<PAGE>
GENERATIONS(TM)
FLEXIBLE PAYMENT VARIABLE AND FIXED GROUP
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: 1-800-346-4944 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 group deferred annuity certificates (the "Certificates") described in
this Prospectus.
You may use USL's Separate Account USL VA-R ("Separate Account") for a variable
investment return under the Certificates based on one or more of the following
mutual fund series of the Van Kampen Life Investment Trust ("Trust") and the
Morgan Stanley Dean Witter Universal Funds, Inc. ("Fund"):
<TABLE>
<CAPTION>
. Van Kampen Life Investment Trust . Morgan Stanley Dean Witter Universal Funds Inc.
<S> <C> <C>
. Domestic Income Portfolio . Asian Equity Portfolio
. Emerging Growth Portfolio . Emerging Markets Equity Portfolio
. Enterprise Portfolio . Equity Growth Portfolio
. Government Portfolio . Global Equity Portfolio
. Growth and Income Portfolio . International Magnum Portfolio
. Money Market Portfolio . Fixed Income Portfolio
. Morgan Stanley Real Estate Securities Portfolio . High Yield Portfolio
. Strategic Stock Portfolio . Mid Cap Value Portfolio
Value Portfolio
</TABLE>
You may also use USL's guaranteed interest option. This option currently has
one Guarantee Period, with a guaranteed interest rate.
We have designed this Prospectus to provide 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 52 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-
800-346-4944. You may also 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 prospectuses of the
Van Kampen Life Investment Trust and the Morgan Stanley Dean Witter Universal
Funds, Inc.
This Prospectus is dated July 1, 1999
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Definitions................................................................................ 4
Fee Table.................................................................................. 7
Synopsis of Certificate Provisions......................................................... 10
Minimum Investment Requirements...................................................... 10
Purchase Payment Accumulation........................................................ 10
Fixed and Variable Annuity Payments.................................................. 11
Changes in Allocations Among Divisions and Guarantee Periods......................... 11
Surrenders and Withdrawals........................................................... 12
Cancellation Rights.................................................................. 12
Death Proceeds....................................................................... 12
Limitations Imposed by Retirement Plans and Employers................................ 12
Communications to Us................................................................. 12
Financial and Performance Information................................................ 13
Other Information.................................................................... 14
Financial Information...................................................................... 15
USL........................................................................................ 15
Separate Account USL VA-R.................................................................. 15
The Series................................................................................. 15
Voting Privileges.................................................................... 18
The Fixed Account.......................................................................... 18
Guarantee Periods.................................................................... 19
Crediting Interest................................................................... 19
New Guarantee Periods................................................................ 20
Certificate Issuance and Purchase Payments................................................. 20
Minimum Requirements................................................................. 21
Payments............................................................................. 22
Owner Account Value........................................................................ 22
Variable Account Value............................................................... 22
Fixed Account Value.................................................................. 23
Transfer, Automatic Rebalancing, Surrender and Partial Withdrawal of Owner Account Value... 23
Transfers............................................................................ 23
Automatic Rebalancing................................................................ 25
Surrenders........................................................................... 25
Partial Withdrawals.................................................................. 26
Annuity Period and Annuity Payment Options................................................. 27
Annuity Commencement Date............................................................ 27
Application of Owner Account Value................................................... 27
Fixed and Variable Annuity Payments.................................................. 27
Annuity Payment Option............................................................... 28
Election of Annuity Payment Option................................................... 28
Available Annuity Payment Options.................................................... 29
Transfers............................................................................ 31
Death Proceeds............................................................................. 31
Death Proceeds Before the Annuity Commencement Date.................................. 31
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Death Proceeds After the Annuity Commencement Date................................... 33
Proof of Death....................................................................... 33
Charges Under the Certificates............................................................. 34
Premium Taxes........................................................................ 34
Surrender Charge..................................................................... 34
Transfer Charges..................................................................... 36
Annual Certificate Fee............................................................... 37
Charge to the Separate Account ...................................................... 37
Miscellaneous........................................................................ 37
Systematic Withdrawal Plan........................................................... 38
One-Time Reinvestment Privilege...................................................... 38
Reduction in Surrender Charges or Administrative Charges............................. 38
Other Aspects of the Certificates.......................................................... 38
Owners, Annuitants and Beneficiaries; Assignments.................................... 38
Reports.............................................................................. 39
Rights Reserved by Us................................................................ 39
Payment and Deferment................................................................ 40
Federal Income Tax Matters................................................................. 41
General.............................................................................. 41
Non-Qualified Certificates........................................................... 41
Individual Retirement Annuities ("IRAs")............................................. 43
Roth IRAs............................................................................ 45
Simplified Employee Pension Plans.................................................... 46
Simple Retirement Accounts........................................................... 46
Other Qualified Plans................................................................ 46
Private Employer Unfunded Deferred Compensation Plans................................ 48
Federal Income Tax Withholding and Reporting......................................... 48
Taxes Payable by USL and the Separate Account........................................ 48
Distribution Arrangements.................................................................. 49
Services Agreements........................................................................ 49
Legal Matters.............................................................................. 50
Year 2000 Considerations................................................................... 50
Other Information on File.................................................................. 51
Contents of Statement of Additional Information............................................ 52
Request for Statement of Additional Information............................................ 53
</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 distributions of your Account Value.
ACCUMULATION UNIT - a measuring unit used in calculating your interest in a
Division of Separate Account USL VA-R 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.
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<PAGE>
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.
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 Separate
Account USL VA-R 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 Separate Account USL VA-
R.
GENERAL ACCOUNT - all assets of USL other than those in Separate Account USL
VA-R 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, NY 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.)
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT") - a federal law governing the
operations of investment companies such as the Series and the Separate Account.
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.
PARTICIPANT - the Owner of a Certificate.
QUALIFIED - 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.
5
<PAGE>
SEPARATE ACCOUNT - the segregated asset account of USL named Separate Account
USL VA-R which receives and 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
Van Kampen Life Investment Trust or the Morgan Stanley Dean Witter Universal
Funds, Inc.
SURRENDER CHARGE - a charge for sales expenses that we may assess when you
surrender a Certificate or receive payment of certain other amounts from a
Certificate.
