, 1998,
approximately $3.3 billion of consolidated shareholder's equity represents net
assets of the Company which cannot be transferred, in the form of dividends,
loans, or advances to the Parent Company. Approximately $2.5 billion of
consolidated shareholders' equity is similarly restricted as to transfer from
its subsidiaries to the Company.
Generally, the net assets of the Company's subsidiaries available for transfer
to the Parent are limited to the amounts that the subsidiaries' net assets, as
determined in accordance with statutory accounting practices, exceed minimum
statutory capital requirements. However, payments of such amounts as dividends
may be subject to approval by regulatory authorities and are generally limited
to the greater of 10% of policyholders' surplus or the previous year's statutory
net gain from operations.
The Company has various leases, substantially all of which are for office space
and facilities. Rentals under financing leases, contingent rentals, and future
minimum rental commitments and rental expense under operating leases are not
material.
F-40
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED)
In recent years, various life insurance companies have been named as defendants
in class action lawsuits relating to life insurance pricing and sales practices,
and a number of these lawsuits have resulted in substantial settlements. On
December 16, 1998, American General Corporation announced that certain of its
life insurance subsidiaries had entered into agreements to resolve all pending
market conduct class action lawsuits. The settlements are not final until
approved by the courts and any appeals are resolved. If court approvals are
obtained and appeals are not taken, it is expected the settlements will be final
in third quarter 1999.
In conjunction with the proposed settlements, the Company recorded a charge of
$97.1 million ($63.1 million after-tax) in the fourth quarter of 1998. The
charge covers the cost of policyholder benefits and other anticipated expenses
resulting from the proposed settlements, as well as other administrative and
legal costs.
On December 31, 1998, the Company entered into an agreement with the Parent
Company whereby the Company assigned, and the Parent Company assumed, $80.1
million of the liabilities of the Company related to the proposed resolution.
The liabilities of American General Life Insurance Company of New York, which
totaled $17.0 million, were not assumed by the Parent Company. As consideration
for the assumption of the liabilities, the Company paid the Parent Company an
amount equal to the liabilities recorded with respect to the proposed resolution
of the litigation. The assignment of the liabilities was not a novation, and
accordingly, the Company retains a contingent liability related to the
litigation. The litigation liabilities were reduced by payments of $2.7 million,
and the remaining balance of $94.4 million was included in other liabilities on
the Company's balance sheet at December 31, 1998.
The Company is party to various other lawsuits and proceedings arising in the
ordinary course of business. Many of these lawsuits and proceedings arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon information
presently available, the Company believes that the total amounts that will
ultimately be paid, if any, arising from these lawsuits and proceedings will not
have a material adverse effect on the Company's consolidated results of
operations and financial position. However, it should be noted that the
frequency of large damage awards, including large punitive damage awards, that
bear little or no relation to actual economic damages incurred by plaintiffs in
jurisdictions like Alabama and Mississippi continues to create the potential for
an unpredictable judgment in any given suit.
F-41
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED)
The increase in the number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. At December 31, 1998 and 1997, the Company has accrued $6.0 million and
$7.6 million, respectively, for guaranty fund assessments, net of $3.7 million
and $4.3 million, respectively, of premium tax deductions. The Company has
recorded receivables of $6.2 million and $9.7 million at December 31, 1998 and
1997, respectively, for expected recoveries against the payment of future
premium taxes. Expenses incurred for guaranty fund assessments were $3.6
million, $2.1 million, and $6.0 million in 1998, 1997, and 1996, respectively.
F-42
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. REINSURANCE
Reinsurance transactions for the years ended December 31, 1998, 1997, and 1996
were as follows:
<TABLE>
<CAPTION>
CEDED TO ASSUMED PERCENTAGE OF
GROSS OTHER FROM OTHER AMOUNT
AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET
----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Life insurance in force $46,057,031 $13,288,183 $629,791 $33,398,639 1.89%
====================================================================
Premiums:
Life insurance and annuities $ 90,298 $ 42,235 $ 117 $ 48,180 0.24%
Accident and health insurance 1,134 87 - 1,047 0.00%
--------------------------------------------------------------------
Total premiums $ 91,432 $ 42,322 $ 117 $ 49,227 0.24%
====================================================================
DECEMBER 31, 1997
Life insurance in force $45,963,710 $10,926,255 $ 4,997 $35,042,452 0.01%
====================================================================
Premiums:
Life insurance and annuities $ 100,357 $ 37,294 $ 75 $ 63,138 0.12%
Accident and health insurance 1,208 172 - 1,036 0.00%
--------------------------------------------------------------------
Total premiums $ 101,565 $ 37,466 $ 75 $ 64,174 0.12%
====================================================================
DECEMBER 31, 1996
Life insurance in force $44,535,841 $ 8,625,465 $ 5,081 $35,915,457 0.01%
====================================================================
Premiums:
Life insurance and annuities $ 104,225 $ 34,451 $ 36 $ 69,810 0.05%
Accident and health insurance 1,426 64 - 1,362 0.00%
--------------------------------------------------------------------
Total premiums $ 105,651 $ 34,515 $ 36 $ 71,172 0.05%
====================================================================
</TABLE>
Reinsurance recoverable on paid losses was approximately $7.7 million, $2.3
million, and $6.9 million at December 31, 1998, 1997, and 1996, respectively.
Reinsurance recoverable on unpaid losses was approximately $2.5 million, $3.2
million, and $4.3 million at December 31, 1998, 1997, and 1996, respectively.
F-43
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED)
INTERNAL SYSTEMS
The Company's ultimate parent, American General Corporation, ("AGC") has
numerous technology systems that are managed on a decentralized basis. AGC's
Year 2000 readiness efforts are therefore being undertaken by its key business
units with centralized oversight. Each business unit, including the Company, has
developed and is implementing a plan to minimize the risk of a significant
negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of the Company's information technology and
non-information technology systems; (2) assess which items in the inventory may
expose the Company to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, substantially all
of the Company's critical systems are Year 2000 ready and have been returned to
operations. However, activities (3) through (5) for certain systems are ongoing,
with vendor upgrades expected to be received during the first half of 1999.
