<PAGE>
THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK
PROFILE OF THE SELECT RESERVE(SM)
FLEXIBLE PAYMENT VARIABLE AND FIXED GROUP DEFERRED ANNUITY CERTIFICATES
This Profile summarizes information you should know before investing in a
Certificate. The Certificates are more fully described in the Prospectus that
accompanies this Profile. Please read the Prospectus carefully.
1. THE CERTIFICATES. The Select Reserve(SM) Certificates ("Certificates") are
flexible payment variable and fixed group deferred annuity certificates issued
by The United States Life Insurance Company in the City of New York ("USL").
They are primarily designed for investment of after-tax money in non-qualified
annuities in order to provide retirement income. Because of a minimum initial
purchase payment of $50,000, the Certificates may not be suitable for many tax-
qualified plan programs. However, you may wish to use a Certificate for
programs such as a rollover individual retirement annuity.
You may use the Divisions of The United States Life Insurance Company in the
City of New York Separate Account USL VA-R ("Separate Account") for a variable
investment return under a Certificate. Variable returns are based on one or
more series of the mutual funds listed in Section 4, below. You may also use
USL's Fixed Account, for investment in Guarantee Periods with guaranteed
principal and interest.
The Divisions of the Separate Account offer an opportunity to realize better
returns than those guaranteed under the Guarantee Periods. The Divisions
involve risk, however, and you can lose money. You may make transfers among the
Divisions and Guarantee Periods.
The Certificates have an accumulation phase and an annuity phase. During the
accumulation phase, earnings accumulate on a tax-deferred basis and are taxed as
income when you make a withdrawal. When you begin receiving regular annuity
payments, a portion of each payment is taxable. Various distribution methods
are available during the accumulation phase and the annuity phase.
The amount accumulated under your Certificate during the accumulation phase will
determine the amount of annuity payments during the annuity phase.
2. ANNUITY PAYMENTS. Your Certificate's value may be applied to any one of the
following annuity payout options (assuming that you are the annuitant): (1)
Life Annuity - monthly payments during your life; (2) Life Annuity - Period
Certain - monthly payments, during your life, but with payments continuing to
the beneficiary for the balance of the 10, 15 or 20 years (as you choose) if you
die before the end of the chosen period; (3) Joint and Last Survivor-Life -
monthly payments during your life and the life of another payee, with payments
continuing during the lifetime of the survivor; (4) Certain Period - monthly
payments to you or another payee and on your death or the death of the other
payee to a beneficiary for a specified period of time between 5 and 40 years,
with no life contingencies;
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(5) Specified Dollar Amount - monthly payments in amounts not less than $125 nor
more than $200 per year for each $1,000 of the original amount due, with the
balance to a beneficiary if the person receiving the payments dies prior to
completion of the payments.
With the exception of option 5, you may choose annuity payments under the above
options to be made on a fixed or variable basis. The dollar amount of your
payments on a variable basis will depend upon the investment performance of the
Divisions. Option 5 is available only on a fixed basis. A payee receiving
variable (but not fixed) annuity payments under option 4 may elect at any time
to terminate the option and receive the commuted (current) value of the annuity.
3. PURCHASE. You can purchase a Certificate by submitting an application. The
minimum initial purchase payment is $50,000. You may contribute additional
amounts of $5,000 or more at any time during the accumulation phase.
4. INVESTMENT OPTIONS. Through the Divisions, you may invest in one or more of
the following series of the mutual funds named below:
<TABLE>
<S> <C> <C>
AMERICAN GENERAL SERIES NAVELLIER VARIABLE INSURANCE ROYCE CAPITAL FUND
PORTFOLIO COMPANY SERIES FUND, INC. . Royce Premier
. Money Market Fund . Navellier Growth Portfolio
Portfolio . Royce Total Return
HOTCHKIS AND WILEY Portfolio
VARIABLE TRUST OFFITBANK VARIABLE
. Hotchkis and Wiley Equity INSURANCE FUND, INC. WRIGHT MANAGED BLUE
Income VIP Portfolio . OFFITBANK VIF- CHIP SERIES TRUST
. Hotchkis and Wiley Low Emerging Markets Fund . Wright International
Duration VIP Portfolio . OFFITBANK VIF- Blue Chip Portfolio
High Yield Fund . Wright Selected Blue
LEVCO SERIES TRUST . OFFITBANK VIF- Chip Portfolio
. LEVCO Equity Value Fund Total Return Fund
. OFFITBANK VIF-
U.S. Government
Securities Fund
</TABLE>
You may also invest in a Guarantee Period. Currently, USL offers a one-year
Guarantee Period. Other Guarantee Periods may be offered, in the future, with
different interest rates and durations.
5. EXPENSES. We deduct a daily charge for mortality and expense risks at an
annual rate of 0.36%, and a daily charge for administration expenses at an
annual rate of 0.04%, of the average daily net asset value of a Division.
There also are investment series charges, ranging from 0.54% to 2.00% of the
average annual assets of the series listed in Section 4, above, depending on the
series involved. Charges for state premium and other applicable taxes ("premium
taxes") may also apply at the time you elect to start receiving annuity
payments.
Page 2
<PAGE>
The first two columns in the following chart show the Certificate charges and
the investment series charges. The third column, "Total Annual Charges," shows
the total of the charges in the first two columns. The last two columns provide
two examples of the total annual charges, in dollars, that you would pay under a
Certificate, assuming that you invest $1,000 in a Certificate that earns 5%
annually and that you withdraw your money: (1) at the end of year 1, and (2) at
the end of year 10. The column for year 1 shows the total annual charges for
that year. The column for year 10 shows the aggregate of all the annual charges
assessed for the 10 years. The examples assume that there are no charges for
premium taxes.
<TABLE>
<CAPTION>
EXAMPLES OF
TOTAL ANNUAL TOTAL ANNUAL TOTAL ANNUAL
CERTIFICATE SERIES TOTAL ANNUAL CHARGES AT END OF:
INVESTMENT SERIES CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hotchkis and Wiley Equity Income VIP 0.40% 1.15% 1.55% $16 $185
Hotchkis and Wiley Low Duration VIP 0.40% 0.58% 0.98% $10 $120
LEVCO Equity Value 0.40% 1.10% 1.50% $15 $179
Navellier Growth 0.40% 1.50% 1.90% $19 $222
OFFITBANK VIF-Emerging Markets 0.40% 1.50% 1.90% $19 $222
OFFITBANK VIF-High Yield 0.40% 1.15% 1.55% $16 $200
OFFITBANK VIF-Total Return 0.40% 0.80% 1.20% $12 $145
OFFITBANK VIF-U.S. Government 0.40% 0.60% 1.00% $10 $122
Securities
Royce Premier 0.40% 1.35% 1.75% $18 $206
Royce Total Return 0.40% 1.35% 1.75% $18 $206
Wright International Blue Chip 0.40% 2.00% 2.40% $25 $309
Wright Selected Blue Chip 0.40% 1.27% 1.67% $17 $198
Money Market 0.40% 0.54% 0.94% $10 $121
</TABLE>
The charges reflect any expense reimbursement or waiver. For more information,
see the Fee Table in the Prospectus.
6. TAXES. Usually, you pay taxes on earnings only when distributions are made
from your Certificate. You may also pay a 10% penalty on the taxable portion of
distributions received prior to age 59 1/2.
7. ACCESS TO YOUR MONEY. Prior to the annuity starting date, you may receive
distributions under your Certificate through the following withdrawal options:
(1) partial withdrawals of at least $100 may be taken at any time, and (2)
systematic withdrawals paid monthly, quarterly, semiannually or annually,
subject to a $100 minimum for each payment.
You also have access to your Certificate's value by surrendering the
Certificate. You may do this at any time prior to the annuity starting date.
During the annuity payout period, a person receiving variable payments, under a
certain period option, may also surrender the Certificate. Withdrawals and
surrenders may be subject to income tax and a tax penalty.
Page 3
<PAGE>
8. PERFORMANCE. During the accumulation phase, your Certificate's value in the
Divisions may fluctuate, reflecting the investment performance of the Divisions
you have selected. The following chart shows hypothetical total returns for
Divisions whose corresponding series have at least one full calendar year of
operations. The returns shown are based on the actual historical performance of
the corresponding series. They reflect all charges and deductions of the series
and the Divisions that would have been made during the periods shown. Thus, the
chart reflects all of the charges in the third column of the chart in Section 5,
above, for the Divisions included below. If also included, premium taxes would
reduce the performance numbers shown below. Past performance is not a guarantee
of future results.
<TABLE>
<CAPTION>
CALENDAR YEAR
Division 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LEVCO Equity Value 15.52% N/A N/A N/A N/A N/A N/A N/A N/A N/A
OFFITBANK VIF -Emerging (16.70)% 5.77% N/A N/A N/A N/A N/A N/A N/A N/A
Markets
OFFITBANK VIF- 3.89% 11.20% N/A N/A N/A N/A N/A N/A N/A N/A
High Yield
Royce Premier 8.48% 16.32% N/A N/A N/A N/A N/A N/A N/A N/A
Wright International 7.96% 5.06% 16.62% 9.34% N/A N/A N/A N/A N/A N/A
Blue Chip
Wright Selected (3.03)% 31.21% 21.99% 25.43% N/A N/A N/A N/A N/A N/A
Blue Chip
Money Market 4.74% 4.49% 4.32% 4.85% 3.11% 2.01% 2.57% 4.83% 7.18% 8.24%
</TABLE>
9. DEATH BENEFIT. If you die before the annuity starting date, the beneficiary
will receive a death benefit. The death benefit is the Certificate value at the
time we receive proof of death and a written request specifying the manner of
payment, less premium taxes. However, if death occurs prior to age 81, and
before the annuity starting date, the death benefit is the greater of (1) the
death benefit in the preceding sentence or (2) the sum of all purchase payments
you have paid under the Certificate, less any partial withdrawals and premium
taxes.
10. OTHER INFORMATION.
TAX-QUALIFIED PLANS. Please consult your tax adviser before purchasing a
Certificate as a rollover from an existing tax-qualified retirement plan,
including another individual retirement account or annuity under Section 408 of
the Internal Revenue Code. Any discussion of taxes in this Profile does not
apply to such a Certificate.
FREE LOOK. You can examine your Certificate for a period of 10 days after you
receive it, and return it to us for a refund. Your refund will equal your
Certificate's value, reflecting any investment gain or loss in the Divisions you
have specified.
Page 4
<PAGE>
AUTOMATIC REBALANCING. You can have your money automatically rebalanced among
the Divisions quarterly, semiannually, or annually in order to retain the
proportional investments you select.
REPORTS. We will mail to Certificate owners or annuitants any reports and
communications required by law. The toll-free number for daily Division values
is 1-800-246-1924.
11. INQUIRIES. If you need more information, please contact your registered
representative. You may also contact us at:
The United States Life Insurance Company in the City of New York
Administrative Center
P.O. Box 1401
Houston, Texas 77251-1401
Telephone 1-800-246-1924.
Page 5
<PAGE>
SELECT RESERVE(SM)
FLEXIBLE PAYMENT VARIABLE AND
FIXED DEFERRED ANNUITY CERTIFICATES OFFERED BY
THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK
<TABLE>
<CAPTION>
Address for Services: Address for Payments via US Mail: Address for Express Delivery Payments:
<S> <C> <C>
The United States Life Insurance The United States Life Insurance The United States Life Insurance
Company In the City of New York Company In the City of New York Company In the City of New York
Administrative Center P.O. Box 4728 Dept A c/o Southwest Bank of Texas
P.O. Box 1401 Houston, Texas 77210-4728 4400 Post Oak Parkway
Houston, Texas 77251-1401 Houston, Texas 77027
Telephone: 1-800-246-1924 Attention: Lockbox Processing
</TABLE>
The United States Life Insurance Company in the City of New York ("USL") is
offering, under a group annuity master contract, the flexible payment variable
and fixed deferred annuity certificates (the "Certificates") described in this
Prospectus.
You may use The United States Life Insurance Company in the City of New York
Separate Account USL VA-R ("the Separate Account") for a variable investment
return under the Certificates based on one or more series of the mutual funds
named below, as follows:
<TABLE>
<CAPTION>
American General Series Portfolio Navellier Variable Insurance Series Fund, Royce Capital Fund
Company Inc. . Royce Premier
<S> <C> <C>
. Money Market Fund . Navellier Growth Portfolio Portfolio
. Royce Total Return
Hotchkis and Wiley OFFITBANK Variable Portfolio
Variable Trust Insurance Fund, Inc.
. Hotchkis and Wiley Equity . OFFITBANK VIF- Wright Managed Blue
Income VIP Portfolio Emerging Markets Fund Chip Series Trust
. Hotchkis and Wiley Low Duration VIP . OFFITBANK VIF- . Wright International
Portfolio High Yield Fund Blue Chip Portfolio
. OFFITBANK VIF- . Wright Selected Blue
LEVCO Series Trust Total Return Fund Chip Portfolio
. LEVCO Equity Value . OFFITBANK VIF-
Fund U.S. Government
Securities Fund
</TABLE>
You may also use USL's guaranteed interest option. This option currently has
one Guarantee Period, with a guaranteed interest rate.
This Prospectus provides you with information that you should have before
investing in the Certificates. Please read the Prospectus carefully and keep it
for future reference.
For additional information about the Certificates, you may request a copy of the
Statement of Additional Information (the "Statement"), dated July 1, 1999. We
have filed the Statement with the Securities and Exchange Commission ("SEC") and
have incorporated it by reference into this Prospectus. The "Contents" of the
Statement appears at page 44 of this Prospectus. You may obtain a free copy of
the Statement if you write or call our Administrative Center, which is located
at 2727-A Allen Parkway, Houston, Texas 77019-2191. The telephone number is 1-
800-246-1924. You may obtain the Statement through the SEC's Web site at
http://www.sec.gov.
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the Prospectus. Any representation to the contrary is a
criminal offense. The Certificates are not available in all states.
This Prospectus is valid only if you also receive current fund prospectuses of
the American General Series Portfolio Company, Hotchkis and Wiley Variable
Trust, LEVCO Series Trust, Navellier Variable Insurance Series Fund, Inc.,
OFFITBANK Variable Insurance Fund, Inc., Royce Capital Fund, and Wright Managed
Blue Chip Series Trust.
This Prospectus is dated July 1, 1999
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Definitions................................................................................ 4
Fee Table.................................................................................. 7
Communications to Us....................................................................... 9
Performance Information.................................................................... 9
Financial Ratings........................................................................ 10
Other Information........................................................................ 11
Financial Information...................................................................... 11
USL........................................................................................ 11
Separate Account USL VA-R.................................................................. 12
The Series................................................................................. 12
Voting Privileges........................................................................ 15
The Fixed Account.......................................................................... 16
Guarantee Periods........................................................................ 16
Crediting Interest....................................................................... 17
New Guarantee Periods.................................................................... 17
Certificate Issuance and Purchase Payments................................................. 18
Minimum Requirements..................................................................... 18
Payments................................................................................. 19
Cancellation............................................................................. 19
Owner Account Value........................................................................ 20
Variable Account Value................................................................... 20
Fixed Account Value...................................................................... 20
Transfer, Automatic Rebalancing, Surrender and Partial Withdrawal of Owner Account Value... 21
Transfers................................................................................ 21
Automatic Rebalancing.................................................................... 22
Surrenders............................................................................... 22
Partial Withdrawals...................................................................... 23
Annuity Period and Annuity Payment Options................................................. 23
Annuity Commencement Date................................................................ 23
Application of Owner Account Value....................................................... 24
Fixed and Variable Annuity Payments...................................................... 24
Annuity Payment Options.................................................................. 25
Election of Annuity Payment Option....................................................... 25
Availability of Annuity Payment Options.................................................. 26
Transfers................................................................................ 27
Death Proceeds............................................................................. 27
Death Proceeds Before the Annuity Commencement Date...................................... 27
Death Proceeds After the Annuity Commencement Date....................................... 29
Proof of Death........................................................................... 29
Charges Under the Certificates............................................................. 30
Premium Taxes............................................................................ 30
Transfer Charges......................................................................... 30
Charge to the Separate Account........................................................... 30
Miscellaneous............................................................................ 31
Systematic Withdrawal Plan............................................................... 31
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Reduction in Administrative Expense Charge............................................... 31
Other Aspects of the Certificates.......................................................... 32
Owners, Annuitants, and Beneficiaries; Assignments....................................... 32
Reports.................................................................................. 32
Rights Reserved by Us.................................................................... 33
Payment and Deferment.................................................................... 33
Federal Income Tax Matters................................................................. 34
General.................................................................................. 34
Non-Qualified Certificates............................................................... 34
Individual Retirement Annuities ("IRAs")................................................. 36
Roth IRAs................................................................................ 38
Simplified Employee Pension Plans........................................................ 39
Simple Retirement Accounts............................................................... 39
Other Qualified Plans.................................................................... 39
Private Employer Unfunded Deferred Compensation Plans.................................... 40
Federal Income Tax Withholding and Reporting............................................. 41
Taxes Payable by USL and the Separate Account............................................ 41
Distribution Arrangements.................................................................. 41
Services Agreements........................................................................ 42
Legal Matters.............................................................................. 42
Year 2000 Considerations................................................................... 42
Other Information on File.................................................................. 44
Contents of Statement of Additional Information............................................ 44
</TABLE>
3
<PAGE>
DEFINITIONS
WE, OUR AND US - The United States Life Insurance Company in the City of New
York ("USL").
YOU AND YOUR - a reader of this Prospectus who is contemplating making purchase
payments or taking any other action in connection with a Certificate. This is
generally the Owner of a Certificate.
ACCOUNT VALUE - the sum of your Fixed Account Value and Variable Account Value
after deduction of any fees. We may subtract certain other charges from your
Account Value in the case of transfers or distribution of your Account Value.
ACCUMULATION UNIT - a measuring unit used in calculating your interest in a
Division of the Separate Account before the Annuity Commencement Date.
ADMINISTRATIVE CENTER - our annuity service center to which you should direct
all requests, instructions and other communications. Our Administrative Center
is located at 2727-A Allen Parkway, Houston, Texas 77019-2191. The mailing
address for services is P.O. Box 1401, Houston, Texas 77251-1401. The mailing
address for purchase payments is The United States Life Insurance Company in the
City of New York, P.O. Box 4728 Dept A, Houston, Texas 77210-4728.
ANNUITANT - the person named as Annuitant in the application for a Certificate
and on whose life annuity payments may be based.
ANNUITY COMMENCEMENT DATE - the date on which we begin making payments under an
Annuity Payment Option, unless you elect a single sum payment instead.
ANNUITY PAYMENT OPTION - one of the ways in which you can request us to make
annuity payments to you. An Annuity Payment Option will control the amount of
each payment, how often we make payments, and for how long we make payments.
ANNUITY PERIOD - the period of time during which we make annuity payments under
an Annuity Payment Option.
ANNUITY UNIT - a measuring unit used to calculate the amount of Variable Annuity
Payments.
BENEFICIARY - the person who will receive any proceeds due under a Certificate
following the death of an Owner or an Annuitant.
CERTIFICATE - an individual annuity Certificate offered by this Prospectus.
CERTIFICATE ANNIVERSARY - each anniversary of the date of issue of the
Certificate.
CERTIFICATE YEAR - each year beginning with the date of issue of the
Certificate.
CODE - the Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT - a person whom you designate under a Non-Qualified
Certificate to become the Annuitant if the Annuitant dies before the Annuity
Commencement Date and the Contingent Annuitant is alive when the Annuitant dies.
4
<PAGE>
CONTINGENT BENEFICIARY - a person whom you designate to receive any proceeds due
under a Certificate following the death of an Owner or an Annuitant, if the
Beneficiary has died but the Contingent Beneficiary is alive when the proceeds
become payable.
DIVISION - one of the several different investment options into which the
Separate Account is divided. Each Division invests in shares of a Series.
FIXED ACCOUNT - the name of the investment option that allows you to allocate
purchase payments to USL's General Account.
FIXED ACCOUNT VALUE - the sum of your net purchase payments and transfers in the
Fixed Account, plus accumulated interest less any partial withdrawals and
transfers you make out of the Fixed Account.
FIXED ANNUITY PAYMENTS - annuity payments that are fixed in amount and do not
vary with the investment experience of any Division of the Separate Account.
GENERAL ACCOUNT - all assets of USL other than those in the Separate Account or
any other legally segregated separate account established by USL.
GUARANTEED INTEREST RATE - the rate of interest we credit during any Guarantee
Period, on an effective annual basis.
GUARANTEE PERIOD - the period for which we credit a Guaranteed Interest Rate.
HOME OFFICE - our office at the following address and phone number: The United
States Life Insurance Company in the City of New York, 125 Maiden Lane, New
York, N.Y. 10038; 1-212-709-6000. (You should, however, contact your sales
representative or our Administrative Center for all services. Purchase payments
should be mailed to the address for payments shown on the first page of this
Prospectus.)
NON-QUALIFIED - not eligible for the kind of federal income tax treatment that
occurs with retirement plans allowed by Sections 401, 403, 408 or 408A of the
Code.
OWNER - the holder of record of a Certificate, except that the employer or
trustee may be the Owner of the Certificate in connection with a retirement
plan.
QUALIFIED - eligible for the kind of federal income tax treatment that occurs
with retirement plans under sections 401, 403, 408 or 408A of the Code.
SEPARATE ACCOUNT - the segregated asset account of USL named The United States
Life Insurance Company in the City of New York Separate Account USL VA-R which
invests purchase payments under the Certificates.
SERIES - an individual portfolio of a mutual fund that you may choose for
investment under the Certificates. Currently, the Series are part of either the
American General Series Portfolio Company, Hotchkis and Wiley Variable Trust,
LEVCO Series Trust, Navellier Variable Insurance Series Fund, Inc., OFFITBANK
Variable Insurance Fund, Inc., Royce Capital Fund, and Wright Managed Blue Chip
Series Trust.
VALUATION DATE - a day when we are open for business. However, a day is not a
Valuation Date, if the Series in which a Division invests does not calculate the
value of its shares on that day.
5
<PAGE>
VALUATION PERIOD - the period that starts at the close of regular trading on the
New York Stock Exchange on a Valuation Date and ends at the close of regular
trading on the New York Stock Exchange on the next Valuation Date.
VARIABLE ACCOUNT VALUE - the sum of your account values in the Separate Account
Divisions. Your account value in a Separate Account Division is the value of a
Division's Accumulation Unit multiplied by the number of Accumulation Units you
have in that Division.
VARIABLE ANNUITY PAYMENTS - annuity payments that vary in amount based on the
investment earnings and losses of one or more of the Divisions.
WRITTEN - signed, dated, and in a form satisfactory to us and received at our
Administrative Center. You must use special forms we or your sales
representative provide to elect an Annuity Option.
