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CORPORATE AMERICA - VARIABLE
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 Corporate Markets Group
Houston, Texas 77019-2191 P.O. Box 4647
Phone: 1-888-222-4943 Houston, Texas 77210-4647
or 1-713-831-6934
or: 1-888-436-5258 (hearing impaired)
Fax: 1-713-831-4622
This booklet is called the "prospectus."
This Policy is available to individuals, corporations, and other
organizations. This Policy may be sold under certain arrangements that include
those in which a trustee or an employer, for example, purchases policies
covering a certain class of individuals. Other arrangements include those in
which an employer allows us to sell the Policy to its employees or retirees on
an individual basis.
Investment options. The AGL declared fixed interest account is the fixed
investment option for this Policy. You can also use AGL's Separate Account VL-R
("Separate Account") to invest in the following variable investment options. You
may change your selections from time to time:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER INVESTMENT OPTION
---- ------------------ -----------------
<S> <C> <C>
. AIM Variable Insurance Funds.............. AIM Advisors, Inc......................... AIM V.I. International Equity Fund
AIM V.I. Value Fund
. American Century Variable Portfolios, Inc. American Century Investment............... VP Value Fund
Management, Inc.
. Ayco Series Trust......................... Ayco Asset Management..................... Ayco Large Cap Growth Fund I
. Dreyfus Investment Portfolios............. The Dreyfus Corporation................... MidCap Stock Portfolio
. Dreyfus Variable Investment Fund.......... The Dreyfus Corporation................... Quality Bond Portfolio
Small Cap Portfolio
. Fidelity Variable Insurance Products Fund. Fidelity Management & Research............ VIP Equity-Income Portfolio
Company VIP Growth Portfolio
VIP Asset Manager Portfolio
VIP Contrafund Portfolio
. Janus Aspen Series - Service Shares....... Janus Capital............................. International Growth Portfolio
Worldwide Growth Portfolio
Aggressive Growth Portfolio
. J. P. Morgan Series Trust II.............. J. P. Morgan Investment Management Inc.... J. P. Morgan Small Company
Portfolio
. MFS Variable Insurance Trust.............. Massachusetts Financial Services.......... MFS Emerging Growth Series
Company MFS Research Series
MFS Capital Opportunities Series
MFS New Discovery Series
. Neuberger Berman Advisers Management
Trust.................................... Neuberger Berman Management Inc........... Mid-Cap Growth Portfolio
. North American Funds Variable Product
Series I................................. American General Advisers................. International Equities Fund
MidCap Index Fund
Money Market Fund
Nasdaq-100 Index Fund
Stock Index Fund
Small Cap Index Fund
Science & Technology Fund
. PIMCO Variable Insurance Trust............ Pacific Investment Management............. PIMCO Short-Term Bond Portfolio
Company PIMCO Real Return Bond Portfolio
PIMCO Total Return Bond Portfolio
. Putnam Variable Trust - Class IB Shares... Putnam Investment Management, Inc......... Putnam VT Diversified Income Fund
Putnam VT Growth and Income Fund
Putnam VT International Growth and
Income Fund
. SAFECO Resource Series Trust.............. SAFECO Asset Management................... Equity Portfolio
Company Growth Opportunities Portfolio
. The Universal Institutional Funds, Inc.... Morgan Stanley Asset Management........... Equity Growth Portfolio
Miller, Anderson & Sherrerd, LLP.......... High Yield Portfolio
. Vanguard Variable Insurance Fund.......... Wellington Management Company, LLP........ High Yield Bond Portfolio
The Vanguard Group........................ REIT Index Portfolio
. Van Kampen Life Investment Trust.......... Van Kampen Asset Management Inc........... Strategic Stock Portfolio
. Warburg Pincus Trust...................... Credit Suisse Asset Management, LLC....... Small Company Growth Portfolio
</TABLE>
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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 (OTHER THAN OUR DECLARED FIXED
INTEREST OPTION). 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 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 may,
within limits, (1) change the amount of insurance, (2) borrow or withdraw
amounts you have invested, (3) choose when and how much you invest, and (4)
choose whether your accumulation value under your Policy, upon notification of
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 you the greater of (i) any premium
payments received by us or (ii) your accumulation value plus any charges that
have been deducted. 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 net 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 available
investment options in the ratios 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 net premium.
We have designed this prospectus to provide you with information that you
should have before investing in the Policy. It also contains information that
will be helpful to you in exercising the various options you will have once you
own a Policy. Please read the prospectus carefully and keep it for future
reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR 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 POLICY IS NOT AVAILABLE IN ALL STATES.
THE POLICY IS NOT INSURED BY THE FDIC OR ANY OTHER AGENCY. THE POLICY IS
NOT A DEPOSIT OR OTHER OBLIGATION OF ANY BANK AND IS NOT BANK GUARANTEED. THE
POLICY IS SUBJECT TO INVESTMENT RISKS AND POSSIBLE LOSS OF PRINCIPAL INVESTED.
THIS PROSPECTUS IS DATED OCTOBER 2, 2000.
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GUIDE TO THIS PROSPECTUS
This prospectus contains information that you should know before you
purchase a Corporate America - Variable 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
BASIC QUESTIONS YOU MAY HAVE PROSPECTUS
--------------------------------------------------------------------------------
. How can I invest money in a Policy? 4
. How will the value of my investment in a Policy change over time? 5
. What is the basic amount of insurance ("death benefit")
that AGL pays when the insured person dies? 6
. 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? 14
. How can I change my Policy's investment options? 15
. How can I change my Policy's insurance coverage? 16
. What additional rider benefits might I select? 16
. How can I access my investment in a Policy? 18
. Can I choose the form in which AGL pays out proceeds from my Policy? 19
. To what extent can AGL vary the terms and conditions of the Policy
in particular cases? 20
. How will my Policy be treated for income tax purposes? 21
. How do I communicate with AGL? 21
Investment Option currently not available. The Ayco Large Cap Growth Fund
I, although we disclose certain information about this fund, is currently not
available as an investment option. This is a fund which is currently in
registration with the SEC. The fund's investment advisor anticipates that this
fund will be effective with the SEC and available for investment under the
Policy on or about November 15, 2000. We will give you written notice when this
fund becomes available.
Illustrations of a hypothetical Policy. Starting on page 22, 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 can also provide
you with a similar sample illustration that is more tailored to your own
circumstances and wishes.
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Additional information. You may find the answers to any other questions you
have under "Additional Information" beginning on page 29 or in the forms of our
Policy and riders. A table of contents for the "Additional Information" portion
of this prospectus also appears on page 29. 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.
These begin on page Q-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.
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 $300. Otherwise, with a
few exceptions mentioned below, you can make premium payments at any time and in
any amount. Premium payments we receive after your right to return expires as
discussed on page 2 will be allocated upon receipt to the available investment
options you have chosen.
Limits on premium payments. Federal tax law limits your ability to make
certain very large amounts of premium payments (relative to the amount of your
Policy's insurance coverage) and may impose penalties on amounts you take out of
your Policy if you do not observe certain additional requirements. These tax law
requirements are summarized further under "Tax Effects" beginning on page 30. We
will monitor your premium payments, however, to be sure that you do not exceed
permitted amounts or inadvertently incur any tax penalties. Also, 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.
Ways to pay premiums. You can 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." Premium payments after the initial premium payment must be
sent directly to our Home Office. We also accept premium payments by wire or by
exchange from another insurance company. You may obtain further information
about how to make premium payments by any of these methods from your AGL
representative or from our Home Office shown on the first page of this
prospectus.
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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 39. You must have at least $5,000
of accumulation value to start dollar cost averaging and each transfer under the
program must be at least $100. 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. We do not charge you for using this feature.
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 $5,000
to begin automatic rebalancing. You cannot participate in this program while
also participating in dollar cost averaging (discussed above). Rebalancing ends
upon your request. We do not charge you for using this feature.
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 (except our declared fixed interest 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 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
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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. Our Home Office address and
telephone numbers are shown on the first page of this prospectus.
We invest any accumulation value you have allocated to our declared fixed
interest account option as part of our general assets. We credit interest on
that accumulation value at a rate which we declare from time to time. We
guarantee that the interest will be credited at an effective annual rate of at
least 4%. Although this interest increases the amount of any accumulation value
that you have in our declared fixed interest account option, such accumulation
value will also be reduced by any charges that are allocated to this option
under the procedures described under "Allocation of charges." The "daily charge"
described on page 8 and the charges and expenses of the Mutual Funds discussed
beginning on page below do not apply to our declared fixed interest account
option.
The Policy is "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 Corporate
America - Variable 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 on the date of the insured person's
death plus the Policy's accumulation value on the date of
notification 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.
Any premiums received by us after the date of the insured person's death
will be returned and not included in your accumulation value for purposes of
calculating the death benefit amount.
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Federal tax law requires a minimum death benefit in relation to
accumulation value for a Policy to qualify as life insurance. The death benefit
of a Policy will be increased if necessary to ensure that the Policy will
continue to qualify as life insurance. One of two tests under current federal
tax law can be used to determine if a Policy complies with the definition of
life insurance in Section 7702 of the Internal Revenue Code of 1986, as amended
(the "Code").
The "guideline premium test" limits the amount of premiums payable under a
Policy to a certain amount for an insured of a particular age and gender. The
test also applies a prescribed "corridor factor" to determine a minimum ratio of
death benefit to accumulation value. The corridor factor depends upon the
attained age of the insured. The corridor factor decreases slightly (or remains
the same at older and younger ages) from year to year as the attained age of the
insured increases. Below is a sample list of corridor factors for the guideline
premium test:
TABLE OF ALTERNATIVE BASIC DEATH BENEFITS AS A PERCENTAGE
MULTIPLE OF POLICY ACCUMULATION VALUE
GUIDELINE PREMIUM TEST
INSURED
PERSON'S
AGE* 40 45 50 55 60 65 70 75 100
% 250% 215% 185% 150% 130% 120% 115% 105% 100%
_____________
* Nearest birthday at the beginning of the Policy year in which the insured
person dies.
The "cash value accumulation test" also requires that a minimum death
benefit be maintained, using a minimum ratio of death benefit to a Policy's
accumulation value. If the accumulation value of a Policy is at any time greater
than the net single premium at the insured's age and gender for the proposed
death benefit, the death benefit will be increased automatically by multiplying
the accumulation value by a "death benefit factor" computed in compliance with
the Code. The death benefit factor depends upon the gender and the attained age
of the insured. Below is a sample list of the cash value accumulation test
factors (for a male):
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TABLE OF ALTERNATIVE BASIC DEATH BENEFITS AS A PERCENTAGE
MULTIPLE OF POLICY ACCUMULATION VALUE
CASH VALUE ACCUMULATION TEST
INSURED
PERSON'S
AGE* 40 45 50 55 60 65 70 75 100
% 344% 294% 252% 218% 191% 169% 152% 138% 104%
_____________
* Nearest birthday at the beginning of the Policy year in which the insured
person dies.
If the accumulation value is reduced (e.g., by partial surrenders, charges
or adverse investment performance) at a time when a minimum death benefit under
Section 7702 of the Code is in effect, such minimum death benefit will also be
reduced. You must elect either the guideline premium test or the cash value
accumulation test at issuance and once elected, the choice may not be changed.
WHAT CHARGES WILL AGL DEDUCT FROM MY INVESTMENT IN A POLICY?