THIRD PARTY RELATIONSHIPS
The Company has relationships with various third parties who must also be Year
2000 ready. These third parties provide, or receive resources and services to
(or from) the Company and include organizations with which the Company exchanges
information. Third parties include vendors of hardware, software, and
information services; providers of infrastructure services such as voice and
data communications and utilities for office facilities; investors, customers;
distribution channels; and joint venture partners. Third parties differ from
internal systems in that the Company exercises less, or no, control over Year
2000 readiness. The Company has developed a plan to assess and attempt to
mitigate the risks associated with the potential failure of third parties to
achieve Year 2000 readiness. The plan includes the following activities (1)
identify and classify third party dependencies; (2) research, analyze, and
document Year 2000 readiness for critical third parties; and (3) test critical
hardware and software products and electronic interfaces. As of December 31,
1998, AGC has identified and assessed more approximately 700 critical third
party dependencies, including those related to the Company. A more detailed
evaluation will be completed during the first quarter 1999 as part of the
Company's contingency planning efforts. Due to the various stages of third
parties' Year 2000 readiness, the Company's testing activities will extend
through 1999.
F-44
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED) (CONTINUED)
CONTINGENCY PLANS
The Company has commenced contingency planning to reduce the risk of Year 2000-
related business failures. The contingency plans, which address both internal
systems and third party relationships, include the following activities: (1)
evaluate the consequences of failure of business processes with significant
exposure to Year 2000 risk; (2) determine the probability of a Year 2000 related
failure for those processes that have a high consequence of failure; (3) develop
an action plan to complete contingency plans for those processes that rank high
in consequence and probability of failure; and (4) complete the applicable
actions plans. The Company is currently developing action plans and expects to
substantially complete all contingency planning activities by April 30, 1999.
RISKS AND UNCERTAINTIES
Based on its plans to make internal systems ready for Year 2000, to deal with
third party relationships, and to develop contingency action, the Company
believes that it will experience at most isolated and minor disruptions of
business processes following the turn of the century. Such disruptions are not
expected to have a material effect on the Company's future results of
operations, liquidity, or financial condition. However, due to the magnitude and
complexity of this project, risks and uncertainties exist and the Company is not
able to predict a most reasonably likely worst case scenario. If conversion of
the Company's internal systems is not completed on a timely basis (due to non-
performance by significant third party vendors, lack of qualified personnel to
perform the Year 2000 work, or other unforeseen circumstances in completing the
Company's plans), or if critical third parties fail to achieve Year 2000
readiness on a timely basis, the Year 2000 issue could have a material adverse
impact on the Company's operation following the turn of the century.
COSTS
Through December 31, 1998, the Company has incurred, and anticipates that it
will continue to incur, costs for internal staff, third-party vendors, and other
expenses to achieve Year 2000 readiness. The cost of activities related to Year
2000 readiness has not had a material adverse effect on the Company's results of
operations or financial condition. In addition, the Company has elected to
accelerate the planned replacement of certain systems as part of the Year 2000
plans. Costs of the replacement systems are being capitalized and amortized over
their useful lives, in accordance with the Company's normal accounting policies.
F-45
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. DIVISION OPERATIONS
15.1 NATURE OF OPERATIONS
The Company manages its business operation through two divisions, which are
based on products and services offered.
RETIREMENT SERVICES
The Retirement Services Division provides tax-deferred retirement annuities and
employer-sponsored retirement plans to employees of educational, health care,
public sector, and other not-for-profit organizations marketed nationwide
through exclusive sales representatives.
LIFE INSURANCE
The Life Insurance division provides traditional, interest-sensitive, and
variable life insurance and annuities to a broad spectrum of customers through
multiple distribution channels focused on specific market segments.
15.2 DIVISION RESULTS
Results of each division exclude goodwill amortization, net realized investment
gains, and non-recurring items.
Division earnings information was as follows:
<TABLE>
<CAPTION>
REVENUES INCOME BEFORE TAXES EARNINGS
------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retirement Services $1,987 $1,859 $1,745 $ 469 $398 $343 $315 $261 $226
Life Insurance 870 822 774 162 147 141 107 97 92
------------------------------------------------------------------------------------------------------------
Total divisions 2,857 2,681 2,519 631 545 484 422 358 318
Goodwill
amortization - - - (2) (2) (2) (2) (2) (2)
RG (L) (34) 30 29 (34) 30 29 (22) 19 19
Nonrecurring items - - - (125)(a) - - (81)(a) - -
------------------------------------------------------------------------------------------------------------
Total consolidated $2,823 $2,711 $2,548 $ 470 $573 $511 $317 $375 $335
============================================================================================================
</TABLE>
(a) Includes $97 million pretax ($63 million after-tax) in litigation
settlements and $28 million pretax ($18 million after-tax) in Year 2000
costs.
F-46
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. DIVISION OPERATIONS (CONTINUED)
15.2 DIVISION RESULTS (CONTINUED)
Division balance sheet information was as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
-------------------------------------------------------------------
DECEMBER 31
-------------------------------------------------------------------
IN MILLIONS 1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retirement Services $41,347 $35,195 $38,841 $33,136
Life Insurance 8,894 8,370 7,831 7,367
-------------------------------------------------------------------
Total consolidated $50,241 $43,565 $46,672 $40,503
===================================================================
</TABLE>
F-47
<PAGE>
INDEX OF WORDS AND PHRASES
This index should help you to locate more information about some of the
terms and phrases used in this prospectus.
PAGE TO
SEE IN THIS
DEFINED TERM PROSPECTUS
- ------------ ----------
accumulation value 6
AGLC 40
AGL 21
amount at risk 5
automatic rebalancing 6
basis 23
beneficiary 27
cash surrender value 13
close of business 29
Code 22
cost of insurance rates 29
daily charge 9
date of issue 30
death benefit 7
dollar cost averaging 6
full surrender 13
Fund 2
investment option 1
lapse 11
Legacy Plus 1
loan, loan interest 13
maturity, maturity date 14
modified endowment contract 23
monthly deduction day 30
monthly insurance charge 9
Mutual Fund 2
option 1, 2 12
partial surrender 13
payment option 14
planned periodic premium 11
Policy 1
Policy loan 13
Policy month, year 30
preferred loan interest 14
premium payments 5
premiums 5
prospectus 1
43
<PAGE>
PAGE TO
SEE IN THIS
DEFINED TERM PROSPECTUS
- ------------ ----------
reinstate, reinstatement 11
SEC 2
separate account 1
Separate Account VL-R 22
seven-pay test 23
specified amount 7
surrender 13
telephone transactions 17
transfers 12
valuation date, period 29
We have filed a registration statement relating to Separate Account VL-R and
the Policy with the SEC. The registration statement, which is required by the
Securities Act of 1933, includes additional information that is not required in
this prospectus. If you would like the additional information, you may obtain it
from the SEC's Website at http://www.sec.gov or main office in Washington, D.C.
You will have to pay a fee for the material.