6
<PAGE>
FEE TABLE
The purpose of this Fee Table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly under a
Certificate. The table reflects expenses of the Separate Account and the
Series. We may also deduct amounts for state premium taxes or similar
assessments, where applicable.
PARTICIPANT TRANSACTION CHARGES
Front-End Sales Charge Imposed on Purchases................. 0%
Surrender Charge............................................ 0%
(computed as a percentage of purchase payments surrendered)
Transfer Charge............................................. $0/1/
ANNUAL CERTIFICATE FEE........................................... $0
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average
daily net asset value)
Mortality and Expense Risk Charge........................... 0.36%
Administrative Expense Charge............................... 0.04%
----
Total Separate Account Annual Expenses......................... 0.40%
====
_______________________
/1/ This charge is $25 after the 12th transfer during each Certificate Year
before the Annuity Commencement Date. Certain exceptions apply.
7
<PAGE>
<TABLE>
<CAPTION>
THE SERIES' ANNUAL EXPENSES/1,2/ (as a percentage of average daily Variable Account Value)
Management Other Annual
Fees After Expenses Expenses
Expense After Expense After Expense
Reimbursement Reimbursement Reimbursement
and Waiver/4/ and Waiver/4/ and Waiver/4/
--------------- --------------- ---------------
<S> <C> <C> <C>
Hotchkis and Wiley Equity Income VIP 0.75% 0.40% 1.15%
Hotchkis and Wiley Low Duration VIP 0.46% 0.12% 0.58%
LEVCO Equity Value 0.00% 1.10% 1.10%
Navellier Growth 0.85% 0.65% 1.50%
OFFITBANK VIF-Emerging Markets 0.00% 1.50% 1.50%
OFFITBANK VIF-High Yield 0.66% 0.49% 1.15%
OFFITBANK VIF-Total Return3 0.00% 0.80% 0.80%
OFFITBANK VIF-U. S. Government Securities 0.00% 0.60% 0.60%
Royce Premier 0.00% 1.35% 1.35%
Royce Total Return 0.00% 1.35% 1.35%
Wright International Blue Chip 0.00% 2.00% 2.00%
Wright Selected Blue Chip 0.00% 1.27% 1.27%
Money Market 0.50% 0.04% 0.54%
</TABLE>
- ----------
/1/ The Series' advisers or managers have entered into administrative
services agreements with USL. The advisers or managers pay fees to USL for
these services. The fees do not have a direct relationship to the Series'
Annual Expenses. (See "Services Agreements.")
/2/ We estimate other expenses for the current fiscal year for the Hotchkis
and Wiley Equity Income VIP, Hotchkis and Wiley Low Duration VIP, Navellier
Growth, OFFITBANK VIF-Total Return, OFFITBANK VIF-U.S. Government Securities,
and Royce Total Return Series, because these Series do not have financial
statements covering a period of at least ten months.
/3/ OFFITBANK VIF-Total Return may invest a portion of its assets in shares
of OFFITBANK VIF-High Yield, OFFITBANK VIF-Emerging Markets, and OFFITBANK VIF-
U.S. Government Securities. Shareholders of OFFITBANK VIF-Total Return will
indirectly bear the expenses of the underlying funds at the rates stated above.
/4/ If expense reimbursements and fee waivers were terminated, management
fees and other expenses would have been as shown in the following table.
<TABLE>
<CAPTION>
Management Other Total Annual
Fees Expenses Expenses
---------- --------- ------------
<S> <C> <C> <C>
Hotchkis and Wiley Equity Income VIP 0.75% 7.06% 7.81%
Hotchkis and Wiley Low Duration VIP 0.46% 5.10% 5.56%
LEVCO Equity Value 0.85% 1.19% 2.04%
Navellier Growth 0.85% 69.32% 70.17%
OFFITBANK VIF- Emerging Markets 0.90% 2.02% 2.92%
OFFITBANK VIF- High Yield 0.85% 0.70% 1.55%
OFFITBANK VIF-Total Return2 0.80% 11.56% 12.36%
OFFITBANK VIF-U. S. Government Securities 0.00% 0.60% 0.60%
Royce Premier 1.00% 6.05% 7.05%
Royce Total Return 1.00% 17.08% 18.08%
Wright International Blue Chip 0.80% 4.36% 5.16%
Wright Selected Blue Chip 0.65% 1.46% 2.11%
Money Market 0.50% 0.04% 0.54%
</TABLE>
8
<PAGE>
Example/5/ Whether or not you surrender or annuitize at the end of the
applicable time period, the following expenses would apply to a
$1,000 investment if you assume a 5% annual return on assets:
<TABLE>
<CAPTION>
If all amounts are allocated
to a Division that invests in
one of the following Series: 1 year 3 years 5 years/5/ 10 years/5/
- ----------------------------------- ------ ------- ---------- ----------
<S> <C> <C> <C> <C>
Hotchkis and Wiley Equity Income VIP $16 $49 N/A N/A
Hotchkis and Wiley Low Duration VIP $10 $31 N/A N/A
LEVCO Equity Value $15 $47 N/A N/A
Navellier Growth $19 $60 N/A N/A
OFFITBANK VIF-Emerging Markets $19 $60 $103 $222
OFFITBANK VIF-High Yield $16 $50 $ 88 $200
OFFITBANK VIF-Total Return $12 $38 N/A N/A
OFFITBANK VIF-U. S. Government Securities $10 $32 N/A N/A
Royce Premier $18 $55 $ 95 $206
Royce Total Return $18 $55 N/A N/A
Wright International Blue Chip $25 $78 $136 $309
Wright Selected Blue Chip $17 $53 $ 91 $198
Money Market $10 $30 $ 53 $121
</TABLE>
___________________________________
/5/ In this Example, "N/A" reflects SEC rules that require Hotchkis and Wiley
Equity Income VIP, Hotchkis and Wiley Low Duration VIP, LEVCO Equity Value,
Navellier Growth, OFFITBANK VIF-Total Return, OFFITBANK VIF-U.S. Government
Securities, and Royce Total Return to complete the Example for only the one and
three year periods.
The Example is not a representation of past or future expenses. Actual
expenses may be greater or less than those shown. The assumed 5% annual rate of
return is not an estimate or a guarantee of future investment performance. The
Example assumes an estimated Average Account Value of $50,000.
COMMUNICATIONS TO US
You should include, in communications to us, your Certificate number, your name,
and, if different, the Annuitant's name. You may direct communications to the
addresses and phone numbers on the first page of this Prospectus.
Unless this Prospectus states differently, we will consider purchase payments or
other communications to be received on the date we actually receive them, if
they are in proper form. However, we will consider purchase payments to be
received on the next Valuation Date if we receive them (1) after the close of
regular trading on the New York Stock Exchange or (2) on a date that is not a
Valuation Date.
PERFORMANCE INFORMATION
From time to time, we may include in advertisements and other sales materials
several types of performance information for the Divisions. This information
may include "average annual total return" and "cumulative total return." The
Hotchkis and Wiley Low Duration VIP Division, OFFITBANK VIF-High Yield Division
and OFFITBANK VIF-U.S. Government Securities Division may also advertise
"yield." The Money Market Division may advertise "yield" and "effective yield."
9
<PAGE>
The performance information that we may present is not an estimate or guarantee
of future investment performance and does not represent the actual investment
experience of amounts invested by a particular Owner. Additional information
concerning a Division's performance appears in the Statement.
Total Return and Yield Quotations. Average annual total return and cumulative
total return figures measure the net income of a Division and any realized or
unrealized gains or losses of the underlying investments in the Division, over
the period stated. Average annual total return figures are annualized and
represent the average annual percentage change in the value of an investment in
a Division over the period stated. Cumulative total return figures represent
the cumulative change in value of an investment in a Division for various
periods stated.
Yield is a measure of the net dividend and interest income earned over a
specific one-month or 30-day period (seven-day period for the Money Market
Division), expressed as a percentage of the value of the Division's Accumulation
Units. Yield is an annualized figure, which means that we assume that the
Division generates the same level of net income over a one-year period and
compound that income on a semi-annual basis. We calculate the effective yield
for the Money Market Division similarly, but include the increase due to assumed
compounding. The Money Market Division's effective yield will be slightly
higher than its yield due to this compounding effect.
Average annual total return figures reflect deduction of all recurring charges
and fees applicable under the Certificate to all Owner accounts, including the
following:
. the Mortality and Expense Risk Charge, and
. the Administrative Expense Charge.
Division Performance. The investment performance for each Division that invests
in a corresponding Series of the Trust will reflect the investment performance
of that Series for the periods stated. This information appears in the
Statement. For periods before the date the Certificates became available, we
calculate the performance information for a Division on a hypothetical basis. In
so doing, we reflect deductions of current Separate Account fees and charges
under the Certificate from the historical performance of the corresponding
Series. We may waive or reimburse certain fees or charges applicable to the
Certificate. Such waivers or reimbursements will affect each Division's
performance results.
Information about the experience of the investment advisers to the Series of the
Fund appears in the prospectus for the Fund.
FINANCIAL RATINGS
USL may advertise or report to Owners its ratings as an insurance company by the
A. M. Best Company. Each year, A. M. Best reviews the financial status of
thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect A.M. Best's current opinion of the relative financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's Ratings range from A++ to F.
10
<PAGE>
USL may also advertise or report to Owners its ratings as to claims-paying
ability by the Standard & Poor's Corporation. A Standard & Poor's insurance
claims-paying ability rating is an assessment of an operating insurance
company's financial capacity to meet the obligations of its insurance policies
in accordance with their terms. Standard & Poor's ratings range from AAA to D.
USL may additionally advertise its ratings as to claims-paying ability by the
Duff & Phelps Credit Rating Co. A Duff & Phelps' claims-paying ability rating
is an assessment of a company's insurance claims-paying ability. Duff & Phelps'
ratings range from AAA to CCC.
Current ratings from A.M. Best, Standard & Poor's, and Duff & Phelps Credit
Rating Co. may be used from time to time in any advertising about the
Certificates, as well as in any reports that publish the ratings.
The ratings reflect the claims-paying ability and financial strength of USL.
They are not a rating of investment performance that purchasers of insurance
products funded through separate accounts, such as the Separate Account, have
experienced or are likely to experience in the future.
OTHER INFORMATION
USL may also advertise endorsements from organizations, individuals or other
parties that recommend USL or the Certificates. USL may occasionally include in
advertisements (1) comparisons of currently taxable and tax-deferred investment
programs, based on selected tax brackets, or (2) discussions of alternative
investment vehicles and general economic conditions.
FINANCIAL INFORMATION
The financial statements of USL appear in the Statement. Please see the first
page of this Prospectus for information on how to obtain a copy of the
Statement. You should consider the financial statements of USL only as bearing
on the ability of USL to meet its contractual obligations under the
Certificates. The financial statements do not bear on the investment
performance of the Separate Account. (See "Contents of Statement of Additional
Information.") There are no financial statements for the Separate Account as it
had not yet begun operations as of the date of this Prospectus.
USL
USL is a stock life insurance company, organized under the laws of the State of
New York in 1850. USL is an indirect, wholly-owned subsidiary of American
General Corporation, a diversified financial services holding company engaged
primarily in the insurance business. USL is principally involved in writing
life insurance policies and annuity contracts in the State of New York. The
commitments under the Certificates are USL's, and American General Corporation
has no legal obligation to back those commitments.
USL 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
11
<PAGE>
individual life insurance and annuity products. USL's membership in IMSA applies
only to USL and not its products.
SEPARATE ACCOUNT USL VA-R
USL established the Separate Account on August 8, 1997. The Separate Account is
registered as a unit investment trust under the Investment Company Act of 1940
("1940 Act").
Each Division of the Separate Account is part of USL's general business, and the
assets of the Separate Account belong to USL. Under New York law and the terms
of the Certificates, the assets of the Separate Account will not be chargeable
with liabilities arising out of any other business that USL may conduct. These
assets will be held exclusively to meet USL's obligations under variable annuity
Certificates. Furthermore, USL credits or charges the Separate Account with the
income, gains, and losses from the Separate Account's assets, whether or not
realized, without regard to other income, gains, or losses of USL.
THE SERIES
The Separate Account has 13 Divisions funding the variable benefits under the
Certificates. These Divisions invest in shares of one or more series of
American General Series Portfolio Company, Hotchkis and Wiley Variable Trust,
LEVCO Series Trust, Navellier Variable Insurance Series Fund, Inc., OFFITBANK
Variable Insurance Fund, Inc., Royce Capital Fund and Wright Managed Blue Chip
Series Trust (collectively, the "Underlying Funds").
The Underlying Funds offer shares of these Series, without sales charges,
exclusively to insurance company variable annuity and variable life insurance
separate accounts and not directly to the public. The Underlying Funds also
offer shares to variable annuity and variable life insurance separate accounts
of insurers that are not affiliated with USL.
We do not foresee any disadvantage to you arising out of these arrangements.
Nevertheless, 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 one of the Underlying Funds could cause the contracts or certificates funded
through another separate account to lose their tax-deferred status. Such a
result might require us to take remedial action. A separate account may have to
withdraw its participation in the Underlying Fund, if a material irreconcilable
conflict arises among separate accounts. In that event, the Underlying Fund may
have to liquidate portfolio securities at a loss to pay for a separate account's
redemption of Trust or Fund shares. At the same time, the Boards of Trustees
and the Boards of Directors of the Underlying Funds, and we, will monitor events
for any material irreconcilable conflicts that may possibly arise and determine
what action, if any, to take to remedy or eliminate the conflict.
12
<PAGE>
The Series of the Underlying Funds and their management are as follows:
<TABLE>
<CAPTION>
INVESTMENT COMPANY SERIES ADVISER/MANAGER
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
American General Series Portfolio Money Market Fund The Variable Annuity Life
Company Insurance Company
- ------------------------------------------------------------------------------------------------------------
Hotchkis and Wiley Variable Trust Hotchkis and Wiley Equity Hotchkis and Wiley
Income VIP Portfolio
Hotchkis and Wiley Low
Duration VIP Portfolio
- ------------------------------------------------------------------------------------------------------------
LEVCO Series Trust LEVCO Equity Value John A. Levin and Co., Inc.
Fund
- ------------------------------------------------------------------------------------------------------------
Navellier Variable Insurance Series Navellier Growth Navellier & Associates, Inc.
Fund, Inc. Portfolio
- ------------------------------------------------------------------------------------------------------------
OFFITBANK Variable Insurance Fund, OFFITBANK VIF-Emerging OFFITBANK*
Inc. Markets Fund
OFFITBANK VIF-High Yield
Fund
OFFITBANK VIF-Total
Return Fund
OFFITBANK VIF- U.S.
Government Securities
Fund
- ------------------------------------------------------------------------------------------------------------
Royce Capital Fund Royce Premier Portfolio Royce & Associates, Inc.
Royce Total Return
Portfolio
- ------------------------------------------------------------------------------------------------------------
Wright Managed Blue Chip Series Trust Wright International Blue Wright Investors' Service, Inc.
Chip Portfolio
Wright Selected Blue Chip
Portfolio
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*On May 13, 1999, OFFITBANK entered into an agreement with the Wachovia
Corporation ("Wachovia") pursuant to which OFFITBANK Holdings, Inc., the sole
shareholder of OFFITBANK, will merge with Wachovia. OFFITBANK will continue to
operate under its own name as a distinct Wachovia company and it is not
anticipated that the investment process or personnel at OFFITBANK will be
affected by the proposed merger. Subject to the approval of federal and state
regulators, the merger is anticipated to close in the third quarter of 1999.
13
<PAGE>
The investment objective of each Series is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SERIES INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Money Market Fund Liquidity, protection of capital and current income through investments in short-term
money market instruments. Shares of the Money Market Fund are neither insured nor
guaranteed by the U.S. Government. There is no assurance that this Fund will be able
to maintain a stable net asset value of $1.00 per share.
- ------------------------------------------------------------------------------------------------------------------
Hotchkis and Wiley Provide current income and long-term growth of income, accompanied by growth of
Equity Income VIP capital. Invests primarily in domestic equity securities.
Portfolio
- ------------------------------------------------------------------------------------------------------------------
Hotchkis and Wiley Low Maximize total return, consistent with preservation of capital. Invests in a
Duration VIP Portfolio diversified portfolio of fixed-income securities of varying maturities with a
portfolio duration of one to three years.
- ------------------------------------------------------------------------------------------------------------------
LEVCO Equity Value Fund Achieve long-term growth of capital by emphasizing the preservation of capital and
control of volatility. A research intensive, value oriented stock selection process
is used in constructing a diversified portfolio.
- ------------------------------------------------------------------------------------------------------------------
Navellier Growth Achieve long-term growth of capital primarily through investment in companies with
Portfolio appreciation potential.
- ------------------------------------------------------------------------------------------------------------------
OFFITBANK VIF-Emerging Provide investors with a competitive total investment return by focusing on current
Markets Fund yield and opportunities for capital appreciation primarily by investing in corporate
and sovereign debt securities of emerging market countries.
- ------------------------------------------------------------------------------------------------------------------
OFFITBANK VIF-High High current income, with capital appreciation as a secondary objective. Invests
Yield Fund primarily in U.S. corporate fixed income securities which are rated below investment
grade or unrated at the time of investment.
- ------------------------------------------------------------------------------------------------------------------
OFFITBANK VIF- Total Maximize total return from a combination of capital appreciation and current income by
Return Fund investing in a diversified portfolio of fixed income securities, including U.S.
Government or agencies' obligations, investment grade fixed income, high yield and
fixed income securities and securities of other investment companies. An SEC
exemptive order permits this Fund to purchase shares of any of the existing or any new
Series of the OFFITBANK Variable Insurance Fund, Inc.
- ------------------------------------------------------------------------------------------------------------------
OFFITBANK VIF- U.S. Current income consistent with preservation of capital. Invests at least 80% of its
Government Securities assets in U.S. Government obligations.
Fund
- ------------------------------------------------------------------------------------------------------------------
Royce Premier Portfolio Long-term growth and, as a secondary objective, current income. Invests in a limited
number of equity securities of small-cap companies viewed by Royce & Associates, Inc.
as having superior financial characteristics and/or unusually attractive business
prospects.
- ------------------------------------------------------------------------------------------------------------------
Royce Total Return Equal focus on both long-term growth of capital and current income. Invests primarily
Portfolio in a diversified portfolio of dividend-paying securities of small and micro-cap
companies selected on a value basis.
- ------------------------------------------------------------------------------------------------------------------
Wright International Long-term capital appreciation by investing primarily in equity securities of
Blue Chip Portfolio well-established, non-U.S. companies that meet the advisor's quality standards.
- ------------------------------------------------------------------------------------------------------------------
Wright Selected Blue Long-term capital appreciation and, as a secondary objective, reasonable current
Chip Portfolio income, by investing primarily in equity securities of well-established U.S. companies
that meet the Advisor's quality standards.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
We automatically reinvest any dividends or capital gain distributions that we
receive on shares of the Series held under Certificates. We reinvest at the
Series' net asset value on the date payable. Dividends and distributions will
reduce the net asset value of each share of the corresponding Series and
increase the number of shares outstanding of the Series by an equivalent value.
However, these dividends and distributions do not change your Account Value.
14
<PAGE>
Before selecting any Division, you should carefully read the Underlying Fund
Prospectus. The Prospectus provides more complete information about the Series
in which the Division invests, including investment objectives and policies,
charges and expenses. An Underlying Fund may accompany its Prospectus with a
summary of the Prospectus called a "profile."
You can find information about the investment performance of a Series of the
Underlying Funds and information about the business experience of the investment
advisers to the Series in the Prospectuses. You may obtain additional copies of
a Prospectus by contacting our Administrative Center at the addresses and phone
numbers on the first page of this Prospectus. When making your request, please
specify the Series of the Underlying Fund in which you are interested.
High yielding fixed-income securities such as those in which the OFFITBANK VIF-
High Yield, Emerging Markets and Total Return Divisions invest are subject to
greater market fluctuations and risk of loss of income and principal than
investments in lower yielding fixed-income securities. You should carefully
read the Underlying Fund Prospectuses for each Series in which these Divisions
invest and consider your ability to assume the risks of making an investment in
these Divisions.
VOTING PRIVILEGES
The following people may give us voting instructions for Series' shares held in
the Separate Account Divisions attributable to their Certificate:
. You, as the Owner, before the Annuity Commencement Date, and
. The Annuitant or other payee, during the Annuity Period.
We will vote according to such instructions at meetings of shareholders of the
Series.
We will determine who is entitled to give voting instructions and the number of
votes for which they may give directions as of the record date for a meeting.
We will calculate the number of votes in fractions. We will calculate the
number of votes for any Series as follows:
. For each Owner before the Annuity Commencement Date, we will divide
(1) the Owner's Variable Account Value invested in the corresponding
Division by (2) the net asset value of one share of that Series.
. For each Annuitant or payee during the Annuity Period, we will divide
(1) our liability for future Variable Annuity Payments to the
Annuitant or payee by (2) the value of an Annuity Unit. We will
calculate our liability for future Variable Annuity Payments based on
the mortality assumptions and the assumed interest rate that we use in
determining the number of Annuity Units under a Certificate and the
value of an Annuity Unit.
We will vote all shares of each Series owned by the Separate Account as follows:
. Shares for which we receive instructions, in accordance with those
instructions, and
. Shares for which we receive no instructions, in the same proportion
as the shares for which we receive instructions.
15
<PAGE>
Shares of each Series may be owned by separate accounts of insurance companies
other than us. We understand that each Series will see that all insurance
companies vote shares uniformly.
We believe that our voting instruction procedures comply with current federal
securities law requirements. However, we reserve the right to modify these
procedures to conform with legal requirements and interpretations that are put
in effect or modified from time to time.
THE FIXED ACCOUNT
Amounts in the Fixed Account or supporting Fixed Annuity Payments become part of
our General Account. We have not registered interests in the General Account
under the Securities Act of 1933, and we have not registered the General Account
as an investment company under the 1940 Act based on federal law exclusion and
exemption. The staff of the Securities and Exchange Commission has advised us
that it has not reviewed the disclosures in this Prospectus that relate to the
Fixed Account or Fixed Annuity Payments. At the same time, we have legal
responsibility for the accuracy and completeness of this Prospectus.
Our obligations for the Fixed Account are legal obligations of USL. Our General
Account assets support these obligations. These General Account assets also
support our obligations under other insurance and annuity contracts.
Investments purchased with amounts allocated to the Fixed Account are the
property of USL. Owners have no legal rights in such investments.
GUARANTEE PERIODS
Account Value that the Owner allocates to the Fixed Account earns a Guaranteed
Interest Rate beginning with the date of the allocation. This Guaranteed
Interest Rate continues for the number of years that the Owner selects from
among the Guarantee Periods that we then offer.