Deductions from each premium payment. We deduct from each premium payment
a charge to cover costs associated with the issuance of the Policy,
administrative services we perform and a premium tax that is then applicable to
us in your state or other jurisdiction. The amount we deduct in policy year 1
through 7 is 9% up to the "target premium" and 5% on any premium amounts in
excess of the target premium. The amount we deduct in year 8 and thereafter is
5% of all premium payments. The target premium is an amount of premium that is
approximately equal to the seven-pay premium, which is the maximum amount of
premium that may be paid without the Policy becoming a modified endowment
contract. See "Tax Effects" starting on page 30.
Flat Monthly Charge. We will deduct $7 per month from your accumulation
value to cover administrative services we perform. Also, we have the right to
raise this charge at any time to not more than $10 per month.
Daily charge. We make a daily deduction at an annual effective rate of
.35% 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 .25%, and after 20 years, we
will further reduce the charge to a maximum of .15%. Because the Policy was
first offered in 1999, however, this decrease has not yet occurred for any
outstanding Policy. The daily deduction charges are the maximums we may charge;
we may charge less, but we can never charge more.
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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 an otherwise
identical Policy, 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 an otherwise identical Policy, 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.
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.
We may offer the Policy on a guaranteed issue basis to certain groups or
classes based on our established guidelines, including face amount limitations.
Our cost of insurance rates will generally be higher for a guaranteed issue
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.
Partial Surrender Fee. For each partial surrender you make, we may in the
future charge a $25 transaction fee to cover administrative services. This
charge will be deducted from the investment options in the same ratio as the
requested transfer unless you specify otherwise.
Allocation of charges. You may choose the investment options from which we
deduct all monthly charges. If you do not choose or have enough accumulation
value in the investment options you selected, we will deduct these charges in
proportion to the amount of accumulation value you then have in each investment
option.
For a further discussion regarding the charges we will deduct from your
investment in a Policy, see "More About Policy Charges" on page 37.
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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 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/1/ (as a percentage of average net assets)
<TABLE>
<CAPTION>
FUND OTHER FUND TOTAL FUND
MANAGEMENT OPERATING OPERATING
FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER
EXPENSE 12B-1 EXPENSE EXPENSE
NAME OF FUND REIMBURSEMENT) FEES REIMBURSEMENT) REIMBURSEMENT)
-------------- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS:/1/
AIM V.I. International Equity Fund 0.75% 0.22% 0.97%
AIM V.I. Value Fund 0.61% 0.15% 0.76%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.:/1/
VP Value Fund 1.00% 0.00% 1.00%
AYCO SERIES TRUST:/1, 2/
Ayco Large Cap Growth Fund I 0.00% 1.00% 1.00%
DREYFUS INVESTMENT PORTFOLIOS:/1/
MidCap Stock Portfolio/3/ 0.75% 0.22% 0.97%
DREYFUS VARIABLE INVESTMENT FUND:/1/
Quality Bond Portfolio 0.65% 0.09% 0.74%
Small Cap Portfolio 0.75% 0.03% 0.78%
FIDELITY VARIABLE INSURANCE
PRODUCTS FUND:/1, 4/
VIP Equity-Income Portfolio 0.48% 0.25% 0.10% 0.83%
</TABLE>
(Footnotes begin on page 13)
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<TABLE>
<CAPTION>
FUND OTHER FUND TOTAL FUND
MANAGEMENT OPERATING OPERATING
FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER
EXPENSE 12B-1 EXPENSE EXPENSE
NAME OF FUND REIMBURSEMENT) FEES REIMBURSEMENT) REIMBURSEMENT)
-------------- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
VIP Growth Portfolio 0.58% 0.25% 0.10% 0.93%
VIP Asset Manager Portfolio 0.53% 0.25% 0.11% 0.89%
VIP Contrafund Portfolio 0.58% 0.25% 0.12% 0.95%
JANUS ASPEN SERIES - SERVICE SHARES:/5/
International Growth Portfolio 0.65% 0.25% 0.11% 1.01%
Worldwide Growth Portfolio 0.65% 0.25% 0.05% 0.95%
Aggressive Growth Portfolio 0.65% 0.25% 0.02% 0.92%
J. P. MORGAN SERIES TRUST II:/1/
J. P. Morgan Small Company 0.60% 0.55% 1.15%
Portfolio/3/
MFS VARIABLE INSURANCE TRUST:/1/
MFS Emerging Growth Series /3/ 0.74% 0.09% 0.83%
MFS Research Series /3/ 0.74% 0.11% 0.85%
MFS Capital Opportunities Series/3/ 0.74% 0.16% 0.90%
MFS New Discovery Series/3/ 0.88% 0.17% 1.05%
NEUBERGER BERMAN ADVISERS
MANAGEMENT TRUST:/1/
Mid-Cap Growth Portfolio/3/ 0.85% 0.15% 1.00%
NORTH AMERICAN FUNDS VARIABLE
PRODUCT SERIES I:/1/
International Equities Fund 0.35% 0.08% 0.43%
MidCap Index Fund 0.31% 0.07% 0.38%
Money Market Fund 0.50% 0.07% 0.57%
</TABLE>
(Footnotes begin on page 13)
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<TABLE>
<CAPTION>
FUND OTHER FUND TOTAL FUND
MANAGEMENT OPERATING OPERATING
FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER
EXPENSE 12B-1 EXPENSE EXPENSE
NAME OF FUND REIMBURSEMENT) FEES REIMBURSEMENT) REIMBURSEMENT)
-------------- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Nasdaq-100 Index Fund /6/ 0.40% 0.10% 0.50%
Stock Index Fund 0.26% 0.06% 0.32%
Small Cap Index Fund 0.35% 0.04% 0.39%
Science & Technology Fund 0.90% 0.05% 0.95%
PIMCO VARIABLE INSURANCE TRUST:/1, 7/
PIMCO Short-Term Bond Portfolio/3/ 0.25% 0.35% 0.60%
PIMCO Real Return Bond Portfolio/3/ 0.25% 0.40% 0.65%
PIMCO Total Return Bond Portfolio/3/ 0.25% 0.40% 0.65%
PUTNAM VARIABLE TRUST-Class IB Shares/8/
Putnam VT Diversified Income Fund 0.68% 0.15% 0.10% 0.93%
Putnam VT Growth and Income Fund 0.46% 0.15% 0.04% 0.65%
Putnam VT International Growth 0.80% 0.15% 0.22% 1.17%
and Income Fund
SAFECO RESOURCE SERIES TRUST:/1/
Equity Portfolio 0.74% 0.02% 0.76%
Growth Opportunities Portfolio 0.74% 0.04% 0.78%
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.:/1/
Equity Growth Portfolio/3/ 0.29% 0.56% 0.85%
High Yield Portfolio/3/ 0.19% 0.61% 0.80%
</TABLE>
(Footnotes begin on page 13)
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<TABLE>
<CAPTION>
FUND OTHER FUND TOTAL FUND
MANAGEMENT OPERATING OPERATING
FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER
EXPENSE 12B-1 EXPENSE EXPENSE
NAME OF FUND REIMBURSEMENT) FEES REIMBURSEMENT) REIMBURSEMENT)
-------------- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
VANGUARD VARIABLE INSURANCE FUND:
High Yield Bond Portfolio 0.26% 0.03% 0.29%
REIT Index Portfolio 0.15% 0.12% 0.27%
VAN KAMPEN LIFE INVESTMENT TRUST:/1/
Strategic Stock Portfolio/3/ 0.24% 0.41% 0.65%
WARBURG PINCUS TRUST:/1/
Small Company Growth Portfolio 0.90% 0.24% 1.14%
</TABLE>
----------------------
/1/The Mutual Funds' advisers or administrators have entered into arrangements
under which they pay certain amounts to AGL. The fees do not have a direct
relationship to the Mutual Funds' Annual Expenses, and do not increase the
amount of charges you pay under your Policy. (See "Certain arrangements" under
"More About Policy Charges" and "Service Agreements").
/2/Fees and charges for Ayco Series Trust are for fiscal year 2000 and are the
fees and charges that the trust anticipates it will charge when this fund
becomes available. We will give you written notice of any changes to this
footnote when this fund becomes available under the Policy.
/3/For the Funds indicated, management fees and other expenses as shown for
fiscal year 1999 would have been the percentages shown below without certain
voluntary expense reimbursements from the investment adviser. Current and
future fees and expenses may vary from the fiscal year 1999 fees and expenses.
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL
FEES EXPENSES ANNUAL EXPENSES
----------- --------- ----------------
<S> <C> <C> <C>
DREYFUS INVESTMENT PORTFOLIOS
MidCap Stock Portfolio 0.75% 0.71% 1.46%
J.P. MORGAN SERIES TRUST II
J.P. Morgan Small Company Portfolio 0.60% 1.97% 2.57%
MFS VARIABLE INSURANCE TRUST
MFS Emerging Growth Series 0.75% 0.09% 0.84%
MFS Research Series 0.75% 0.11% 0.86%
MFS Capital Opportunities Series 0.75% 0.27% 1.02%
MFS New Discovery Series 0.90% 1.59% 2.49%
</TABLE>
(Footnotes continue on page 14)
13
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL
FEES EXPENSES ANNUAL EXPENSES
----------- --------- ----------------
<S> <C> <C> <C>
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
Mid-Cap Growth Portfolio 0.85% 0.23% 1.08%
PIMCO VARIABLE INSURANCE TRUST
PIMCO Short-Term Bond Portfolio 0.25% 1.17% 1.42%
PIMCO Real Return Bond Portfolio 0.25% 0.67% 0.92%
PIMCO Total Return Bond Portfolio 0.25% 0.44% 0.69%
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
Equity Growth Portfolio 0.55% 0.56% 1.11%
High Yield Portfolio 0.50% 0.61% 1.11%
VAN KAMPEN LIFE INVESTMENT TRUST
Strategic Stock Portfolio 0.50% 0.41% 0.91%
</TABLE>
No other Funds received any such reimbursements.
/4/The prospectuses for Fidelity Variable Insurance Products Fund under "Fund
Distribution" discuss this 12b-1 fee.
/5/Expenses are based on the estimated expenses that the new Service Shares
class of each Portfolio expects to incur in its initial fiscal year. The
prospectus for Janus Aspen Series under "Fees and Expenses" discusses the 12b-1
fee.
/6/Fees and charges for the Nasdaq-100 Index Fund are estimated for the current
fiscal year.
/7/AGL has entered into a service agreement with PIMCO Variable Insurance Trust
under which a portion of the Other Fund Operating Expenses is paid to AGL to
reimburse AGL for services provided to the PIMCO Variable Insurance Trust.
/8/The prospectus for Putnam Variable Trust-Class IB Shares under "Distribution
Plan" discusses this 12b-1 fee.
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 annually. However, payment of
this amount or any other specific amounts of premiums is not mandatory. You
need to invest enough to ensure that your Policy's accumulation value, less any
indebtedness and after your monthly deductions, stays above zero. The less you
invest, the more likely it is that your Policy's accumulation value, less any
indebtedness and after your monthly deductions, could fall to zero, as a result
of the deductions we periodically make from your accumulation value.