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.
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 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. (See "Synopsis of Certificate Provisions -
Communications to Us.") You must use special forms your sales representative or
we provide to elect an Annuity Option or exercise your one-time reinvestment
privilege.
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.
TRANSACTION CHARGES
Front-End Sales Charge Imposed on Purchases........................ 0%
Maximum Surrender Charge/1/........................................ 6%
(computed as a percentage of purchase payments surrendered)
Transfer Fee.......................................................$ 0/2/
ANNUAL CERTIFICATE FEE/3/...............................................$ 30
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average daily Variable
Account Value)
Mortality and Expense Risk Charge.................................. 1.25%
Administrative Expense Charge...................................... 0.15%
-----
Total Separate Account Annual Expenses............................... 1.40%
=====
- -------------------
/1/ This charge does not apply or is reduced under certain circumstances. See
"Surrender Charge."
/2/ This charge is $25 after the 12th transfer during each Certificate Year
before the Annuity Commencement Date.
/3/ This charge does not apply during the Annuity Period.
7
<PAGE>
THE SERIES' ANNUAL EXPENSES/1,2/ (as a percentage of average net assets)
<TABLE>
<CAPTION>
Management Other Annual
Fees After Expenses Expenses
Expense After Expense After Expense
Series Reimbursement Reimbursement Reimbursement
- ---------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Domestic Income 0.01% 0.59% 0.60%
Emerging Growth 0.32% 0.53% 0.85%
Enterprise 0.46% 0.14% 0.60%
Government 0.37% 0.23% 0.60%
Growth and Income 0.26% 0.49% 0.75%
Money Market 0.11% 0.49% 0.60%
Morgan Stanley Real Estate Securities 1.00% 0.08% 1.08%
Strategic Stock 0.00% 0.65% 0.65%
Asian Equity 0.00% 1.21% 1.21%
Emerging Markets Equity 0.00% 1.95% 1.95%
Equity Growth 0.09% 0.76% 0.85%
Global Equity 0.32% 0.83% 1.15%
International Magnum 0.15% 1.00% 1.15%
Fixed Income 0.06% 0.64% 0.70%
High Yield 0.15% 0.65% 0.80%
Mid Cap Value 0.23% 0.82% 1.05%
Value 0.08% 0.77% 0.85%
</TABLE>
- ----------------
/1/ The Series' advisers have entered into administrative services agreements
with USL. The advisers pay fees to USL for these services. The fees do not
have a direct relationship to the Series' Annual Expenses. (See "Services
Agreements.")
/2/ Management fees and other expenses would have been the percentages shown in
the following table without certain voluntary expense reimbursements from
the investment adviser.
<TABLE>
<CAPTION>
Management Other Total Annual
Fees Expenses Expenses
----------- --------- -------------
<S> <C> <C> <C>
Domestic Income 0.50% 0.59% 1.09%
Emerging Growth 0.70% 0.53% 1.23%
Enterprise 0.50% 0.14% 0.64%
Government 0.50% 0.23% 0.73%
Growth and Income 0.60% 0.49% 1.09%
Money Market 0.50% 0.49% 0.99%
Morgan Stanley Real Estate Securities 1.00% 0.08% 1.08%
Strategic Stock 0.50% 0.75% 1.25%
Asian Equity 0.80% 2.00% 2.80%
Emerging Markets Equity 1.25% 2.20% 3.45%
Equity Growth 0.55% 0.76% 1.31%
Global Equity 0.80% 0.83% 1.63%
International Magnum 0.80% 1.00% 1.80%
Fixed Income 0.40% 0.64% 1.04%
High Yield 0.50% 0.65% 1.15%
Mid Cap Value 0.75% 0.82% 1.57%
Value 0.55% 0.77% 1.32%
</TABLE>
8
<PAGE>
Example The following expenses would apply to a $1,000 investment at the end of
the applicable time period, if you surrender your Certificate (or if you
annuitize under circumstances where you owe a surrender charge)/3/ , and if you
assume a 5% annual return on assets:
If all amounts are invested
in one of the following Series 1 year 3 years 5 years 10 years
- ------------------------------ ------ ------- ------- --------
Domestic Income $75 $110 $147 $239
Emerging Growth $78 $118 $160 $265
Enterprise $75 $110 $147 $239
Government $75 $110 $147 $239
Growth and Income $77 $114 $155 $255
Money Market $75 $110 $147 $239
Morgan Stanley Real Estate Securities $80 $124 $172 $288
Strategic Stock $76 $111 $150 $245
Asian Equity $81 $128 $178 $301
Emerging Markets Equity $89 $150 $214 $370
Equity Growth $78 $118 $160 $265
Global Equity $81 $127 $175 $295
International Magnum $81 $127 $175 $295
Fixed Income $76 $113 $152 $250
High Yield $77 $116 $158 $260
Mid Cap Value $80 $124 $170 $285
Value $78 $118 $160 $265
Example The following expenses would apply to a $1,000 investment at the end of
the applicable time period, if you do not surrender your Certificate (or if you
annuitize under circumstances where a surrender charge is not payable)/3/, and
if you assume a 5% annual return on assets:
If all amounts are invested
in one of the following Series 1 year 3 years 5 years 10 years
- ------------------------------ ------ ------- ------- --------
Domestic Income $21 $ 65 $111 $239
Emerging Growth $24 $ 73 $124 $265
Enterprise $21 $ 65 $111 $239
Government $21 $ 65 $111 $239
Growth and Income $23 $ 69 $119 $255
Money Market $21 $ 65 $111 $239
Morgan Stanley Real Estate Securities $26 $ 79 $136 $288
Strategic Stock $22 $ 66 $114 $245
Asian Equity $27 $ 83 $142 $301
Emerging Markets Equity $35 $105 $178 $370
Equity Growth $24 $ 73 $124 $265
Global Equity $27 $ 82 $139 $295
International Magnum $27 $ 82 $139 $295
Fixed Income $22 $ 68 $116 $250
High Yield $23 $ 71 $122 $260
Mid Cap Value $26 $ 79 $134 $285
Value $24 $ 73 $124 $265
- ----------------------
/3/ See "Surrender Charge" for a description of the circumstances when you may
be required to pay the Surrender Charge under annuitization.