You should rely only on the information contained in this prospectus or
sales materials we have approved. We have not authorized anyone to provide you
with information that is different. The policies are not available in all
states. This prospectus is not an offer in any state to any person if the offer
would be unlawful.
44
<PAGE>
PART II
(OTHER INFORMATION)
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore, or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
American General Life Insurance Company's Bylaws provide in Article VII,
Section 1 for indemnification of directors, officers and employees of the
Company.
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF
1940
American General Life Insurance Company hereby represents that the fees and
charges deducted under the Policy, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and risks
assumed by American General Life Insurance Company.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
The facing sheet.
Cross-Reference Table.
Prospectus, consisting of 44 pages of text, plus 8 financial pages of Separate
Account VL-R and 47
financial pages of American General Life Company.
The undertaking to file reports.
The Rule 484 undertaking.
Representation pursuant to Section 26(e)(2)(A).
The signatures.
Written Consents of the following persons:
(a) Mayer, Brown & Platt.
(b) Independent Auditors.
The following exhibits:
1. Exhibits required by Article IX, paragraph A of Form N-8B-2:
(1)(a) Resolutions of Board of Directors of American General Life
Insurance Company authorizing the establishment of Separate
Account VL-R. (3)
(1)(b) Resolutions of Board of Directors of American General Life
Insurance Company authorizing the establishment of variable life
insurance standards of suitability and conduct. (1)
(2) Not applicable.
(3)(a) Amended and Restated Distribution Agreement between American
General Securities Incorporated and American General Life
Insurance Company effective October 15, 1998. (4)
(3)(b) Form of Selling Group Agreement. (5)
(3)(c) Not applicable.
(4) Not applicable.
(5)(a)(i) Amended specimen form of the Lockwood Flexible Premium Variable
Life Insurance Policy (Policy Form No. 98615). (6)
(6)(a) Amended and Restated Articles of Incorporation of American
General Life Insurance Company, effective December 31, 1991. (2)
II-2
<PAGE>
(6)(b) Bylaws of American General Life Insurance Company, adopted
January 22, 1992. (3)
(6)(c) Amendment to the Amended and Restated Articles of Incorporation
of American General Life Insurance Company, effective
July 13, 1995. (6)
(7) Not applicable.
(8)(a) Form of Participation Agreement by and between BT Insurance
Funds Trust and American General Life Insurance Company. (6)
(8)(b)(i) Participation Agreement by and among American General Life
Insurance Company, American General Securities Incorporated,
Morgan Stanley Universal Funds, Inc., Morgan Stanley Asset
Management Inc., and Miller Anderson & Sherrerd LLP. (10)
(ii) Amendment One to Participation Agreement by and among American
General Life Insurance Company, American General Securities
Incorporated, Morgan Stanley Universal Funds, Inc., Morgan
Stanley Asset Management Inc., and Miller Anderson & Sherrerd
LLP. (5)
(iii) Amended Number 2 to Participation Agreement Among Morgan Stanley
Dean Witter Universal Funds, Inc., Van Kampen Distributors, Inc.,
Morgan Stanley Dean Witter Investment Management Inc., Miller
Anderson & Sherrerd, LLP, American General Life Insurance
Company, and American General Securities Incorporated. (5)
(iv) Form of Amendment No. 3 to the Participation Agreement by
and between Morgan Stanley Universal Funds, Inc. and American
General Life Insurance Company. (6)
(v) Amendment Four to Participation Agreement by and among American
General Life Insurance Company, American General Securities
Incorporated, Morgan Stanley Universal Funds, Inc., Morgan
Stanley Asset Management Inc., and Miller Anderson & Sherrerd
LLP. (9)
(8)(c) Form of First Amendment to Participation Agreement by and
between American General Life Insurance Company and American
General Series Portfolio Company. (6)
(8)(d) Form of Agreement by and between AIM Variable Insurance
Funds, Inc. and American General Life Insurance Company. (6)
(8)(e)(i) Participation Agreement by and among American General Life
Insurance Company, American General Securities Incorporated and
Royce Capital Fund, dated as of August 1, 1998. (8)
II-3
<PAGE>
(8)(e)(ii) First Amendment to Participation Agreement by and between
Royce Capital Fund and American General Life Insurance
Company. (8)
(8)(f) Form of Administrative Services Agreement between American
General Life Insurance Company and fund distributor. (6)
(8)(g) Form of services agreement dated July 31, 1975, (limited to
introduction and first two recitals, and sections 1-3) among
various affiliates of American General Corporation, including
American General Life Insurance Company and American General
Life Companies. (7)
(8)(h) Administrative Services Agreement dated as of June 1, 1998,
between American General Life Insurance Company and AIM
Advisors, Inc. (4)
(i)(i) Form of Participation Agreement among MFS Variable Insurance
Trust, American General Life Insurance Company and
Massachusetts Financial Services Company. (5)
(i)(ii) Amendment One to Participation Agreement by and among MFS
Variable Insurance Trust, American General Life Insurance
Company and Massachusetts Financial Services Company dated
December 1, 1998. (9)
(j) Form of Participation Agreement among Putnam Variable Trust,
Putnam Mutual Funds Corp., and American General Life Insurance
Company. (5)
(k) Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and American
General Life Insurance Company dated as of April 1, 1999. (9)
(l) Administrative Services Agreement between Bankers Trust Company
and American General Life Insurance Company dated as of January
1, 1999. (9)
(m) Form of Administrative Services Agreement between Franklin
Templeton Services, Inc. and American General Life Insurance
Company. (9)
(n) Administrative Services Agreement between Royce & Associates,
Inc. and American General Life Insurance Company dated as of
February 26, 1998. (8)
(o) Form of Participation Agreement among Oppenheimer Variable
Account Funds, Oppenheimerfunds, Inc. and American General Life
Insurance Company. (Filed herewith)
(9) All other material contracts not entered into in the ordinary
course of business of the trust or of the depositor concerning
the trust.
Not applicable.
II-4
<PAGE>
(10)(a) Specimen form of application for life insurance issued by
American General Life Insurance Company. (6)
(10)(b) Specimen form of supplemental application for variable life
insurance issued by American General Life Insurance Company on
Policy Form No. 98615. (6)
(10)(c) Form of Service request. (6)
(10)(d) Form of Owner Authorization of Third Party Transfer. (6)
Other Exhibits
2(a) Opinion and Consent of Pauletta P. Cohn, Associate General
Counsel of American General Life Companies. (6)
2(b) Consent of Mayer, Brown & Platt. (Filed herewith)
2(c) Opinion and Consent of American General Life Insurance
Company's actuary. (6)
3 Not applicable.
4 Not applicable.
6 Consent of Independent Auditors. (Filed herewith)
7 Powers of Attorney. (11)
27 Financial Data Schedule. Not applicable.
(1) Incorporated herein by reference to the initial filing of the Form S-6
Registration Statement (File No. 333-42567) of American General Life
Insurance Company Separate Account VL-R on December 18, 1997.