14
<PAGE>
Policy lapse and reinstatement. If your Policy's accumulation value does
fall to zero, we will notify you and give you a grace period of 61 days 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 and all riders 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 will have to pay
enough premium to keep your Policy in force for two months as well as pay or
reinstate any indebtedness. In the Policy, you will find additional information
about the values and terms of a Policy after it is reinstated.
HOW CAN I CHANGE MY POLICY'S INVESTMENT OPTIONS?
Future premium payments. You may at any time change the investment options
in which your future premiums 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
$500. See "Additional Rights That We Have" on page 44.
Also, in any one policy year, the amount that may be transferred out of our
declared fixed interest account option each year is limited to the greatest of:
. 25% of the accumulation value you had in the declared fixed interest
account option as of the Policy anniversary;
. the sum of any amounts transferred from the declared fixed interest account
option in the prior Policy year; or
. $500.
You may make transfers any time, except that transfers out of our declared
fixed interest account option must be made within 60 days after the Policy
anniversary. We will not honor any request received outside that period.
Transfer Fee. We may in the future charge a $25 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 may
not unilaterally terminate or
15
<PAGE>
discontinue transfer privileges. However, we reserve the right to suspend such
privileges for a reasonable period.
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.
We treat an increase in specified amount in many respects as if it were the
issuance of a new Policy. 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.
Decrease in coverage. After the first policy year, you may request a
reduction in the specified amount of coverage, but not below certain minimums.
If the insured is younger than 65, the death benefit may be reduced to no less
than $50,000, otherwise the minimum is $25,000 (or, if greater, the minimum
amount the tax law requires).
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.
Tax consequences of changes in insurance coverage. Please read "Tax Effects"
starting on page 30 of this prospectus to learn about possible tax consequences
of changing your insurance coverage under your Policy.
WHAT ADDITIONAL RIDER BENEFITS MIGHT I SELECT?
You can request that your Policy include the additional rider benefits
described below. (These riders may not be available in all states.) For most
of the riders that you choose, a charge, which will be shown on page 3 of your
Policy, will be deducted from your accumulation value on each monthly deduction
date. Eligibility for and changes in these benefits are subject to our rules
and procedures as in effect from time to time. More details are included in the
form of each rider, which we suggest that you review if you choose any of these
benefits.
16
<PAGE>
. Flexible Term Rider, which provides a death benefit coverage in addition
to the base policy death benefit. The cost of insurance rates are the
same as the base policy. Use of this rider to provide a portion of the
total death benefit reduces the target premium, as a percentage of total
premium, and also reduces the total policy charges and increases the
accumulation value and cash surrender value.
. Interim Term Rider, which provides temporary coverage during the period
prior to issuance of the Policy.
. Return of Premium Rider, which provides increases in the death benefit
equal to the sum of all premiums paid for the policy, including premiums
for all riders except for the Interim Term Rider, less:
1) the total amount of all partial withdrawals from the policy's cash
surrender value; and
2) the amount of any policy loan, reduced by unearned loan interest, if
any.
Death Benefit Option 2 may not be selected with the Return of Premium
Rider.
. Maturity Extension Rider, which permits you to extend the Policy's
maturity date beyond what it otherwise would be.
The death benefit after the original maturity date will be equal to the
accumulation value on the date of death. All accumulation value that is
in the Separate Account can remain there.
No additional premium payments, new loans, monthly insurance charge, or
changes in specified amount will be allowed after the original maturity
date. There is a flat monthly charge of no more than $10 each month
after the original maturity date. After this rider is elected, it may
not be revoked.
Extension of the maturity date beyond the insured persons's age 100 may
result in the current taxation of increases in your Policy accumulation
value as a result of interest or investment experience after that time.
You should consult a qualified tax advisers before making such an
extension.
Tax consequences of additional rider benefits. Adding or deleting riders, or
increasing or decreasing coverage under existing riders can have tax
consequences. See "Tax Effects" starting on page 30. You should consult a
qualified tax adviser.
17
<PAGE>
HOW CAN I ACCESS MY INVESTMENT IN A POLICY?
Full surrender. You may at any time, without charge, 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." During the first
Policy year, the cash surrender value will be equal to the accumulation value,
less any Policy loans, plus 60% of the deductions from each premium payment made
during the first Policy year. During the second Policy year, the cash surrender
value will be equal to the accumulation value, less any Policy loans, plus 40%
of the deductions from each premium payment made during the first Policy year.
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 $500. 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 Policy to fail to qualify as life insurance
under the tax laws. The specified amount remaining after a partial surrender
will not be less than the minimum amount allowed.
You may apply for a partial surrender without reducing your Policy's
specified amount of insurance if you meet certain requirements established by
us, including satisfactory evidence of insurability.
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.
Partial surrender fee. We may in the future charge a $25 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 the interest that will be payable on your
loan and on any existing policy loans through your next Policy anniversary.
This rule is not applicable in all states.
We remove from your investment options an amount equal to your loan and hold
that amount as collateral for the loan. We will credit your Policy with
interest on this collateral amount at a
18
<PAGE>
guaranteed effective annual rate of at least 4% (rather than any amount you
could otherwise earn in one of our investment options). We can use interest
rates greater than the guaranteed rates used to calculate accumulation values of
amounts allocated to the declared fixed interest account. Interest which we
apply to that portion of the declared fixed interest account will be at an
annual effective rate of not less than 4.0% nor more than 4.75% for the first
seven years, and not less than 4.25% nor more than 4.75% thereafter. Any amount
not paid by its due date will automatically be added to the loan balance as an
additional loan.
When a loan is made, we will cancel units from each applicable division of
the Separate Account and reduce the unloaned portion of the general account in
the ratio that the loan bears to the unloaned Accumulation Value of your Policy,
unless you specify otherwise in writing. The amount being borrowed from the
Separate Account will be transferred to the general account.
You may repay all or part of your loan at any time before the notification of
the death of the Insured while your Policy is in force. Each repayment must be
at least $100 or the entire loan balance, if less. You must designate any loan
repayment as such. Otherwise, we will treat it as a premium payment instead.
Repayment of a loan will be allocated to the general account. You may tell us
how to allocate repayments in excess of any loaned amount. If you do not tell
us, any amount in excess of the loaned amount will be transferred from the
general account to the divisions in the same ratio currently in effect for the
allocation of net premiums. Any unpaid loan will be deducted from the proceeds
we pay following notification of the insured person's death.
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 100/th/ 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:
. 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.
19
<PAGE>
. Option 4 - Proceeds left to accumulate with interest.
Additional payment options may also be available with our consent. We have
the right to reject any payment option, if the payee is a corporation or other
entity. You can read more about each of these options in the Policy and in the
separate form of payment contract that we issue when any such option takes
effect.
Within 60 days after notification of the insured person's death, any
beneficiary 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 advisor 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.
Policy 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.
State law requirements. AGL is subject to the insurance laws and regulations
in every jurisdiction in which the Corporate America - Variable Policy is sold.
As a result, various time periods and other terms and conditions 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.
20
<PAGE>
HOW WILL MY POLICY BE TREATED FOR INCOME TAX PURPOSES?
Generally, death benefits paid under a Policy are not subject to income tax.
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 to
the extent of gain. 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. If your Policy
lapses, you may have to pay income tax on a portion of any outstanding loan.
For further information about the tax consequences of owning a Policy, please
read "Tax Effects" starting on page 30.
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;
. change of allocation percentages for premium payments;
. loan repayments or charges;
21
<PAGE>
. change of death benefit option or manner of death benefit payment;
. increase in specified 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
1-888-222-4943.
ILLUSTRATIONS OF HYPOTHETICAL POLICY BENEFITS
To help explain how our Policy works, we have prepared the following tables:
22
<PAGE>
PAGE TO
SEE IN THIS
TABLE PROSPECTUS
----- ----------
Cash Value Accumulation Test, Death Benefit Option 1-
Current Charges.............................................. 25
Guaranteed Maximum Charges................................... 26
Guideline Premium Test, Death Benefit Option 1-
Current Charges.............................................. 27
Guaranteed Maximum Charges................................... 28
The tables show how death benefits, accumulation values, and cash surrender
values ("Policy benefits") under a sample Corporate America - Variable 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. Seven annual premium
payments of $10,000 are assumed to be paid for an initial $180,538 of specified
amount of coverage as determined using the Cash Value Accumulation Test death
benefit compliance method and an initial $290,000 of specified amount of
coverage as determined using the Guideline Premium Test. The illustrations
assume no Policy loan has been taken.
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. The tables reflect a medically underwritten Policy. A
guaranteed issue Policy would have higher cost of insurance charges 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 .35% for the first 10 Policy years, .25% for
Policy years 11-20, and .15% thereafter, plus a flat monthly charge of
$7.00 and current monthly insurance charges.
. The guaranteed maximum charge table assumes that these charges include a
daily charge at an annual rate effective rate of .35% for the first 10
Policy years, .25% for Policy years 11-20, and .15% thereafter, plus a flat
monthly charge of $10.00 and guaranteed monthly insurance charges.
The charges assumed by both the current and guaranteed maximum charge tables
also include Mutual Fund expenses of .78% of aggregate Mutual Fund assets. This
percentage 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 - 14 of this prospectus. We expect the reimbursement
arrangements to continue in the future. If the reimbursement arrangements were
not currently in
23
<PAGE>
effect, the arithmetic average of Mutual Fund expenses would equal .92% of
aggregate Mutual Fund assets.
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.
24
<PAGE>
CORPORATE AMERICA - VARIABLE
ANNUAL PREMIUM $10,000 INITIAL SPECIFIED AMOUNT $180,538
DEATH BENEFIT OPTION 1
CASH VALUE ACCUMULATION TEST
MALE AGE 45
PREFERRED - MEDICALLY UNDERWRITTEN
ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
End of Death Benefit Accumulation Value Cash Surrender Value
Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Year Annual Investment Return of Annual Investment Return of Annual Investment Return of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
1 180,538 180,538 180,538 8,809 9,349 9,889 9,349 9,889 10,429
2 180,538 180,538 180,538 17,458 19,092 20,791 17,818 19,452 21,151
3 180,538 180,538 180,538 25,947 29,248 32,817 25,947 29,248 32,817
4 180,538 180,538 180,538 34,298 39,859 46,116 34,298 39,859 46,116
5 180,538 180,538 180,538 42,528 50,967 60,847 42,528 50,967 60,847
6 180,538 180,538 194,582 50,629 62,590 77,156 50,629 62,590 77,156
7 180,538 183,017 232,873 58,591 74,747 95,109 58,591 74,747 95,109
8 180,538 185,325 249,373 57,432 77,933 104,867 57,432 77,933 104,867
9 180,538 187,616 266,977 56,195 81,205 115,555 56,195 81,205 115,555
10 180,538 189,911 285,797 54,884 84,569 127,268 54,884 84,569 127,268
15 180,538 203,880 405,874 47,937 103,957 206,952 47,937 103,957 206,952
20 180,538 219,582 578,366 38,475 126,833 334,072 38,475 126,833 334,072
</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.