At the end of a Guarantee Period, we will allocate your Account Value in that
Guarantee Period, including interest you have earned, to a new Guarantee Period
of the same length. In the alternative, the Owner may submit a Written request
to us to allocate this amount to a different Guarantee Period or Periods or to
one or more of the Divisions of the Separate Account. We must receive this
Written request at least three business days before the end of the Guarantee
Period.
We will contact the Owner regarding the scheduled Annuity Commencement Date, if
the Owner has not provided the necessary Written request and the renewed
Guarantee Period extends beyond the scheduled Annuity Commencement Date.
The first day of the new Guarantee Period (or other reallocation) will be the
day after the end of the prior Guarantee Period. We will notify the Owner in
writing at least 15 days and not more than 45 days before the end of any
Guarantee Period.
If the Owner's Account Value in a Guarantee Period is less than $500, we reserve
the right to transfer, without charge, the balance to the Money Market Division
at the end of that Guarantee Period. However, we will transfer the balance to
another Division selected by the Owner, if we have received Written instructions
to transfer the balance to that Division.
16
<PAGE>
CREDITING INTEREST
We declare the Guaranteed Interest Rates from time to time as market conditions
dictate. We tell an Owner the Guaranteed Interest Rate for a chosen Guarantee
Period at the time we receive a purchase payment, make a transfer, or renew a
Guarantee Period. We may credit a different interest rate to one Guarantee
Period than to another Guarantee Period that is the same length but that began
on a different date. The minimum Guaranteed Interest Rate is an effective
annual rate of 3%.
Proceeds from an exchange, rollover or transfer will accrue interest in the
following manner, if you allocate them to the Fixed Account within 60 days
following the date of application for a Certificate:
. We credit interest to such proceeds during the Guarantee Period
chosen.
. We will calculate interest at a rate that is the higher of:
(a) the current interest rate we use on the date of application for
the Guarantee Period selected; or
(b) the current interest rate that we use on the date we receive the
proceeds.
Proceeds that we receive more than 60 days after the date the application is
signed receive interest at the rate in effect on the date we receive the
proceeds.
We credit interest to the Fixed Account starting with the date we receive the
proceeds. The interest rate we use remains the same for the duration of the
applicable Guarantee Period.
USL's management makes the final determination of the Guaranteed Interest Rates
to be declared. USL cannot predict or assure the level of any future Guaranteed
Interest Rates in excess of the minimum Guaranteed Interest Rate stated in your
Certificate.
You may obtain information concerning the Guaranteed Interest Rates that apply
to the various Guarantee Periods at any time from your sales representative or
from the addresses or telephone numbers on the first page of this Prospectus.
NEW GUARANTEE PERIODS
Each allocation or transfer of an amount to a Guarantee Period starts the
running of a new Guarantee Period for that amount. That new Guarantee Period
will earn a Guaranteed Interest Rate that will continue unchanged until the end
of that Period. The Guaranteed Interest Rate will never be less than the
minimum Guaranteed Interest Rate stated in your Certificate.
We may offer one or more Guarantee Periods with a required dollar cost averaging
feature. (See "Transfers.") Currently, we make available a one-year Guarantee
Period and no others. However, we reserve the right to change the Guarantee
Periods that we make available at any time, except that we will always make
available a one-year Guarantee Period.
17
<PAGE>
CERTIFICATE ISSUANCE AND PURCHASE PAYMENTS
The minimum initial purchase payment is $50,000. The minimum subsequent
purchase payment is $5,000. We reserve the right to modify these minimums at our
discretion.
Your application to purchase a Certificate must be on a Written application that
we provide and that you sign. USL and American General Securities Incorporated,
as distributor of the Certificates, may agree on a different medium or format
for the application. When a purchase payment accompanies an application to
purchase a Certificate and you have properly completed the application, we will
either:
. process the application, credit the purchase payment, and issue the
Certificate, or
. reject the application and return the purchase payment within two
Valuation Dates after receipt of the application.
If you have not completed the application or have not completed it correctly, we
will request additional documents or information within five Valuation Dates
after receipt of the application.
If we have not received a correctly completed application within five Valuation
Dates after receipt of the purchase payment at our Administrative Center, we
will return the purchase payment immediately. However, you may specifically
consent to our retaining the purchase payment until you complete the
application. In that case, we will credit the initial purchase payment as of
the end of the Valuation Period in which we receive the last information
required to process the application.
We will credit subsequent purchase payments as of the end of the Valuation
Period in which we receive them along with any required Written identifying
information.
We reserve the right to reject any application or purchase payment for any
reason.
MINIMUM REQUIREMENTS
If your Account Value in any Division falls below $500 because of a partial
withdrawal from the Certificate, we reserve the right to transfer, without
charge, the remaining balance to the Money Market Division.
If your Account Value in any Division falls below $500 because of a transfer to
another Division or to the Fixed Account, we reserve the right to transfer the
remaining balance in that Division, without charge and pro rata, to the
investment option or options to which the transfer was made.
We will waive these minimum requirements for transfers under the automatic
rebalancing program. (See "Automatic Rebalancing.")
If your total Account Value falls below $10,000, we may cancel the Certificate.
We consider such a cancellation a full surrender of the Certificate. We will
provide you with 60 days advance notice of any cancellation in these
circumstances.
18
<PAGE>
So long as the Account Value does not fall below $10,000, you do not have to
make further purchase payments. You may, however, elect to make subsequent
purchase payments at any time before the Annuity Commencement Date, if the Owner
and Annuitant are still living.
PAYMENTS
You should make checks for subsequent purchase payments payable to The United
States Life Insurance Company in the City of New York and forward them directly
to the address for payments shown on the first page of this Prospectus, unless
we ask you to use another address. We also accept purchase payments by wire or
by exchange from another insurance company. You may obtain further information
about how to make purchase payments by either of these methods from your sales
representative or from us at the addresses and telephone numbers on the first
page of this Prospectus.
You may make purchase payments pursuant to employer-sponsored plans only with
our agreement.
Your purchase payments are allocated to the Divisions of the Separate Account or
the Guarantee Periods of the Fixed Account as of the date we credit the purchase
payments to your Certificate. In your application form, you select (in whole
percentages) the amount of each purchase payment that you are allocating to each
Division and Guarantee Period. You can change these allocation percentages at
any time by Written notice to us.
We issue the Certificates under a group annuity master contract that we have
issued to the trustee of a group trust. We established the group trust under
Delaware law. The master contract provides for rights under the Certificates
and further provides that nothing in the master contract will invalidate or
impair any right granted to an Owner. The master contract does not provide any
material ownership rights to the master contract owner and, in particular, does
not authorize the master contract owner to surrender the master contract.
CANCELLATION
You may cancel your Certificate by delivering it or mailing it with a Written
cancellation request to our Administrative Center or to your sales
representative, before the close of business on the 10th day after you receive
the Certificate. If you send these items by mail, properly addressed and
postage prepaid, we will consider them received at our Administrative Center on
the date we actually receive them.
We will refund to you the sum of:
. any purchase payments allocated to a Guarantee Period of the Fixed
Account,
. your Account Value allocated to the Divisions of the Separate
Account, and
. any additional amount deducted for premium taxes.
19
<PAGE>
OWNER ACCOUNT VALUE
Before the Annuity Commencement Date, your Account Value under a Certificate is
the sum of your Variable Account Value and Fixed Account Value, as discussed
below.
VARIABLE ACCOUNT VALUE
As of any Valuation Date before the Annuity Commencement Date:
. Your Variable Account Value is the sum of your Variable Account
Values in each Division of the Separate Account.
. Your Variable Account Value in a Division is the product of the
number of your Accumulation Units in that Division multiplied by the
value of one such Accumulation Unit as of that Valuation Date.
There is no guaranteed minimum Variable Account Value. To the extent that your
Account Value is allocated to the Separate Account, you bear the entire
investment risk.
We credit Accumulation Units in a Division to you when you allocate purchase
payments or transfer amounts to that Division. Similarly, we redeem
Accumulation Units when you transfer or withdraw amounts from a Division or when
we pay certain charges under the Certificate. We determine the value of these
Accumulation Units at the end of the Valuation Date on which we make the credit
or charge.
The value of an Accumulation Unit for a Division on any Valuation Date is equal
to the previous value of that Division's Accumulation Unit multiplied by that
Division's net investment factor for the Valuation Period ending on that
Valuation Date.
The net investment factor for a Division is determined by dividing (1) the net
asset value per share of the Series' shares held by the Division, determined at
the end of the current Valuation Period, plus the per share amount of any
dividend or capital gains distribution made for the Series' shares held by the
Division during the current Valuation Period, by (2) the net asset value per
share of the Series' shares held in the Division determined at the end of the
previous Valuation Period. We then subtract from that result a factor
representing the mortality risk, expense risk and administrative expense charge.
FIXED ACCOUNT VALUE
As of any Valuation Date before the Annuity Commencement Date:
. Your Fixed Account Value is the sum of your Fixed Account Value in
each Guarantee Period.
. Your Fixed Account Value in any Guarantee Period is equal to the
following amounts, in each case increased by accrued interest at the
applicable Guaranteed Interest Rate: (1) the amount of net purchase
payments, renewals and transferred amounts allocated to the Guarantee
Period, less (2) the amount of any transfers or withdrawals out of
the Guarantee Period, including withdrawals to pay applicable
charges.
20
<PAGE>
USL guarantees the Fixed Account Value. USL bears the investment risk for
amounts allocated to the Fixed Account, except to the extent that USL may vary
the Guaranteed Interest Rate for future Guarantee Periods (subject to the
minimum Guaranteed Interest Rate stated in your Certificate).
TRANSFER, AUTOMATIC REBALANCING, SURRENDER AND PARTIAL
WITHDRAWAL OF OWNER ACCOUNT VALUE
TRANSFERS
You can transfer your Account Value beginning 30 days after we issue your
Certificate and before the Annuity Commencement Date. The following rules
apply:
. You may transfer your Account Value at any time among the available
Divisions of the Separate Account and Guarantee Periods. Transfers
will be effective at the end of the Valuation Period in which we
receive your Written transfer request.
. If a transfer causes your Account Value in any Division or Guarantee
Period to fall below $500, we reserve the right to transfer the
remaining balance in that Division or Guarantee Period in the same
proportions as the transfer request.
. You may make up to 12 transfers each Certificate Year without charge.
We will charge you $25 for each additional transfer.
. You may transfer no more than 25% of the Account Value you allocated
to a Guarantee Period at its inception during any Certificate Year.
This 25% limitation does not apply to transfers (1) within 15 days
before or after the end of the Guarantee Period in which you held the
transferred amounts, or (2) a renewal at the end of the Guarantee
Period to the same Guarantee Period.
We reserve the right to defer any transfers from the Fixed Account to any
Division for up to six months.
You may establish an automatic transfer plan. (We also refer to this plan as a
dollar cost averaging plan.) Under this plan, we will automatically transfer
amounts from the Money Market Division or the one-year Guarantee Period (or any
other Guarantee Period that is available at that time) to one or more other
Divisions. By transferring a set amount on a regular schedule instead of
transferring the total amount at one particular time, you may reduce the risk of
investing in the corresponding Division only when the price is high. An
automatic transfer plan does not guarantee a profit and it does not protect
against a loss if market prices decline. You will select:
. the amount we are to transfer under the plan;
. the frequency of the transfers--either monthly, quarterly, semi-
annually, or annually; and
. the duration of the plan.
Transfers under any automatic transfer plan will:
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. not count towards the 12 free transfers each Certificate Year,
. not incur a $25 charge,
. not be subject to the 25% limitation on transfers from a Guarantee
Period, and
. not be subject to the Account Value minimum requirement described
above.
You may obtain additional information about how to establish an automatic
transfer plan from your sales representative or from us at the telephone numbers
and addresses on the first page of this Prospectus. You cannot have an
automatic transfer plan in effect at the same time you have Automatic
Rebalancing, described below, in effect.
We have not designed the Certificates for professional market timing
organizations or other entities using programmed and frequent transfers. We may
not unilaterally terminate or discontinue transfer privileges. However, we
reserve the right to suspend such privileges for a reasonable period.
AUTOMATIC REBALANCING
You may arrange for Automatic Rebalancing among the Separate Account Divisions
if your Certificate has an Account Value of $25,000 or more at the time we
receive the application for Automatic Rebalancing. You may apply for Automatic
Rebalancing either at issue or after issue, and you may subsequently discontinue
it.
Under Automatic Rebalancing, we transfer funds among the Separate Account
Divisions to maintain the percentage allocation you have selected for each
Division. At your election, we will make these transfers on a quarterly, semi-
annual or annual basis, measured from the Certificate Anniversary date. A
Certificate Anniversary date that falls on the 29th, 30th, or 31st of the month
will result in Automatic Rebalancing starting with the 1st of the next month.
Automatic Rebalancing does not permit transfers to or from any Guarantee Period.
Transfers under Automatic Rebalancing will not count towards the 12 free
transfers each Certificate Year and will not incur a $25 charge. You cannot
have Automatic Rebalancing in effect at the same time you have an automatic
transfer plan, described above, in effect.
SURRENDERS
At any time before the Annuity Commencement Date and while the Annuitant is
still living, the Owner may make a full surrender from a Certificate.
We will pay you the following upon full surrender:
. your Account Value at the end of the Valuation Period in which we
receive a Written surrender request,
. minus any applicable premium tax.
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Our current practice is to require that you return the Certificate with any
request for a full surrender.
After a full surrender, or if the Owner's Account Value falls to zero, all
rights of the Owner, Annuitant or any other person under the Certificate will
end.
All collateral assignees of record must consent to any full surrender.
PARTIAL WITHDRAWALS
Your Written request for a partial withdrawal should specify the Divisions of
the Separate Account, or the Guarantee Periods of the Fixed Account, from which
you wish to make the partial withdrawal. We will take the withdrawal pro rata
from the Divisions and Guarantee Periods, if (1) you do not tell us how to make
the withdrawal, or (2) we cannot make the withdrawal as you requested.
Partial withdrawal requests must be for at least $100 or, if less, all of your
Account Value. If your remaining Account Value in a Division or Guarantee
Period would be less than $500 as a result of the withdrawal (except for the
Money Market Division), we reserve the right to transfer the remaining balance
to the Money Market Division. We will do this without charge. We may deny your
request for a partial withdrawal if it would reduce your Account Value below
$10,000.
We will always pay you the amount of your partial withdrawal request (except
that we may deny your request for a partial withdrawal if it would reduce your
Account Value below $10,000). Therefore, the value of your Accumulation Units
and Fixed Account interests that we redeem will equal the amount of the
withdrawal request, plus any applicable premium tax. You can also tell us to
take income tax from the amount you want withdrawn.
We also make available a systematic withdrawal plan. Under this plan, you may
make automatic partial withdrawals in amounts and at periodic intervals that you
specify. The terms and conditions that apply to other partial withdrawals will
also apply to this plan. You may obtain additional information about how to
establish a systematic withdrawal plan from your sales representative or from us
at the addresses and telephone numbers on the first page of this Prospectus. We
reserve the right to modify or terminate the systematic withdrawal plan at any
time.
The Code imposes a penalty tax on certain premature surrenders or withdrawals.
See the "Federal Income Tax Matters" section for a discussion of this and other
tax implications of total surrenders and systematic and other partial
withdrawals. The section also discusses tax withholding requirements.
All collateral assignees of record must consent to any partial withdrawals.
ANNUITY PERIOD AND ANNUITY PAYMENT OPTIONS
ANNUITY COMMENCEMENT DATE
The Annuity Commencement Date may be any day of any month between the
Annuitant's 50th and 90th birthday. You may select the Annuity Commencement
Date on the Certificate application. You
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may also change a previously selected date any time before that date by
submitting a Written request, subject to our approval.
See "Federal Income Tax Matters" for a discussion of the penalties that may
result from distributions prior to the Annuitant's reaching age 59 1/2 under any
Certificate or after April 1 of the year following the calendar year in which
the Annuitant reaches age 70 1/2 under certain Qualified Certificates.
APPLICATION OF OWNER ACCOUNT VALUE
We will automatically apply your Variable Account Value in any Division to
provide Variable Annuity Payments based on that Division and your Fixed Account
Value to provide Fixed Annuity Payments. However, we will apply your Account
Value in different proportions, if you give us Written instructions at least 30
days before the Annuity Commencement Date.
We deduct any applicable state and local premium taxes from the amount of
Account Value that we apply to an Annuity Payment Option. Subject to any such
adjustments, we apply your Variable and Fixed Account Values to an Annuity
Payment Option, as discussed below, as of the end of the Valuation Period that
contains the 10th day before the Annuity Commencement Date.
FIXED AND VARIABLE ANNUITY PAYMENTS
We will determine your first monthly Fixed or Variable Annuity Payment using the
annuity tables in the Certificate and the amount of your Account Value that is
applied to provide the Fixed or Variable Annuity Payments.
We determine the amount of each monthly Fixed Annuity Payment thereafter based
on the terms of the Annuity Payment Option selected.
We determine the amount of each monthly Variable Annuity Payment thereafter as
follows:
. We convert the Account Value that we apply to provide Variable Annuity
Payments to a number of Annuity Units. We do this by dividing the
amount of the first Variable Annuity Payment by the value of an
Annuity Unit of a Division as of the end of the Valuation Period that
includes the 10th day before the Annuity Commencement Date. This
number of Annuity Units remains constant for any Annuitant.
. We determine the amount of each subsequent Variable Annuity Payment by
multiplying the number of Annuity Units by the value of an Annuity
Unit as of the end of the Valuation Period that contains the 10th day
before the date of each payment.
. If we base the Variable Annuity Payments on more than one Division, we
perform these calculations separately for each Division.
. The value of an Annuity Unit at the end of a Valuation Period is the
value of the Annuity Unit at the end of the previous Valuation Period,
multiplied by the net investment factor (see "Variable Account Value")
for the Valuation Period, with an offset for the 3.5% assumed interest
rate used in the Certificate's annuity tables.
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The Certificate's annuity tables use a 3.5% assumed interest rate. A Variable
Annuity Payment based on a Division will be greater than the previous month, if
the Division's investment return for the month is at an annual rate greater than
3.5%. Conversely, a Variable Annuity Payment will be less than the previous
month, if the Division's investment return is at an annual rate less than 3.5%.
ANNUITY PAYMENT OPTIONS
Sixty to ninety days before the scheduled Annuity Commencement Date, we will (1)
notify you that the Certificate is scheduled to mature, and (2) request that you
select an Annuity Payment Option.
If you have not selected an Annuity Payment Option ten days before the Annuity
Commencement Date, we will proceed as follows:
. we will extend the Annuity Commencement Date to the Annuitant's 90th
birthday, if the scheduled Annuity Commencement Date is any date
prior to the Annuitant's 90th birthday; or
. we will pay the Account Value, less any applicable charges and
premium taxes, in one sum to you, if the scheduled Annuity
Commencement Date is the Annuitant's 90th birthday.
The Code imposes minimum distribution requirements on the Annuity Payment Option
you choose for a Qualified Certificate. (See "Federal Income Tax Matters.") We
are not responsible for monitoring or advising Owners whether they are meeting
the minimum distribution requirements, unless we have received a specific
Written request to do so.
ELECTION OF ANNUITY PAYMENT OPTION
You may elect an Annuity Payment Option only if the initial annuity payment
meets the following minimum requirements:
. where you elect only Fixed or Variable Annuity Payments, the initial
payment must be at least $20; or
. where you elect a combination of Variable and Fixed Annuity Payments,
the initial payment must be at least $10 on each basis.
If the initial annuity payment falls below these amounts, we will reduce the
frequency of annuity payments. If the initial payment still falls below these
amounts, we will make a single payment to the Annuitant or other properly-
designated payee equal to your Account Value. We will deduct premium tax from
such payment, if it is required in your state.
You may elect the annuity option for payments to a Beneficiary, if you or the
Annuitant dies. If you have not made this election, the Beneficiary may do so
within 60 days after your or the Annuitant's death. (See "Death Proceeds.")
Thereafter, the Beneficiary will have all the remaining rights and powers under
the Certificate and be subject to all of its terms and conditions. We will make
the first annuity payment at the beginning of the second month following the
month in which we approve the settlement request. We will credit Annuity Units
based on Annuity Unit Values at the end of the Valuation Period that contains
the 10th day before the beginning of that second month.
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When an Annuity Payment Option becomes effective, you must deliver the
Certificate to our Administrative Center, in exchange for a payment contract
providing for the option elected.
We provide information about the relationship between the Annuitant's gender and
the amount of annuity payments, including any requirements for gender-neutral
annuity rates and in connection with certain employee benefit plans under
"Gender of Annuitant" in the Statement. (See "Contents of Statement of
Additional Information.")
AVAILABLE ANNUITY PAYMENT OPTIONS
Each Annuity Payment Option, except Option 5, is available on both a fixed and
variable basis. Option 5 is available on a fixed basis only.
OPTION 1 - LIFE ANNUITY - We make annuity payments monthly during the lifetime
of the Annuitant. These payments stop with the last payment due before the
death of the Annuitant. We do not guarantee a minimum number of payments under
this arrangement. For example, the Annuitant or other payee might receive only
one annuity payment, if the Annuitant dies before the second annuity payment.
OPTION 2 - LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN - We make
annuity payments monthly during the lifetime of an Annuitant. In addition, we
guarantee that the Beneficiary will receive monthly payments for the remainder
of the period certain, if the Annuitant dies during that period.
OPTION 3 - JOINT AND LAST SURVIVOR LIFE ANNUITY - We make annuity payments
monthly during the lifetime of the Annuitant and another payee and during the
lifetime of the survivor of the two. We stop making payments with the last
payment before the death of the survivor. We do not guarantee a minimum number
of payments under this arrangement. For example, the Annuitant or other payee
might receive only one annuity payment if both die before the second annuity
payment. The election of this option is ineffective if either one dies before
the Annuity Commencement Date. In that case, the survivor becomes the sole
Annuitant, and we do not pay death proceeds because of the death of the other
Annuitant.
OPTION 4 - PAYMENTS FOR A DESIGNATED PERIOD - We make annuity payments monthly
to an Annuitant or other properly-designated payee, or at his or her death, to
the Beneficiary, for a selected number of years ranging from five to 40. If
this option is selected on a variable basis, the designated period may not
exceed the life expectancy of the Annuitant or other properly-designated payee.
Under the fourth Option, we make no mortality guarantee, even though we reduce
Variable Annuity Payments as a result of a charge to the Separate Account that
is partially for mortality risks. (See "Charge to the Separate Account.")
A payee receiving Variable (but not Fixed) Annuity Payments under Option 4 can
elect at any time to commute (terminate) the option and receive the current
value of the annuity option in a single sum. The current value of an annuity
under Option 4 is the value of all remaining annuity payments, assumed to be
level, discounted to present value at an annual rate of 3.5%. We calculate that
value the next time we determine values after receiving your Written request for
payment. The election of a single sum payment under Option 4 is the only way
you may terminate any Annuity Payment Option once annuity payments have started.