(2) Incorporated herein by reference to the initial filing of the Form N-4
Registration Statement (File No. 33-43390) of Separate Account D of AGL on
October 16, 1991.
(3) Incorporated herein by reference to the filing of Post-Effective
Amendment No. 1 of the Form N-4 Registration Statement (File No. 33-
43390) of Separate Account D of AGL on April 30, 1992.
(4) Incorporated herein by reference to the initial filing of the Form N-4
Registration Statement (File No. 333-70667) of American General Life
Insurance Company Separate Account D on January 15, 1999.
II-5
<PAGE>
(5) Incorporated by reference to the filing of Pre-Effective Amendment No. 1 of
the Form S-6 Registration Statement (File No. 333-42567) of American
General Life Insurance Company Separate Account VL-R on March 23, 1998.
(6) Incorporated by reference to the filing of Pre-Effective Amendment No. 3 of
the Form S-6 Registration Statement (File No. 333-53909) of American
General Life Insurance Company Separate Account VL-R on August 19, 1998.
(7) Incorporated by reference to the filing of Post-Effective Amendment No. 23
to the Form N-4 Registration Statement of American General Life Insurance
Company's Separate Account A (File No. 33-44745) on April 24, 1998.
(8) Incorporated by reference to the filing of Post-Effective Amendment No. 3
to the Form N-4 Registration Statement of American General Life Insurance
Company's Separate Account D (File No. 333-40637) on March 30, 1999.
(9) Incorporated by reference to the filing of Pre-Effective Amendment No. 1 to
the Form N-4 Registration Statement of American General Life Insurance
Company's Separate Account D (File No. 333-70667) on March 18, 1999.
(10) Incorporated by reference to Post-Effective Amendment No. 12 to
Registrant's Form N-4 Registration Statement (File No. 33-43390) on April
30, 1997.
(11) Incorporated by reference to Post-Effective Amendment No. 1 to Registrant's
Form S-6 Registration Statement (File No. 333-53909) on February 17, 1999.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
American General Life Insurance Company Separate Account VL-R, certifies that it
meets all of the requirements for effectiveness of this amended registration
statement pursuant to Rule 485(a) under the Securities Act of 1933 and has duly
caused this amended registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, and its seal to be hereunto affixed and
attested, all in the City of Houston, and State of Texas, on this 22nd day of
April, 1999.
AMERICAN GENERAL LIFE INSURANCE
COMPANY
SEPARATE ACCOUNT VL-R
(Registrant)
BY: AMERICAN GENERAL LIFE INSURANCE
COMPANY
(On behalf of the Registrant and itself)
BY: /s/ ROBERT F. HERBERT, JR.
--------------------------------
Robert F. Herbert, Jr.
Senior Vice President
[SEAL]
ATTEST: BY /s/ PAULETTA P. COHN
---------------------------
Pauletta P. Cohn
Secretary
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ RONALD H. RIDLEHUBER* Principal Executive Officer and April 22, 1999
- ---------------------------- Director
(Ronald H. Ridlehuber)
/s/ PHILIP K. POLKINGHORN* Principal Financial Officer and April 22, 1999
- ---------------------------- Director
(Philip K. Polkinghorn)
/s/ ROBERT F. HERBERT, JR* Principal Accounting Officer and April 22, 1999
- ---------------------------- Director
(Robert F. Herbert, Jr.)
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ DAVID A. FRAVEL* Director April 22, 1999
- ----------------------------
(David A. Fravel)
/s/ ROYCE G. IMHOFF, II* Director April 22, 1999
- ----------------------------
(Royce G. Imhoff, II)
/s/ JOHN V. LAGRASSE* Director April 22, 1999
- ----------------------------
(John V. LaGrasse)
/s/ RODNEY O. MARTIN, JR*. Director April 22, 1999
- ----------------------------
(Rodney O. Martin, Jr.)
/s/ JON P. NEWTON* Director April 22, 1999
- ----------------------------
(Jon P. Newton)
/s/ GARY D. REDDICK* Director April 22, 1999
- ----------------------------
(Gary D. Reddick)
/s/ ROBERT F. HERBERT, JR
- ----------------------------
* By Robert F. Herbert, Jr.
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibits required by Article IX, paragraph A of Form N-8B-2:
(1)(a) Resolutions of Board of Directors of American General Life
Insurance Company authorizing the establishment of Separate
Account VL-R. (3)
(1)(b) Resolutions of Board of Directors of American General Life
Insurance Company authorizing the establishment of variable
life insurance standards of suitability and conduct. (1)
(2) Not applicable.
(3)(a) Amended and Restated Distribution Agreement between American
General Securities Incorporated and American General Life
Insurance Company effective October 15, 1998. (4)
(3)(b) Form of Selling Group Agreement. (5)
(3)(c) Not applicable.
(4) Not applicable.
(5)(a)(i) Amended specimen form of the Lockwood Flexible Premium Variable
Life Insurance Policy (Policy Form No. 98615). (6)
(6)(a) Amended and Restated Articles of Incorporation of American
General Life Insurance Company, effective December 31, 1991.
(2)
(6)(b) Bylaws of American General Life Insurance Company, adopted
January 22, 1992. (3)
(6)(c) Amendment to the Amended and Restated Articles of incorporation
of American General Life Insurance Company, effective July 13,
1995. (6)
(7) Not applicable.