25
<PAGE>
CORPORATE AMERICA - VARIABLE
ANNUAL PREMIUM $10,000 INITIAL SPECIFIED AMOUNT $180,538
DEATH BENEFIT OPTION 1
CASH VALUE ACCUMULATION TEST
MALE AGE 45
PREFERRED - MEDICALLY UNDERWRITTEN
ASSUMING GUARANTEED CHARGES
<TABLE>
<CAPTION>
End of Death Benefit Accumulation Value Cash Surrender Value
Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Year Annual Investment Return of Annual Investment Return of Annual Investment Return of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
1 180,538 180,538 180,538 8,099 8,617 9,135 8,639 9,157 9,675
2 180,538 180,538 180,538 16,085 17,635 19,248 16,445 17,995 19,608
3 180,538 180,538 180,538 23,963 27,082 30,459 23,963 27,082 30,459
4 180,538 180,538 180,538 31,723 36,970 42,882 31,723 36,970 42,882
5 180,538 180,538 180,538 39,373 47,334 56,672 39,373 47,334 56,672
6 180,538 180,538 181,577 46,920 58,210 72,000 46,920 58,210 72,000
7 180,538 180,538 217,529 54,358 69,624 88,842 54,358 69,624 88,842
8 180,538 180,538 231,354 52,611 71,987 97,289 52,611 71,987 97,289
9 180,538 180,538 246,077 50,777 74,405 106,509 50,777 74,405 106,509
10 180,538 180,538 261,747 48,838 76,872 116,559 48,838 76,872 116,559
15 180,538 180,538 358,252 37,309 90,405 182,670 37,309 90,405 182,670
20 180,538 182,519 490,174 20,314 105,425 283,132 20,314 105,425 283,132
</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.
26
<PAGE>
CORPORATE AMERICA - VARIABLE
ANNUAL PREMIUM $10,000 INITIAL SPECIFIED AMOUNT $290,000
DEATH BENEFIT OPTION 1
GUIDELINE PREMIUM TEST
MALE AGE 45
PREFERRED - MEDICALLY UNDERWRITTEN
ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
End of Death Benefit Accumulation Value Cash Surrender Value
Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Year Annual Investment Return of Annual Investment Return of Annual Investment Return of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
1 290,000 290,000 290,000 8,742 9,279 9,817 9,282 9,819 10,357
2 290,000 290,000 290,000 17,281 18,905 20,594 17,641 19,265 20,954
3 290,000 290,000 290,000 25,610 28,884 32,426 25,610 28,884 32,426
4 290,000 290,000 290,000 33,761 39,267 45,465 33,761 39,267 45,465
5 290,000 290,000 290,000 41,758 50,100 59,872 41,758 50,100 59,872
6 290,000 290,000 290,000 49,584 61,387 75,784 49,584 61,387 75,784
7 290,000 290,000 290,000 57,210 73,127 93,350 57,210 73,127 93,350
8 290,000 290,000 290,000 55,691 75,850 102,717 55,691 75,850 102,717
9 290,000 290,000 290,000 54,019 78,561 113,001 54,019 78,561 113,001
10 290,000 290,000 290,000 52,199 81,269 124,327 52,199 81,269 124,327
15 290,000 290,000 290,000 42,066 96,339 203,620 42,066 96,339 203,620
20 290,000 290,000 411,953 27,198 112,014 337,666 27,198 112,014 337,666
</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.
27
<PAGE>
CORPORATE AMERICA - VARIABLE
ANNUAL PREMIUM $10,000 INITIAL SPECIFIED AMOUNT $290,000
DEATH BENEFIT OPTION 1
GUIDELINE PREMIUM TEST
MALE AGE 45
PREFERRED - MEDICALLY UNDERWRITTEN
ASSUMING GUARANTEED CHARGES
<TABLE>
<CAPTION>
End of Death Benefit Accumulation Value Cash Surrender Value
Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Year Annual Investment Return of Annual Investment Return of Annual Investment Return of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
1 290,000 290,000 290,000 7,602 8,104 8,606 8,142 8,644 9,146
2 290,000 290,000 290,000 15,054 16,540 18,088 15,414 16,900 18,448
3 290,000 290,000 290,000 22,363 25,333 28,552 22,363 25,333 28,552
4 290,000 290,000 290,000 29,504 34,477 40,087 29,504 34,477 40,087
5 290,000 290,000 290,000 36,484 44,000 52,829 36,484 44,000 52,829
6 290,000 290,000 290,000 43,311 53,933 66,929 43,311 53,933 66,929
7 290,000 290,000 290,000 49,964 64,280 82,534 49,964 64,280 82,534
8 290,000 290,000 290,000 47,354 65,431 89,642 47,354 65,431 89,642
9 290,000 290,000 290,000 44,577 66,481 97,436 44,577 66,481 97,436
10 290,000 290,000 290,000 41,600 67,399 105,985 41,600 67,399 105,985
15 290,000 290,000 290,000 23,018 69,499 164,626 23,018 69,499 164,626
20 0 290,000 323,947 0 63,337 265,530 0 63,337 265,530
</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.
28
<PAGE>
ADDITIONAL INFORMATION
A general overview of the Policy appears at pages 1- 28. 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................................................................ 29
Separate Account................................................... 30
Tax Effects........................................................ 30
Voting Privileges.................................................. 36
Your Beneficiary................................................... 37
Assigning Your Policy.............................................. 37
More About Policy Charges.......................................... 37
Effective Date of Policy and Related Transactions.................. 39
More About Our Declared Fixed Interest Account Option.............. 40
Distribution of the Policy......................................... 41
Payment of Policy Proceeds......................................... 42
Adjustments to Death Benefit....................................... 43
Additional Rights That We Have..................................... 44
Performance Information............................................ 44
Our Reports to Policy Owners....................................... 45
AGL's Management................................................... 45
Principal Underwriter's Management................................. 48
Legal Matters...................................................... 49
Accounting and Auditing Experts.................................... 50
Actuarial Expert................................................... 50
Services Agreement................................................. 50
Certain Potential Conflicts........................................ 50
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 52, 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
29
<PAGE>
diversified financial services holding company engaged primarily in the
insurance business. American General Financial Group is the marketing name for
American General Corporation and its subsidiaries. The commitments under the
Policies are AGL's, and American General Corporation has no legal obligation to
back those commitments.
AGL is a member of the Insurance Marketplace Standards Association ("IMSA").
IMSA is a voluntary membership organization created by the life insurance
industry to promote ethical market conduct for individual life insurance and
annuity products. AGL's membership in IMSA applies only to AGL and not its
products.
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
Separate Account VL-R on May 6, 1997 under Texas law.
For record keeping and financial reporting purposes, Separate Account VL-R is
divided into 64 separate "divisions," 40 of which correspond to the 40 variable
investment options available under the Policy. The remaining 24 divisions, and
some of these 40 divisions, represent investment options available under other
variable life policies 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 are our property. The assets in Separate
Account VL-R would be available only to satisfy the claims of owners of the
Policy, 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 Policy 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.
We do not know the likelihood of continuation of the present federal income
tax laws or of the current interpretations by the Internal Revenue Service. For
instance, the United States Congress has in the past and may in the future
consider legislation that, if adopted, could significantly affect the tax
treatment of corporate-owned life insurance. For example, on February 7, 2000,
the Clinton Administration proposed legislation in the President's budget
message for fiscal year 2001 to amend the current tax law regarding the current
tax treatment of corporate-owned life insurance.
30
<PAGE>
Current law provides for interest deductibility on indebtedness incurred by
a corporation, which is the owner and beneficiary of a contract and which is
used to purchase a life insurance, annuity or endowment contract, on the life of
an employee, officer, director or 20% owner of the business. The proposal would
repeal this exception under the corporate owned life insurance proration rules
for contracts covering employees, officers or directors, other than 20% owners
of a business which is the owner and beneficiary of an annuity, endowment or
life insurance contact. The proposal would be effective for taxable years
beginning after the date of the enactment. It is uncertain at this time whether
the Administration's proposal will be adopted. You should consult a tax adviser
for further information.
General. A Corporate America - Variable 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.
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 by
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.
31
<PAGE>
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.
Rider benefits. The premium payments and any death benefits to be paid under
any term insurance rider you may purchase under your Policy will not disqualify
your Policy as life insurance for tax purposes. However, a term rider may be
determined to constitute a "qualified additional benefit" as that term is
defined in Section 7702 of the Internal Revenue Code. The death benefit to be
paid under a rider that is a "qualified additional benefit" will not be treated
as a future benefit of the Policy for tax purposes. The premium payments for the
same rider, however, would be treated as future benefits for purposes of
compliance with Section 7702. You should consult a qualified tax adviser
regarding any term rider you may purchase.
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 and not as a 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 Policy 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.
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
32
<PAGE>
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 your
basis would be increased by the amount of any prior distribution 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 Policy 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.
33
<PAGE>
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 Corporate America - Variable 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. The federal estate tax is integrated with the federal gift tax under
a unified rate schedule and unified credit. The Taxpayer Relief Act of 1997
gradually raised the value of the credit to $1,000,000. 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.
34
<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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.
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);
37
<PAGE>
. 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 Policy (such as the costs of
processing applications for Policy and other unreimbursed administrative
expenses, costs of paying marketing and distribution expenses for the
Policy, and costs of paying death claims if the mortality experience of
insured persons is worse than we expect);
. compensate us for the risk we assume under the Policy; or
. otherwise be retained by us as profit.
Although the paragraphs above describe the primary purposes for which
charges under the Policy 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 for a unisex
policy 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 gender.
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<PAGE>
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.
Certain arrangements. Most of the distributors or advisers of the Mutual
Funds listed on page 1 of this prospectus make certain payments to us, on a
quarterly basis, for certain administrative, Policy, and policy owner support
expenses. These amounts will be reasonable for the services performed and are
not designed to result in a profit. These amounts are paid by the distributors
or the advisers, and will not be paid by the Mutual Funds, the divisions or
Policy 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 compute values under a Policy on
each day that the New York Stock Exchange is open for business. 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."
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.
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
39
<PAGE>
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 or decreases 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;
. 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 second
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.
MORE ABOUT OUR DECLARED FIXED INTEREST ACCOUNT OPTION
Our general account. Our general account assets are all of our assets that
we do not hold in legally segregated separate accounts. Our general account
supports our obligations to you under your Policy's declared fixed interest
account option. Because of applicable exemptions, no interest in this option has
been registered under the Securities Act of 1933, as amended. Neither our
general account nor our declared fixed interest account is an investment company
under the Investment Company Act of 1940. We have been advised that the staff of
the SEC has not reviewed the
40
<PAGE>
disclosures that are included in this prospectus for your information about our
general account or our declared fixed interest account option. Those
disclosures, however, may be subject to certain generally applicable provisions
of the federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
How we declare interest. We can at any time change the rate of interest we
are paying on any accumulation value allocated to our declared fixed interest
account option, but it will always be at an effective annual rate of at least
4%.
Under these procedures, it is likely that at any time different interest
rates will apply to different portions of your accumulation value, depending on
when each portion was allocated to our declared fixed interest account option.
Any charges, partial surrenders, or loans that we take from any accumulation
value that you have in our declared fixed interest account option will be taken
from each portion in reverse chronological order based on the date that
accumulation value was allocated to this option.
DISTRIBUTION OF THE POLICY
American General Securities Incorporated ("AGSI") is the principal
underwriter of the Policy. AGSI is a wholly-owned subsidiary of AGL. AGL, in
turn, is a wholly-owned subsidiary of American General Corporation. 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 Policy.
We and AGSI have sales agreements with various broker-dealers under which
the Policy will be sold by registered representatives of the broker-dealers.