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OPTION 5 - PAYMENTS OF A SPECIFIC DOLLAR AMOUNT - We pay the amount due in equal
monthly installments of a designated dollar amount until the remaining balance
is less than the amount of one installment. The amount of each installment may
not be less than $125 or more than $200 each year per $1,000 of the original
amount due. If the person receiving these payments dies, we continue to make
the remaining payments to the Beneficiary. Payments under this option are
available on a fixed basis only. To determine the remaining balance at the end
of any month, we decrease the balance at the end of the previous month by the
amount of any installment paid during the month. We then apply, to the
remainder, interest at a rate not less than 3.5% compounded annually. If the
remaining balance at any time is less than the amount of one installment, we
will pay the balance as the final payment under the option.
The Code may treat the election of Option 4 or Option 5 in the same manner as a
surrender of the total account. For tax consequences of such treatment, see
"Federal Income Tax Matters." In addition, the Code may not give tax-deferred
treatment to subsequent earnings.
ALTERNATIVE AMOUNT UNDER FIXED LIFE ANNUITY OPTIONS - In the case of Fixed
Annuity Payments under one of the first three Annuity Payment Options described
above, we make a special election available. In that case, the Owner (or the
Beneficiary, if the Owner has not elected a payment option) may elect monthly
payments based on single payment immediate fixed annuity rates we offer at that
time. This provision allows the Annuitant or other properly-designated payee to
receive the fixed annuity purchase rate in effect for new single payment
immediate annuity certificates, if it is more favorable.
In place of monthly payments, you may elect payments on a quarterly, semi-annual
or annual basis. In that case, we determine the amount of each annuity payment
on a basis consistent with that described above for monthly payments.
TRANSFERS
After the Annuity Commencement Date, the Annuitant or other properly-designated
payee may make six transfers every Certificate Year among the available
Divisions of the Separate Account or from the Divisions to a Fixed Annuity
Payment Option. We will assess no charge for the transfer. We do not permit
transfers from a Fixed to a Variable Annuity Payment Option. If a transfer
causes the value in any Division to fall below $500, we reserve the right to
transfer the remaining balance in that Division in the same proportion as the
transfer request. We make transfers effective at the end of the Valuation
Period in which we receive the Written transfer request at our Administrative
Center. We reserve the right to terminate or restrict transfers at any time.
DEATH PROCEEDS
DEATH PROCEEDS BEFORE THE ANNUITY COMMENCEMENT DATE
The death proceeds described below are payable to the Beneficiary under the
Certificate if any of the following events occurs before the Annuity
Commencement Date:
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. the Annuitant dies, and no Contingent Annuitant has been named under
a Non-Qualified Certificate;
. the Annuitant dies, and we also receive proof of death of any named
Contingent Annuitant; or
. the Owner (including the first to die in the case of joint Owners) of
a Non-Qualified Certificate dies, regardless of whether the deceased
Owner was also the Annuitant. (However, if the Beneficiary is the
Owner's surviving spouse, or the Owner's surviving spouse is a joint
Owner, the surviving spouse may elect to continue the Certificate as
described later in this section.)
If the deceased Owner was a joint Owner, we will pay the death proceeds to the
surviving joint Owner. In this case, we will treat the surviving joint Owner as
the Beneficiary, and we will not recognize any other designation of Beneficiary.
However, joint Owners may provide written instructions to pay death proceeds in
a different manner.
Before age 81, the death proceeds will equal the greater of:
. the sum of all net purchase payments made (less any premium taxes we
deducted previously and all prior partial withdrawals); or
. the Owner's Account Value as of the end of the Valuation Period in
which we receive, at our Administrative Center, proof of death and
the Written request as to the manner of payment.
At age 81 and afterward, the death proceeds will equal the Account Value.
In all cases, we will deduct any applicable premium taxes.
We will pay the death proceeds to the Beneficiary as of the date the proceeds
become payable. Such date is the end of the Valuation Period in which we
receive:
. proof of the Owner's or Annuitant's death, and
. a Written request from the Beneficiary specifying the manner of
payment.
If the Owner has not already done so, the Beneficiary may, within 60 days after
the date the death proceeds become payable, elect to receive the death proceeds
as (1) a single sum or (2) in the form of one of the Annuity Payment Options
provided in the Certificate. (See "Annuity Payment Options.") If we do not
receive a request specifying the manner of payment, we will make a single
payment, based on values we determine at that time.
If the Owner (including the first to die if there are joint Owners) under a Non-
Qualified Certificate dies before the Annuity Commencement Date, we will
distribute all amounts payable under the Certificate in accordance with the
following rules:
. We will distribute all amounts:
(a) within five years of the date of death, or
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(b) if the Beneficiary elects, as annuity payments, beginning within
one year of the date of death and continuing over a period not
extending beyond the life or life expectancy of the Beneficiary.
. If the Beneficiary is the Owner's surviving spouse, the spouse may
elect to continue the Certificate as the new Owner. If the original
Owner was the Annuitant, the surviving spouse may also elect to
become the new Annuitant. This election is also available to the
surviving spouse who is a joint Owner, even if the surviving spouse
is not the Beneficiary. In this case, we will treat the surviving
spouse as the Beneficiary, and we will not recognize any other
designation of Beneficiary.
. If the Owner is not a natural person, these distribution requirements
apply at the death of the primary Annuitant, within the meaning of
the Code. Under a parallel section of the Code, similar requirements
apply to retirement plans for which we issue Qualified Certificates.
Failure to satisfy the requirements described in this section may result in
serious adverse tax consequences.
DEATH PROCEEDS AFTER THE ANNUITY COMMENCEMENT DATE
If the Annuitant dies on or after the Annuity Commencement Date, the amounts
payable to the Beneficiary or other properly-designated payee are any continuing
payments under the Annuity Payment Option in effect. (See "Annuity Payment
Options.") In such case, the payee will:
. have all the remaining rights and powers under a Certificate, and
. be subject to all the terms and conditions of the Certificate.
Also, if the Annuitant dies on or after the Annuity Commencement Date, no
previously named Contingent Annuitant can become the Annuitant.
If the payee under a Non-Qualified Certificate dies after the Annuity
Commencement Date, we will distribute any remaining amounts payable under the
terms of the Annuity Payment Option at least as rapidly as under the method of
distribution in effect when the payee died. If the payee is not a natural
person, this requirement applies upon the death of the primary Annuitant, within
the meaning of the Code.
Under a parallel section of the Code, similar requirements apply to retirement
plans for which we issue Qualified Certificates.
Failure to satisfy the requirements described in this section may result in
serious adverse tax consequences.
PROOF OF DEATH
We accept the following as proof of any person's death:
. a certified death certificate;
. a certified decree of a court of competent jurisdiction as to the
finding of death;
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. a written statement by a medical doctor who attended the deceased at
the time of death; or
. any other proof satisfactory to us.
Once we have paid the death proceeds, the Certificate terminates, and our
obligations are complete.
CHARGES UNDER THE CERTIFICATES
PREMIUM TAXES
When applicable, we will deduct premium taxes imposed by certain states. We may
deduct such amount either at the time the tax is imposed or later. We may
deduct the amount as follows:
. from purchase payment(s) when received;
. from the Owner's Account Value at the time annuity payments begin;
. from the amount of any partial withdrawal; or
. from proceeds payable upon termination of the Certificate for any
other reason, including death of the Owner or Annuitant, or surrender
of the Certificate.
If premium tax is paid, USL may reimburse itself for the tax when making the
deduction under the second, third, and fourth items on the list, immediately
above, by multiplying the sum of Purchase Payments being withdrawn by the
applicable premium tax percentage.
Applicable premium tax rates depend upon the Owner's then-current place of
residence. Applicable rates currently range from 0% to 3.5%. The rates are
subject to change by legislation, administrative interpretations, or judicial
acts. We will not make a profit on this charge.
TRANSFER CHARGES
We describe the charges to pay for the expense of making transfers under
"Transfer, Automatic Rebalancing, Surrender and Partial Withdrawal of Owner
Account Value - Transfers" and "Annuity Period and Annuity Payment Options -
Transfers." These charges are not designed to yield a profit.
CHARGE TO THE SEPARATE ACCOUNT
We deduct from Separate Account assets a daily charge at an annualized rate of
0.40% (which we may change, but which will never exceed 0.66%) of the average
daily net asset value of the Separate Account attributable to the Certificates.
This charge (1) offsets administrative expenses and (2) compensates us for
assuming mortality and expense risks under the Certificate. The 0.40% charge
divides into 0.04% for administrative expenses and 0.36% for assumption of
mortality and expense risk.
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We do not expect to earn a profit on that portion of the charge that is for
administrative expenses. However, we do expect to derive a profit from the
portion that is for the assumption of mortality and expense risks. There is no
necessary relationship between the amount of administrative charges deducted for
a given Certificate and the amount of expenses actually attributable to that
Certificate.
In assuming the mortality risk, we incur the risks that
. our actuarial estimate of mortality rates may prove erroneous,
. Annuitants will live longer than expected, and
. more Owners or Annuitants than expected will die at a time when the
death benefit we guarantee is higher than the net surrender value of
their interests in the Certificates.
In assuming the expense risk, we incur the risk that the revenues from the
expense charges under the Certificates (charges that we guarantee will not
increase) will not cover our expense of administering the Certificates.
MISCELLANEOUS
Each Series pays charges and expenses out of its assets. The prospectus for
each Series describes the charges and expenses.
We reserve the right to impose charges or establish reserves for any federal or
local taxes that we incur today or may incur in the future and that we deem
attributable to the Certificates.
SYSTEMATIC WITHDRAWAL PLAN
You may make automatic partial withdrawals, at periodic intervals, through a
systematic withdrawal program. Minimum payments are $100. You may choose from
payment schedules of monthly, quarterly, semi-annual, or annual payments. You
may start, stop, increase, or decrease payments. You may elect to (1) start
withdrawals as early as 30 days after the issue date of the Certificate and (2)
take withdrawals from the Fixed Account or any Division. Systematic withdrawals
are subject to the terms and conditions applicable to other partial withdrawals.
REDUCTION IN ADMINISTRATIVE EXPENSE CHARGE
We may reduce the Administrative Expense Charge imposed under certain Qualified
Certificates for employer-sponsored plans. Any such reductions will reflect
differences in costs or services and will not be unfairly discriminatory as to
any person. Differences in costs and services result from factors such as
reduced sales expenses or administrative efficiencies relating to serving a
large number of employees of a single employer and functions assumed by the
employer that we otherwise would have to perform.
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OTHER ASPECTS OF THE CERTIFICATES
Only an officer of USL can agree to change or waive the provisions of any
Certificate. The Certificates are non-participating, which means they are not
entitled to share in any dividends, profits or surplus of USL.
OWNERS, ANNUITANTS, AND BENEFICIARIES; ASSIGNMENTS
You, as the Owner of a Certificate, will be the same as the Annuitant, unless
you choose a different Annuitant when you purchase a Certificate. In the case
of joint ownership, both Owners must join in the exercise of any rights or
privileges under the Certificate. You choose the Annuitant and any Contingent
Annuitant in the application for a Certificate and may not change that choice.
You choose the Beneficiary and any Contingent Beneficiary when you purchase a
Certificate. You may change a Beneficiary or Contingent Beneficiary before the
Annuity Commencement Date, while the Annuitant is still alive. The payee may
make this change after the Annuity Commencement Date.
We will make any designation of a new Beneficiary or Contingent Beneficiary
effective as of the date it is signed. However, the change in designation will
not affect any payments we make or action we take before we receive the Written
request. We also need the Written consent of any irrevocably-named Beneficiary
or Contingent Beneficiary before we make a change. Under certain retirement
programs, the law may require spousal consent to name or change a Beneficiary to
a person other than the spouse. We are not responsible for the validity of any
designation of a Beneficiary or Contingent Beneficiary.
If the Beneficiary or Contingent Beneficiary is not living at the time we are to
make any payment, you as the Owner will be the Beneficiary. If you are not then
living, your estate will be the Beneficiary.
In the case of joint ownership, we will treat the surviving joint Owner as the
Beneficiary upon the death of a joint Owner. We will not recognize any other
designation of Beneficiary, unless joint Owners provide written instructions to
pay death proceeds in a different manner.
Owners and other payees may assign their rights under Qualified Certificates
only in certain narrow circumstances referred to in the Certificates. Owners
and other payees may assign their rights under Non-Qualified Certificates,
including their ownership rights. We take no responsibility for the validity of
any assignment. Owners must make a change in ownership rights in Writing and
send a copy to our Administrative Center. We will make the change effective on
the date it was made. However, we are not bound by a change until the date we
record it. The rights under a Certificate are subject to any assignment of
record at our Administrative Center. An assignment or pledge of a Certificate
may have adverse tax consequences. (See "Federal Income Tax Matters.")
REPORTS
We will mail to Owners (or anyone receiving payments following the Annuity
Commencement Date), any reports and communications required by applicable law.
We will mail to the last known address of record. You should give us prompt
written notice of any address change.
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RIGHTS RESERVED BY US
Upon notice to the Owner, we may modify a Certificate to the extent necessary in
order to:
. reflect a change in the Separate Account or any Division;
. create new separate accounts;
. operate the Separate Account in any form permitted under the 1940 Act
or in any other form permitted by law;
. transfer any assets in any Division to another Division, to one or
more separate accounts, or to the Fixed Account;
. add, combine or remove Divisions in the Separate Account, or combine
the Separate Account with another separate account;
. add, restrict or remove Guarantee Periods of the Fixed Account;
. make any new Division available to you on a basis we determine;
. substitute, for the shares held in any Division, the shares of
another Series or the shares of another investment company or any
other investment permitted by law;
. make any changes required by the Code or by any other law, regulation
or interpretation in order to continue treatment of the Certificate
as an annuity;
. commence deducting premium taxes or adjust the amount of premium
taxes deducted in accordance with state law that applies; or
. make any changes required to comply with the rules of any Series.
When required by law, we will obtain (1) your approval of changes and (2) the
approval of any appropriate regulatory authority.
PAYMENT AND DEFERMENT
We will normally pay amounts surrendered or withdrawn from a Certificate within
seven calendar days after the end of the Valuation Period in which we receive
the Written surrender or withdrawal request at our Administrative Center. A
Beneficiary may request the manner of payment of death proceeds within 60 days
after the death proceeds become payable. If we do not receive a Written request
specifying the manner of payment, we will pay the death benefit as a single sum,
normally within seven calendar days after the end of the Valuation Period that
contains the last day of the 60 day period. We reserve the right, however, to
defer payments or transfers out of the Fixed Account Value for up to six months.
Also, we reserve the right to defer payment of that portion of your Account
Value that is attributable to a purchase payment made by check for a reasonable
period of time (not to exceed 15 days) to allow the check to clear the banking
system.
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<PAGE>
Finally, we reserve the right to defer payment of any surrender, annuity
payment, or death proceeds out of the Variable Account Value 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 as determined by the Securities and Exchange Commission
("SEC");
. the SEC determines that an emergency exists, as a result of which
disposal of securities held in a Division is not reasonably
practicable or it is not reasonably practicable to fairly determine
the Variable Account Value; or
. the SEC by order permits the delay for the protection of Owners.
We may also postpone transfers and allocations of Account Value among the
Divisions and the Fixed Account under these circumstances.
FEDERAL INCOME TAX MATTERS
GENERAL
We cannot comment on all of the federal income tax consequences associated with
the Certificates. Federal income tax law is complex. Its application to a
particular person may vary according to facts peculiar to the person.
Consequently, we do not intend for you to take this discussion as tax advice.
You should consult with a competent tax adviser before purchasing a Certificate.
We base this discussion on our understanding of the law, regulations and
interpretations existing on the date of this Prospectus. Congress, in the past,
has enacted legislation changing the tax treatment of annuities in both the
Qualified and the Non-Qualified markets and may do so again in the future. The
Treasury Department may issue new or amended regulations or other
interpretations of existing tax law. The courts may also interpret the tax law
in ways that affect the tax treatment of annuities. Any such change could have
a retroactive effect. We suggest that you consult your legal or tax adviser on
these issues.
The discussion does not address federal estate and gift tax, social security
tax, or any state or local tax consequences associated with the Certificates.
NON-QUALIFIED CERTIFICATES
Purchase Payments. Purchasers of a Certificate that does not qualify for
special tax treatment and is "Non-Qualified" may not deduct from their gross
income the amount of purchase payments made.
Tax Deferral Before Annuity Commencement Date. Owners who are natural persons
are not taxed currently on (1) increases in their Account Value resulting from
interest earned in the Fixed Account, or (2) the investment experience of the
Separate Account so long as the Separate Account complies with certain
diversification requirements. These requirements mean that the Separate Account
must
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<PAGE>
invest in Series that are "adequately diversified" in accordance with Treasury
Department regulations. We do not control the Series, but we have received
commitments from the investment advisers to the Series to use their best efforts
to operate the Series in compliance with these diversification requirements. A
Certificate investing in a Series that failed to meet the diversification
requirements would subject Owners to current taxation of income in the
Certificate for the period of such diversification failure (and any subsequent
period). Income means the excess of the Account Value over the Owner's
investment in the Certificate (discussed below).
Control over allocation of values among different investment alternatives may
cause Owners or persons receiving annuity payments to be treated as the owners
of the Separate Account's assets for tax purposes. However, current regulations
do not provide guidance as to how to avoid this result. We reserve the right to
amend the Certificates in any way necessary to avoid this result. The Treasury
Department has stated that it may establish standards through regulations or
rulings. These standards may apply only prospectively, although they could
apply retroactively if the Treasury Department considers the standards not to
reflect a new position.
Owners that are not natural persons -- that is, Owners such as corporations --
are taxed currently on annual increases in their Account Value, unless an
exception applies. Exceptions apply for, among other things, Owners that are
not natural persons but that hold a Certificate as an agent for a natural
person.
Taxation of Annuity Payments. Part of each annuity payment received after the
Annuity Commencement Date is excludible from gross income.
In the case of Fixed Annuity Payments, the excludible portion is found by
multiplying:
. the amount paid, by
. the ratio of the investment in the Certificate (discussed below) to
the expected return under the Fixed Annuity Payment Option.
In the case of Variable Annuity Payments, the excludible portion is the
investment in the Certificate divided by the number of expected payments.
In both cases, the remaining portion of each annuity payment, and all payments
made after the investment in the Certificate has been reduced to zero, are
included in the payee's income. Should annuity payments stop on account of the
death of the Annuitant before the investment in the Certificate has been fully
paid out, the payee is allowed a deduction for the unpaid amount. If the payee
is the Annuitant, the deduction is taken on the final tax return. If the payee
is a Beneficiary, that Beneficiary may receive the balance of the total
investment as payments are made or on the Beneficiary's final tax return. An
Owner's "investment in the Certificate" is the amount equal to the portions of
purchase payments made by or on behalf of the Owner that have not been excluded
or deducted from the individual's gross income, less amounts previously received
under the Certificate that were not included in income.
Taxation of Partial Withdrawals and Total Surrenders. Partial withdrawals from
a Certificate are includible in income to the extent that the Owner's Account
Value exceeds the investment in the Certificate. In the event you surrender a
Certificate in its entirety, the amount of your investment in the
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<PAGE>
Certificate is excludible from income, and any amount you receive in excess of
your investment in the Certificate is includible in income. All annuity
contracts or Certificates we issue to the same Owner during any calendar year
are aggregated for purposes of determining the amount of any distribution that
is includible in gross income.
Penalty Tax on Premature Distributions. In the case of such a distribution,
there may be imposed a federal tax penalty equal to 10% of the amount treated as
taxable income. The penalty tax will not apply, however, to distributions:
. made on or after the recipient reaches age 59 1/2,
. made on account of the recipient's becoming disabled,
. that are made after the death of the Owner before the Annuity
Commencement Date or of the payee after the Annuity Commencement Date
(or if such person is not a natural person, that are made after the
death of the primary Annuitant, as defined in the Code); or
. that are part of a series of substantially equal periodic payments
made at least annually over the life (or life expectancy) of the
Annuitant or the joint life (or joint life expectancies) of the
Annuitant and the Beneficiary, provided such payments are made for a
minimum of 5 years and the distribution method is not changed before
the recipient reaches age 59 1/2 (except in the case of death or
disability).
Premature distributions may result for example, from the following:
. an early Annuity Commencement Date,
. an early surrender,
. partial withdrawal from a Certificate, including a partial withdrawal
under a systematic withdrawal plan,
. assignment of a Certificate, or
. the early death of an Annuitant, unless the third clause listed above
involving the death of the Owner, applies.
Payment of Death Proceeds. Special rules apply to the distribution of any death
proceeds payable under the Certificate. (See "Death Proceeds.")
Assignments and Loans. An assignment, loan, or pledge under a Non-Qualified
Certificate is taxed in the same manner as a partial withdrawal, as described
above. Repayment of a loan or release of an assignment or pledge is treated as
a new purchase payment.
Individual Retirement Annuities ("IRAs")
Purchase Payments. Individuals who are not active participants in a tax-
qualified retirement plan may, in any year, deduct from their taxable income
purchase payments for an IRA equal to the lesser of
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<PAGE>
$2,000 or 100% of the individual's earned income. In the case of married
individuals filing a joint return, the deduction will, in general, be the lesser
of $4,000 or 100% of the combined earned income of both spouses, reduced by any
deduction for an IRA purchase payment allowed to the spouse. Single persons who
participate in a tax-qualified retirement plan and who have adjusted gross
income not in excess of $31,000 may fully deduct their IRA purchase payments.
Those who have adjusted gross income in excess of $41,000 will not be able to
deduct purchase payments. For those with adjusted gross income in the range
between $31,000 and $41,000, the deduction decreases to zero, based on the
amount of income. Beginning in 2000, that income range will increase, as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 and
thereafter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$32,000 $33,000 $34,000 $40,000 $45,000 $50,000
to to to to to to
$42,000 $43,000 $44,000 $50,000 $55,000 $60,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Similarly, the otherwise deductible portion of an IRA purchase payment will be
phased out, in the case of married individuals filing joint tax returns, with
adjusted gross income between $51,000 and $61,000, and in the case of married
individuals filing separately, with adjusted gross income between $0 and
$10,000. (A husband and wife who file separate returns and live apart at all
times during the taxable year are not treated as married individuals.)
Beginning in 2000, the income range over which the otherwise deductible portion
of an IRA purchase payment will be phased out for married individuals filing
joint tax returns will increase as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 and
thereafter
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$52,000 $53,000 $54,000 $60,000 $65,000 $70,000 $75,000 $ 80,000
t0 to to to to to to to
$62,000 $63,000 $64,000 $70,000 $75,000 $80,000 $85,000 $100,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
A married individual filing a joint tax return, who is not an active participant
in a tax-qualified retirement plan, but whose spouse is an active participant in
such a plan, may, in any year, deduct from his or her taxable income purchase
payments for an IRA equal to the lesser of $2,000 or 100% of the individual's
earned income. For the individual, the adjusted gross income range over which
the otherwise deductible portion of an IRA purchase payment will be phased out
is $150,000 to $160,000.