(8)(a) Form of Participation Agreement by and between BT Insurance
Funds Trust and American General Life Insurance Company. (6)
E-1
<PAGE>
(8)(b)(i) Participation Agreement by and among American General Life
Insurance Company, American General Securities Incorporated,
Morgan Stanley Universal Funds, Inc., Morgan Stanley Asset
Management Inc., and Miller Anderson & Sherrerd LLP. (10)
(ii) Amendment One to Participation Agreement by and among American
General Life Insurance Company, American General Securities
Incorporated, Morgan Stanley Universal Funds, Inc., Morgan
Stanley Asset Management Inc., and Miller Anderson & Sherrerd
LLP. (5)
(iii) Amended Number 2 to Participation Agreement Among Morgan
Stanley Dean Witter Universal Funds, Inc., Van Kampen
Distributors, Inc., Morgan Stanley Dean Witter Investment
Management Inc., Miller Anderson & Sherrerd, LLP, American
General Life Insurance Company, and American General Securities
Incorporated. (5)
(iv) Form of Amendment No. 3 to the Participation Agreement by
and between Morgan Stanley Universal Funds, Inc. and American
General Life Insurance Company. (6)
(v) Amendment Four to Participation Agreement by and among American
General Life Insurance Company, American General Securities
Incorporated, Morgan Stanley Universal Funds, Inc., Morgan
Stanley Asset Management Inc., and Miller Anderson & Sherrerd
LLP. (9)
(8)(c) Form of First Amendment to Participation Agreement by and
between American General Life Insurance Company and American
General Series Portfolio Company. (6)
(8)(d) Form of Agreement by and between AIM Variable Insurance
Funds, Inc. and American General Life Insurance Company. (6)
(8)(e)(i) Participation Agreement by and among American General Life
Insurance Company, American General Securities Incorporated and
Royce Capital Fund, dated as of August 1, 1998. (8)
(8)(e)(ii) First Amendment to Participation Agreement by and between
Royce Capital Fund and American General Life Insurance Company.
(8)
(8)(f) Form of Administrative Services Agreement between American
General Life Insurance Company and fund distributor. (6)
E-2
<PAGE>
(8)(g) Form of services agreement dated July 31, 1975, (limited to
introduction and first two recitals, and sections 1-3) among
various affiliates of American General Corporation, including
American General Life Insurance Company and American General
Life Companies. (7)
(8)(h) Administrative Services Agreement dated as of June 1, 1998,
between American General Life Insurance Company and AIM
Advisors, Inc. (4)
(i)(i) Form of Participation Agreement among MFS Variable Insurance
Trust, American General Life Insurance Company and
Massachusetts Financial Services Company. (5)
(i)(ii) Amendment One to Participation Agreement by and among MFS
Variable Insurance Trust, American General Life Insurance
Company and Massachusetts Financial Services Company dated
December 1, 1998. (9)
(j) Form of Participation Agreement among Putnam Variable Trust,
Putnam Mutual Funds Corp., and American General Life Insurance
Company. (5)
(k) Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and American
General Life Insurance Company dated as of April 1, 1999. (9)
(l) Administrative Services Agreement between Bankers Trust Company
and American General Life Insurance Company dated as of
January 1, 1999. (9)
(m) Form of Administrative Services Agreement between Franklin
Templeton Services, Inc. and American General Life Insurance
Company. (9)
(n) Administrative Services Agreement between Royce & Associates,
Inc. and American General Life Insurance Company dated as of
February 26, 1998. (8)
(o) Form of Participation Agreement among Oppenheimer Variable
Account Funds, Oppenheimerfunds, Inc. and American General Life
Insurance Company. (Filed herewith)
E-3
<PAGE>
(9) All other material contracts not entered into in the ordinary
course of business of the trust or of the depositor concerning
the trust.
Not applicable.
(10)(a) Specimen form of application for life insurance issued by
American General Life Insurance Company. (6)
(10)(b) Specimen form of supplemental application for variable life
insurance issued by American General Life Insurance Company on
Policy Form No. 98615. (6)
(10)(c) Form of Service request. (6)
(10)(d) Form of Owner Authorization of Third Party Transfer. (6)
Other Exhibits
2(a) Opinion and Consent of Pauletta P. Cohn, Associate General
Counsel of American General Life Companies. (6)
2(b) Consent of Mayer, Brown & Platt. (Filed herewith)
2(c) Opinion and Consent of American General Life Insurance
Company's actuary. (6)
3 Not applicable.
4 Not applicable.
6 Consent of Independent Auditors. (Filed herewith)
7 Powers of Attorney. (11)
27 Financial Data Schedule. Not applicable.
(1) Incorporated herein by reference to the initial filing of the Form S-6
Registration Statement (File No. 333-42567) of American General Life
Insurance Company Separate Account VL-R on December 18, 1997.
(2) Incorporated herein by reference to the initial filing of the Form N-4
Registration Statement (File No. 33-43390) of Separate Account D of AGL on
October 16, 1991.
E-4
<PAGE>
(3) Incorporated herein by reference to the filing of Post-Effective
Amendment No. 1 of the Form N-4 Registration Statement (File No. 33-
43390) of Separate Account D of AGL on April 30, 1992.
(4) Incorporated herein by reference to the initial filing of the Form N-4
Registration Statement (File No. 333-70667) of American General Life
Insurance Company Separate Account D on January 15, 1999.
(5) Incorporated by reference to the filing of Pre-Effective Amendment No. 1 of
the Form S-6 Registration Statement (File No. 333-42567) of American
General Life Insurance Company Separate Account VL-R on March 23, 1998.
(6) Incorporated by reference to the filing of Pre-Effective Amendment No. 3 of
the Form S-6 Registration Statement (File No. 333-53909) of American
General Life Insurance Company Separate Account VL-R on August 19, 1998.
(7) Incorporated by reference to the filing of Post-Effective Amendment No. 23
to the Form N-4 Registration Statement of American General Life Insurance
Company's Separate Account A (File No. 33-44745) on April 24, 1998.
(8) Incorporated by reference to the filing of Post-Effective Amendment No. 3
to the Form N-4 Registration Statement of American General Life Insurance
Company's Separate Account D (File No. 333-40637) on March 30, 1999.
(9) Incorporated by reference to the filing of Pre-Effective Amendment No. 1 to
the Form N-4 Registration Statement of American General Life Insurance
Company's Separate Account D (File No. 333-70667) on March 18, 1999.
(10) Incorporated by reference to Post-Effective Amendment No. 12 to
Registrant's Form N-4 Registration Statement (File No. 33-43390) on April
30, 1997.
(11) Incorporated by reference to Post-Effective Amendment No. 1 to Registrant's
Form S-6 Registration Statement (File No. 333-53909) on February 17, 1999.
E-5
<PAGE>
EXHIBIT 8(o)
PARTICIPATION AGREEMENT
Among
OPPENHEIMER VARIABLE ACCOUNT FUNDS,
OPPENHEIMERFUNDS, INC.
and
AMERICAN GENERAL LIFE INSURANCE COMPANY
THIS AGREEMENT (the "Agreement"), made and entered into as of the ____
day of April, 1999 by and among American General Life Insurance Company
(hereinafter the "Company"), on its own behalf and on behalf of each separate
account of the Company named in Schedule 1 to this Agreement, as may be amended
from time to time by mutual consent (hereinafter collectively the "Accounts"),
Oppenheimer Variable Account Funds (hereinafter the "Fund") and
OppenheimerFunds, Inc. (hereinafter the "Adviser").