These registered representatives 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 for promotion and sales of
the Policy. AGSI also has its own registered representatives who will sell the
Policy, and we will pay compensation to AGSI for these sales. The compensation
payable to broker-dealers for the sales of the Policy may vary with the sales
agreement, but is generally not expected to exceed, for the Policy:
. in the first Policy year, 20% of the premiums paid up to the target
amount and 4% of the premiums in excess of the target amount;
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<PAGE>
. in Policy years 2-7, 8% of the premiums paid up to the target amount
and 3 1/2% of the premiums in excess of the target amount;
. in Policy years 8-15, 3% of the premiums paid up to the target amount,
2% of the premiums in excess of the target amount and 0.15% of the
Policy's accumulation value (reduced by any outstanding loans); and
. in Policy years 16 and thereafter, 2% of the premiums paid up to the
target amount, 2% of the premiums in excess of the target amount; and
0.10% of the Policy's accumulation value (reduced by any outstanding
loans).
The maximum value of any alternative amounts we may pay for sales of the
Policy 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 with respect
to any increase in the specified amount of coverage that you request. In
addition, we may pay the broker-dealers expense allowances, bonuses, wholesaler
fees and training allowances.
We pay the compensation directly to AGSI or any other selling broker-dealer
firm. 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, 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;
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<PAGE>
. 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.
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 commits suicide during the first two Policy years, we
will limit the death benefit proceeds to the total of all premiums that have
been paid to the time of death minus any outstanding Policy loans (plus credit
for any unearned interest) and any partial surrenders. A new two year period
begins if you increase the specified amount. You can increase the specified
amount only if the insured is living at the time of the increase. In this case,
if the insured commits suicide during the first two years following the
increase, we will refund the monthly insurance deductions attributable to the
increase. The death benefit will then be based on the specified amount in
effect before 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.
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<PAGE>
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 $500;
. 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 $500 for any other reason;
. change interest rates and charges as long as we stay within the minimum and
maximum charges permitted in your Policy;
. change the underlying Mutual Fund that any investment option uses or make
any new Mutual Fund available to you;
. add or delete investment options, combine two or more investment options,
or withdraw assets relating to Corporate America - Variable from one
investment option and put them into another;
. make any changes required to comply with the requirements of any investment
option;
. 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
44
<PAGE>
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.
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
--------------------------------------------------------------------------------
Rodney O. Martin, Jr. Director of American General Life Insurance Company since
August 1996. Chairman of the Board and CEO of American
General Life Insurance Company since April 2000.
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, Hartford,
Connecticut (1990-1995).
45
<PAGE>
Donald W. Britton Director of the Board of American General Life Insurance
Company since April 1999. President of American General
Life Insurance Company since April 2000. President of
First Colony Life, Lynchburg, Virginia (1996 - April
1999) and Executive Vice President of First Colony Life
(1992 - 1996).
David A. Fravel Director of American General Life Insurance Company since
November 1996. Elected Executive Vice President in April
1998. Previously held position of Senior Vice President
of American General Life Insurance Company since November
1996. Senior Vice President of Massachusetts Mutual,
Springfield, Missouri (March 1996-June 1996); Vice
President, New Business, Connecticut Mutual Life
Insurance Company, Hartford, Connecticut (December 1978-
March 1996).
David L. Herzog Director, Executive Vice President and Chief Financial
Officer of American General Life Insurance Company since
March 2000. Vice President of General American, St.
Louis, Missouri (June 1991 - February 2000).
John V. LaGrasse Director of American General Life Insurance Company since
August 1996. Chief Technology Officer of American General
Life Insurance Company since April, 2000. Elected
Executive Vice President in July 1998. Previously held
position of Senior Vice President of American General
Life Insurance Company since August 1996. Director of
Citicorp Insurance Services, Inc., Dover, Delaware
(1986-1996).
Paul L. Mistretta Executive Vice President of American General Life
Insurance Company since July 1999. Senior Vice President
of First Colony Life Insurance, Lynchburg, Virginia
(1992 - July 1999).
Brian D. Murphy Executive Vice President of American General Life
Insurance Company since July 1999. Previously held
position of Senior Vice President-Insurance Operations of
American General Life Insurance Company since April 1998.
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).
46
<PAGE>
Don M. Ward Executive Vice President of American General Life
Insurance Company since April 2000. Senior Vice President
of American General Life Insurance Company since February
1998. Vice President of Pacific Life Insurance Company,
Newport Beach, CA (1991 - February 1998).
Thomas M. Zurek Director and Executive Vice President of American
General Life Insurance Company since April 1999. Elected
General Counsel in December 1998. Previously held various
positions with American General Life Insurance Company
including Senior Vice President since December 1998 and
Vice President since October 1998. 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).
Wayne A. Barnard Senior Vice President of American General Life Insurance
Company since November 1997. Previously held various
positions with American General Life Insurance Company
including Vice President since February 1991.
Robert M. Beuerlein Senior Vice President and Chief Actuary of American
General Life Insurance Company since September 1999.
Previously held position of Vice President of American
General Life Insurance Company since December 1998.
Director, Senior Vice President and Chief Actuary of The
Franklin Life Insurance Company, Springfield, Illinois
(January 1991 - June 1999).
David J. Dietz Senior Vice President - Corporate Markets Group of
American General Life Insurance Company since January
1999. President and Chief Executive Officer - Individual
Insurance Operations of The United States Life Insurance
Company in the City of New York since September, 1997.
President of Prudential Select Life, Newark, New Jersey
(August 1990 - September 1997).
William Guterding Senior Vice President of American General Life Insurance
Company since April 1999. Senior Vice President and Chief
Underwriting Officer of The United States Life Insurance
Company in the City of New York since October, 1980.
Robert F. Herbert, Jr. Senior Vice President and Treasurer of American General
Life Insurance Company since May 1996, and Controller
since February 1991.
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<PAGE>
Simon J. Leech Senior Vice President for American General Life Insurance
Company since July 1997. Previously held various
positions with American General Life Insurance Company
since 1981, including Director of Policy Owners' Service
Department in 1993, and Vice President-Policy
Administration in 1995.
Royce G. Imhoff, II Director for American General Life Insurance Company
since November 1997. Previously held various positions
with American General Life Insurance Company including
Vice President since August 1996 and Regional Director
since 1992.
The principal business address of each person listed above is our Home Office;
except that the street number for Messrs. Fravel, LaGrasse, Martin, Herzog,
Britton, Mistretta, Barnard and Zurek is 2929 Allen Parkway, the street number
for Mr. Ward is 2727 Allen Parkway, the street number for Mr. Guterding is 125
Maiden Lane, New York, New York.
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
Rodney O. Martin, Jr. Director and Vice Chairman
American General Life Companies
2929 Allen Parkway
Houston, TX 77019
Donald W. Britton Director and Assistant
American General Life Companies Vice President
2929 Allen Parkway
Houston, TX 77019
Royce G. Imhoff, II Director
American General Life Companies
2727-A Allen Parkway
Houston, Texas 77019
48
<PAGE>
Alice T. Kane Director
American General Retirement Services
125 Maiden Lane
New York, New York 10038
John A. Kalbaugh Vice President -
American General Life Companies Chief Marketing Officer
2727 Allen Parkway
Houston, TX 77019
Sander J. Ressler Vice President,
2727 Allen Parkway Chief Compliance Officer and
Houston, TX 77019 Secretary
Don M. Ward Vice President
American General Life Companies
2727 Allen Parkway
Houston, TX 77019
Pauletta P. Cohn Assistant Secretary
American General Life Companies
2727 Allen Parkway
Houston, TX 77019
Robert F. Herbert, Jr. Assistant Treasurer
American General Life Companies
2727-A Allen Parkway
Houston, Texas 77019
D. Lynne Walters Assistant Tax Officer
2929 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, Deputy General Counsel of the American General Life Companies, an
affiliate of AGL, has opined as to the validity of the Policy.
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<PAGE>
ACCOUNTING AND AUDITING EXPERTS
The consolidated balance sheets of AGL as of December 31, 1999 and 1998 and
the related consolidated income statements, statements of comprehensive income,
statements of shareholders' equity, and statements of cash flows for the year
ended December 31, 1999, 1998 and 1997 included in this prospectus have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere in this prospectus, and are included in this
prospectus in reliance upon such report of Ernst & Young LLP given on the
authority of such firm as experts in accounting and auditing. The address of
Ernst & Young LLP is One Houston Center, 1221 McKinney, Suite 2400, Houston,
Texas 77010-2007.
ACTUARIAL EXPERT
Actuarial matters have been examined by Wayne A. Barnard, who is Senior Vice
President 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
Policy.
SERVICES AGREEMENTS
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 Corporate America - Variable Policy.
We have entered into various services agreements with most of the advisers or
administrators for the Mutual Funds. We receive fees for the administrative
services we perform. These fees do not result in any additional charges under
the Policies that are not described under "What charges will AGL deduct from my
investment in a Policy?"
We have entered into a services agreement with PIMCO Variable Insurance Trust
under which we receive fees paid directly by this Mutual Fund for services we
perform.
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
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<PAGE>
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.
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 Corporate America - Variable Policy. They should not be considered as
bearing upon the investment experience of Separate Account VL-R. No financial
statements of Separate Account VL-R are included because, at the date of this
prospectus, none of the 40 divisions of Separate Account VL-R were available
under the Corporate America - Variable policies.