9
<PAGE>
THE EXAMPLES ARE 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
examples assume an estimated average Account Value of $40,000 for each of the
Divisions.
SYNOPSIS OF CERTIFICATE PROVISIONS
You should read this synopsis together with the other information in this
Prospectus.
The purpose of the Certificates is to provide retirement benefits through
. the accumulation of purchase payments on a fixed or variable basis; and
. the application of such accumulations to provide Fixed or Variable
Annuity Payments.
MINIMUM INVESTMENT REQUIREMENTS
Your initial purchase payment must be at least $2,000 if you are buying a
Qualified Certificate, and $5,000 if you are buying a Non-Qualified Certificate.
(See "Federal Income Tax Matters" for a discussion of the various tax aspects
involved in purchasing Qualified and Non-Qualified Certificates.) The amount of
any subsequent purchase payment that you make must be at least $100. If your
Account Value falls below $500, we may cancel your Certificate and treat it as a
full surrender. We also may transfer funds, without charge, from a Division
(other than the Money Market Division) or Guarantee Period under your
Certificate to the Money Market Division, if the Account Value of that Division
or Guarantee Period falls below $500. (See "Certificate Issuance and Purchase
Payments.")
PURCHASE PAYMENT ACCUMULATION
We accumulate purchase payments on a variable or fixed basis until the Annuity
Commencement Date.
For variable accumulation, you may allocate part or all of your Account Value to
one or more of the 17 available Divisions of the Separate Account. Each
Division invests solely in shares of one of 17 corresponding Series. (See "The
Series.") The value of accumulated purchase payments allocated to a Division
increases or decreases, as the value of the investments in a Series' shares
increases or decreases, subject to reduction by charges and deductions. (See
"Variable Account Value.")
For fixed accumulation, you may allocate part or all of your Account Value to
one or more of the Guarantee Periods available in our Fixed Account at the time
you make your allocation. Each Guarantee Period is for a different period of
time and has a different Guaranteed Interest Rate. The value of accumulated
purchase payments increases at the Guaranteed Interest Rate applicable to that
Guarantee Period. (See "The Fixed Account.")
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Over the lifetime of your Certificate, you may allocate part or all of your
Account Value to no more than 18 Divisions and Guarantee Periods. This limit
includes those Divisions and Guarantee Periods from which you have either
transferred or withdrawn all of your Account Value previously allocated to such
Divisions or Guarantee Periods. For example, if you allocate 100% of your
initial purchase payment to the Money Market Division, you have selected the
Money Market Division as one of the 18 Divisions and Guarantee Periods available
to you. When you transfer all of your Account Value from the Money Market
Division, it remains as one of the 18 Divisions and Guarantee Periods available
to you, even if you never again allocate any of your Account Value of a new
purchase payment to the Money Market Division.
FIXED AND VARIABLE ANNUITY PAYMENTS
You may elect to receive Fixed or Variable Annuity Payments or a combination of
Payments beginning on the Annuity Commencement Date. Fixed Annuity Payments are
periodic payments from USL in a fixed amount guaranteed by USL. The amount of
the Payments will depend on the Annuity Payment Option chosen, the age and, in
some cases, the gender of the Annuitant, and the total amount of Account Value
applied to the fixed Annuity Payment Option.
Variable Annuity Payments are similar to Fixed Annuity Payments, except that the
amount of each periodic payment from USL will vary reflecting the net investment
return of the Division or Divisions you selected under your variable Annuity
Payment Option. The payment for a given month will exceed the previous month's
payment, if the net investment return for a given month exceeds the assumed
interest rate used in the Certificate's annuity tables. The monthly payment
will be less than the previous payment if the net investment return for a month
is less than the assumed interest rate. The assumed interest rate used in the
Certificate's annuity tables is 3.5%. USL may offer other forms of the
Certificate with a lower assumed interest rate and reserves the right to
discontinue the offering of the higher interest rate form of Certificate. (See
"Annuity Period and Annuity Payment Options.")
CHANGES IN ALLOCATIONS AMONG DIVISIONS AND GUARANTEE PERIODS
Before the Annuity Commencement Date, you may change your allocation of future
purchase payments to the various Divisions and Guarantee Periods, without
charge.
In addition, you may reallocate your Account Value among the Divisions and
Guarantee Periods before the Annuity Commencement Date. However, you are
limited in the amount that you may transfer out of a Guarantee Period. See
"Transfer, Automatic Rebalancing, Surrender and Partial Withdrawal of Owner
Account Value - Transfers," for these and other conditions of transfer.
After the Annuity Commencement Date, you may make transfers from a Division to
another Division or to a fixed Annuity Payment Option. However, you may not
make transfers from a fixed Annuity Payment Option. (See "Annuity Period and
Annuity Payment Options - Transfers.")
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<PAGE>
SURRENDERS AND WITHDRAWALS
You may make a total surrender of or partial withdrawal from your Certificate at
any time prior to the Annuity Commencement Date by Written request to us. A
surrender or partial withdrawal may require you to pay a Surrender Charge, and
some surrenders and partial withdrawals may require you to pay tax penalties.
(See "Surrenders and Partial Withdrawals.")
CANCELLATION RIGHTS
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 the 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 premium taxes and Annual Certificate Fee that have been deducted.
DEATH PROCEEDS
If the Annuitant or Owner dies before the Annuity Commencement Date, we will pay
a benefit to the Beneficiary. (See "Death Proceeds Before the Annuity
Commencement Date.")
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
An employer or trustee who is the Owner under a retirement plan may limit
certain rights you would otherwise have under a Certificate. These limitations
may restrict total and partial withdrawals, the amount or timing of purchase
payments, the start of annuity payments, and the type of annuity options that
you may select. You should familiarize yourself with the provisions of any
retirement plan in which a Certificate is used. We are not responsible for
monitoring or assuring compliance with the provisions of any retirement plan.
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 the 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
12
<PAGE>
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.
FINANCIAL AND PERFORMANCE INFORMATION
From time to time, the Separate Account may include in advertisements and other
sales materials several types of performance information for the Divisions.