Tax Free Rollovers. Amounts may be transferred, in a tax-free rollover, from
(1) a tax-qualified plan to an IRA or (2) from one IRA to another IRA if, the
transfer meets certain conditions. All taxable distributions ("eligible
rollover distributions") from tax-qualified plans are eligible to be rolled over
with the exception of:
. annuities paid over a life or life expectancy,
. installments for a period of ten years or more; and
. required minimum distributions under section 401(a)(9) of the Code.
Rollovers may be accomplished in two ways. First, we may pay an eligible
rollover distribution directly to an IRA (a "direct rollover"). Second, we may
pay the distribution directly to the Annuitant
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and then, within 60 days of receipt, the Annuitant may roll the amount over to
an IRA. However, any amount that was not distributed as a direct rollover will
be subject to 20% income tax withholding.
Distributions from an IRA. Amounts received under an IRA as annuity payments,
upon partial withdrawal or total surrender, or on the death of the Annuitant,
are included in the Annuitant's or other recipients' income. If nondeductible
purchase payments have been made, a pro rata portion of such distributions may
not be includible in income. A 10% penalty tax is imposed on the amount
includible in gross income from distributions that occur before the Annuitant
reaches age 59 1/2 and that are not made on account of death or disability, with
certain exceptions. These exceptions include:
. distributions that are part of a series of substantially equal
periodic payments made at least annually over the life (or life
expectancy) of the Annuitant or the joint lives (or joint life
expectancies) of the Annuitant and the Beneficiary; provided such
payments are made for a minimum of five years and the distribution
method is not changed before the recipient reaches age 59 1/2 (except
in the case of death or disability),
. distributions for medical expenses in excess of 7.5% of the
Annuitant's adjusted gross income and withdrawals for medical
insurance (without regard to the 7.5% AGI floor) if the individual
has received unemployment compensation under federal or state law for
at least 12 consecutive weeks under certain conditions,
. distributions for qualified first-time home purchases for the
individual, a spouse, children, grandchildren, or ancestor of the
individual or the individual's spouse, subject to a $10,000 lifetime
maximum; and
. distributions for higher education expenses for the individual, a
spouse, children, or grandchildren.
Distributions of minimum amounts required by the Code must commence by April 1
of the calendar year following the calendar year in which the Annuitant reaches
age 70 1/2 or retires (whichever is later). Additional distribution rules apply
after the death of the Annuitant. These rules are similar to those governing
distributions on the death of an Owner (or other payee during the Annuity
Period) under a Non-Qualified Certificate. (See "Death Proceeds.") Failure to
comply with the minimum distribution rules will result in a penalty tax of 50%
of the amount by which the minimum distribution required exceeds the actual
distribution.
ROTH IRAS
Individuals may purchase a new type of non-deductible IRA, known as a Roth IRA.
Purchase payments for a Roth IRA are limited to $2,000 per year. This permitted
contribution is phased out for adjusted gross income between $95,000 and
$110,000 in the case of single taxpayers, between $150,000 and $160,000 in the
case of married taxpayers filing joint returns, and between $0 and $10,000 in
the case of married taxpayers filing separately. An overall $2,000 annual
limitation continues to apply to all of a taxpayer's IRA contributions,
including Roth IRAs and non-Roth IRAs.
An individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents
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<PAGE>
income or a previously deductible IRA contribution. There are no similar
limitations on rollovers from a Roth IRA to another Roth IRA.
Qualified distributions from Roth IRAs are entirely tax-free. A qualified
distribution requires that (1) the individual has held the Roth IRA for at least
five years, and (2) the distribution is made either after the individual reaches
age 59 1/2, on the individual's death or disability, or as qualified first-time
home purchase. Qualified Distributions for a qualified first-time home
purchase, are subject to a $10,000 lifetime maximum for the individual, a
spouse, child, grandchild, or ancestor of such individual or the individual's
spouse.
SIMPLIFIED EMPLOYEE PENSION PLANS
Eligible employers may establish an IRA plan known as a simplified employee
pension plan ("SEP"), if certain requirements are met. An employee may make
contributions to a SEP in accordance with the rules applicable to IRAs discussed
above. Employer contributions to an employee's SEP are deductible by the
employer and are not currently includible in the taxable income of the employee,
provided that total employer contributions do not exceed the lesser of 15% of an
employee's compensation or $30,000.
SIMPLE RETIREMENT ACCOUNTS
Eligible employers may establish an IRA plan known as a simple retirement
account ("SRA"), if they meet certain requirements. Under an SRA, the employer
contributes elective employee compensation deferrals up to a maximum of $6,000 a
year to the employee's SRA. The employer must, in general, make a fully vested
matching contribution for employee deferrals up to a maximum of 3% of
compensation.
OTHER QUALIFIED PLANS
Purchase Payments. Purchase payments made by an employer under a pension,
profit sharing, or annuity plan qualified under section 401 or 403(a) of the
Code, not in excess of certain limits, are deductible by the employer. The
purchase payments are also excluded from the current income of the employee.
Distributions Before the Annuity Commencement Date. Purchase payments
includible in an employee's taxable income (less any amounts previously received
that were not includible in the employee's taxable income) represent the
employee's "investment in the Certificate." Amounts received before the Annuity
Commencement Date under a Certificate in connection with a section 401 or 403(a)
plan are generally allocated on a pro-rata basis between the employee's
investment in the Certificate, and other amounts. A lump-sum distribution will
not be includible in income in the year of distribution if the employee
transfers, within 60 days of receipt, all amounts received (less the employee's
investment in the Certificate), to another tax-qualified plan, to an individual
retirement account or an IRA in accordance with the rollover rules under the
Code.
However, any amount that is not distributed as a direct rollover will be subject
to 20% income tax withholding. (See "Tax Free Rollovers.") Special tax
treatment may be available, for tax years beginning before December 31, 1999, in
the case of certain lump-sum distributions that are not rolled over to another
plan or IRA.
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<PAGE>
A 10% penalty tax is imposed on the amount includible in gross income from
distributions that occur before the employee reaches age 59 1/2 and that are not
made on account of death or disability, with certain exceptions. These
exceptions include distributions that are:
. part of a series of substantially equal periodic payments made at
least annually beginning after the employee separates from service
and made over the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and the
Beneficiary, provided such payments are made for at least 5 years and
the distribution method is not changed before the recipient reaches
age 59 1/2 (except in the case of death or disability),
. made after the employee's separation from service on account of early
retirement after attaining age 55,
. made to pay for qualified higher education or first-time home buyer
expenses,
. made to an alternate payee pursuant to a qualified domestic relations
order, if the alternate payee is the spouse or former spouse of the
employee; or
. distributions for medical expenses in excess of 7.5% of the
Annuitant's adjusted gross income and withdrawals for medical
insurance (without regard to the 7.5% AGI floor) if the individual
has received unemployment compensation under federal or state law for
at least 12 consecutive weeks under certain conditions.
Annuity Payments. A portion of annuity payments received under Certificates for
section 401 and 403(a) plans after the Annuity Commencement Date may be
excludible from the employee's income, in the manner discussed above, in
connection with Variable Annuity Payments, under "Non-Qualified Certificates -
Taxation of Annuity Payments." The difference is that, here, the number of
expected payments is determined under a provision in the Code. Distributions of
minimum amounts required by the Code generally must commence by April 1 of the
calendar year following the calendar year in which the employee reaches age 70
1/2 (or retires, if later). Failure to comply with the minimum distribution
rules will result in a penalty tax of 50% of the amount by which the minimum
distribution required exceeds the actual distribution.
Self-Employed Individuals. Various special rules apply to tax-qualified plans
established by self-employed individuals.
PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS
Purchase Payments. Private taxable employers may establish unfunded, Non-
Qualified deferred compensation plans for a select group of management or highly
compensated employees and/or for independent contractors. To avoid current
taxation these benefits must be subject to a substantial risk of forfeiture.
These types of programs allow individuals to defer (1) receipt of up to 100% of
compensation that would otherwise be includible in income, and (2) payment of
federal income taxes on the amounts.
40
<PAGE>
Deferred compensation plans represent a contractual promise on the part of the
employer to pay current compensation at some future time. The Certificate is
owned by the employer and is subject to the claims of the employer's creditors.
The individual has no right or interest in the Certificate and is entitled only
to payment from the employer's general assets in accordance with plan
provisions. Purchase payments are not currently deductible by the employer until
benefits are included in the taxable income of the employee.
Taxation of Distributions. Amounts that an individual receives from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
FEDERAL INCOME TAX WITHHOLDING AND REPORTING
Amounts distributed from a Certificate, to the extent includible in taxable
income, are subject to federal income tax withholding.
In some cases, if you own more than one Qualified annuity contract, the
contracts may be considered together to determine whether the federal tax law
requirement for minimum distributions after age 70 1/2, or retirement in
appropriate circumstances, has been satisfied. You may rely on distributions
from another annuity contract or certificate to satisfy the minimum distribution
requirement under a Qualified Certificate we issued. However, you must sign a
waiver releasing us from any liability to you for not calculating and reporting
the amount of taxes and penalties payable for failure to make required minimum
distributions under the Certificate.
TAXES PAYABLE BY USL AND THE SEPARATE ACCOUNT
USL is taxed as a life insurance company under the Code. The operations of the
Separate Account are part of the total operations of USL and are not taxed
separately. Under existing federal income tax laws, USL is not taxed on
investment income derived by the Separate Account (including realized and
unrealized capital gains) with respect to the Certificates. USL reserves the
right to allocate to the Certificates any federal, state or other tax liability
that may result in the future from maintenance of the Separate Account or the
Certificates.
Certain Series may elect to pass through to USL any taxes withheld by foreign
taxing jurisdictions on foreign source income. Such an election will result in
additional taxable income and income tax to USL. The amount of additional income
tax, however, may be more than offset by credits for the foreign taxes withheld
that the Series will also pass through. These credits may provide a benefit to
USL.
DISTRIBUTION ARRANGEMENTS
Individuals who sell the Certificates will be licensed by state insurance
authorities as agents of USL. The individuals will also be registered
representatives of (1) American General Securities Incorporated ("AGSI"), the
principal underwriter of the Certificates, or (2) other broker-dealer firms.
However, some individuals may be representatives of firms that are exempt from
broker-dealer regulation. AGSI and any non-exempt broker-dealer firms are
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as broker-dealers and are members of the National
Association of Securities Dealers, Inc.
41
<PAGE>
AGSI is an affiliate of USL. AGSI's principal business address is 2727 Allen
Parkway, Houston, Texas 77019-2191. USL offers the Certificates on a continual
basis. USL does not pay any compensation for distribution of the Certificates.
SERVICES AGREEMENTS
American General Life Companies ("USLC") is party to a general services
agreement with USL. AGLC, an affiliate of USL, is a corporation incorporated in
Delaware on November 24, 1997. Its address is 2727-A Allen Parkway, Houston,
Texas 77019-2191. Under this agreement, AGLC provides services to USL,
including most of the administrative, data processing, systems, customer
services, product development, actuarial, auditing, accounting and legal
services for USL and the Certificates.
USL has entered into administrative services agreements with the advisers or
managers for the mutual funds that offer shares to the Divisions. USL receives
fees for the administrative services it performs. These fees do not result in
any additional charges under the Certificates that are not described under
"Charges under the Certificates."
LEGAL MATTERS
We are not involved in any legal matters about the Separate Account that would
be considered material to the interests of Owners. Pauletta P. Cohn, Esquire,
Associate General Counsel of AGLC has passed upon the legality of the
Certificates described in this Prospectus. Freedman, Levy, Kroll & Simonds,
Washington, D.C., has advised USL on certain federal securities law matters.
YEAR 2000 CONSIDERATIONS
Internal Systems. USL's ultimate parent, American General Corporation (AGC), has
numerous technology systems that are managed on a decentralized basis. AGC's
Year 2000 readiness efforts are being undertaken by its key business units with
centralized oversight. Each business unit, including USL, has developed and is
implementing a plan to minimize the risk of a significant negative impact on its
operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of our information technology and non-
information technology systems; (2) assess which items in the inventory may
expose us to business interruptions due to Year 2000 issues; (3) reprogram or
replace systems that are not Year 2000 ready; (4) test systems to prove that
they will function into the next century as they do currently; and (5) return
the systems to operations. As of December 31, 1998, substantially all of our
critical systems are Year 2000 ready and have been returned to operations.
However, activities (3) through (5) for certain systems are ongoing, with vendor
upgrades expected to be received during the first half of 1999.
Third Party Relationships. We have relationships with various third parties who
must also be Year 2000 ready. These third parties provide (or receive)
resources and services to (or from) USL and
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include organizations with which we exchange information. Third parties include
vendors of hardware, software, and information services; providers of
infrastructure services such as voice and data communications and utilities for
office facilities; investors; customers; distribution channels; and joint
venture partners. Third parties differ from internal systems in that we exercise
less, or no, control over Year 2000 readiness. We developed a plan to assess and
attempt to reduce the risks associated with the potential failure of third
parties to achieve Year 2000 readiness. The plan includes the following
activities: (1) identify and classify third party dependencies; (2) research,
analyze, and document Year 2000 readiness for critical third parties; and (3)
test critical hardware and software products and electronic interfaces. As of
December 31, 1998, AGC has identified and assessed approximately 700 critical
third party dependencies, including those relating to USL. A more detailed
evaluation will be completed during first quarter 1999 as part of our
contingency planning efforts. Due to the various stages of third parties' Year
2000 readiness, our testing activities will extend through 1999.
Contingency Plans. USL and its affiliates have commenced contingency planning
to reduce the risk of Year 2000-related business failures. The contingency
plans, which address both internal systems and third party relationships,
include the following activities: (1) evaluate the consequences of failure of
business processes with significant exposure to Year 2000 risk; (2) determine
the probability of a Year 2000-related failure for those processes that have a
high consequence of failure; (3) develop an action plan to complete contingency
plans for those processes that rank high in consequence and probability of
failure; and (4) complete the applicable action plans. We are currently
developing contingency plans and expect to substantially complete all
contingency planning activities during the second quarter of 1999.
Risks and Uncertainties. Based on our plans to make internal systems ready for
Year 2000, to deal with third party relationships, and to develop contingency
actions, we believe that we will experience at most isolated and minor
disruptions of business processes following the turn of the century. Such
disruptions are not expected to have a material effect on USL's future results
of operations, liquidity, or financial condition. However, due to the size and
complexity of this project, risks and uncertainties exist, and we cannot predict
a most reasonably likely worst case scenario. If conversion of our internal
systems is not completed on a timely basis (due to non-performance by
significant third-party vendors, lack of qualified personnel to perform the Year
2000 work, or other unforeseen circumstances in completing our plans), or if
critical third parties fail to achieve Year 2000 readiness on a timely basis,
the Year 2000 issues could have a material adverse impact on our operations
following the turn of the century.
Costs. Through December 31, 1998, USL has incurred, and anticipates that it
will continue to incur, costs for internal staff, third-party vendors, and other
expenses to achieve Year 2000 readiness. The cost of activities related to Year
2000 readiness has not had a material adverse effect on our results of
operations or financial condition. In addition, we have elected to accelerate
the planned replacement of certain systems as part of the Year 2000 plans.
Costs of the replacement systems are not passed to Divisions of the Separate
Account.
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<PAGE>
OTHER INFORMATION ON FILE
We have filed a Registration Statement with the Securities and Exchange
Commission under the Securities Act of 1933 for the Certificates described in
this Prospectus. We have not included all of the information in the
Registration Statement and its exhibits. Statements contained in this
Prospectus concerning the group master contract, Certificates and other legal
instruments are intended to be summaries. For a complete statement of their
terms, you should refer to the documents that we filed with the Securities and
Exchange Commission.
We will send you a Statement on request without charge. Its contents are as
follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
General Information..................................................... 2
Regulation and Reserves................................................. 2
Independent Auditors.................................................... 4
Services................................................................ 4
Principal Underwriter................................................... 4
Annuity Payments........................................................ 5
Gender of Annuitant................................................... 5
Misstatement of Age or Gender and Other Errors....................... 5
Change of Investment Adviser or Investment Policy....................... 5
Performance Data for the Divisions...................................... 5
Average Annual Total Return Calculations.............................. 5
Cumulative Total Return Calculations.................................. 6
Hypothetical Performance.............................................. 6
Money Market Division Yield and Effective Yield Calculations.......... 7
Performance Comparisons............................................... 8
Effect of Tax-Deferred Accumulation..................................... 9
Financial Statements.................................................... 10
Index to Financial Statements........................................... 11
44
<PAGE>
THE UNITED STATES LIFE INSURANCE COMPANY
IN THE CITY OF NEW YORK
SEPARATE ACCOUNT USL VA-R
SELECT RESERVE(SM)
FLEXIBLE PAYMENT VARIABLE AND
FIXED GROUP DEFERRED ANNUITY CERTIFICATES
OFFERED BY
THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK
ADMINISTRATIVE CENTER
P.O. BOX 1401, HOUSTON, TEXAS 77251-1401
1-800-246-1924
STATEMENT OF ADDITIONAL INFORMATION
Dated July 1, 1999
This Statement of Additional Information ("Statement") is not a prospectus. You
should read it with the Prospectus for The United States Life Insurance Company
in the City of New York Separate Account USL VA-R (the "Separate Account"),
dated July 1, 1999, concerning flexible payment variable and fixed group
deferred annuity Select Reserve(SM) certificates (the "Certificates"). The
Separate Account invests in certain Series of the:
. American General Series Portfolio Company,
. Hotchkis and Wiley Variable Trust,
. LEVCO Series Trust,
. Navellier Variable Insurance Series Fund, Inc.,
. OFFITBANK Variable Insurance Fund, Inc.,
. Royce Capital Fund, and
. Wright Managed Blue Chip Series Trust.
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You can obtain a copy of the Prospectus for the Certificates and any Prospectus
supplements by contacting The United States Life Insurance Company in the City
of New York ("USL") at the address or telephone numbers given above. You have
the option of receiving benefits on a fixed basis through USL's Fixed Account or
on a variable basis through USL's Separate Account. Terms have the same meaning
in this Statement that they do in the Prospectus under the heading
"Definitions."
TABLE OF CONTENTS
General Information................................................... 2
Regulation and Reserves............................................... 2
Independent Auditors.................................................. 4
Services.............................................................. 4
Principal Underwriter................................................. 4
Annuity Payments...................................................... 5
Gender of Annuitant................................................. 5
Misstatement of Age or Gender and Other Errors..................... 5
Change of Investment Adviser or Investment Policy..................... 5
Performance Data for the Divisions.................................... 5
Average Annual Total Return Calculations............................ 5
Cumulative Total Return Calculations................................ 6
Hypothetical Performance............................................ 6
Money Market Division Yield and Effective........................... 7
Yield Calculations............................................... 7
Performance Comparisons............................................. 8
Effect of Tax-Deferred Accumulation................................... 9
Financial Statements..................................................10
Index to Financial Statements.........................................11
GENERAL INFORMATION
USL is a stock life insurance company established under the laws of the state of
New York. The Company is a wholly-owned subsidiary of USLIFE Corporation, which
in turn is a wholly-owned subsidiary of AGC Life Insurance Company, a Missouri
corporation ("AG Missouri"). It is engaged primarily in the life insurance
business and annuity business. AG Missouri, in turn, is a wholly-owned
subsidiary of American General Corporation, a Texas holding corporation engaged
primarily in the insurance business.
REGULATION AND RESERVES
USL is subject to regulation and supervision by the State of New York, where it
is licensed to do business. This regulation covers a variety of areas,
including:
. benefit reserve requirements,
. adequacy of insurance company capital and surplus,
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. various operational standards, and
. accounting and financial reporting procedures.
USL's operations and accounts are subject to periodic examination by insurance
regulatory authorities.
Under most insurance guaranty fund laws, a state can assess insurers doing
business in the state for covered insurance contract losses incurred by
insolvent companies. State laws set limits for these assessments. However, USL
cannot reasonably estimate the amount of any future assessments of USL under
these laws. Most states have the authority to excuse or defer an assessment, if
it would threaten an insurer's own financial strength. The Account Value held
in the Separate Account may not be covered by insurance guaranty fund laws. The
Account Value held in the Fixed Account is covered by the insurance guaranty
fund laws.
The federal government generally has not directly regulated the business of
insurance. However, federal initiatives often have an impact on the business in
a variety of ways. Federal measures that may adversely affect the insurance
business include:
. employee benefit regulation,
. tax law changes affecting the taxation of insurance companies or of
insurance products,
. changes in the relative desirability of various personal investment
vehicles, and
. removal of impediments on the entry of banking institutions into the
business of insurance.
Also, both the executive and legislative branches of the federal government are
considering various insurance regulatory matters. This could ultimately result
in direct federal regulation of some aspects of the insurance business. USL
cannot predict whether this will occur or, if it does, what the effect on USL
would be.
State insurance law requires USL to carry reserves on its books, as liabilities,
to meet its obligations under outstanding insurance contracts. USL bases these
reserves on assumptions about future claims experience and investment returns,
among other things.
Neither the reserve requirements nor the other aspects of state insurance
regulation provide absolute protection to holders of insurance contracts,
including the Certificates, if USL were to incur claims or expenses at rates
significantly higher than expected. This might happen, for example, due to a
spread of acquired immune deficiency syndrome or other infectious diseases or
catastrophes, or significant unexpected losses on its investments.
INDEPENDENT AUDITORS
The 1998 financial statements of USL included in this Statement were audited by
Ernst & Young LLP, independent auditors, as set forth in their reports,
appearing elsewhere herein, and are included in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
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Ernst & Young LLP is located at 787 Seventh Avenue, New York, New York 10019.
The financial statements of USL for the three months ended March 31, 1999,
included in this Statement, have not been audited.
SERVICES
USL and American General Life Companies ("AGLC") are parties to a services
agreement. Most of the affiliated companies within the American General
Corporation holding company system, including certain life insurance companies,
are also parties to a similar agreement. AGLC is a corporation incorporated in
Delaware on November 24, 1997, with its home office located at 2727-A Allen
Parkway, Houston, Texas 77019. AGLC provides shared services to USL and certain
other life insurance companies at cost. These services include data processing,
systems, customer services, product development, actuarial, auditing,
accounting, and legal. USL did not pay any fees to AGLC in 1998, because AGLC
performed no services under the agreement.
PRINCIPAL UNDERWRITER
American General Securities Incorporated ("AGSI") is the principal underwriter
for the Certificates. AGSI also serves as principal underwriter to American
General Life Insurance Company of New York's Separate Account E, as well as to
AGL's Separate Account A, Separate Account D, and Separate Account VL-R, all of
which are unit investment trusts registered under the Investment Company Act of
1940. AGSI, a Texas corporation, is a wholly-owned subsidiary of AGL and a
member of the National Association of Securities Dealers, Inc.