WHEREAS, the Fund is an open-end management investment company and is
available to act as the investment vehicle for separate accounts now in
existence or to be established at any date hereafter for variable life insurance
policies and variable annuity contracts (collectively, the "Variable Insurance
Products") offered by insurance companies (hereinafter "Participating Insurance
Companies");
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio", and each representing the
interests in a particular managed pool of securities and other assets;
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated July 16, 1986 (File No. 812-6324) granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both
<PAGE>
affiliated and unaffiliated life insurance companies (hereinafter the "Mixed and
Shared Funding Exemptive Order")
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act");
WHEREAS, the Adviser is duly registered as an investment adviser under
the federal Investment Advisers Act of 1940;
WHEREAS, the Company has registered or will register certain variable
annuity and/or life insurance contracts under the 1933 Act (hereinafter
"Contracts") (unless an exemption from registration is available);
WHEREAS, the Accounts are or will be duly organized, validly existing
segregated asset accounts, established by resolution of the Board of Directors
of the Company, to set aside and invest assets attributable to the aforesaid
variable contracts (the Contract(s) and the Account(s) covered by the Agreement
are specified in Schedule 2 attached hereto, as may be modified by mutual
consent from time to time);
WHEREAS, the Company has registered or will register the Accounts as
unit investment trusts under the 1940 Act (unless an exemption from registration
is available);
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios (the
Portfolios covered by this Agreement are specified in Schedule 2 attached hereto
as may be modified by mutual consent from time to time), on behalf of the
Accounts to fund the Contracts named in Schedule 3, as may be amended from time
to time by mutual consent, and the Fund is authorized to sell such shares to
unit investment trusts such as the Accounts at net asset value; and
NOW, THEREFORE, in consideration of their mutual promises, the Fund,
the Adviser and the Company agree as follows:
-2-
<PAGE>
ARTICLE I. Sale of Fund Shares
1.1. The Fund agrees to sell to the Company those shares of the Fund
which the Company orders on behalf of the Account, executing such orders on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee in proper form of the order for the shares of the Fund. For
purposes of this Section 1.1, the Company shall be the designee of the Fund for
receipt of such orders from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives written (or
facsimile) notice of such order by 9:30 a.m. New York time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the SEC. "Proper form" means that amounts to be
invested or redeemed are identified on the Company's computer system by
Participant, Contract and Fund in accordance with the Company's standard
procedures for processing transactions. The Company agrees to provide the Fund
and the Adviser with at least ten Business Days' notice of any change in the
Company's standard procedures for processing transactions.
1.2. If the Company requests the purchase of Fund shares, the
Company shall pay for such purchase by wiring federal Funds to the Fund or its
designated account or as otherwise instructed by the Fund's treasurer, on the
day the order is transmitted by the Company. If the Company requests a net
redemption resulting in a payment of redemption proceeds to the Company, the
Fund shall wire the redemption proceeds to the Company on the day the order is
transmitted by the Company, unless doing so would require the Fund to dispose of
portfolio securities or otherwise incur additional costs, but in such event,
proceeds shall be wired to the Company within three business days and the Fund
shall notify the person designated in writing by the Company as the recipient
for such notice of such delay by 3:00 p.m. Eastern time the same Business Day
that the Company transmits the redemption order to the Fund. If the Company's
order requests the application of redemption proceeds from the redemption of
shares
-3-
<PAGE>
of one Portfolio to the purchase of shares of another Portfolio, the Fund shall
so apply such proceeds the same Business Day that the Company transmits such
order to the Fund.
1.3. The Fund shall make the Portfolio's net asset value per share
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated but shall use its best efforts to
make such net asset value available by 6:30 p.m. Eastern time. If the Fund
provides the Company with the incorrect share net asset value information
through no fault of the Company, the Company on behalf of the Separate Accounts,
shall be entitled to an adjustment to the number of shares purchased or redeemed
to reflect the correct share net asset value. Any error in the calculation of
net asset value, dividend and capital gain information greater than or equal to
$.01 per share of that Portfolio, shall be reported immediately upon discovery
to The Company. Any error of a lesser amount shall be corrected in net asset
value per share of that Portfolio or the next Business Day after discovery by
the Fund.
1.4. The Fund agrees to redeem for cash, upon the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption in proper form. For
purposes of this Section 1.4, the Company shall be the designee of the Fund for
receipt of requests for redemption and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives written (or facsimile)
notice of such request for redemption by 9:30 a.m. New York time on the next
following Business Day. Payment shall be made within the time period specified
in the Fund's prospectus or statement of additional information, in federal
funds transmitted by wire to the Company's account as designated by the Company
in writing from time to time.
1.5. The Company agrees to purchase and redeem the shares of the
Portfolios named in Schedule 3 in accordance with the provisions of the then
current prospectus and statement of additional information of the Fund. The
Company shall not permit any person other than a Contract owner to give
-4-
<PAGE>
instructions to the Company which would require the Company to redeem or
exchange shares of the Fund.
1.6 Issuance and transfer of Fund Shares will be by book entry only.
Stock certificates will not be issued to the Company. Shares ordered from the
Fund will be recorded in an appropriate title for the Company, on behalf of its
Account.
1.7 The Fund shall furnish same day notice (by wire, telecopier, or
telephone, and if by telephone, followed by confirmation in writing or by
telecopier) to the Company of any income, dividends or capital gain
distributions payable on the Fund's shares. The Company hereby elects to receive
all such income, dividends and capital gain distributions of the Fund in the
form of additional shares of that the Fund. The Company reserves the right to
revoke this election and to receive all such income, dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of shares
so issued as payment of such dividends and distributions.
ARTICLE II. Sales Material, Prospectuses and Other Reports
2.1. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser is named, at least ten Business Days
prior to its use. No such material shall be used if the Fund or its designee
reasonably object in writing or by telecopier to such use within ten Business
Days after receipt of such material. "Business Day" shall mean any day in which
the New York Stock Exchange is open for trading and in which the Fund calculates
its net asset value pursuant to the rules of the Securities and Exchange
Commission.
2.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time,
-5-
<PAGE>
or in reports or proxy statements for the Fund, or in sale literature or other
promotional material approved by the Fund or its designee, except with the
permission of the Fund.
2.3. For purposes of this Article II, the phrase "sales literature
or other promotional material" means advertisements (such as material published,
or designed for use in, a newspaper, magazine, or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboard
or electronic media), and sales literature (such as brochures, circulars, market
letters and form letters), distributed or made generally available to customers
or the public.