This information may include "average annual total return," "total return," and
"cumulative total return." The Domestic Income Division, the Government
Division, and the Growth and Income Division may also advertise "yield." The
Money Market Division may advertise "yield" and "effective yield."
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, 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. Total return figures are also
annualized, but do not, as described below, reflect deduction of any applicable
Surrender Charge or Annual Certificate Fee. Cumulative total return figures
represent the cumulative change in the 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,
. the Administrative Expense Charge,
. the applicable Surrender Charge that may be charged at the end of the
period in question; and
. a pro-rated portion of the Annual Certificate Fee.
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<PAGE>
Yield, effective yield, total return, and cumulative total return figures do not
reflect deduction of any Surrender Charge that we may impose upon partial
withdrawal, and thus may be higher than if such charge were deducted. Total
return and cumulative total return figures also do not reflect deduction of the
Annual Certificate Fee.
Division Performance. The investment performance for each Division that invests
in a corresponding Series 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 investment experience of the Series of the Fund and the
Trust appears in the prospectuses of the Fund and the Trust.
USL may also 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.
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
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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.")
USL
USL is a stock life insurance company, which was 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 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 with the Securities and Exchange Commission as a unit investment
trust under the 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 17 Divisions funding the variable benefits under the
Certificates. These Divisions invest in shares of eight separate investment
Series of the Trust and nine separate Series of the Fund.
The Trust and the Fund 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 Trust and the Fund also
offer shares to variable annuity and variable life insurance separate accounts
of insurers that are not affiliated with USL.
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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 the Trust or the Fund 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 Trust or the Fund, if a material
irreconcilable conflict arises among separate accounts. In such event, the
Trust or the 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 Trust's Board of Trustees, the Fund's Board of Directors 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.
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.
The names of the Series of the Trust in which the available Divisions invest are
as follows:
Van Kampen Life Investment Trust
Domestic Income Portfolio
Emerging Growth Portfolio
Enterprise Portfolio
Government Portfolio
Growth and Income Portfolio
Money Market Portfolio
Morgan Stanley Real Estate Securities Portfolio
Strategic Stock Portfolio
Van Kampen Asset Management Inc. is the investment adviser of each Series of the
Trust. Van Kampen Funds Inc. is the distributor of shares of each Series of the
Trust.
The names of the Series of the Fund in which the available Divisions invest are
as follows:
Morgan Stanley Dean Witter Universal Funds, Inc.
Asian Equity Portfolio
Emerging Markets Equity Portfolio
Equity Growth Portfolio
Global Equity Portfolio
International Magnum Portfolio
Fixed Income Portfolio
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High Yield Portfolio
Mid Cap Value Portfolio
Value Portfolio
Morgan Stanley Dean Witter Investment Management Inc. is the investment adviser
of the Asian Equity, Emerging Markets Equity, Equity Growth, Global Equity, and
International Magnum Portfolios. (On December 1, 1998, Morgan Stanley Asset
Management Inc. changed its name to Morgan Stanley Dean Witter Investment
Management Inc. The investment adviser continues to use the name Morgan Stanley
Asset Management, in some instances.) Miller Anderson & Sherrerd, LLP is the
investment adviser of the Fixed Income, High Yield, Mid Cap Value and Value
Portfolios. Morgan Stanley & Co. Incorporated is the distributor of shares of
each Series of the Fund.
The investment advisers and the distributors are all wholly-owned subsidiaries
of Morgan Stanley Dean Witter & Co. Morgan Stanley Dean Witter & Co. is a
preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses -- securities, asset
management and credit services.
Before selecting any Division, you should carefully read the prospectus. The
prospectus provides more complete information about the Series in which that
Division invests, including investment objectives and policies, charges and
expenses.
You can find information about the investment performance of the Series of the
Trust in the Statement. You can find information about the experience of the
investment advisers to the Series of the Fund in the prospectus for the Fund.
You may obtain additional copies of a prospectus by contacting USL's
Administrative Center at the addresses and phone numbers on the first page of
this Prospectus. When making your request, please indicate the names of the
Series in which you are interested.
High yielding fixed-income securities, such as those in which the Domestic
Income Portfolio and the High Yield Portfolio 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 about these
Series in the Trust and Fund prospectuses and related statements of additional
information and consider your ability to assume the risks of making an
investment in the Divisions that invest in them.
The name of each Series of the Trust and the Fund describes its type (e.g.,
money market fund, growth and income fund, fixed income fund, etc.), except for
the Enterprise Portfolio, the Strategic Stock Portfolio, and the International
Magnum Portfolio. The Enterprise Portfolio invests primarily in growth common
stocks that are believed to have above average potential for capital
appreciation. The Strategic Stock Portfolio invests primarily in dividend
paying equity securities with the potential for above average total return
through a combination of potential capital appreciation and dividend income,
consistent with the preservation of invested capital. The International Magnum
Portfolio invests primarily in equity securities of issuers domiciled in
Australia, Japan, New Zealand, Western Europe, and certain developed countries
in Asia, with the objective of long-term capital appreciation.
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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.
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
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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 months or years that the Owner selects
from among the Guarantee Periods that we offer at the time.
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. If the
Owner elects to annuitize in this case, we will, under certain circumstances,
waive the Surrender Charge. (See "Annuity Payment Options" and "Surrender
Charge.")
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 such balance to
another Division selected by the Owner, if we have received Written instructions
to transfer such balance to that Division.
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:
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. 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 the application for
the Guarantee Period selected; or
(b) the current interest rate we use on the date we receive the proceeds.
Proceeds that we receive more than 60 days after the date the application is
signed will receive interest at the rate in effect on the date we receive the
proceeds. The interest rate we use remains in effect 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 applicable
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.
Each Guarantee Period has its own Guaranteed Interest Rate. Guarantee Periods
can have different Guaranteed Interest Rates. We have the right to change the
Guaranteed Interest Rate for future Guarantee Periods of various lengths. These
changes will not affect the Guaranteed Interest Rates being paid on Guarantee
Periods that have already started. Each allocation or transfer of an amount to
a Guarantee Period starts the running of a new Guarantee Period for the amount
allocated or transferred. That amount earns 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.