As principal underwriter for the Separate Account, AGSI received no compensation
from USL for any of the past three fiscal years.
USL offers the securities under the Certificates on a continuous basis.
ANNUITY PAYMENTS
GENDER OF ANNUITANT
When annuity payments are based on life expectancy, the amount of each annuity
payment ordinarily will be higher if the Annuitant or other measuring life is a
male, as compared with a female, under an otherwise identical Certificate. This
is because, statistically, females tend to have longer life expectancies than
males.
However, Montana, and certain other jurisdictions, do not permit differences in
annuity payment rates between males and females.
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In addition, employers should be aware that, under most employer-sponsored
plans, the law prohibits Certificates that make distinctions based on gender.
Under these plans, USL will make available Certificates with no such
differences.
MISSTATEMENT OF AGE OR GENDER AND OTHER ERRORS
If the age or gender of an Annuitant has been misstated to us, any amount
payable will be the amount that the purchase payments paid would have purchased
at the correct age and gender. If we made any overpayments because of incorrect
information about age or gender or any error or miscalculation, we will deduct
the overpayment from the next payment or payments due. We will add any
underpayments to the next payment. We will credit or charge the amount of any
adjustment with interest at the assumed interest rate used in the Certificate's
annuity tables.
CHANGE OF INVESTMENT ADVISER OR INVESTMENT POLICY
Unless otherwise permitted by law or regulation, no Series may change the
investment adviser to any Series or any investment policy without the consent of
the shareholders. If required, we will file approval of or change of any
investment objective with the insurance department of each state where a
Certificate has been delivered. We will notify you (or, after annuity payments
start, the payee) of any material investment policy change that we have
approved. We will also notify you of any investment policy change before its
implementation by the Separate Account, if the change requires your comment or
vote.
PERFORMANCE DATA FOR THE DIVISIONS
We may quote investment results for the available Divisions of Separate Account
USL VA-R from time to time. These results will not be an estimate or guarantee
of future investment performance. Nor will they represent the actual experience
of amounts invested by a particular Owner. We will carry performance figures to
the nearest one-hundredth of one percent. We may include in the figures the
effect of voluntary fee waivers and expense reimbursements to the Funds from
their investment adviser and administrator.
AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
Each Division may advertise its average annual total return. We calculate each
Division's average annual total return quotation under the following standard
method that the Securities and Exchange Commission ("SEC") prescribes:
. We take a hypothetical $1,000 investment in the Division's
Accumulation Units on the first day of the period at the maximum
offering price. This figure is the Accumulation Unit Value per unit
("initial investment").
. We calculate the ending redeemable value ("redeemable value") of
that investment at the end of the period. The redeemable value
reflects the effect of all recurring charges and fees applicable
under the Certificate to all Owner accounts. Recurring charges and
fees include the
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Mortality and Expense Risk Charge and the Administrative Expense
Charge. We do not reflect any premium taxes in the calculation.
. We divide the redeemable value by the initial investment.
. We take this quotient to the Nth root (N representing the number of
years in the period), subtract 1 from the result, and express the
result as a percentage.
CUMULATIVE TOTAL RETURN CALCULATIONS
Each Division may also advertise cumulative total return performance.
Cumulative total return performance is the compound rate of return on a
hypothetical initial investment of $1,000 in each Division's Accumulation Units
on the first day of the period at the maximum offering price. This figure is
the Accumulation Unit value per unit ("initial investment"). Cumulative total
return figures (and the related "Growth of a $1,000 Investment" figures set
forth below) do not include the effect of any premium taxes. Cumulative total
return figures reflect changes in Accumulation Unit value. We calculate these
quotations by finding the cumulative rates of return of the hypothetical initial
investment over various periods, according to the following formula, and then
expressing those rates as a percentage:
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value at the end of the applicable period of a
hypothetical $1,000 investment made at the beginning of the applicable
period.
HYPOTHETICAL PERFORMANCE
Each Division may advertise hypothetical performance, based on the calculations
described above, where all or a portion of the actual historical performance of
the corresponding Series in which the Division invests pre-dates the effective
date of the Division. The tables below provide hypothetical performance
information for the available Divisions of the Separate Account based on the
actual historical performance of the corresponding Series in which each of these
Divisions invests. This information reflects all actual charges and deductions
of these Series and the Separate Account that hypothetically would have been
made if the Separate Account invested assets under the Certificates in these
Series for the periods indicated.
All of the actual historical performance of the corresponding Series, as of the
date of this Statement, predates the effective date of the Division investing in
that Series. The tables below will be revised, in future Statements, to show
actual annual historical performance that occurs after the effective date of a
Division.
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Hypothetical Historical Average Annual Total Returns
(Through December 31, 1998)
<TABLE>
<CAPTION>
Since
Series
Investment Division One Year Five Years/1/ Ten Years/1/ Inception/2/
- ------------------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Hotchkis and Wiley Equity Income VIP N/A N/A N/A (8.31)%
Hotchkis and Wiley Low Duration VIP N/A N/A N/A 5.18 %
LEVCO Equity Value 15.52% N/A N/A 11.29 %
Navellier Growth N/A N/A N/A 14.21 %
OFFITBANK VIF-Emerging Markets (16.70)% N/A N/A (3.02)%
OFFITBANK VIF-High Yield 3.89 % N/A N/A 9.46 %
OFFITBANK VIF-Total Return N/A N/A N/A 2.97 %
OFFITBANK VIF-U.S. Gov. Securities/3/ N/A N/A N/A 6.38 %
Royce Premier 8.48 % N/A N/A 12.96 %
Royce Total Return N/A N/A N/A 3.44 %
Wright International Blue Chip 7.96 % N/A N/A 5.87 %
Wright Selected Blue Chip (3.03)% N/A N/A 13.03 %
Money Market 4.74 % 4.52% 6.10% N/A/1/
</TABLE>
Hypothetical Historical Cumulative Total Returns
(Through December 31, 1998)
<TABLE>
<CAPTION>
Since
Series
Investment Division One Year Five Years/1/ Ten Years/1/ Inception/2/
- ------------------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Hotchkis and Wiley Equity Income VIP N/A N/A N/A (6.62) %
Hotchkis and Wiley Low Duration VIP N/A N/A N/A 4.06 %
LEVCO Equity Value 15.52 % N/A N/A 16.25 %
Navellier Growth N/A N/A N/A 11.82 %
OFFITBANK VIF-Emerging Markets (16.70)% N/A N/A (6.94)%
OFFITBANK VIF-High Yield 3.89 % N/A N/A 28.12 %
OFFITBANK VIF-Total Return N/A N/A N/A 1.49 %
OFFITBANK VIF-U.S. Gov. Securities/3/ N/A N/A N/A 2.26 %
Royce Premier 8.48 % N/A N/A 27.77 %
Royce Total Return N/A N/A N/A 2.16 %
Wright International Blue Chip 7.96 % N/A N/A 32.89 %
Wright Selected Blue Chip (3.03)% N/A N/A 84.25 %
Money Market 4.74% 24.72% 80.81% N/A/1/
</TABLE>
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Hypothetical Historical Growth of a $1,000 Investment in the Divisions
(Through December 31, 1998)
<TABLE>
<CAPTION>
Since
Series
Investment Division One Year Five Years/1/ Ten Years/1/ Inception/2/
- ------------------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Hotchkis and Wiley Equity Income VIP N/A N/A N/A $ 934
Hotchkis and Wiley Low Duration VIP N/A N/A N/A $1,041
LEVCO Equity Value $1,155 N/A N/A $1,163
Navellier Growth N/A N/A N/A $1,118
OFFITBANK VIF-Emerging Markets $ 833 N/A N/A $ 931
OFFITBANK VIF-High Yield $1,039 N/A N/A $1,281
OFFITBANK VIF-Total Return N/A N/A N/A $1,015
OFFITBANK VIF-U.S. Gov. Securities/3/ N/A N/A N/A $1,023
Royce Premier $1,085 N/A N/A $1,278
Royce Total Return N/A N/A N/A $1,022
Wright International Blue Chip $1,080 N/A N/A $1,329
Wright Selected Blue Chip $ 970 N/A N/A $1,842
Money Market $1,047 $1,247 $1,808 NA/1/
- --------------------------
</TABLE>
1 "N/A" reflects SEC rules that require us to show return information for no
more than 10 years.
2 The inception dates for each Series funding the Divisions listed above are:
Money Market, January 16, 1986; Wright International Blue Chip and Wright
Selected Blue Chip, January 5, 1994; OFFITBANK VIF-High Yield, April 4, 1996;
OFFITBANK VIF-Emerging Markets, August 28, 1996; Royce Premier, December 27,
1996; LEVCO Equity Value, August 4, 1997; Navellier Growth, February 27, 1998;
Hotchkis and Wiley Equity Income VIP and Hotchkis and Wiley Low Duration VIP,
March 18, 1998; Royce Total Return, May 14, 1998; OFFITBANK VIF-Total Return,
June 29, 1998; OFFITBANK VIF-U.S. Government Securities, August 21, 1998.
3 Between September 24, 1998 and March 31, 1999 the net asset value for the
OFFITBANK VIF-U.S. Government Securities Fund did not change because the Fund
had no assets.
MONEY MARKET DIVISION YIELD AND EFFECTIVE YIELD CALCULATIONS
We calculate the Money Market Division's yield for which we use a standard
method that the SEC prescribes. Under that method, we base the current yield
quotation on a seven-day period and calculate that yield as follows:
. We take the net change in the Accumulation Unit value during the
period.
. We divide that net change by the Accumulation Unit value at the
beginning of the period to obtain the base period return.
. We multiply the base period return by the fraction 365/7 to obtain
the current yield figure.
. We carry the current yield figure to the nearest one-hundredth of
one percent.
We do not include realized capital gains or losses and unrealized appreciation
or depreciation of the Division's Portfolio in the calculation. The Money
Market Division's hypothetical historical yield for the seven-day period ended
December 31, 1998 was 4.41%.
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We determine the Money Market Division's effective yield by taking the base
period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period
return +1)365/7 -1. The Money Market Division's hypothetical historical
effective yield for the seven day period ended December 31, 1998 was 4.51%.
Yield and effective yield do not reflect the deduction of premium taxes that
may be imposed upon the redemption of Accumulation Units.
PERFORMANCE COMPARISONS
In our advertising and sales literature, we may compare the performance of each
or all of the available Divisions of the Separate Account to the performance of
(1) other variable annuities in general or (2) particular types of variable
annuities that invest in mutual funds, or series of mutual funds, with
investment objectives similar to each of the Divisions of the Separate Account.
Lipper Inc. ("Lipper") and the Variable Annuity Research and Data Service
("VARDS(R)") are independent services that monitor and rank the performance of
variable annuity issuers in each of the major categories of investment
objectives on an industry-wide basis. Lipper's rankings include variable life
insurance issuers as well as variable annuity issuers. VARDS(R) rankings compare
only variable annuity issuers. The performance analyses prepared by Lipper and
VARDS(R) rank such issuers on the basis of total return. Total return assumes
the reinvestment of dividends and distributions, but does not take into
consideration sales charges, redemption fees or certain expense deductions at
the separate account level. In addition, VARDS(R) prepares risk-adjusted
rankings, which consider the effects of market risk on total return performance.
In addition, we may compare each Division's performance in advertisements and
sales literature to the following benchmarks:
. the Standard & Poor's 500 Composite Stock Price Index, an unmanaged
weighted index of 500 leading domestic companies that represents
approximately 80% of the market capitalization of the United States
equity market;
. the Dow Jones Industrial Average, an unmanaged unweighted average of
30 blue chip industrial corporations listed on the New York Stock
Exchange and generally considered representative of the United
States stock market;
. the Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, a statistical measure of change, over time, in the
prices of goods and services in major spending groups and generally
is considered to be a measure of inflation;
. the Lehman Brothers Government and Domestic Strategic Income Index,
the Salomon Brothers High Grade Domestic Strategic Income Index, and
the Merrill Lynch Government/Corporate Master Index, unmanaged
indices that are generally considered to represent the performance
of intermediate and long term bonds during various market cycles;
and
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. the Morgan Stanley Capital International Europe Australasia Far East
Index, an unmanaged index that is considered to be generally
representative of major non-United States stock markets.
EFFECT OF TAX-DEFERRED ACCUMULATION
The Certificates qualify for tax-deferred treatment on earnings. This tax-
deferred treatment increases the amount available for accumulation by deferring
taxes on any earnings until the earnings are withdrawn. The longer the taxes are
deferred, the more the potential you have for the assets under your Certificate
to grow over the term of the Certificates.
The hypothetical tables set out below illustrate this potential. The tables
compare accumulations based on a single initial purchase payment of $100,000
compounded annually under:
. a Certificate, under which earnings are not taxed until withdrawn in
connection with a full surrender, partial withdrawal, or
annuitization, or termination due to insufficient Account Value
("withdrawal of earnings") and
. an investment under which earnings are taxed on a current basis
("Taxable Investment"), based on an assumed tax rate of 28%, and the
assumed earning rates specified.
5 Years 10 Years 20 Years
-------- -------- --------
(7.50% earnings rate)
Certificate $143,563 $206,103 $424,785
Certificate (after Taxes) $131,365 $176,394 $333,845
Taxable Investment $130,078 $169,202 $286,294
(10.00% earnings rate)
Certificate $161,051 $259,374 $672,750
Certificate (after Taxes) $143,957 $214,749 $512,380
Taxable Investment $141,571 $200,423 $401,694
The hypothetical tables do not reflect any fees or charges under a Certificate
or Taxable Investment. However, the Certificates impose:
. a Mortality and Expense Risk Charge of 0.36%, and
. an Administrative Expense Charge of 0.04%.
A Taxable Investment could incur comparable fees or charges. Fees and charges
would reduce the return from a Certificate or Taxable Investment.
Under the Certificates, a withdrawal of earnings is subject to tax, and may be
subject to an additional 10% tax penalty before age 59 1/2.
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These tables are only illustrations of the effect of tax-deferred accumulations
and are not a guarantee of future performance.
INDEX TO
FINANCIAL STATEMENTS
USL Financial Statements Page No.
-------
I. Three Months Ended March 31, 1999 and 1998............ Q-1
Report of Independent Auditors........................ Q-3
Balance Sheets........................................ Q-4
Statements of Income.................................. Q-6
Statements of Comprehensive Income.................... Q-7
Statements of Shareholder's Equity.................... Q-8
Statements of Cash Flows.............................. Q-9
Note to Financial Statements.......................... Q-10
II. Years Ended December 31, 1998, 1997, and 1996......... F-1
Report of Independent Auditors........................ F-3
Balance Sheets........................................ F-4
Statements of Income.................................. F-6
Statements of Comprehensive Income.................... F-7
Statements of Shareholder's Equity.................... F-8
Statements of Cash Flows.............................. F-9
Notes to Financial Statements......................... F-10
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FINANCIAL STATEMENTS
THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Q-1
<PAGE>
The United States Life Insurance Company in the City of New York
Financial Statements
Three months ended March 31, 1999 and 1998
CONTENTS
Report of Independent Auditors......................................... Q-3
Reviewed Financial Statements
Balance Sheets......................................................... Q-4
Statements of Income................................................... Q-6
Statements of Comprehensive Income..................................... Q-7
Statements of Shareholder's Equity..................................... Q-8
Statements of Cash Flows............................................... Q-9
Note to Financial Statements........................................... Q-10
Q-2
<PAGE>
[ERNST & YOUNG LLP LOGO] . 787 Seventh Avenue . Phone: 212 773 3000
New York, New York 10019
Report of Independent Auditors
Board of Directors and Stockholder
The United States Life Insurance Company
in the City of New York
We have reviewed the accompanying balance sheet of The United States Life
Insurance Company in the City of New York as of March 31, 1999, and the related
statements of income and cash flows for the three-month periods ended March 31,
1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheets of The United States Life Insurance Company in the
City of New York as of December 31, 1998 and 1997, and the related statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998, and in our report dated April 23, 1999, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
New York, New York
May 7, 1999
ERNST & YOUNG LLP
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
Q-3
<PAGE>
The United States Life Insurance Company in the City of New York
Balance Sheets
MARCH 31 DECEMBER 31
1999 1998
--------------------------
(In Thousands)
ASSETS
Investments:
Fixed maturity securities, at fair value
(amortized cost - $1,919,000 in 1999 and $2,021,878 $2,047,519
$1,897,758 in 1998)
Equity securities, at fair value (cost - $568
in 1999 and $568 in 1998) 584 584
Mortgage loans on real estate 82,597 84,387
Policy loans 84,537 84,412
Investment real estate 3,929 6,101
Other long-term investments 10,408 1,385
Short-term investments 7 3,005
--------------------------
Total investments 2,203,940 2,227,393
Cash 4,282 5,045
Indebtedness from affiliates 2,020 6,832
Accrued investment income 41,779 37,227
Accounts and premiums receivable 142,668 231,863
Reinsurance recoverable 688,571 620,661
Deferred policy acquisition costs 108,280 98,552
Property and equipment 4,387 4,318
Other assets 30,020 12,886
--------------------------
Total assets $3,225,947 $3,244,777
==========================
Q-4
<PAGE>
MARCH 31 DECEMBER 31
1999 1998
--------------------------
(In Thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits
Life and Annuity $1,725,637 $1,729,001
Accident & Health 489,494 407,942
Other policy claims and benefits payable 105,685 116,912
Other policyholders' funds 105,707 109,130
Federal income taxes (17,306) (7,585)
Indebtedness to affiliates 19,993 1,848
Ceded reinsurance payable 139,880 245,576
Other liabilities 139,441 118,339
--------------------------
Total liabilities 2,708,531 2,721,163
--------------------------
Shareholder's equity:
Common stock, $2 par value, 1,980,658 shares
authorized, issued, and outstanding 3,961 3,961
Additional paid-in capital 8,361 8,361
Accumulated other comprehensive income 32,416 53,394
Retained earnings 472,678 457,898
--------------------------
Total shareholder's equity 517,416 523,614
--------------------------
Total liabilities and shareholder's equity $3,225,947 $3,244,777
==========================
Q-5
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Income
THREE MONTHS ENDED MARCH 31
1999 1998
---------------------------
(In Thousands)
Revenues:
Premiums and other considerations $51,499 $173,493
Net investment income 45,037 47,720
Net realized investment gains (losses) 37 138
Other 1,109 1,427
---------------------------
Total revenues 97,682 222,778
---------------------------
Benefits and expenses:
Benefits 52,426 149,375
Operating costs and expenses 23,049 56,764
---------------------------
Total benefits and expenses 75,475 206,139
---------------------------
Income before income tax expense 22,207 16,639
Income tax expense 7,427 4,428
---------------------------
Net income $14,780 $ 12,211
===========================
Q-6
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Comprehensive Income
THREE MONTHS ENDED MARCH 31
1999 1998
---------------------------
(In Thousands)
Net income $ 14,780 $12,211
---------------------------
Other comprehensive income:
Gross change in unrealized (losses)
gains on securities (pretax: 1999:
$(32,148); 1998: $(12,649)) (20,896) (8,222)
Less: gains (losses) realized in net income 82 -
---------------------------
Change in net unrealized (losses) gains
on securities (pretax: 1999:
$(32,274); 1998: $(12,649)) (20,978) (8,222)
---------------------------
Comprehensive (loss) income $ (6,198) $ 3,989
===========================
Q-7
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Shareholder's Equity
MARCH 31 DECEMBER 31
1999 1998
--------------------------
(In Thousands)
Common stock:
Balance at beginning of year $ 3,961 $ 3,961
Change during period - -
--------------------------
Balance at end of period 3,961 3,961
--------------------------
Additional paid-in capital:
Balance at beginning of year 8,361 8,361
Change during period - -
--------------------------
Balance at end of period 8,361 8,361
--------------------------
Accumulated other comprehensive income:
Balance at beginning of year 53,394 53,830
Change in unrealized gains (losses) on
securities (20,978) (436)
--------------------------
Balance at end of period 32,416 53,394
--------------------------
Retained earnings:
Balance at beginning of year 457,898 483,349
Net income (loss) 14,780 (25,451)
--------------------------
Balance at end of period 472,678 457,898
--------------------------
Total shareholder's equity $517,416 $523,614
==========================
Q-8
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
-------------------------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,780 $ 12,211
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts and premiums receivable 106,813 (3,666)
Change in future policy benefits 73,759 (25,877)
Amortization of policy acquisition costs 9,928 16,135
Policy acquisition costs deferred (7,283) (15,912)
Change in other policyholders' funds (1,531) 3,515
Provision for deferred income tax expense 5,335 (74)
Depreciation 349 205
Amortization (471) (468)
Change in indebtedness to/from affiliates 4,157 8,108
Change in reinsurance balances (173,606) (867)
Net (gain) loss on sale of investments (37) (138)
Other, net (38,484) 13,419
-------------------------------
Net cash (used in) provided by operating activities (6,291) 6,591
-------------------------------
INVESTING ACTIVITIES
Purchases of investments and loans made (703,914) (563,047)
Sales or maturities of investments and receipts from
repayment of loans 657,247 581,048
Sales and purchases of property, equipment, and
software, net (418) (494)
-------------------------------
Net cash (used in) provided by investing activities (47,085) 17,507
-------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 32,369 33,098
Policyholder account withdrawals (27,940) (86,036)
Short-term collateralized financings 29,384 37,090
Affiliate borrowings 18,800 -
-------------------------------
Net cash provided by (used in) financing activities 52,613 (15,848)
-------------------------------
(Decrease) increase in cash (763) 8,250
Cash at beginning of period 5,045 4,834
-------------------------------
Cash at end of period $ 4,282 $ 13,084
===============================
Interest paid amounted to approximately $8 thousand in 1999. There was no interest paid in 1998.
</TABLE>
Q-9
<PAGE>
The United States Life Insurance Company in the City of New York
Note to Financial Statements
March 31, 1999
BASIS OF PRESENTATION
The financial statements for the interim periods herein are unaudited. However,
they have been prepared in accordance with generally accepted accounting
principles for interim financial information and in the opinion of management,
such information reflects all adjustments considered necessary for a fair
presentation. Operating results for the interim period are not necessarily
indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the audited
financial statements and notes of the Company for the year ended December 31,
1998.