CONSOLIDATED FINANCIAL STATEMENTS OF PAGE TO
AMERICAN GENERAL LIFE INSURANCE COMPANY SEE IN THIS
--------------------------------------- PROSPECTUS
----------
Unaudited Balance Sheet as of June 30, 2000......................... Q-1
Unaudited Income Statement for the six months ended June 30, 2000... Q-3
Report of Ernst & Young, LLP Independent Auditors................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998........ F-2
Consolidated Income Statements for the years ended
December 31, 1999, 1998 and 1997............................... F-4
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997............ F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997........................ F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997......................... F-7
Notes to Consolidated Financial Statements.......................... F-8
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<PAGE>
American General Life Insurance Company
Consolidated Balance Sheet
(Unaudited)
June 30
2000
----------------
(In Thousands)
ASSETS
Investments:
Fixed maturity securities, at fair value (amortized cost -
$27,397,632) $26,486,802
Equity securities, at fair value (cost - $269,013) 276,251
Mortgage loans on real estate 1,955,401
Policy loans 1,262,556
Investment real estate 129,185
Other long-term investments 202,551
Short-term investments 1,036,782
-----------
Total investments 31,349,528
Cash 62,715
Investment in Parent Company (cost - $7,958) 42,676
Indebtedness from affiliates 44,248
Accrued investment income 475,107
Accounts receivable 228,854
Deferred policy acquisition costs 2,120,995
Property and equipment 69,419
Other assets 251,246
Assets held in separate accounts 24,640,270
-----------
Total assets $59,285,058
===========
Q-1
<PAGE>
American General Life Insurance Company
Consolidated Balance Sheet
(Unaudited)
June 30
2000
----------------
(In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $29,527,010
Other policy claims and benefits payable 52,437
Other policyholders' funds 372,669
Federal income taxes 288,307
Indebtedness to affiliates 4,690
Other liabilities 1,473,684
Liabilities related to separate accounts 24,640,270
-----------
Total liabilities 56,359,067
Shareholders' equity:
Common stock, $10 par value, 600,000 shares
authorized, issued, and outstanding 6,000
Preferred stock, $100 par value, 8,500 shares
authorized, issued, and outstanding 850
Additional paid-in capital 1,372,378
Accumulated other comprehensive income/(loss) (428,386)
Retained earnings 1,975,149
-----------
Total shareholders' equity 2,925,991
-----------
Total liabilities and shareholders' equity $59,285,058
===========
Q-2
<PAGE>
American General Life Insurance Company
Consolidated Income Statement
(Unaudited)
Six months
ended June 30
2000
----------------
(In Thousands)
Revenues:
Premiums and other considerations $ 325,542
Net investment income 1,169,590
Net realized investment loss (62,863)
Other 65,461
----------
Total revenues 1,497,730
Benefits and expenses:
Benefits 884,923
Operating costs and expenses 284,589
----------
Total benefits and expenses 1,169,512
----------
Income before income tax expense 328,218
Income tax expense 110,407
----------
Net income $ 217,811
==========
Q-3
<PAGE>
[LETTERHEAD OF ERNST & YOUNG]
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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American General
Life Insurance Company and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
------------------------------
Ernst & Young LLP
March 1,2000
F-1
<PAGE>
American General Life Insurance Company
Consolidated Balance Sheets
DECEMBER 31
1999 1998
-----------------------------
(In Thousands)
ASSETS
Investments:
Fixed maturity securities, at fair value
(amortized cost - $27,725,167 in 1999 and $27,029,409 $28,906,261
$27,425,605 in 1998)
Equity securities, at fair value (cost -
$198,640 in 1999 and $193,368 in 1998) 237,065 211,684
Mortgage loans on real estate 1,918,956 1,557,268
Policy loans 1,234,729 1,170,686
Investment real estate 125,563 119,520
Other long-term investments 129,155 86,194
Short-term investments 123,779 222,949
----------------------------
Total investments 30,798,656 32,274,562
Cash 45,983 117,675
Investment in Parent Company (cost - $8,597 in
1999 and 1998) 53,083 54,570
Indebtedness from affiliates 75,195 161,096
Accrued investment income 482,652 459,961
Accounts receivable 186,592 196,596
Deferred policy acquisition costs 1,956,653 1,087,718
Property and equipment 78,908 66,197
Other assets 250,299 206,318
Assets held in separate accounts 23,232,419 15,616,020
----------------------------
Total assets $57,160,440 $50,240,713
============================
See accompanying notes.
F-2
<PAGE>
American General Life Insurance Company
Consolidated Balance Sheets
DECEMBER 31
1999 1998
-----------------------------
(In Thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $29,901,842 $29,353,022
Other policy claims and benefits payable 53,326 54,278
Other policyholders' funds 371,632 398,587
Federal income taxes 375,332 677,315
Indebtedness to affiliates 7,086 18,173
Other liabilities 372,416 554,783
Liabilities related to separate accounts 23,232,419 15,616,020
----------------------------
Total liabilities 54,314,053 46,672,178
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 1,371,687 1,368,089
Accumulated other comprehensive (loss) income (356,865) 679,107
Retained earnings 1,824,715 1,514,489
----------------------------
Total shareholder's equity 2,846,387 3,568,535
----------------------------
Total liabilities and shareholder's equity $57,160,440 $50,240,713
============================
See accompanying notes.
F-3
<PAGE>
American General Life Insurance Company
Consolidated Statements of Income
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------
(In Thousands)
Revenues:
Premiums and other considerations $ 540,029 $ 470,238 $ 428,721
Net investment income 2,348,196 2,316,933 2,198,623
Net realized investment gains 5,351 (33,785) 29,865
(losses)
Other 82,581 69,602 53,370
-----------------------------------------
Total revenues 2,976,157 2,822,988 2,710,579
Benefits and expenses:
Benefits 1,719,375 1,788,417 1,757,504
Operating costs and expenses 495,606 467,067 379,012
Interest expense 74 15 782
Litigation settlement - 97,096 -
-----------------------------------------
Total benefits and expenses 2,215,055 2,352,595 2,137,298
-----------------------------------------
Income before income tax expense 761,102 470,393 573,281
Income tax expense 263,196 153,719 198,724
------------------------------------------
Net income $ 497,906 $ 316,674 $ 374,557
==========================================
See accompanying notes.
F-4
<PAGE>
American General Life Insurance Company
Consolidated Statements of Comprehensive Income
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------
(In Thousands)
Net income $ 497,906 $ 316,674 $ 374,557
Other comprehensive income:
Gross change in unrealized gains
(losses) on securities (pretax:
($1,581,500) $341,000; $318,700) (1,027,977) 222,245 207,124
Less: gains (losses) realized in 7,995 (29,336) (1,251)
net income
----------------------------------------
Change in net unrealized gains
(losses) on securities (pretax:
($1,593,800) $387,000; $320,600) (1,035,972) 251,581 208,375
----------------------------------------
Comprehensive (loss) income $ (538,066) $ 568,255 $ 582,932
========================================
See accompanying notes.
F-5
<PAGE>
American General Life Insurance Company
Consolidated Statements of Shareholder's Equity
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------
(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 1,368,089 1,184,743 933,342
Capital contribution from Parent
Company - 182,284 250,000
Other changes during year 3,598 1,062 1,401
-------------------------------------------
Balance at end of year 1,371,687 1,368,089 1,184,743
Accumulated other comprehensive
(loss) income:
Balance at beginning of year 679,107 427,526 219,151
Change in unrealized gains
(losses) on securities (1,035,972) 251,581 208,375
------------------------------------------
Balance at end of year (356,865) 679,107 427,526
Retained earnings:
Balance at beginning of year 1,514,489 1,442,495 1,469,618
Net income 497,906 316,674 374,557
Dividends paid (187,680) (244,680) (401,680)
------------------------------------------
Balance at end of year 1,824,715 1,514,489 1,442,495
-------------------------------------------
Total shareholder's equity $2,846,387 $3,568,535 $3,061,614
===========================================
See accompanying notes.
F-6
<PAGE>
American General Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
OPERATING ACTIVITIES
Net income $ 497,906 $ 316,674 $ 374,557
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts receivable 10,004 11,613 (37,752)
Change in future policy benefits and other
policy claims (2,422,221) (866,428) (1,143,736)
Amortization of policy acquisition costs 101,066 125,062 115,467
Policy acquisition costs deferred (307,854) (244,196) (219,339)
Change in other policyholders' funds (26,955) 273 21,639
Provision for deferred income tax expense 85,257 15,872 13,264
Depreciation 24,066 19,418 16,893
Amortization (30,894) (26,775) (28,276)
Change in indebtedness to/from affiliates 74,814 (51,116) (8,695)
Change in amounts payable to brokers (43,321) (894) 31,769
Net loss (gain) on sale of investments 45,379 37,016 (29,865)
Other, net (170,413) 57,307 30,409
--------------------------------------------------------------------
Net cash used in operating activities (2,163,166) (606,174) (863,665)
INVESTING ACTIVITIES
Purchases of investments and loans made (44,508,908) (28,231,615) (29,638,861)
Sales or maturities of investments and
receipts from repayment of loans 43,879,377 26,656,897 28,300,238
Sales and purchases of property, equipment,
and software, net (87,656) (105,907) (9,230)
--------------------------------------------------------------------
Net cash used in investing activities (717,187) (1,680,625) (1,347,853)
FINANCING ACTIVITIES
Policyholder account deposits 5,747,658 4,688,831 4,187,191
Policyholder account withdrawals (2,754,915) (2,322,307) (1,759,660)
Dividends paid (187,680) (244,680) (401,680)
Capital contribution from Parent - 182,284 250,000
Other 3,598 1,062 1,401
--------------------------------------------------------------------
Net cash provided by financing activities 2,808,661 2,305,190 2,277,252
--------------------------------------------------------------------
(Decrease) increase in cash (71,692) 18,391 65,734
Cash at beginning of year 117,675 99,284 33,550
--------------------------------------------------------------------
Cash at end of year $ 45,983 $ 117,675 $ 99,284
====================================================================
</TABLE>
Interest paid amounted to approximately $2,026,000, $420,000, and $1,004,000, in
1999, 1998, and 1997, respectively.
See accompanying notes.
F-7
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1999
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 life 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-8
<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,
1999.
Statutory financial statements differ from GAAP. Significant differences were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
Net income:
<S> <C> <C> <C>
Statutory net income (1999 balance is
unaudited) $ 350,294 $ 259,903 $ 327,813
Deferred policy acquisition costs and cost
of insurance purchased 200,285 116,597 103,872
Deferred income taxes (86,456) (53,358) (13,264)
Adjustments to policy reserves 23,110 52,445 (30,162)
Goodwill amortization (2,437) (2,033) (2,067)
Net realized gain on investments 2,246 41,488 20,139
Litigation settlement - (63,112) -
Other, net 10,864 (35,256) (31,774)
--------------------------------------------------------
GAAP net income $ 497,906 $ 316,674 $ 374,557
========================================================
Shareholders' equity:
Statutory capital and surplus (1999 balance
is unaudited) $1,753,570 $1,670,412 $1,636,327
Deferred policy acquisition costs and cost
of insurance purchased 1,975,667 1,109,831 835,031
Deferred income taxes (350,258) (698,350) (535,703)
Adjustments to policy reserves (202,150) (274,532) (319,680)
Acquisition-related goodwill 52,317 54,754 51,424
Asset valuation reserve ("AVR") 351,904 310,564 255,975
Interest maintenance reserve ("IMR") 53,226 27,323 9,596
Investment valuation differences (683,500) 1,487,658 1,272,339
Surplus from separate accounts (180,362) (174,447) (150,928)
Other, net 75,973 55,322 7,233
--------------------------------------------------------
Total GAAP shareholders' equity $2,846,387 $3,568,535 $3,061,614
========================================================
</TABLE>
F-9
<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. At
December 31, 1999 and 1998, insurance investment contracts of $25.9 million and
$24.1 million, respectively, were included in the Company's liabilities.
F-10
<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, 1999 and 1998. 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 1999, the Company maintained a trading portfolio of certain fixed
maturity securities. Trading securities are recorded at fair value. Unrealized
and realized gains (losses) are included in net investment income. The Company
held no trading securities at December 31, 1999, and trading securities did not
have a material effect on net investment income in 1999.
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-11
<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 and any amortization of premium or discount on
delinquent mortgage loans is recorded as income only when actual interest
payments are 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-12
<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, 1999, CIP
of $19.0 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-13
<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 insurance and 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, 1999.
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 $28 million, $63 million, and $25 million, during
1999, 1998, and 1997, 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. Benefits paid and future policy benefits
related to ceded insurance contracts are recorded as reinsurance receivables.
F-14
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (Continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.11 PARTICIPATING POLICY CONTRACTS
Participating life insurance accounted for approximately 1% and 2% of life
insurance in force at December 31, 1999 and 1998, respectively.
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 $4.6 million in 1999.
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.
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.
F-15
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (Continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.13 ACCOUNTING CHANGES
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") 133, Accounting for Derivative
Instruments and Hedging Activities, which requires all derivative instruments to
be recognized at fair value in the balance sheet. Changes in the fair value of a
derivative instrument will be reported as earnings or other comprehensive
income, depending upon the intended use of the derivative instrument. The
Company will adopt SFAS 133 on January 1, 2001. The Company does not expect
adoption to have a material impact on the Company's results of operations and
financial position.