CERTIFICATE ISSUANCE AND PURCHASE PAYMENTS
The minimum initial purchase payment is $2,000 for a Qualified Certificate and
$5,000 for a Non-Qualified Certificate. The minimum subsequent purchase payment
is $100. We reserve the right to modify these minimums at our discretion.
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Your application to purchase a Certificate must be on a Written application that
we provide and that you sign. USL and Van Kampen Funds, Inc., 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, 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 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.
We will waive these minimum requirements for transfers under the automatic
rebalancing program. (See "Automatic Rebalancing.")
If your total Account Value falls below $500, 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 such cancellation.
So long as the Account Value does not fall below $500, 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.
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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.
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.
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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.
USL guarantees the Fixed Account Value. Therefore, 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.
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. 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.
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 of market price 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.
We may also offer certain "special automatic transfer plans" to Owners who:
. make the new purchase payments, and
. do not own another annuity contract or certificate which USL, or any USL
affiliate, issued.
Under such plans, we will make equal monthly transfers over a period of time
that we will determine. We may offer a higher Guaranteed Interest Rate under
such a special automatic transfer plan than we would offer for another Guarantee
Period of the same duration that is not offered under such a plan. Any such
higher interest rate will reflect differences in costs or services and will not
be unfairly discriminatory as to any person. Differences in costs or services
will result from such factors as reduced sales expenses or administrative
efficiencies related to transferring amounts to other Divisions on an automatic,
rather than a discretionary, basis.
Transfers under any automatic transfer plan will:
. not count towards the 12 free transfers each Certificate Year,
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. not incur a $25 charge,
. not be subject to the 25% limitation on transfers from a Guarantee
Period, and
. not be subject to the minimum Account Value 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 of 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,
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. minus any applicable Surrender Charge,
. minus any uncollected Certificate Fee (see "Annual Certificate Fee"), and
. minus any applicable premium tax.
Our current practice is to require that you return the Certificate to our
Administrative Center 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
terminate. The Owner will, however, have a right to reinvest the proceeds of
the Certificate. (See "One-Time Reinvestment Privilege.")
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 will always pay you the amount of your partial withdrawal request, unless it
exceeds the value of your Certificate. In that case, we pay the surrender value
of your Certificate. The value of your Accumulation Units and Fixed Account
interests that we redeem will equal the amount of the withdrawal request, plus
any applicable Surrender Charge and premium tax. You can also tell us to take
Surrender Charges and 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.
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All collateral assignees of record must consent to any partial withdrawal.
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 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 before 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. In some cases, we may
deduct a Surrender Charge from the amount we apply. (See "Surrender Charge.")
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.
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. 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.
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 before
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 in connection with Qualified Certificates. (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
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. 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 any applicable
Surrender Charge, uncollected Annual Certificate Fee and premium tax.
You may elect the annuity option that will apply 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.
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
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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 provide 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 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.
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.
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.")
The Code may treat the election of Option 4 or Option 5 in the same manner as a
surrender of the total Account Value. 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.
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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 one transfer every 180 days 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:
. 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.
The death proceeds, before deduction of any applicable premium taxes, will equal
the greatest of:
. the sum of all net purchase payments made (less any premium taxes we
deducted previously and all prior partial withdrawals);
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. 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; or
. the "highest anniversary value" before the date of death, as defined
below.
The highest anniversary value before the date of death will be determined as
follows:
. First, we will calculate the Account Values at the end of each of the
past Certificate Anniversaries that occurs before the deceased's 81st
birthday (We will thereafter use only the highest of the Certificate
Anniversary Account Values that occurred before the deceased's 81st
birthday.);
. Second, we will increase each of the Account Values by the amount of net
purchase payments the Owner has made since the end of such Certificate
Years; and
. Third, we will reduce the result by the amount of any withdrawals the
Owner has made since the end of such Certificate Years.
The highest anniversary value will be an amount equal to the highest of such
values. Net purchase payments are purchase payments less applicable taxes
deducted at the time the purchase payment is made.
The death proceeds become payable to the Beneficiary when 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 sum
payment, based on values we determine at that time.
If the Owner 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
(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.
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. 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 dies. 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 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.
SURRENDER CHARGE
The Surrender Charge reimburses us for part of our expenses in distributing the
Certificates. We believe, however, that the amount of our expenses will exceed
the amount of revenues generated by the Surrender Charge. We will pay for extra
expenses out of our general surplus, which might include profits from the charge
for the assumption of mortality and expense risks.
Unless a withdrawal is exempt from the Surrender Charge (as discussed below),
the Surrender Charge is a percentage of the amount of each purchase payment that
you withdraw during the first seven years after we receive that purchase
payment. The percentage declines depending on how many years have passed since
we originally credited the withdrawn purchase payment to your Account Value, as
follows:
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Surrender Charge as a
Year of Purchase Percentage of Purchase
Payment Withdrawal Payment Withdrawn
------------------ --------------------
1st 6%
2nd 6%
3rd 5%
4th 5%
5th 4%
6th 3%
7th 2%
Thereafter 0%
In computing the Surrender Charge, we deem withdrawals from your Account Value
to consist first of purchase payments, in order of contribution, followed by any
amounts in excess of purchase payments. The Surrender Charge will apply to the
following transactions, which we consider to be withdrawals:
. total surrender;
. partial withdrawal;
. commencement of an Annuity Payment Option; and
. termination due to insufficient Account Value.