Q-10
<PAGE>
FINANCIAL STATEMENTS
THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
F-1
<PAGE>
The United States Life Insurance Company in the City of New York
Financial Statements
Years ended December 31, 1998, 1997, and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....... F-3
Audited Financial Statements
Balance Sheets....................... F-4
Statements of Income................. F-6
Statements of Comprehensive Income... F-7
Statements of Shareholder's Equity... F-8
Statements of Cash Flows............. F-9
Notes to Financial Statements........ F-10
</TABLE>
F-2
<PAGE>
[ERNST & YOUNG LLP LOGO] . 787 Seventh Avenue . Phone: 212 773 3000
New York, New York 10019
Report of Independent Auditors
Board of Directors and Stockholder
The United States Life Insurance Company
in the City of New York
We have audited the accompanying balance sheets of The United States Life
Insurance Company in the City of New York (an indirectly wholly owned subsidiary
of American General Corporation) as of December 31, 1998 and 1997, and the
related statements of income, comprehensive income, shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The United States Life
Insurance Company in the City of New York at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
New York, New York ---------------------
April 23, 1999 ERNST & YOUNG LLP
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-3
<PAGE>
The United States Life Insurance Company in the City of New York
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------
<S> <C> <C>
(In Thousands)
ASSETS
Investments:
Fixed maturity securities, at fair value
(amortized cost - $1,897,758 in 1998 and
$2,215,928 in 1997) $2,047,519 $2,352,376
Equity securities, at fair value (cost - $568 in
1998 and $568 in 1997) 584 578
Mortgage loans on real estate 84,387 60,565
Policy loans 84,412 87,726
Investment real estate 6,101 7,731
Other long-term investments 1,385 971
Short-term investments 3,005 55,908
------------------------------
Total investments 2,227,393 2,565,855
Cash 5,045 4,834
Indebtedness from affiliates 6,832 1,711
Accrued investment income 37,227 44,050
Accounts and premiums receivable 231,863 64,717
Reinsurance recoverable 620,661 58,479
Deferred policy acquisition costs 98,552 185,243
Property and equipment 4,318 1,971
Other assets 12,886 9,702
------------------------------
Total assets $3,244,777 $2,936,562
==============================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------------
<S> <C> <C>
(In Thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits
Life and Annuity $1,729,001 $1,876,294
Accident & Health 407,942 186,879
Other policy claims and benefits payable 116,912 115,712
Other policyholders' funds 109,130 86,400
Federal income taxes (7,585) 32,457
Indebtedness to affiliates 1,848 4,746
Ceded reinsurance payable 245,576 5,127
Other liabilities 118,339 79,446
-------------------------------
Total liabilities 2,721,163 2,387,061
-------------------------------
Shareholder's equity:
Common stock, $2 par value, 1,980,658 shares
authorized, issued, and outstanding 3,961 3,961
Additional paid-in capital 8,361 8,361
Accumulated other comprehensive income 53,394 53,830
Retained earnings 457,898 483,349
-------------------------------
Total shareholder's equity 523,614 549,501
-------------------------------
Total liabilities and shareholder's equity $3,244,777 $2,936,562
===============================
</TABLE>
See accompanying notes.
F-5
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Revenues:
Premiums and other considerations $594,155 $666,173 $609,582
Net investment income 185,838 189,262 195,687
Net realized investment (losses)
gains (3,951) (3,116) 3,836
Other 4,901 26,576 8,355
-----------------------------------------------
Total revenues 780,943 878,895 817,460
-----------------------------------------------
Benefits and expenses:
Benefits 514,020 594,021 559,396
Operating costs and expenses 221,115 212,977 225,291
Loss on reinsurance settlements 59,878 - -
Litigation settlement 30,689 - -
Change in control costs - 6,955 -
-----------------------------------------------
Total benefits and expenses 825,702 813,953 784,687
-----------------------------------------------
(Loss) income before income tax
(benefit) expense (44,759) 64,942 32,773
Income tax (benefit) expense (19,308) 22,700 10,943
-----------------------------------------------
Net (loss) income $(25,451) $ 42,242 $ 21,830
===============================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Comprehensive Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Net (loss) income $(25,451) $42,242 $ 21,830
----------------------------------------------
Other comprehensive (loss) income:
Gross change in unrealized (losses)
gains on securities (pretax: 1998:
$(4,920); 1997: $46,905; 1996:
($73,462)) (3,198) 30,488 (47,750)
Less: (losses) gains realized in
net income (2,762) 2,060 1,812
----------------------------------------------
Change in net unrealized (losses)
gains on securities (pretax: 1998:
$(671); 1997: $43,735; 1996:
($76,249) (436) 28,428 (49,562)
----------------------------------------------
Comprehensive (loss) income $(25,887) $70,670 $(27,732)
==============================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Shareholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Common stock:
Balance at beginning of year $ 3,961 $ 3,961 $ 3,961
Change during year - - -
-----------------------------------------------
Balance at end of year 3,961 3,961 3,961
-----------------------------------------------
Additional paid-in capital:
Balance at beginning of year 8,361 8,361 8,361
Change during year - - -
-----------------------------------------------
Balance at end of year 8,361 8,361 8,361
-----------------------------------------------
Accumulated other comprehensive
income:
Balance at beginning of year 53,830 25,402 74,964
Change in unrealized (losses) gains
on securities (436) 28,428 (49,562)
-----------------------------------------------
Balance at end of year 53,394 53,830 25,402
-----------------------------------------------
Retained earnings:
Balance at beginning of year 483,349 441,107 419,277
Net (loss) income (25,451) 42,242 21,830
-----------------------------------------------
Balance at end of year 457,898 483,349 441,107
-----------------------------------------------
Total shareholder's equity $ 523,614 $549,501 $478,831
===============================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
OPERATING ACTIVITIES
Net (loss) income $ (25,451) $ 42,242 $ 21,830
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts and premiums receivable (167,146) (6,977) (7,385)
Change in future policy benefits 174,629 82,006 64,811
Amortization of policy acquisition costs 66,331 58,583 85,536
Policy acquisition costs deferred (62,766) (62,651) (63,041)
Change in other policyholders' funds 22,573 21,783 11,452
Provision for deferred income tax expense (45,403) (995) 1,992
Depreciation 1,327 1,100 1,024
Amortization (1,734) (2,360) (2,306)
Change in indebtedness to/from affiliates (8,019) 3,415 732
Change in reinsurance balances (321,733) (9,492) (8,537)
Net (gain) loss on sale of investments 3,951 3,116 (3,836)
Other, net 118,537 39,806 26,497
--------------------------------------------------------------------
Net cash (used in) provided by operating
activities (244,904) 169,576 128,769
--------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments and loans made (2,833,731) (2,407,890) (1,246,498)
Sales or maturities of investments and receipts
from repayment of loans 3,183,379 2,507,408 1,280,163
Sales and purchases of property, equipment, and
software, net (3,674) 274 (1,861)
--------------------------------------------------------------------
Net cash provided by investing activities 345,974 99,792 31,804
--------------------------------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 131,386 135,668 133,763
Policyholder account withdrawals (232,245) (407,383) (307,065)
--------------------------------------------------------------------
Net cash (used in) financing activities (100,859) (271,715) (173,302)
--------------------------------------------------------------------
Increase (decrease) in cash 211 (2,347) (12,729)
Cash at beginning of year 4,834 7,181 19,910
--------------------------------------------------------------------
Cash at end of year $ 5,045 $ 4,834 $ 7,181
====================================================================
</TABLE>
Interest paid amounted to approximately $5.3 million in 1998. There was no
interest paid in 1997 or 1996.
See accompanying notes.
F-9
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements
December 31, 1998
NATURE OF OPERATIONS
The United States Life Insurance Company in the City of New York (the "Company")
is domiciled in the State of New York. The Company is a wholly owned subsidiary
of USLIFE Corporation. Through the acquisition of USLIFE Corporation by American
General Corporation (the "Parent Company") on June 17, 1997, American General
Corporation became the ultimate parent of the Company.
The Company offers a broad portfolio of individual life and annuity products as
well as group and credit insurance.
The individual life line of business includes universal life, level term, whole
life and interest sensitive whole life as well as annuities. These individual
and annuity products are sold primarily to affluent markets, generally through
independent general agencies and producers as well as financial institutions.
The Company also provides products for preferred international markets and other
target markets through lower cost distribution channels.
Group insurance products include group life, accidental death & dismemberment
("AD&D"), dental, vision and disability coverage and are sold through
independent general agents and producers as well as third party administrators.
These products are marketed nationwide to employers, professional and affinity
associations. The Company also offers managed care medical products to small
employers in four states (New York, New Jersey, Colorado and Illinois).
1. ACCOUNTING POLICIES
1.1 PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Transactions with the Parent Company
and other subsidiaries of the Parent Company are not eliminated from the
financial statements of the Company.
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.
1.2 INSURANCE CONTRACTS
The insurance contracts accounted for in these financial statements include both
long-duration and short-duration contracts.
Long-duration contracts include traditional whole life, endowment, guaranteed
renewable term life, universal life, limited payment, and investment contracts.
Long-duration
F-10
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.2 INSURANCE CONTRACTS (CONTINUED)
contracts generally require the performance of various functions and services
over a period of more than one year.
Short-duration contracts include group major medical, dental, term life, AD&D,
excess major medical, hospital indemnity and long-term and short-term disability
policies. Short-term contracts generally require the performance of various
functions and services over a period of one year or less.
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.
1.3 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
All fixed maturity and equity securities were classified as available-for-sale
and recorded at fair value at December 31, 1998, 1997, and 1996. After adjusting
related balance sheet accounts as if the unrealized gains (losses) had been
realized, the net adjustment is recorded in accumulated other comprehensive
income within shareholders' equity. If the fair value of a security classified
as available-for-sale declines below its cost and this decline is considered to
be other than temporary, the security is reduced to its fair value, and the
reduction is recorded as a realized loss.
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.
F-11
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.3 INVESTMENTS (CONTINUED)
POLICY LOANS
Policy loans are reported at unpaid principal balance.
INVESTMENT REAL ESTATE
Investment real estate is classified as held for investment or available for
sale, based on management's intent. Real estate held for investment is carried
at cost, less accumulated depreciation and impairment write-downs. Real estate
available for sale is carried at the lower of cost (less accumulated
depreciation, if applicable) or fair value less cost to sell.
INVESTMENT INCOME
Interest on fixed maturity securities and performing and restructured mortgage
loans is recorded as income when earned and is adjusted for any amortization of
premium or discount. Interest on delinquent mortgage loans is recorded as income
when received. Dividends are recorded as income on ex-dividend dates.
REALIZED INVESTMENT GAINS
Realized investment gains (losses) are recognized using the specific-
identification method.
1.4 DEFERRED POLICY ACQUISITION COSTS ("DPAC")
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life contracts is charged to expense in
relation to the estimated gross profits of those contracts. DPAC associated with
insurance investment contracts is effectively charged off over the period ending
one year beyond the surrender charge period. DPAC 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 is 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 on at least an annual basis.
Management considers estimated future gross profits or future premiums, future
lapse
F-12
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.4 DEFERRED POLICY ACQUISITION COSTS ("DPAC") (CONTINUED)
rates, expected mortality/morbidity, interest earned and credited rates,
persistency, and expenses in determining whether the carrying amount is
recoverable.
1.5 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 1.4).
For all other contracts, premiums are recognized when due.
1.6 POLICY AND CONTRACT CLAIMS RESERVES
The Company's insurance and annuity liabilities relate to both long-duration and
short-duration contracts. The contracts normally cannot be changed or canceled
by the Company during the contract period.
For long-duration contracts such as interest-sensitive life and insurance
investment contracts, reserves equal the sum of the policy account balance and
deferred revenue charges. Reserves for other long-duration 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 2.2% to 11.25% at December 31, 1998.
Short-duration contracts are rated based on attained age and are guaranteed
issue and thus not subject to the normal wear-off mortality/morbidity patterns.
No policy reserves other than unearned premium reserves are held. The unearned
premium reserve is based on gross premium and is calculated on a pro rata basis.
Incurred but not reported claim reserves are based upon patterns demonstrated
through run-out studies. Reserves for open long-term disability claims are based
on the 1964 and 1985 Commissioner Disability Tables, modified for company
experience. The interest assumption is 6%.
1.7 REINSURANCE
The Company limits its exposure to loss on any single insured to $1.5 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. The Company remains obligated
for amounts ceded in the
F-13
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.7 REINSURANCE (CONTINUED)
event that the reinsurers do not meet their obligations.
A recoverable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. 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 recoverables. The cost of reinsurance is recognized
over the life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies.
1.8 PARTICIPATING POLICY CONTRACTS
Participating life insurance accounted for approximately 36.7%, 33.2%, and 24.3%
of individual life insurance in force at December 31, 1998, 1997 and 1996
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 $2.4 million, $2.6 million and $2.8 million in 1998, 1997 and
1996 respectively.
1.9 INCOME TAXES
The Company was acquired by American General Corporation on June 17, 1997.
Following the acquisition, the Company will file a separate life company federal
income tax return for five years.
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.
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
accumulated other comprehensive income in shareholder's equity.
F-14
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1.10 CHANGES IN ACCOUNTING AND REPORTING STANDARDS
During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) 130, Reporting Comprehensive Income, which establishes standards for
reporting and displaying comprehensive income and its components in the
financial statements. The Company elected to report comprehensive income and its
components in a separate statement of comprehensive income. Adoption of this
statement did not change recognition or measurement of net income and,
therefore, did not impact the Company's results of operations or financial
position.
Effective January 1, 1998, the Company adopted SFAS 132, Employers' Disclosures
about Pension and Other Postretirement Benefits, which revised disclosure
requirements for employers' pension and other retiree benefits. SFAS 132 did not
change the measurement or recognition of pension or other postretirement benefit
plans. The Company has restated disclosures for earlier years presented, as
required under SFAS 132.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, which requires all
derivative instruments to be recognized at fair value as either assets or
liabilities in the balance sheet. Changes in the fair value of a derivative
instrument are to be reported as earnings or other comprehensive income,
depending upon the intended use of the derivative instrument. This statement is
effective for years beginning after June 15, 1999. Adoption of SFAS 133 is not
expected to have a material impact on the Company's results of operations or
financial position.
F-15
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS
2.1 INVESTMENT INCOME
Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Investment income:
Fixed maturities $176,449 $176,714 $183,290
Equity securities 49 49 49
Mortgage loans on real estate 5,766 7,277 7,644
Investment real estate 1,556 1,365 1,530
Policy loans 5,521 5,683 5,649
Other long-term investments 310 652 1,691
Short-term investments 2,742 1,280 1,164
Investment income from affiliates 57 - -
---------------------------------------------
Gross investment income 192,450 193,020 201,017
Investment expenses 6,612 3,758 5,330
---------------------------------------------
Net investment income $185,838 $189,262 $195,687
=============================================
</TABLE>
2.2 NET REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) by type of investment were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 2,860 $ 6,704 $ 15,241
Gross losses (7,111) (3,534) (12,230)
------------------------------------------------
Total fixed maturities (4,251) 3,170 3,011
Equity securities - - (259)
Other investments 300 (6,286) 1,084
------------------------------------------------
Net realized investment gains
(losses) before tax (3,951) (3,116) 3,836
Income tax expense (benefit) (1,383) (1,090) 1,344
------------------------------------------------
Net realized investment gains
(losses) after tax $(2,568) $(2,026) $ 2,492
================================================
</TABLE>
F-16
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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 1.3). Amortized cost and fair value at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Fixed maturity securities:
Corporate securities:
Investment-grade $1,626,339 $131,810 $(1,684) $1,756,465
Below investment-grade 112,767 3,415 (1,173) 115,009
Mortgage-backed securities* 50,036 912 - 50,948
U.S. government obligations 19,968 4,238 - 24,206
Foreign governments 79,794 11,944 - 91,738
State and political
subdivisions 6,469 139 - 6,608
Redeemable preferred stocks 2,385 160 - 2,545
-------------------------------------------------------------
Total fixed maturity
securities $1,897,758 $152,618 $(2,857) $2,047,519
=============================================================
Equity securities $ 568 $ 25 $ (9) $ 584
=============================================================
</TABLE>
*Primarily include pass-through securities guaranteed by the U.S. government and
government agencies.
F-17
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturity securities:
Corporate securities:
Investment-grade $1,969,450 $118,880 $(1,019) $2,087,311
Below investment-grade 113,181 2,745 (426) 115,500
Mortgage-backed securities* 3,725 459 - 4,184
U.S. government obligations 20,916 3,001 (24) 23,893
Foreign governments 96,162 12,254 - 108,416
State and political
subdivisions 9,992 293 (1) 10,284
Redeemable preferred stock 2,502 286 - 2,788
-----------------------------------------------------------------
Total fixed maturity
securities $2,215,928 $137,918 $(1,470) $2,352,376
=================================================================
Equity securities $ 568 $ 22 $ (12) $ 578
=================================================================
</TABLE>
*Primarily include pass-through securities guaranteed by the U.S. government and
government agencies.
F-18
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Net unrealized gains (losses) on securities included in accumulated
comprehensive income in shareholders' equity at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
(In Thousands)
<S> <C> <C>
Gross unrealized gains $152,643 $137,940
Gross unrealized losses (2,866) (1,482)
DPAC and other fair value adjustments (67,632) (53,643)
Deferred federal income taxes (28,751) (28,985)
-------------------------------
Net unrealized gains on securities $ 53,394 $ 53,830
===============================
</TABLE>
The contractual maturities of fixed maturity securities at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity
securities, excluding
mortgage-backed
securities:
Due in one year or
less $ 193,010 $ 196,606 $ 91,283 $ 91,461
Due after one year
through five years 551,151 579,964 762,673 795,257
Due after five years
through ten years 357,288 382,038 521,239 542,858
Due after ten years 746,273 837,963 837,008 918,616
Mortgage-backed
securities 50,036 50,948 3,725 4,184
------------------------------------------------------------
Total fixed maturity
securities $1,897,758 $2,047,519 $2,215,928 $2,352,376
============================================================
</TABLE>
Actual maturities may differ from contractual maturities, since borrowers may
have the right to call or prepay obligations. In addition, corporate
requirements and investment strategies may result in the sale of investments
before maturity. Proceeds from sales of fixed maturities were $587.3 million,
$576.2 million, and $404.5 million during 1998, 1997, and 1996, respectively.
F-19
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.4 MORTGAGE LOANS ON REAL ESTATE
Diversification of the geographic location and type of property collateralizing
mortgage loans reduces the concentration of credit risk. For new loans, the
Company requires loan-to-value ratios of 75% or less, based on management's
credit assessment of the borrower. The mortgage loan portfolio was distributed
as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
--------------------------------------------------
(In Millions)
<S> <C> <C> <C>
DECEMBER 31, 1998
Geographic distribution:
South Atlantic $16 19.0% - %
Pacific 7 8.3 27.6
Mid-Atlantic 32 38.1 -
East North Central 14 16.7 -
Mountain 3 3.6 -
West South Central 5 6.0 -
East South Central - - -
West North Central 1 1.2 -
New England 11 13.1 -
Allowance for losses (5) (6.0) -
-------------------------------
Total $84 100.0% 2.4%
===============================
Property type:
Office $39 46.4% - %
Retail 28 33.3 6.5
Industrial 16 19.0 -
Apartments 2 2.4 -
Other 4 4.9 -
Allowance for losses (5) (6.0) -
-------------------------------
Total $84 100.0% 2.4%
===============================
</TABLE>
F-20
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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, 1997
Geographic distribution:
South Atlantic $ 2 3.3% -%
Pacific 2 3.3 95.5
Mid-Atlantic 39 65.0 -
East North Central 9 15.0 -
Mountain 4 6.7 -
West South Central 3 5.0 -
East South Central - - -
West North Central 1 1.7 -
New England 5 8.3 -
Allowance for losses (5) (8.3) -
-------------------
Total $60 100.0% 3.1%
===================
Property type:
Office $15 25.0% -%
Retail 28 46.7 6.5
Industrial 15 25.0 -
Apartments 2 3.3 -
Other 5 8.3 -
Allowance for losses (5) (8.3) -
-------------------
Total $60 100.0% 3.1%
===================
F-21
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.5 INVESTMENT SUMMARY
Investments of the Company were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-----------------------------------------------------------------------------------------------
CARRYING CARRYING
COST FAIR VALUE AMOUNT COST FAIR VALUE AMOUNT
-----------------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and
government agencies and
authorities $ 19,968 $ 24,206 $ 24,206 $ 20,916 $ 23,893 $ 23,893
States, municipalities, and
political subdivisions 6,469 6,608 6,608 9,992 10,284 10,284
Foreign governments 79,794 91,738 91,738 96,162 108,416 108,416
Public utilities 320,947 345,320 345,320 392,640 411,186 411,186
Mortgage-backed securities 50,036 50,948 50,948 3,725 4,184 4,184
All other corporate bonds 1,418,159 1,526,154 1,526,154 1,689,991 1,791,625 1,791,625
Redeemable preferred stocks 2,385 2,545 2,545 2,502 2,788 2,788
-----------------------------------------------------------------------------------------------
Total fixed maturities 1,897,758 2,047,519 2,047,519 2,215,928 2,352,376 2,352,376
Equity securities:
Nonredeemable preferred stocks 568 584 584 568 578 578
-----------------------------------------------------------------------------------------------
Total fixed maturities and
equity securities 1,898,326 $2,048,103 2,048,103 2,216,496 $2,352,954 2,352,954
========== ==========
Mortgage loans on real estate* 84,387 84,387 60,565 60,565
Investment real estate 6,101 6,101 7,731 7,731
Policy loans 84,412 84,412 87,726 87,726
Other long-term investments 1,385 1,385 971 971
Short-term investments 3,005 3,005 55,908 55,908
---------- --------------------------- ----------
Total investments $2,077,616 $2,227,393 $2,429,397 $2,565,855
========== =========================== ==========
</TABLE>
* Amount is net of allowance for losses of $5 million at both December 31,
1998 and 1997.
F-22
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
3. DEFERRED POLICY ACQUISITION COSTS
The balance of DPAC at December 31 and the components of the change reported in
operating costs and expenses for the years then ended were as follows:
1998 1997 1996
---------------------------------------
(In Thousands)
Balance at January 1 $185,243 $197,572 $199,268
Capitalization 62,766 62,651 63,041
Amortization (66,331) (58,583) (85,536)
Effect of unrealized gains (losses)
on securities (13,832) (15,656) 20,799
Effect of realized gains (losses) (85) (741) -
Reinsurance transfer (69,209) - -
---------------------------------------
Balance at December 31 $ 98,552 $185,243 $197,572
=======================================
On January 29, 1996, USLIFE Corporation announced that the Company would
discontinue new sales of traditional indemnity major medical products. Further,
it would only offer major medical coverage through managed care plans in
selected markets where it has both a significant presence and an appropriate
managed care network in place, while continuing to provide full support and
service to all existing indemnity customers regardless of location.
Concurrently, USLIFE Corporation announced that it would carefully monitor
persistency experience of its group insurance lines in order to determine
whether financial statement adjustments would become necessary.
Recoverability of deferred policy acquisition costs depends on future revenues
and gross profits from the business to which it relates. Evaluation of this
asset, as well as the reserve for policy benefits, requires assumptions as to
the amount and timing of these future revenues and gross profits. USLIFE
Corporation's continuing study disclosed that persistency on this business
deteriorated to a point that a revision in assumptions was necessary.