2. INVESTMENTS
2.1 INVESTMENT INCOME
Investment income by type of investment was as follows:
1999 1998 1997
-------------------------------------------
(In Thousands)
Investment income:
Fixed maturities $2,118,794 $2,101,730 $1,966,528
Equity securities 17,227 1,813 1,067
Mortgage loans on real estate 134,878 148,447 157,035
Investment real estate 20,553 23,139 22,157
Policy loans 69,684 66,573 62,939
Other long-term investments 7,539 3,837 3,135
Short-term investments 24,874 15,492 8,626
Investment income from affiliates 8,695 10,536 11,094
-------------------------------------------
Gross investment income 2,402,244 2,371,567 2,232,581
Investment expenses 54,048 54,634 33,958
-------------------------------------------
Net investment income $2,348,196 $2,316,933 $2,198,623
===========================================
The carrying value of investments that produced no investment income during 1999
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:
1999 1998 1997
-------------------------------------------
(In Thousands)
Fixed maturities:
Gross gains $ 118,427 $ 20,109 $ 42,966
Gross losses (102,299) (62,657) (34,456)
-------------------------------------------
Total fixed maturities 16,128 (42,548) 8,510
Equity securities 793 645 1,971
Other investments (11,570) 8,118 19,384
-------------------------------------------
Net realized investment gains
(losses) 5,351 (33,785) 29,865
before tax
Income tax expense (benefit) 1,874 (11,826) 10,452
Net realized investment gains
(losses) $ 3,477 $(21,959) $ 19,413
after tax
===========================================
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, 1999 and 1998 were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------------------------------------------------
(In Thousands)
DECEMBER 31, 1999
Fixed maturity securities:
Corporate securities:
Investment-grade $19,455,518 $134,003 $(704,194) $18,885,326
Below investment-grade 1,368,494 11,863 (114,260) 1,266,098
Mortgage-backed securities* 6,195,003 45,022 (74,746) 6,165,279
U.S. government obligations 276,621 15,217 (2,376) 289,462
Foreign governments 245,782 5,774 (1,767) 249,789
State and political 154,034 499 (10,836) 143,697
subdivisions
Redeemable preferred stocks 29,715 43 - 29,758
-------------------------------------------------
Total fixed maturity $27,725,167 $212,421 $(908,179) $27,029,409
securities
==================================================
Equity securities $ 198,640 $ 39,381 $ (956) $ 237,065
==================================================
Investment in Parent Company $ 8,597 $ 44,486 $ - $ 53,083
==================================================
* 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)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------------------------------------------------
(In Thousands)
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 86,778 4,796 (187) 91,387
subdivisions
Redeemable preferred stocks 20,313 - (17) 20,296
-------------------------------------------------
Total fixed maturity $27,425,605 $1,556,487 $(75,831) $28,906,261
securities
=================================================
Equity securities $ 193,368 $ 19,426 $ (1,110) $ 211,684
=================================================
Investment in Parent Company $ 8,597 $ 45,973 $ - $ 54,570
=================================================
* 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:
1999 1998
-------------------------------
(In Thousands)
Gross unrealized gains $ 296,288 $1,621,883
Gross unrealized losses (909,135) (76,941)
DPAC and other fair value adjustments 200,353 (488,120)
Deferred federal income taxes 55,631 (377,718)
Net unrealized (losses) gains on securities $(356,863) $ 679,104
===============================
The contractual maturities of fixed maturity securities at December 31, 1999
were as follows:
1999 1998
--------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------------------------------------------------------
(In thousands) (In thousands)
Fixed maturity
securities, excluding
mortgage-backed
securities:
Due in one year or $ 810,124 $ 813,683 $ 531,496 $ 536,264
less
Due after one year
through five years 5,380,557 5,394,918 5,550,665 5,812,581
Due after five years
through ten years 8,350,207 8,080,065 9,229,980 9,747,761
Due after ten years 6,988,799 6,575,461 5,754,220 6,156,950
Mortgage-backed 6,195,480 6,165,282 6,359,244 6,652,705
securities
--------------------------------------------------------
Total fixed maturity $27,725,167 $27,029,409 $27,425,605 $28,906,261
securities
========================================================
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 $12.3 billion,
$5.4 billion, and $14.8 billion during 1999, 1998, and 1997, 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, 1999 and 1998:
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
----------------------------------------------
(In Millions)
DECEMBER 31, 1999
Geographic distribution:
South Atlantic $ 470 24.6% 0.2%
Pacific 363 18.9 7.8
West South Central 185 9.6 0.0
East South Central 144 7.5 0.0
East North Central 256 13.3 0.0
Mid-Atlantic 323 16.8 0.9
Mountain 107 5.6 13.8
West North Central 43 2.2 0.0
New England 44 2.3 0.0
Allowance for losses (16) (0.8) 0.0
-------------------------------
Total $1,919 100.0% 2.4%
===============================
Property type:
Retail $ 628 32.6% 2.5%
Office 746 38.9 4.2
Industrial 302 15.7 0.0
Apartments 189 9.9 0.0
Hotel/motel 46 2.4 0.0
Other 24 1.3 0.2
Allowance for losses (16) (0.8) 0.0
-------------------------------
Total $1,919 100.0% 2.4%
===============================
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)
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
----------------------------------------------
(In Millions)
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%
===============================
Impaired mortgage loans on real estate and related interest income is not
material.
F-22
<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, 1999 DECEMBER 31, 1998
-----------------------------------------------------------------------------------------
CARRYING CARRYING
COST FAIR VALUE AMOUNT COST FAIR VALUE AMOUNT
-----------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
Fixed maturities:
Bonds:
<S> <C> <C> <C> <C> <C> <C>
United States
government and
government agencies $ 276,621 $ 289,462 $ 289,462 $ 417,822 $ 486,965 $ 486,965
and authorities
States, municipalities,
and political 154,034 143,697 143,697 86,778 91,387 91,387
subdivisions
Foreign governments 245,782 249,789 249,789 331,699 353,887 353,887
Public utilities 1,468,758 1,465,129 1,465,129 1,777,172 1,895,326 1,895,326
Mortgage-backed 6,195,003 6,165,279 6,165,279 6,359,242 6,652,703 6,652,703
securities
All other corporate 19,355,254 18,686,295 18,686,295 18,432,579 19,405,697 19,405,697
bonds**
Redeemable preferred 29,715 29,758 29,758 20,313 20,296 20,296
stocks
---------------------------------------------------------------------------------------------
Total fixed maturities 27,725,167 27,029,409 27,029,409 27,425,605 28,906,261 28,906,261
Equity securities:
Common stocks:
Banks, trust, and
insurance companies - - - - - -
Industrial,
miscellaneous, and 180,849 219,089 219,089 176,321 211,684 211,684
other
Nonredeemable preferred
stocks 17,791 17,976 17,976 17,047 - -
---------------------------------------------------------------------------------------------
Total equity securities 198,640 237,065 237,065 193,368 211,684 211,684
Mortgage loans on real 1,918,956 1,829,212 1,918,956 1,557,268 1,607,599 1,557,268
estate*
Investment real estate 125,563 XXXXXXX 125,563 119,520 xxxxxxx 119,520
Policy loans 1,234,729 1,205,056 1,234,729 1,170,686 1,252,409 1,170,686
Other long-term investments 129,155 XXXXXXX 129,155 86,194 xxxxxxx 86,194
Short-term investments 123,779 XXXXXXX 123,779 222,949 xxxxxxx 222,949
---------------------------------------------------------------------------------------------
Total investments $31,455,989 $ XXXXXXX $ 30,798,656 $ 30,775,590 $ xxxxxxx $ 32,274,562
============================================================================================
</TABLE>
* Amount is net of allowance for losses of $16 million and $13 million at
December 31, 1999 and 1998, respectively.
** Includes derivative financial instruments with negative fair values of $4.7
million and $1.0 million and positive fair values of $2.3 million and $24.3
million at December 31, 1999 and 1998, respectively.
F-23
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. DEFERRED POLICY ACQUISITIONS 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:
1999 1998 1997
--------------------------------------
(In Thousands)
Balance at January 1 $1,087,718 $ 835,031 $1,042,783
Capitalization 307,854 244,196 219,339
Amortization (101,066) (125,062) (115,467)
Effect of realized and unrealized
gains (losses) on securities 662,147 133,553 (311,624)
--------------------------------------
Balance at December 31 $1,956,653 $1,087,718 $ 835,031
=======================================
4. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31
1999 1998
------------------------------
(In Thousands)
Goodwill $ 52,317 $ 54,754
American General Corporation CBO (Collateralized
Bond Obligation) 98-1 Ltd. - 9,740
Cost of insurance purchased ("CIP") 19,014 22,113
Computer software 117,571 78,775
Other 61,397 40,936
------------------------------
Total other assets $250,299 $206,318
==============================
F-24
<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, 1999, was as follows:
1999
------------
(In
Thousands)
Balance at January 1 $ 22,113
Acquisition of business -
Accretion of interest at 5.02% 926
Amortization (4,025)
---------
Balance at December 31 $ 19,014
=========
5. FEDERAL INCOME TAXES
5.1 TAX LIABILITIES
Income tax liabilities were as follows:
DECEMBER 31
1999 1998
-----------------------------
(In Thousands)
Current tax (receivable) payable $ 25,074 $ (21,035)
Deferred tax liabilities, applicable to:
Net income 405,889 320,632
Net unrealized investment gains (55,631) 377,718
-----------------------------
Total deferred tax liabilities 350,258 698,350
-----------------------------
Total current and deferred tax liabilities $375,332 $677,315
=============================
F-25
<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:
1999 1998
--------------------------
(In Thousands)
Deferred tax liabilities applicable to:
Deferred policy acquisition costs $ 601,678 $ 307,025
Basis differential of investments - 590,661
Other 171,763 150,189
---------------------------
Total deferred tax liabilities 773,441 1,047,875
Deferred tax assets applicable to:
Policy reserves (215,465) (212,459)
Basis differential of investments (158,421) -
Other (141,236) (137,066)
--------------------------
Total deferred tax assets before valuation
allowance (515,122) (349,525)
Valuation allowance 91,939 -
--------------------------
Total deferred tax assets, net of valuation
allowance (423,183) (349,525)
--------------------------
Net deferred tax liabilities $ 350,258 $ 698,350
==========================
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 $88.2 million at December 31, 1999. At current corporate rates, the
maximum amount of tax on such income is approximately $30.9 million. Deferred
income taxes on these accumulations are not required because no distributions
are expected.
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 income tax expense for the years were as follows:
1999 1998 1997
-------------------------------------
(In Thousands)
Current expense $176,725 $134,344 $185,460
Deferred expense (benefit):
Deferred policy acquisition cost 65,377 33,230 27,644
Policy reserves (22,654) 2,189 (27,496)
Basis differential of investments (4,729) 11,969 3,769
Litigation settlement 22,641 (33,983) -
Year 2000 - (9,653) -
Internally developed software 18,654 - -
Other, net 7,182 15,623 9,347
-------------------------------------
Total deferred expense 86,471 19,375 13,264
-------------------------------------
Income tax expense $263,196 $153,719 $198,724
=====================================
5.2 TAX EXPENSE
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.