The Surrender Charge will NOT apply to withdrawals in the following
circumstances:
. the amount of withdrawals that exceeds the cumulative amount of your
purchase payments;
. death of the Annuitant, at any age, after the Annuity Commencement Date;
. death of the Annuitant, at any age, before the Annuity Commencement Date,
provided no Contingent Annuitant survives;
. death of the Owner, including the first to die in the case of joint
Owners of a Non-Qualified Certificate, unless the Certificate continues
under the special rule for a surviving spouse;
. annuitization over at least five years, or life contingent annuitization
where the life expectancy is at least five years;
. within the 30-day window under the One-Time Reinvestment Privilege;
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. the surrender of a Certificate, or the withdrawal of Certificate Value
(limited to the Variable Account Value and the one year Guarantee Period)
of a Certificate, issued to owners who are bona fide full-time employees
of USL at the time they purchased a Certificate;
. the portion of your first withdrawal or total surrender in any
Certificate Year that does not exceed 15% of the amount of your purchase
payments that (1) have not previously been withdrawn and (2) have been
credited to the Certificate for at least one year. (If you make multiple
withdrawals during a Certificate Year, we will recalculate the amount
eligible for the free withdrawal at the time of each withdrawal. After
the first Certificate Year, you may make non-automatic and automatic
withdrawals in the same Certificate Year subject to the 15% limitation.
For withdrawals under a systematic withdrawal plan, Purchase Payments
credited for 30 days or more are eligible for the 15% free withdrawal);
and
. any amounts withdrawn that are in excess of the amount permitted by the
15% free withdrawal privilege, described above, if you are withdrawing
the amounts to obtain or retain favorable tax treatment. (For example,
under certain circumstances the income and estate tax benefits of a
charitable remainder trust may be available only if you withdraw assets
from a Certificate funding the trust more rapidly than the 15% free
withdrawal privilege permits. This exception is subject to our approval.)
Upon selection of an annuity option that does not qualify for a Surrender Charge
exception above, we use the full amount of the Owner's Account Value to pay for
the annuity option. The amount we use will be the greater of:
. the amount payable to the Owner upon full surrender of a Certificate (see
"Surrenders and Partial Withdrawals"), or
. 95% of what the amount payable to the Owner upon full surrender of a
Certificate would be without a Surrender Charge.
We do not consider a free withdrawal under any of the foregoing Surrender Charge
exceptions to be a withdrawal of purchase payments, except for purposes of
computing the 15% free withdrawal described in the preceding paragraph. The
Code may impose a penalty on distributions if the recipient is under age 59 1/2.
(See "Penalty Tax on Premature Distributions.")
Transfer Charges
We describe the charges to pay 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.
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ANNUAL CERTIFICATE FEE
We will deduct an Annual Certificate Fee of $30 from your Account Value at the
end of each Certificate Year before the Annuity Commencement Date. This Fee is
for administrative expenses (which do not include expenses of distributing the
Certificates). We do not expect the revenues we derive from this Fee to exceed
the expenses. Unless paid directly, the Fee will be allocated among the
Guarantee Periods and Divisions in proportion to your Account Value in each. We
will deduct the entire Fee for the year from the proceeds of any full surrender.
We reserve the right to waive the Fee.
CHARGE TO THE SEPARATE ACCOUNT
We deduct from Separate Account assets a daily charge at an annualized rate of
1.40% of the average daily net asset value of the Separate Account attributable
to the Certificates. This charge (1) offsets administrative expenses not
covered by the Annual Certificate Fee discussed above and (2) compensates us for
assuming mortality and expense risks under the Certificates. The 1.40% charge
divides into .15% for administrative expenses and 1.25% for the assumption of
mortality and expense risks.
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.
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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,
including Surrender Charges and exceptions to Surrender Charges.
ONE-TIME REINVESTMENT PRIVILEGE
If the Account Value is at least $500, you may elect to reinvest all of the
proceeds that you liquidated from the Certificate within the previous 30 days.
In this case, we will credit the Surrender Charge and the Annual Certificate
Fee, if a new Annual Certificate Fee is not then due, back to the Certificate.
We will reinvest the proceeds at the value we next compute following the date of
receipt of the proceeds. Unless you request otherwise, we will allocate the
proceeds among the Divisions and Guarantee Periods in the same proportions as
before surrender. We will compute any subsequent surrender charge as if we had
issued the Certificate at the date of reinvestment for a purchase payment in the
amount of the net surrender proceeds. You may use this privilege only once.
REDUCTION IN SURRENDER CHARGES OR ADMINISTRATIVE CHARGES
We may reduce the Surrender Charges or administrative charges 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.
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.
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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, therefore, give
us prompt written notice of any address change.
RIGHTS RESERVED BY US
Upon notice to the Owner, we may modify a Certificate to the extent necessary
to:
. reflect a change in the Separate Account or any Division;
. credit 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;
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. 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 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.
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 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
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. 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, or 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 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
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<PAGE>
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 Certificate is
excludible from income, and any amount you receive in excess of your investment
in the Certificate is includible in income. All annuity Certificates or
contracts 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:
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. 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 $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
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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:
2000 2001 2002 2003 2004 2005 and
thereafter
------------------------------------------------------------------------
$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
------------------------------------------------------------------------
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
to 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 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),
. 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.
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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 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
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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.
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.
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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.
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
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<PAGE>
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, (2) Van Kampen Funds Inc. ("VK
Funds"), or (3) other broker-dealer firms. However, some individuals may be
representatives of firms that are exempt from broker-dealer regulation. AGSI,
VK Funds 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.
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 continuous basis. USL and VK Funds have
entered into certain revenue and cost-sharing arrangements in connection with
marketing the Certificates.
USL compensates VK Funds and other broker-dealers that sell the Certificates
according to one or more compensation schedules. The schedules provide for
commissions of up to 7.0% of purchase payments that Owners make. Subject to
approval of the New York Insurance Department, USL may also pay continuing
"trail" commissions of up to 0.75%.
USL also has agreed to pay VK Funds for its promotional activities, such as
solicitation of selling group agreements between broker-dealers and USL, agent
appointments with USL, printing and development of sales literature to be used
by USL appointed agents and related marketing support, and related special
promotional campaigns. From time to time, VK Funds may engage in special
promotions where VK Funds pays additional compensation to one or more of the
broker-dealers that sell the Certificates. None of these distribution expenses
results in any additional charges under the Certificates that are not described
under "Charges under the Certificates."
SERVICES AGREEMENTS
American General Life Companies ("AGLC") 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 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."
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LEGAL MATTERS
We are not involved in any legal matter about the Separate Account that would be
considered material to the interests of Owners. Pauletta P. Cohn, 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 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
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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.
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 discussed 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. To make your request,
you can either call us or send us the form on the last page of this Prospectus.