During the second quarter of 1996, the Company recorded a pre-tax charge of
$49.6 million to recognize revised assumptions reflecting current experience on
its traditional indemnity group major medical and related products, including
group life insurance cases sold in tandem with these major medical policies. The
charge includes a $37.2 million writedown of deferred policy acquisition costs
on this block of business and a related adjustment of the reserve for policy
benefits amounting to $12.4 million which is included in Benefits in the
accompanying statements of income. The charge, on an after-tax basis, amounts to
$32.3 million. The impact of this charge on 1996 pre-tax results of the group
life and group health lines was $6.2 million and $43.4 million, respectively.
F-23
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
4. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31
1998 1997
----------------------
(In Thousands)
Prepaid expenses $ 9,225 $7,384
Deferred systems costs 1,218 -
Supply inventory 826 1,298
Other 1,617 1,020
----------------------
Total other assets $12,886 $9,702
======================
5. FEDERAL INCOME TAXES
5.1 TAX LIABILITIES
Income tax liabilities were as follows:
DECEMBER 31
1998 1997
----------------------
(In Thousands)
Current tax payable $ 6,208 $ 613
Deferred tax liabilities, applicable to:
Net income (42,544) 2,859
Net unrealized investment gains 28,751 28,985
----------------------
Total deferred tax liabilities (13,793) 31,844
----------------------
Total current and deferred tax (assets) liabilities $ (7,585) $32,457
======================
F-24
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.1 Tax Liabilities (continued)
Components of deferred tax liabilities and assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities applicable to:
Deferred policy acquisition costs $ 32,544 $ 40,279
Basis differential of investments 54,056 49,421
Other 8,619 26,940
-----------------------
Total deferred tax liabilities 95,219 116,640
Deferred tax assets applicable to:
Policy reserves (56,269) (69,968)
Other (52,743) (14,828)
-----------------------
Total deferred tax assets before valuation
allowance (109,012) (84,796)
Valuation allowance - -
-----------------------
Total deferred tax assets, net of valuation
allowance (109,012) (84,796)
-----------------------
Net deferred tax (assets) liabilities $ (13,793) $ 31,844
=======================
</TABLE>
A portion of life insurance income earned prior to 1984 is not taxable unless it
exceeds certain statutory limitations or is distributed as dividends. Such
income, accumulated in policyholders' surplus accounts, totaled $37.8 million at
December 31, 1998 and 1997. At current corporate rates, the maximum amount of
tax on such income is approximately $13.2 million. Deferred taxes on these
accumulations are not required because no distributions are expected.
F-25
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.2 TAX EXPENSE
Components of income tax (benefit) expense for the years were as follows:
1998 1997 1996
------------------------------------
(In Thousands)
Current tax expense $ 26,095 $23,695 $ 8,951
Deferred tax (benefit) expense:
Deferred policy acquisition cost 2,673 749 (5,314)
Policy reserves (12,552) 3,160 (3,027)
Basis differential of investments 132 (3,168) 595
Litigation settlement (10,272) - -
Reinsurance transaction (22,133) - -
Other, net (3,251) (1,736) 9,738
------------------------------------
Total deferred tax (benefit) expense (45,403) (995) 1,992
------------------------------------
Income tax (benefit) expense $(19,308) $22,700 $10,943
====================================
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.
1998 1997 1996
------------------------------------
(In Thousands)
Income tax at statutory percentage
of GAAP pretax income $(15,666) $22,730 $11,471
Tax-exempt investment income (121) (134) (149)
Other (3,521) 104 (379)
------------------------------------
Income tax (benefit) expense $(19,308) $22,700 $10,943
====================================
F-26
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.3 TAXES PAID
Income taxes paid amounted to approximately $20.5 million, $17.2 million, and
$13.8 million in 1998, 1997, and 1996, respectively.
5.4 TAX RETURN EXAMINATIONS
The Internal Revenue Service ("IRS") has completed examinations of the Company's
tax returns through 1991. The IRS is currently examining tax returns for 1992
through 1994. Although the final outcome of any issues raised in examination is
uncertain, the Company believes that the ultimate liability, including interest,
will not materially exceed amounts recorded in the financial statements.
6. TRANSACTIONS WITH AFFILIATES
American General Corporation and certain affiliated companies provide services
to the Company, principally data processing, investment management, professional
and administrative services. During 1998 and 1997 the Company incurred $25.3
million and $20.5 million, respectively, for these services. In addition, the
Company provides services to certain affiliated companies. During 1998 and 1997
the Company was reimbursed $3.5 million and $6.1 million, respectively, for
these services.
The Company periodically borrows funds from the Parent Company under an
intercompany short-term borrowing agreement entered into during 1997. These
borrowings are on demand and are unsecured. Interest is charged on the average
borrowing based on the commercial paper rate. At December 31, 1998, no amounts
were outstanding under the borrowing agreement.
Affiliated accounts receivable were $6.8 million and $1.7 million in 1998 and
1997, respectively.
Following regulatory approval from the necessary authorities, the Company
reinsured 49% of its credit life and credit accident and health business to
American General Assurance Company, an affiliate, effective January 1, 1998.
This transaction resulted in the cession of approximately 218,000 life policies
representing $379.5 million of insurance in-force and approximately 41,000 A&H
policies. Assets of approximately $10 million were transferred, which resulted
in a pretax loss of approximately $4 million.
Following regulatory approval from the necessary authorities, the Company also
reinsured 49% of its New York and 100% of its non-New York group life (excluding
permanent policies), group accident and health, and individual accident and
health business to American General Assurance Company effective October 1, 1998.
This transaction resulted in the cession of approximately 21,000 life policies
representing
F-27
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
6. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$32.6 billion of insurance in-force and approximately 24,000 A&H policies.
Assets of approximately $254 million were transferred. The Company received a
$13 million ceding commission on this transaction, which resulted in a pretax
loss of approximately $56 million.
The losses on these transactions resulted from the pricing of the business to
yield a competitive market return.
Amounts recoverable of $400 million and amounts payable of $106 million,
relating to this affiliated reinsurance, are included under the captions
"Reinsurance recoverable" and "Ceded reinsurance payable" in the balance sheets
at December 31, 1998.
7. ACCIDENT AND HEALTH RESERVES
Activity in the liability for unpaid claims and claim adjustment expenses for
the Company's accident and health coverage is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance recoverable $ 85,974 $ 72,744 $ 55,450
---------------------------------------
Reinsurance settlements (1) (43,736) - -
---------------------------------------
Add: Incurred losses (2) 179,158 263,015 278,413
---------------------------------------
Deduct: Paid losses related to:
Current year 78,575 82,470 87,119
Prior years 123,039 167,315 174,000
---------------------------------------
Total paid losses 201,614 249,785 261,119
---------------------------------------
Balance as of December 31, net of reinsurance recoverable 19,782 85,974 72,744
Reinsurance recoverable 45,419 1,413 1,094
---------------------------------------
Balance as of December 31, gross of reinsurance recoverable $ 65,201 $ 87,387 $ 73,838
=======================================
</TABLE>
(1) See Note 6.
(2) Substantially all of the Company's incurred claims and claim adjustment
expenses relate to the respective current year.
F-28
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
7. ACCIDENT AND HEALTH RESERVES (CONTINUED)
The liability for unpaid claims and claim adjustment expenses relating to the
Company's accident and health business is based on the estimated amount payable
on claims reported prior to the date of the balance sheets which have not yet
been settled: claims reported subsequent to the date of the balance sheets which
have been incurred during the period than ended, and an estimate (based on past
experience) of incurred but unreported claims relating to such periods.
8. BENEFIT PLANS
8.1 PENSION PLANS
The Company has non-contributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's compensation and
length of credited service.
Equity and fixed maturity securities were 56% and 30%, respectively, of the
plans' assets at the plans' most recent balance sheet dates. Additionally, 1% of
plan assets were invested in general investment accounts of the Parent Company's
subsidiaries through deposit administration insurance contracts.
The benefit plans have purchased annuity contracts from American General
Corporation's subsidiaries to provide benefits for certain retirees. These
contracts are expected to provide future annual benefits to certain retirees of
American General Corporation and its subsidiaries of approximately $52 million.
The components of pension expense and underlying assumptions were as follows:
1998 1997 1996
-----------------------------------
(In Thousands)
Service cost (benefits earned) $ 193 $ 1,065 $ 2,031
Interest cost 1,205 2,593 2,652
Expected return on plan assets (1,714) (3,331) (2,421)
Amortization (309) (418) (47)
-----------------------------------
Pension (income) expense $ (625) $ (91) $ 2,215
===================================
Discount rate on benefit obligation 7.00% 7.25% 7.60%
Rate of increase in compensation 4.25% 4.00% 6.00%
levels
Expected long-term rate of return on
plan assets 10.25% 10.00% 7.50%
F-29
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
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:
1998 1997
--------------------
(In Thousands)
Projected benefit obligation (PBO) $18,022 $26,337
Plan assets at fair value 18,110 23,757
--------------------
Plan assets at fair value in excess of (less 88 (2,580)
than) PBO
Other unrecognized items, net (198) 3,154
--------------------
(Accrued) prepaid pension expense $ (110) $ 574
====================
The change in PBO was as follows:
1998 1997
--------------------
(In Thousands)
PBO at January 1 $26,337 $27,245
Service and interest costs 1,398 3,658
Benefits paid (915) (870)
Actuarial loss (gain) 638 (932)
Transfers and other (9,436) (2,764)
--------------------
PBO at December 31 $18,022 $26,337
====================
The change in the fair value of plan assets was as follows:
1998 1997
--------------------
(In Thousands)
Fair value of plan assets at January 1 $23,757 $22,222
Actual return on plan assets 1,175 2,405
Benefits paid (915) (870)
Transfers (5,907) -
--------------------
Fair value of plan assets at December 31 $18,110 $23,757
====================
F-30
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.2 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.
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 (benefit) in 1998, 1997, and 1996 was $(290)
thousand, $(43) thousand, and $440 thousand, respectively. The accrued liability
for postretirement benefits was $3.7 million and $13.7 million at December 31,
1998 and 1997, respectively. These liabilities were discounted at the same rates
used for the pension plans.
9. 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.
1998 1997
----------------------------------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
----------------------------------------------
(In Millions) (In Millions)
Assets:
Fixed maturity and
equity securities $2,048 $2,048 $2,353 $2,353
Mortgage loans on real
estate $ 91 $ 84 $ 68 $ 61
Policy loans $ 84 $ 84 $ 86 $ 88
Indebtedness from
affiliates $ 7 $ 7 $ 2 $ 2
Liabilities:
Insurance investment
contracts $ 541 $ 560 $ 737 $ 732
F-31
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value of
financial instruments:
FIXED MATURITY AND EQUITY SECURITIES
Fair values of fixed maturity and equity securities were based on quoted
market prices, where available. For investments not actively traded, fair
values were estimated using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using a current market rate applicable to yield,
credit quality, and average life of investments.
MORTGAGE LOANS ON REAL ESTATE
Fair value of mortgage loans was estimated primarily using discounted cash
flows, based on contractual maturities and risk-adjusted discount rates.
POLICY LOANS
Fair value of policy loans was estimated using discounted cash flows and
actuarially determined assumptions, incorporating market rates.
INDEBTEDNESS FROM AFFILIATES
Indebtedness from affiliates is composed of accounts receivable from
affiliates. Due to the short-term nature of accounts receivable, fair value
is assumed to equal carrying value.
INSURANCE INVESTMENT CONTRACTS
Fair value of insurance investment contracts was estimated using cash flows
discounted at market interest rates.
F-32
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
10. STATUTORY FINANCIAL INFORMATION; DIVIDEND PAYING CAPABILITY
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the State of New York
Insurance Department. "Prescribed" statutory accounting practices include state
laws, regulations and general administrative rules, as well as a variety of
publications by the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, from company to company within a state, and may change in the
future. There were no material permitted practices utilized by the Company in
1998, 1997 or 1996.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
accounting practices and may result in changes to the accounting practices that
the Company uses to prepare its statutory financial statements. Codification
will require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domesticated within those
states. Accordingly, before Codification becomes effective for the Company, the
State of New York must adopt Codification as the prescribed basis of accounting
on which domestic insurers must report their statutory basis results to the
Insurance Department. At this time, it is unclear whether the State of New York
will adopt Codification.
Policyholder's surplus and net income, as reported to the domiciliary state
insurance department in accordance with its prescribed or permitted statutory
accounting practices is summarized as follows:
1998 1997 1996
--------------------------------------
(In Thousands)
Statutory net income for the year $ 31,151 $ 24,961 $ 13,132
Statutory surplus at year-end $212,130 $218,111 $180,405
Statutory accounting practices require acquisition costs on new business
(including commissions and underwriting and issue costs) to be charged to
expense when incurred. Regulatory net income includes income (loss) attributed
to participating policyholders of $(6.0) million, $(6.8) million and $(8.4)
million in 1998, 1997 and 1996, respectively, with the 1998, 1997 and 1996
losses primarily a result of higher levels of sales of participating term
insurance products. Regulatory equity capital includes capital attributed to
participating policyholders of $(37.0) million, $(24.9) million and $(13.3)
million at December 31, 1998, 1997 and 1996 respectively. Capital attributed to
participating policyholders is not available for payment of dividends to
shareholders.
F-33
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
10. STATUTORY FINANCIAL INFORMATION; DIVIDEND PAYING CAPABILITY (CONTINUED)
The Company is subject to New York Business Corporation Law, which imposes
restrictions on shareholder dividends. In addition, New York State Insurance Law
requires that no dividend may be declared without prior approval of the State of
New York Insurance Department. New York Law also states that no New York
domiciled company shall declare or distribute dividends to shareholders which
exceeds the lesser of: (1) 10% of surplus as regards policyholders or (2) 100%
of adjusted net investment income, unless the superintendent approves a greater
dividend payment. The Company did not pay any dividends in 1998, 1997 or 1996.
11. LEASES
The Company has various leases, substantially all of which are for office space
and facilities. At December 31, 1998 the future minimum rental commitments under
all of the Company's noncancellable leases were as follows:
YEAR ENDED OFFICE
DECEMBER 31 SPACE EQUIPMENT TOTAL
- -------------------------------------------------------------------------
(In Thousands)
1999 $ 4,892 $452 $ 5,344
2000 4,693 183 4,876
2001 4,685 93 4,778
2002 4,517 - 4,517
2003 4,368 - 4,368
Thereafter 5,342 - 5,342
----------------------------------------
Total $28,497 $728 $29,225
========================================
Rent expense incurred in 1998, 1997 and 1996 was $4.6 million, $3.6 million and
$3.7 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
In recent years, various life insurance companies have been named as defendants
in class action lawsuits relating to life insurance pricing and sales practices,
and a number of these lawsuits have resulted in substantial settlements. On
December 16, 1998, American General Corporation announced that certain of its
life insurance subsidiaries had entered into agreements to resolve all pending
market conduct class action lawsuits. The settlements are not final until
approved by the courts and any appeals are resolved. If court approvals are
obtained and appeals are not taken, it is expected the settlements will be final
in third quarter 1999.
F-34
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In conjunction with the proposed settlements, the Company recorded a charge of
$30.7 million ($19.9 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.
The litigation liability was reduced by payments of $1.3 million, and the
remaining balance of $29.4 million was included in other liabilities on the
Company's balance sheet at December 31, 1998.
In addition to the charges recorded in 1998, the Company will incur additional
expenses for claim administration, outside counsel and actuarial services, and
regulatory expenses, related to the resolution of the litigation, which will be
recorded as incurred. Such expenses are not expected to have a material adverse
effect on the Company's financial position or results of operations.
The Company is party to various other lawsuits and proceedings arising in the
ordinary course of business. Many of these lawsuits and proceedings arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon information
presently available, the Company believes that the total amounts that will
ultimately be paid, if any, arising from these lawsuits and proceedings will not
have a material adverse effect on the Company's 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.
The increase in the number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. At December 31, 1998 and 1997, the Company has accrued $876 thousand and
$1.1 million, respectively, for guaranty fund assessments, and applied $236
thousand and $293 thousand, respectively, for premium tax deductions. The
Company has recorded receivables of $352 thousand and $334 thousand at December
31, 1998 and 1997, respectively, for expected recoveries against the payment of
future premium taxes. Expenses incurred for guaranty fund assessments were $191
thousand, $358 thousand, and $557 thousand in 1998, 1997, and 1996,
respectively.
F-35
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
13. REINSURANCE
Reinsurance transactions for the years ended December 31, 1998, 1997, and 1996
were as follows:
1998 1997 1996
-----------------------------------------------
(In Thousands)
LIFE INSURANCE IN FORCE
Gross $70,948,300 $61,407,508 $52,300,927
Assumed - 11,314,869 9,773,886
Ceded 44,441,277 9,321,704 5,674,223
-----------------------------------------------
Net $26,507,023 $63,400,673 $56,400,590
===============================================
Life and Annuity Premiums
Gross $ 214,384 $ 178,251 $ 154,569
Assumed 22,020 26,171 24,468
Ceded 58,924 19,332 5,467
-----------------------------------------------
Net $ 177,480 $ 185,090 $ 173,570
===============================================
A&H PREMIUMS
Written
Gross $ 459,562 $ 422,886 $ 379,171
Assumed 170,120 1,704 2,190
Ceded 285,628 16,243 12,281
-----------------------------------------------
Net $ 344,054 $ 408,347 $ 369,080
===============================================
Earned
Gross $ 452,348 $ 403,717 $ 378,390
Assumed 168,331 1,503 2,190
Ceded 276,313 15,616 12,252
-----------------------------------------------
Net $ 344,366 $ 389,604 $ 368,328
===============================================
Reinsurance recoverable on paid losses was approximately $10.6 million, $2.4
million, and $3.7 million at December 31, 1998, 1997, and 1996, respectively.
Reinsurance recoverable on unpaid losses was approximately $81.7 million, $3.2
million, and $3.1 million at December 31, 1998, 1997, and 1996, respectively.
The effect of reinsurance on benefits to policyholders and beneficiaries was
$131 million, $13 million, and $20 million during 1998, 1997, and 1996,
respectively.
The Company terminated its participation in both the Federal Employee Government
Life Insurance (FEGLI) and State Government Life Insurance (SGLI) pools in 1998.
The assumed premiums for these pools in 1998 were $19.5 million and $2.5
million, respectively.
F-36
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
13. REINSURANCE (CONTINUED)
The Company participates in several reinsurance pools. These pools are managed
and administered by reinsurance intermediaries on behalf of the Company. The
pools involved various coverages including life, medical and disability.
14. YEAR 2000 CONTINGENCY (UNAUDITED)
INTERNAL SYSTEMS
The Company's ultimate parent, American General Corporation, (AGC) has numerous
technology systems that are managed on a decentralized basis. AGC's Year 2000
readiness efforts are therefore being undertaken by its key business units with
centralized oversight. Each business unit, including the Company, has developed
and is implementing a plan to minimize the risk of a significant negative impact
on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of the Company's information technology and
non-information technology systems; (2) assess which items in the inventory may
expose the Company to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, these activities
had been completed for substantially all of the Company's critical systems,
making them Year 2000 ready. Vendor upgrades for a small number of systems were
either completed in the first quarter 1999 or are expected to be completed by
June 30, 1999; therefore, activities (3) through (5) are ongoing for some
systems.
The Company will continue to test its systems throughout 1999 to maintain Year
2000 readiness. In addition, the company is developing plans for the century
transition, which will restrict systems modifications from November 1999 through
January 2000, create rapid response teams to address problems and limit
vacations for key technical personnel.
THIRD PARTY RELATIONSHIPS
The Company has relationships with various third parties who must also be Year
2000 ready. These third parties provide (or receive) resources and services to
(or from) the Company and include organizations with which the Company exchanges
information. Third parties include vendors of hardware, software, and
information services; providers of infrastructure services such as voice and
data communications and utilities for office facilities; investors; customers;
distribution channels; and joint venture partners. Third parties differ from
internal systems in that the Company exercises less, or no, control over
F-37
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED) (CONTINUED)
THIRD PARTY RELATIONSHIPS (CONTINUED)
Year 2000 readiness. The Company has developed a plan to assess and attempt to
mitigate the risks associated with the potential failure of third parties to
achieve Year 2000 readiness. The plan includes the following activities (1)
identify and classify third party dependencies; (2) research, analyze, and
document Year 2000 readiness for critical third parties; and (3) test critical
hardware and software products and electronic interfaces. As of April 30, 1999,
AGC has identified and assessed its critical third party dependencies, including
those related to the Company. Of these critical dependencies, approximately 300
have been assessed to have a high probability of failure and have been covered
in the Company's contingency planning efforts. Due to the various stages of Year
2000 readiness for these critical third-party dependencies, the Company's
testing activities with critical third parties will extend throughout 1999.
CONTINGENCY PLANS
The Company has commenced contingency planning to reduce the risk of Year 2000-
related business failures. The contingency plans, which address both internal
systems and third party relationships, include the following activities: (1)
evaluate the consequences of failure of critical business processes with
significant exposure to Year 2000 risk; (2) determine the probability of a Year
2000 related failure for those critical processes that have a high consequence
of failure; (3) develop an action plan to complete contingency plans for those
critical processes that rank high in consequence and probability of failure; and
(4) complete the applicable contingency plans. These plans will be tested during
the second and third quarters of 1999.
RISKS AND UNCERTAINTIES
Based on its plans to make internal systems ready for Year 2000, to deal with
third party relationships, and to develop contingency actions, the Company
believes that it will experience at most isolated and minor disruptions of
business processes following the turn of the century. Such disruptions are not
expected to have a material effect on the Company's future results of
operations, liquidity, or financial condition. However, due to the magnitude and
complexity of this project, risks and uncertainties exist and the Company is not
able to predict a most reasonably likely worst case scenario. If Year 2000
readiness is not achieved due to the Company's failure to maintain critical
systems as Year 2000 ready, failure of critical third parties to achieve Year
2000 readiness on a timely basis, failure of contingency plans to reduce Year
2000-related business failures, or other unforeseen circumstances in completing
the Company's plans, the Year 2000 issues could have a material adverse impact
on the Company's operations following the turn of the century.
F-38
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED) (CONTINUED)
COSTS
Through March 31, 1999, Company has incurred, and anticipates that it will
continue to incur, costs for internal staff, third-party vendors, and other
expenses to achieve Year 2000 readiness. The cost of activities related to Year
2000 readiness has not had a material adverse effect on the Company' results of
operations or financial condition. In addition, the Company has elected to
accelerate the planned replacement of certain systems as part of the Year 2000
plans. Costs of the replacement systems are being capitalized and amortized over
their useful lives, in accordance with the Company's normal accounting policies.
F-39