1999 1998 1997
-------------------------------------
(In Thousands)
Income tax at statutory percentage
of GAAP pretax income $266,386 $164,638 $200,649
Tax-exempt investment income (16,423) (11,278) (9,493)
Goodwill 853 712 723
Other 12,380 (353) 6,845
-------------------------------------
Income tax expense $263,196 $153,719 $198,724
=====================================
F-27
<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 $126 million, $159 million, and $168
million in 1999, 1998, and 1997, 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 1992. The IRS is
currently examining tax returns for 1993 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, 1999 DECEMBER 31, 1998
------------------------------------------------------------
PAR VALUE BOOK VALUE PAR VALUE BOOK VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
(In Thousands)
American General
Corporation, 9 3/8%, $ 4,725 $ 3,410 $ 4,725 $ 3,345
due 2008
American General
Corporation, Promissory
notes, due 2004 12,232 12,232 14,679 14,679
American General
Corporation, Restricted
Subordinated Note,
13 1/2%, due 2002 27,378 27,378 29,435 29,435
------------------------------------------------------------
Total notes receivable
from affiliates 44,335 43,020 48,839 47,459
Accounts receivable from
affiliates - 32,175 - 113,637
------------------------------------------------------------
Indebtedness from $44,335 $75,195 $48,839 $161,096
affiliates
============================================================
</TABLE>
F-28
<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 $55,318,000, $46,921,000, and $33,916,000 for such services in
1999, 1998, and 1997, respectively. Accounts payable for such services at
December 31, 1999 and 1998 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, to a number of American General Corporation's life
insurance subsidiaries. The Company received approximately $138,885,000,
$66,550,000, and $6,455,000 for such services and rent in 1999, 1998, and 1997,
respectively. Accounts receivable for rent and services at December 31, 1999 and
1998 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.
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. American
General Corporation follows the intrinsic value method of accounting for stock
options as prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Therefore, the 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-29
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
Under an alternative accounting method of accounting under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
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>
1999 1998 1997
---------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net income as reported $497,906 $316,674 $374,557
Net income pro forma $495,331 $315,078 $373,328
</TABLE>
The average fair values of the options granted during 1999, 1998, and 1997 were
$17.06, $15.38, and $10.33, 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>
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.5% 2.5% 3.0%
Expected volatility 24.4% 23.0% 22.0%
Risk-free interest rate 4.95% 5.76% 6.4%
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 71% and 26%, 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-30
<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 $59 million.
The components of pension expense and underlying assumptions were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 3,575 $ 3,693 $ 1,891
Interest cost 7,440 6,289 2,929
Expected return on plan assets (12,670) (9,322) (5,469)
Amortization (820) (557) 195
Pension (income) expense $ (2,475) $ 103 $ (454)
===============================================
Discount rate on benefit obligation 7.75% 7.00% 7.25%
Rate of increase in compensation levels 4.25% 4.25% 4.00%
Expected long-term rate of return on
plan assets 10.35% 10.25% 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>
1999 1998
-------------------------------
(In Thousands)
<S> <C> <C>
Projected benefit obligation (PBO) $100,600 $ 96,554
Plan assets at fair value 145,863 120,898
-------------------------------
Plan assets at fair value in excess of PBO 45,263 24,344
Other unrecognized items, net (26,076) (10,176)
-------------------------------
Prepaid pension expense $ 19,187 $ 14,168
===============================
</TABLE>
F-31
<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>
1999 1998
-------------------------------
(In Thousands)
<S> <C> <C>
PBO at January 1 $ 96,554 $43,393
Service and interest costs 11,015 9,982
Benefits paid (4,919) (1,954)
Actuarial loss (12,036) 17,089
Amendments, transfers, and acquisitions 9,986 28,044
-------------------------------
PBO at December 31 $100,600 $96,554
===============================
</TABLE>
The change in the fair value of plan assets was as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
(In Thousands)
<S> <C> <C>
Fair value of plan assets at January 1 $120,898 $ 80,102
Actual return on plan assets 17,934 12,269
Benefits paid (4,919) (1,954)
Acquisitions and other 11,950 30,481
-------------------------------
Fair value of plan assets at December 31 $145,863 $120,898
===============================
</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, with 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-32
<PAGE>
American General Life Insurance Company
Notes to Consolidate 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 1999, 1998, and 1997 was $254,000, $60,000,
and $601,000, respectively. The accrued liability for postretirement benefits
was $18.8 million and $19.2 million at December 31, 1999 and 1998, 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-33
<PAGE>
American General Life Insurance Company
Notes to Consolidate 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
sheets 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-34
<PAGE>
American General Life Insurance Company
Notes to Consolidate 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>
1999 1998
-------------------------------
(Dollars in Millions)
<S> <C> <C>
Interest rate swap agreements to receive fixed rate:
Notional amount $ 160 $ 369
Average receive rate 6.73% 6.06%
Average pay rate 6.55% 5.48%
Currency swap agreements (receive U.S.
dollars/pay Canadian dollars):
Notional amount (in U.S. dollars) $ 124 $ 124
Average exchange rate 1.50 1.50
Currency swap agreements (receive U.S. dollars/pay
Australian dollars):
Notional amount (in U.S. dollars) $ 23 $ -
Average exchange rate 0.65 -
</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.
F-35
<PAGE>
American General Life Insurance Company
Notes to Consolidate Financial Statements (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.3 CALL SWAPTIONS (CONTINUED)
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.
Swaptions at December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
(Dollars in Billions)
<S> <C> <C>
Call swaptions:
Notional amount $3.78 $1.76
Average strike rate 4.52% 3.97%
Put swaptions:
Notional amount $2.14 $1.05
Average strike rate 8.60% 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-36
<PAGE>
American General Life Insurance Company
Notes to Consolidate 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.
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-37
<PAGE>
American General Life Insurance Company
Notes to Consolidate 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 $187 million, $244 million, and
$401 million, in dividends on common stock to AGC Life Insurance Company in
1999, 1998, and 1997, respectively. The Company also paid $680 thousand per year
in dividends on preferred stock to an affiliate, The Franklin Life Insurance
Company, in 1999, 1998, and 1997.
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, 1999,
approximately $2.6 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 $1.9 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-38
<PAGE>
American General Life Insurance Company
Notes to Consolidate 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.
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 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. All settlements
were finalized in 1999.
The Company is party to various other lawsuits and proceedings arising in the
ordinary course of business. Many of these lawsuits and proceedings, including
those filed by individuals who have excluded themselves from the market conduct
settlement, and lawsuits relating to policies not covered by the market conduct
settlements, 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-39
<PAGE>
American General Life Insurance Company
Notes to Consolidate 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, 1999 and 1998, the Company has accrued $8.6 million and
$6.0 million, respectively, for guaranty fund assessments, net of $3.4 million
and $3.7 million, respectively, of premium tax deductions. The Company has
recorded receivables of $4.4 million and $6.2 million at December 31, 1999 and
1998, respectively, for expected recoveries against the payment of future
premium taxes. Expenses incurred for guaranty fund assessments were $2.1
million, $3.6 million, and $2.1 million in 1999, 1998, and 1997, respectively.
F-40
<PAGE>
American General Life Insurance Company
Notes to Consolidate Financial Statements (continued)
13. REINSURANCE
Reinsurance transactions for the years ended December 31, 1999, 1998, and 1997
were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Life insurance in force $50,060,334 $17,056,734 $524,062 $33,527,662 1.56%
==============================================================
Premiums:
Life insurance and annuities $ 101,900 $ 49,530 $ 252 $ 52,622 0.48%
Accident and health insurance 977 84 - 893 0.00%
--------------------------------------------------------------
Total premiums $ 102,877 $ 49,614 $ 252 $ 53,515 0.47%
===============================================================
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%
============================================================
</TABLE>
Reinsurance recoverable on paid losses was approximately $8.0 million, $7.7
million, and $2.3 million at December 31, 1999, 1998, and 1997, respectively.
Reinsurance recoverable on unpaid losses was approximately $10.5 million, $2.5
million, and $3.2 million at December 31, 1999, 1998, and 1997, respectively.
F-41
<PAGE>
American General Life Insurance Company
Notes to Consolidate Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED)
Currently, all of our major technology systems, programs, and applications,
including those which rely on third parties, are operating smoothly following
our transition into 2000. We have experienced no interruptions to normal
business operations, including the processing of customer account data and
transactions. We will continue to monitor our technology systems, including
critical third-party dependencies, as necessary to maintain our Year 2000
readiness. We do not expect any future disruptions, if they occur, to have a
material effect on the Company's results of operations, liquidity, or financial
condition.
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.
F-42
<PAGE>
American General Life Insurance Company
Notes to Consolidate Financial Statements (continued)
15. DIVISION OPERATIONS
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
----------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
----------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retirement Services $2,088 $1,987 $1,859 $ 567 $ 469 $ 398 $ 374 $ 315 $ 261
Life Insurance 883 870 822 191 162 147 123 107 97
---------------------------------------------------------------------------------------
Total divisions 2,971 2,857 2,681 758 631 545 497 422 358
Goodwill
amortization - - - (2) (2) (2) (2) (2) (2)
RG (L) 5 (34) 30 5 (34) 30 3 (22) 19
Nonrecurring items - - - - (125)(a) - - (81)(a) -
----------------------------------------------------------------------------------------
Total consolidated $2,976 $2,823 $2,711 $ 761 $ 470 $ 573 $ 498 $ 317 $ 375
=======================================================================================
</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.
Division balance sheet information was as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
--------------------------------------------------------
December 31
--------------------------------------------------------
In millions 1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Retirement Services $47,323 $41,347 $45,359 $38,841
Life Insurance 9,837 8,894 8,955 7,831
--------------------------------------------------------
Total consolidated $57,160 $50,241 $54,314 $46,672
========================================================
</TABLE>
F-43
<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
------------ ----------
AGL................................................................... 29
amount at risk........................................................ 9
automatic rebalancing................................................. 5
basis................................................................. 32
beneficiary........................................................... 37
cash surrender value.................................................. 18
cash value accumulation test.......................................... 7
close of business..................................................... 39
Code.................................................................. 31
Corporate America - Variable.......................................... 1
cost of insurance rates............................................... 9
daily charge.......................................................... 8
date of issue......................................................... 39
death benefit......................................................... 6
dollar cost averaging................................................. 5
full surrender........................................................ 18
Fund.................................................................. 2
guideline premium test................................................ 7
investment option..................................................... 1
lapse................................................................. 15
loan, loan interest................................................... 18
maturity, maturity date............................................... 19
modified endowment contract........................................... 31
monthly deduction day................................................. 39
monthly insurance charge.............................................. 9
52
<PAGE>
PAGE TO
SEE IN THIS
DEFINED TERM PROSPECTUS
------------ ----------
Mutual Fund........................................................... 2
option 1, 2........................................................... 6
partial surrender..................................................... 18
payment option........................................................ 19
planned periodic premium.............................................. 14
Policy................................................................ 3
Policy loan........................................................... 18
Policy month, year.................................................... 39
premium payments...................................................... 4
premiums.............................................................. 4
prospectus............................................................ 1
reinstate, reinstatement.............................................. 15
SEC................................................................... 2
Separate Account...................................................... 1
Separate Account VL-R................................................. 30
seven-pay test........................................................ 31
specified amount...................................................... 6
surrender............................................................. 18
telephone transactions................................................ 22
transfers............................................................. 15
valuation date, period................................................ 39
We have filed a registration statement relating to Separate Account 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.
53