The Statement's contents are as follows:
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CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
General Information........................................................................... 2
Regulation and Reserves....................................................................... 2
Independent Auditors.......................................................................... 3
Services...................................................................................... 3
Principal Underwriter......................................................................... 4
Annuity Payments.............................................................................. 4
Gender of Annuitant......................................................................... 4
Misstatement of Age or Gender and Other Errors.............................................. 4
Change of Investment Adviser or Investment Policy............................................. 5
Performance Data for the Divisions............................................................ 5
Average Annual Total Return Calculations.................................................... 5
Total Return Calculations (without Surrender Charge or Annual Certificate Fee).............. 6
Cumulative Total Return Calculations (without Surrender Charge or Annual Certificate Fee)... 6
Hypothetical Performance.................................................................... 6
Yield Calculations.......................................................................... 9
Money Market Division Yield and Effective Yield Calculations................................ 9
Performance Comparisons..................................................................... 10
Effect of Tax-Deferred Accumulation........................................................... 11
Financial Statements.......................................................................... 12
Index to Financial Statements................................................................. 13
</TABLE>
52
<PAGE>
THE UNITED STATES LIFE INSURANCE COMPANY
IN THE CITY OF NEW YORK ("USL")
Administrative Center, Houston, TX
To obtain a Statement of Additional Information, please complete the form below
and mail to:
The United States Life Insurance Company in the City of New York
Attention: Administrative Center
P.O. Box 1401
Houston, TX 77251-1401
Please send a Statement of Additional Information for the Generations Variable
Annuity to me at the following address:
______________________________________
Name
______________________________________
Address
______________________________________
City/State Zip Code
53
<PAGE>
THE UNITED STATES LIFE INSURANCE COMPANY
IN THE CITY OF NEW YORK
SEPARATE ACCOUNT USL VA-R
GENERATIONS(TM)
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
1-800-346-4944
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 Generations(TM) Certificates. The Separate Account invests in
certain Series of the Van Kampen Life Investment Trust and the Morgan Stanley
Dean Witter Universal Funds, Inc. 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 the
Separate Account. Terms have the same meanings 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............................................. 3
Services......................................................... 3
Principal Underwriter............................................ 4
Annuity Payments................................................. 4
Gender of Annuitant............................................ 4
Misstatement of Age or Gender and Other Errors................. 4
Change of Investment Adviser or Investment Policy................ 5
Performance Data for the Divisions............................... 5
<PAGE>
Average Annual Total Return Calculations....................... 5
Total Return Calculations (without Surrender
Charge or Annual Contract Fee).............................. 6
Cumulative Total Return Calculations (without
Surrender Charge or Annual Contract Fee)..................... 6
Hypothetical Performance....................................... 6
Yield Calculations............................................. 9
Money Market Division Yield and Effective Yield Calculations... 9
Performance Comparisons........................................ 10
Effect of Tax-Deferred Accumulation.............................. 11
Financial Statements............................................. 12
Index to Financial Statements.................................... 13
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,
. 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.
2
<PAGE>
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 Contracts, 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. 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
3
<PAGE>
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 Contracts. AGSI also serves as principal underwriter to AGL's Separate
Account A, Separate Account D, and Separate Account VL-R and to Separate Account
E of American General Life Insurance Company of New York. All of these other
separate accounts 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 has not received any
compensation from USL for any of the prior 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.
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.
4
<PAGE>
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 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 the Separate
Account 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 (1) any applicable Surrender Charge at the end of the period and (2) all
other recurring charges and fees applicable under the Certificate to all Owner
accounts. Other charges and fees include the Mortality and Expense Risk
Charge, the Administrative Expense Charge, and the Annual Certificate Fee. 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.
5
<PAGE>
TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER CHARGE OR ANNUAL CERTIFICATE FEE)
Each Division may also advertise non-standardized total return. We calculate
non-standardized total return in the same manner and for the same time periods
as standardized average annual total return, which we describe immediately
above. However, in making the redeemable value calculation, we do not deduct
any applicable Surrender Charge that we may impose at the end of the period.
This is because we assume that the Certificate will continue through the end of
each period. We also do not deduct the Annual Certificate Fee. Deducting these
charges would reduce the resulting performance results.
CUMULATIVE TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER CHARGE OR ANNUAL
CERTIFICATE FEE)
Each Division may also advertise non-standardized 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, any applicable
Surrender Charge, or the Annual Certificate Fee. Cumulative total return
figures reflect changes in Accumulation Unit value. We calculate these figures
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.