2.4. The Fund shall provide a copy of its current prospectus within
a reasonable period of its filing date, and provide other assistance as is
reasonably necessary in order for the Company once each year (or more frequently
if the prospectus for the Fund is supplemented or amended) to have the
prospectus for the Contracts and the Fund's prospectus printed together in one
document (such printing to be at the Company's expense). The Adviser shall be
permitted to review and approve the typeset form of the Fund's Prospectus prior
to such printing.
2.5. The Fund or the Adviser shall provide the Company with either:
(i) a copy of the Fund's proxy material, reports to shareholders, other
information relating to the Fund necessary to prepare financial reports, and
other communications to shareholders for printing and distribution to Contract
owners at the Company's expense, or (ii) camera ready and/or printed copies, if
appropriate, of such material for distribution to Contract owners at the
Company' expense, within a reasonable period of the filing date for definitive
copies of such material. The Adviser shall be permitted to review and approve
the typeset form of such proxy material and shareholder reports prior to such
printing provided such materials have been provided within a reasonable period.
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<PAGE>
ARTICLE III. Fees and Expenses
3.1. The Fund and Adviser shall pay no fee or other compensation to
the Company under this agreement, and the Company shall pay no fee or other
compensation to the Fund or Adviser, except as provided herein.
3.2. All expenses incident to performance by each party of its
respective duties under this Agreement shall be paid by that party. The Fund
shall see to it that all its shares are registered and authorized for issuance
in accordance with applicable federal law and, if and to the extent advisable by
the Fund, in accordance with applicable state laws prior to their sale. The Fund
shall bear the expenses for the cost of registration and qualification of the
Fund's shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, and the preparation of all statements
and notices required by any federal or state law.
3.3. The Company shall bear the expenses of typesetting, printing
and distributing the Fund's prospectus, proxy materials and reports to owners of
Contracts issued by the Company.
3.4. In the event the Fund adds one or more additional Portfolios
and the parties desire to make such Portfolios available to the respective
Contract owners as an underlying investment medium, a new Schedule 3 or an
amendment to this Agreement shall be executed by the parties authorizing the
issuance of shares of the new Portfolios to the particular Account. The
amendment may also provide for the sharing of expenses for the establishment of
new Portfolios among Participating Insurance Companies desiring to invest in
such Portfolios and the provision of funds as the initial investment in the new
Portfolios.
ARTICLE IV. Potential Conflicts
4.1. The Board of Trustees of the Fund (the "Board") will monitor
the Fund for the existence of any material irreconcilable conflict between the
interests of the Contract owners of all separate accounts investing in the Fund.
An irreconcilable material conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable
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federal or state insurance, tax, or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference in
voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by an insurer to disregard the
voting instructions of Contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and the
implications thereof.
4.2. The Company has reviewed a copy of the Mixed and Shared Funding
Exemptive Order, and in particular, has reviewed the conditions to the requested
relief set forth therein. The Company agrees to be bound by the responsibilities
of a participating insurance companies as set forth in the Mixed and Shared
Funding Exemptive Order, including without limitation the requirement that the
Company report any potential or existing conflicts of which it is aware to the
Board. The Company will assist the Board in carrying out its responsibilities in
monitoring such conflicts under the Mixed and Shared Funding Exemptive Order, by
providing the Board in a timely manner with all information reasonably necessary
for the Board to consider any issues raised. This includes, but is not limited
to, an obligation by the Company to inform the Board whenever Contract owner
voting instructions are disregarded and by confirming in writing, at the Fund's
request, that the Company are unaware of any such potential or existing material
irreconcilable conflicts.
4.3. If it is determined by a majority of the Board, or a majority
of its disinterested Trustees, that a material irreconcilable conflict exists,
the Company shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested trustees), take whatever steps are
necessary to remedy or eliminate the irreconcilable material conflict, up to an
including: (1) withdrawing the assets allocable to some or all of the separate
accounts from the Fund or any Portfolio and reinvesting such assets in a
different investment medium, including (but not limited to) another Portfolio of
the Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected
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<PAGE>
Contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
4.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the Account's
investment in the Fund and terminate this Agreement; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Any such withdrawal and termination must
take place within six (6) months after the Fund gives written notice that this
provision is being implemented, and until the end of the six month period the
Fund shall continue to accept and implement orders by the Company for the
purchase and redemption of shares of the Fund.
4.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the Account's investment in the Fund and terminate this Agreement
within six months after the Board informs the Company in writing that it has
determined that such decision has created an irreconcilable material conflict;
provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a majority of the disinterested members of the Board. Until the end of the
foregoing six month period, the Fund shall continue to accept and implement
orders by the Company for the purchase and redemption of shares of the Fund,
subject to applicable regulatory limitation.
4.6. For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies
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any irreconcilable material conflict, but in no event will the Fund be required
to establish a new funding medium for the Contracts. The Company shall not be
required by Section 4.3 to establish a new funding medium for Contracts if an
offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Board determines that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
particular Account's investment in the Fund and terminate this Agreement within
six (6) months after the Board informs the Company in writing of the foregoing
determination, provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested members of the Board.
ARTICLE V. Applicable Law
5.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
5.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Mixed and Shared Funding Exemptive Order) and the terms hereof shall be
interpreted and construed in accordance therewith.
ARTICLE VI. Termination
6.1 This Agreement shall terminate with respect to some or all
Portfolios:
(a) at the option of any party upon three month's advance
written notice to the other parties, unless a shorter time is agreed to by the
parties;
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the requirements of its
Contracts or are not appropriate funding vehicles for the Contracts, as
determined by the Company reasonably and in good faith. Prompt notice of the
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election to terminate for such cause and an explanation of such cause shall be
furnished by the Company and termination shall be effective ten days after the
Fund's receipt of said notice unless the Fund makes available a sufficient
number of shares to meet the requirements of the Contracts within said ten-day
period; or
(c) as provided in Article IV.
6.2. It is understood and agreed that the right of any party hereto
to terminate this Agreement pursuant to Section 6.1(a) may be exercised for
cause or for no cause.
ARTICLE VII. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify to the
other party.
If to the Fund:
Oppenheimer Variable Account Funds
c/o OppenheimerFunds, Inc.
2 World Trade Center
New York, NY 10048-0203
Attn: Legal Department
If to the Adviser:
OppenheimerFunds, Inc.