6
<PAGE>
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>
Domestic Income (0.62)% 6.05% 5.95% N/A
Emerging Growth 29.54% N/A N/A 23.73%
Enterprise 17.16% 19.67% 16.57% N/A
Government 1.00% 4.15% 6.77% N/A
Growth and Income 11.86% N/A N/A 17.69%
Money Market (2.51)% 2.67% 3.74% N/A
Morgan Stanley Real Estate Securities (18.92)% N/A N/A 12.45%
Strategic Stock 8.80% N/A N/A 10.28%
Asian Equity (13.83)% N/A N/A (34.61)%
Emerging Markets Equity (31.33)% N/A N/A (16.17)%
Equity Growth 11.59% N/A N/A 22.00%
Global Equity 5.81% N/A N/A 12.66%
International Magnum 1.37% N/A N/A 3.97%
Fixed Income 0.31% N/A N/A 4.79%
High Yield (2.74)% N/A N/A 4.96%
Mid Cap Value 8.20% N/A N/A 23.87%
Value (9.57)% N/A N/A 4.68%
</TABLE>
Hypothetical Historical 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>
Domestic Income 5.46% 6.69% 6.01% N/A
Emerging Growth 35.65% N/A N/A 24.55%
Enterprise 23.26% 20.09% 16.62% N/A
Government 7.08% 4.83% 6.83% N/A
Growth and Income 17.95% N/A N/A 19.65%
Money Market 3.57% 3.39% 3.81% N/A
Morgan Stanley Real Estate Securities (12.85)% N/A N/A 13.49%
Strategic Stock 14.89% N/A N/A 14.95%
Asian Equity (7.75)% N/A N/A (30.46)%
Emerging Markets Equity (25.27)% N/A N/A (13.63)%
Equity Growth 17.68% N/A N/A 24.30%
Global Equity 11.90% N/A N/A 15.13%
International Magnum 7.45% N/A N/A 6.63%
Fixed Income 6.39% N/A N/A 7.42%
High Yield 3.34% N/A N/A 7.59%
Mid Cap Value 14.29% N/A N/A 26.13%
Value (3.49)% N/A N/A 7.33%
</TABLE>
7
<PAGE>
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>
Domestic Income 5.46% 38.21% 79.31% N/A
Emerging Growth 35.65% N/A N/A 115.46%
Enterprise 23.26% 149.71% 365.10% N/A
Government 7.08% 26.58% 93.68% N/A
Growth and Income 17.95% N/A N/A 43.68%
Money Market 3.57% 18.11% 45.36% N/A
Morgan Stanley Real Estate Securities (12.85)% N/A N/A 55.65%
Strategic Stock 14.89% N/A N/A 17.51%
Asian Equity ( 7.75)% N/A N/A (48.54)%
Emerging Markets Equity (25.27)% N/A N/A (28.07)%
Equity Growth 17.68% N/A N/A 54.26%
Global Eqity 11.90% N/A N/A 32.43%
International Magnum 7.45% N/A N/A 13.65%
Fixed Income 6.39% N/A N/A 15.34%
High Yield 3.34% N/A N/A 15.70%
Mid Cap Value 14.29% N/A N/A 58.84%
Value (3.49)% N/A N/A 15.14%
</TABLE>
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>
Domestic Income $1,055 $1,382 $1,793 N/A
Emerging Growth $1,356 N/A N/A $2,155
Enterprise $1,233 $2,497 $4,651 N/A
Government $1,071 $1,266 $1,937 N/A
Growth and Income $1,179 N/A N/A $1,437
Money Market $1,036 $1,181 $1,454 N/A
Morgan Stanley Real Estate Securities $ 872 N/A N/A $1,556
Strategic Stock $1,149 N/A N/A $1,175
Asian Equity $ 922 N/A N/A $ 515
Emerging Markets Equity $ 747 N/A N/A $ 719
Equity Growth $1,177 N/A N/A $1,543
Global Equity $1,119 N/A N/A $1,324
International Magnum $1,075 N/A N/A $1,136
Fixed Income $1,064 N/A N/A $1,153
High Yield $1,033 N/A N/A $1,157
Mid Cap Value $1,143 N/A N/A $1,588
Value $ 965 N/A N/A $1,151
</TABLE>
8
<PAGE>
- -------------------
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 to the Divisions are: April 7,
1986 for the Money Market, Enterprise, and Government Series; November 4, 1987
for the Domestic Income Series; July 3, 1995 for the Emerging Growth and Morgan
Stanley Real Estate Securities Series; October 1, 1996 for the Emerging Markets
Equity Series; December 23, 1996 for the Growth and Income Series; January 2,
1997 for the Equity Growth, Global Equity, International Magnum, Fixed Income,
High Yield, Mid Cap Value, and Value Series; March 3, 1997 for the Asian Equity
Series; and November 3, 1997 for the Strategic Stock Series.
Yield Calculations
We calculate the yields for the Domestic Income, Government, and Growth and
Income Divisions by a standard method that the SEC prescribes. The hypothetical
yields for the Domestic Income, Government, and Growth and Income Divisions,
based upon the one month period ended December 31, 1998, were (1.11)%, (0.40)%,
and (1.19)%, respectively. We calculate the yield quotation by dividing
. the net investment income per Accumulation Unit earned during the specified
one month or 30-day period by the Accumulation Unit values on the last day of
the period, according to the following formula that assumes a semi-annual
reinvestment of income:
YIELD = 2[((a-b)/cd + 1)/6/ - 1]
a = net dividends and interest earned during the period by the Series
attributable to the Division
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Division reflects the deduction of all recurring fees and
charges that apply to each Division. These fees and charges include the
Mortality and Expense Risk Charge and the Administrative Expense Charge. They
do not reflect the deduction of Surrender Charges or premium taxes.
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.
9
<PAGE>
. 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 3.08%.
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 3.13%.
Yield and effective yield do not reflect the deduction of premium taxes that we
may impose when you redeem 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,
10
<PAGE>
. 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
. 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:
11
<PAGE>
. a Mortality and Expense Risk Charge of 1.25%,
. a Surrender Charge (applicable to withdrawal of earnings for the first seven
Certificate years) up to a maximum of 6%,
. an Administrative Expense Charge of 0.15%, and
. an Annual Certificate Fee of $30.
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.
These tables are only illustrations of the effect of tax-deferred accumulations
and are not a guarantee of future performance.
FINANCIAL STATEMENTS
There are no current financial statements for the Separate Account included in
this Statement, because, as of the date of this Statement, the Separate Account
had funded no Certificates and held no assets.
You should consider the financial statements of USL that we include in this
Statement primarily as bearing on the ability of USL to meet its obligations
under the Certificates.
12
<PAGE>
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
13
<PAGE>
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
<TABLE>
<S> <C>
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
</TABLE>
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 /s/ ERNST & YOUNG LLP
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
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
--------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities, at fair value
(amortized cost - $1,919,000 in 1999 and
$1,897,758 in 1998) $2,021,878 $2,047,519
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
================================
</TABLE>
Q-4
<PAGE>
<TABLE>
<CAPTION>
March 31 DECEMBER 31
1999 1998
-----------------------------------
<S> <C> <C>
(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
===================================
</TABLE>
Q-5
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
--------------------------------------
(In Thousands)
<S> <C> <C>
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
======================================
</TABLE>
Q-6
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Comprehensive Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
-------------------------------------
(In Thousands)
<S> <C> <C>
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
=====================================
</TABLE>
Q-7
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Shareholder's Equity
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
-----------------------------------
(In Thousands)
<S> <C> <C>
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
===================================
</TABLE>
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
===========================================
</TABLE>
Interest paid amounted to approximately $8 thousand in 1999. There was no
interest paid in 1998.
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