2 World Trade Center
New York, NY 10048-0203
Attn: General Counsel
If to the Company:
American General Life Insurance Company
2727 Allen Parkway
Houston, TX 77019
Attn:
ARTICLE VIII. Indemnification
8.1 Indemnification By The Company
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<PAGE>
8.1(a) The Company agrees to indemnify and hold harmless the Fund and each
director of the Board and officers (collectively, the "Indemnified Parties" for
purposes of this Section 8.1) and any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation (including legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's share or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the
Contracts or advertisements or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity
with information furnished to the Company by or on behalf of the
Fund for use in the Registration Statement or prospectus for the
Contracts or in the Contracts or advertisements or sales literature
(or any amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied
by the Company, or persons under its control) or wrongful conduct of
the Company or persons under its control, with respect to the sale
or distribution of the Contracts or Fund Shares; or
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<PAGE>
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus,
advertisements or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information
furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Company, as limited by and in accordance with the
provisions of Section 8.1(b) and 8.1(c) hereof.
8.1(b) The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
the Fund, whichever is applicable.
8.1(c) The Company shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Company in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Company of any such claim shall not
relieve the Company from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Company shall be
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<PAGE>
entitled to participate, at its own expense, in the defense of such action. The
Company also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the Company to
such party of the Company's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
8.1(d) The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2 Indemnification by the Adviser
8.2(a) The Adviser agrees to indemnify and hold harmless the Company and
the principal underwriter for the Contracts and each of their respective
directors and officers and the principal underwriter for the Contracts and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this Section
8.2) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Adviser) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of our are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or prospectus or advertisements or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not
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<PAGE>
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Adviser or Fund by or
on behalf of the Company for use in the Registration Statement or
prospectus for the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration
Statement, prospectus or sales literature for the Contracts not
supplied by the Adviser or persons under its control) or wrongful
conduct of the Fund, Adviser or Adviser or persons under their
control, with respect to the sale or distribution of the Contracts
or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus,
advertisements or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement
(including a failure whether unintentional or in good faith or
otherwise, to comply with the diversification requirements specified
in Section 817(h) of the Internal Revenue Code (the "Code") and
Treasury Regulation 1.817-5 and any amendments or other
modifications to such Section or Regulation, or to qualify as a
regulated investment company under Subchapter M of the Code); or
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<PAGE>
(v) arise out of or result from any material breach of any
representation or warranty made by the Fund or the Adviser in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Fund or the Adviser; as limited by and in
accordance with the provisions of Section 8.2(b) and 8.2(c) hereof.
8.2(b) The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason or such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c) The Adviser shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Adviser in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Adviser of any such claim shall not
relieve the Adviser from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Adviser also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action. After
notice from the Adviser to such party of the Adviser's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Adviser will not be liable to such
party under this Agreement for any legal or other expenses subsequently incurred
by such party independently in connection with the defense thereof other than
reasonable costs of investigation.
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8.2(d) The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3 Indemnification By the Fund
8.3(a) The Fund agrees to indemnify and hold harmless the Company and the
principal underwriter for Contracts and each of their respective directors and
officers and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Section 8.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Fund) or
litigation (including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements result from the gross negligence, bad faith or willful
misconduct of the Board or any member thereof, are related to the operations of
the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement
(including a failure whether unintentional or in good faith or
otherwise, to comply with the diversification requirements specified
in Section 817(h) of the Code and Treasury Regulation 1.817-5 and
any amendments or other modifications to such Section or Regulation,
or to qualify as a regulated investment company under Subchapter M
of the Code); or
(ii) arise out of or result from any material breach of any
representations or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and 83(c)
hereof.
8.3(b) The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against on Indemnified Party as such
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may arise from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties under this
Agreement or to the Company, the Fund, the Adviser or each Account, whichever is
applicable.
8.3(c) The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund or any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d) The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Contracts, with respect to the operation of either Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. Miscellaneous
9.1. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all
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information reasonably identified as confidential in writing by any other party
hereto and, except as permitted by this Agreement, shall not disclose,
disseminate or utilize such names and addresses and other confidential
information without the express written consent of the affected party until such
time as it may come into the public domain.
9.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
9.3. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
9.4. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
9.5. Each party hereto shall cooperate with, and promptly notify
each other party and all appropriate governmental authorities (including without
limitation the Securities and Exchange Commission, the National Association of
Securities Dealers, Inc. and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
9.6. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
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<PAGE>
9.7. It is understood by the parties that this Agreement is not an
exclusive arrangement in any respect.
9.8. The Company and the Adviser each understand and agree that the
obligations of the Fund under this Agreement are not binding upon any
shareholder of the Fund personally, but bind only the Fund and the Fund's
property; the Company and the Adviser each represent that it has notice of the
provisions of the Declaration of Trust of the Fund disclaiming shareholder
liability for acts or obligations of the Fund.
9.9. This Agreement shall not be assigned by any party hereto
without the prior written consent of all the parties.
9.10. This Agreement sets forth the entire agreement between the
parties and supercedes all prior communications, agreements and understandings,
oral or written, between the parties regarding the subject matter hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed as of the date specified
below.
AMERICAN GENERAL ANNUITY
INSURANCE COMPANY
By: __________________________________
Title: _______________________________
Date: ________________________________
OPPENHEIMER VARIABLE ACCOUNT
FUNDS
By: __________________________________
Title: _______________________________
Date: ________________________________
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OPPENHEIMERFUNDS, INC.
By: _____________________________________
Title: __________________________________
Date: ________________________________
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SCHEDULE 1
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SCHEDULE 2
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SCHEDULE 3
Portfolios of Oppenheimer Variable Account Funds:
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<PAGE>
OTHER EXHIBITS - EXHIBIT 2(b)
CONSENT OF
MAYER, BROWN & PLATT
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Additional Information section comprising a part of Post-
Effective Amendment No. 2 to the Form S-6 Registration Statement of American
General Life Insurance Company Separate Account VL-R with respect to File No.
333-53909.
/s/ MAYER, BROWN & PLATT
-----------------------------
Mayer, Brown & Platt
Washington, D.C.
April 22, 1999
<PAGE>
OTHER EXHIBITS - EXHIBIT 6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference made to our firm under the caption "Independent
Auditors" and to the use of our report dated February 10, 1999, as to the Legacy
Plus Divisions of American General Life Insurance Company Separate Account VL-R,
and February 16, 1999, as to American General Life Insurance Company, in Post-
Effective Amendment No. 2 to the Registration Statement (Form S-6 No. 333-53909)
of American General Life Insurance Company Separate Account VL-R.
/s/ ERNST & YOUNG LLP
-------------------------------
Ernst & Young LLP
Houston, Texas
April 22, 1999
