<PAGE> 1
As filed with the Securities and Exchange Commission on
17 April 1998
Registration No. 2-39272
811-2162
Securities and Exchange Commission
Washington, DC 20549
FORM N-4
Registration Statement Under the Securities Act of 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 43 [ X]
Registration Statement Under the [ X]
Investment Company Act of 1940
Amendment No. 13
General American Separate Account Two
(Exact Name of Registrant)
General American Life Insurance Company
(Name of Depositor)
700 Market Street
St. Louis, MO 63101
(Address of Depositor's Principal Executive office)
Depositor's Telephone Number: (314) 231-1700
Matthew P. McCauley, Esquire
General American Life Insurance Company
700 Market Street
St. Louis, MO 63101
(Name and address of Agent for Service)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill, and Brennan
1275 Pennsylvania Ave., N.W.
Washington, DC 20004-2404
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It is proposed that this filing will become effective (check appropriate
space)
[ ] immediately upon filing pursuant to paragraph (b)
[ X] 1 May 1998 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph a(2) of Rule 485 under
the Securities Act of 1933
DECLARATION PURSUANT TO RULE 24f-2
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933. The Registrant filed the 24f-2 Notice for the
fiscal year ended 31 December 1997 on 13 March 1998.
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<PAGE> 3
Cross Reference Sheet
Pursuant to Rules 481, and 495, `33 Act
Showing Location in Part A (Prospectus) and Part B
(Statement of Additional Information) of Registration
Statement of Information Required by Form N-4
******************************
PART A
Item of Form N-4 Prospectus Caption
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis Questions and
Answers About
the Contract
4. Condensed Financial Information Financial Statements
5. General Description of
(a) Depositor General American
Life Insurance
Company
(b) Registrant General American
Separate Account Two
(c) Portfolio Company General American
Capital Company
(d) Fund Prospectus General American
Capital Company
(e) Voting Rights Voting Rights
(f) Administrators Contract Owner
Inquiries
6. Deductions and Expenses Charges and
Deductions
(a) General Other Charges; Taxes
(b) Sales Load % Surrender Charges
(c) Special Purchase Plan N/A
(d) Commissions Distributor of the
Contracts
(e) Expenses - Registrant Taxes
(f) Fund Expenses Capital Company
Expenses
(g) Organizational Expenses N/A
7. Contracts
(a) Persons with Rights The Contracts;
Distributions Under
the Contracts;
Voting Rights
iii
<PAGE> 4
(b) (i) Allocation of
Purchase Payments Allocation of
Purchase Payments
(ii) Transfers Transfers
(iii) Exchanges N/A
(c) Changes Additions, Deletions
or Substitutions of
Investments
(d) Inquiries Contract Owner
Inquiries
8. Annuity Period Annuity Income
Options
9. Death Benefit Death of Annuitant
Prior to Annuity
Date
10. Purchases and Contract Value
(a) Purchases Contract Application
and Purchase
Payments;
Accumulated Value
(b) Valuation Accumulated Value
(c) Daily Calculation Accumulated Value
(d) Underwriter Distributor of the
Contracts
11. Redemptions
(a) - By Owners Surrenders and
Partial Withdrawals
- By Annuitant Annuity Income
Options
(b) Texas Optional
Retirement Program N/A
(c) Check Delay Surrenders and
Partial Withdrawals
(d) Lapse Can the Contract be
Returned After One
is Delivered?; The
Contract
12. Taxes Federal Tax Matters
13. Legal Proceedings Part B: Legal
Proceedings
14. Table of Contents for the
Statement of Additional
Information Statement of
Additional
Information
iv
<PAGE> 5
PART B
Statement of Additional
Item of Form N-4 Information Caption
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History Part A: General
American Life
Insurance Company
and Separate Account
Two
18. Services
(a) Fees and Expenses of
Registrant N/A
(b) Management Contracts N/A
(c) Custodian N/A
Independent Public
Accountant Financial Statements
(d) Assets of Registrant Safekeeping of
Account Assets
(e) Affiliated Persons N/A
(f) Principal Underwriter Distribution of the
Contract
19. Purchase of Securities Distribution of
Being Offered the Contract
20. Underwriters Distribution of the
Contract
21. Money Market Yield Money Market Yield
Calculation
22. Annuity Payments Computation of
Variable Annuity
Income Payments
23. Financial Statements Financial Statements
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GENERAL AMERICAN SEPARATE ACCOUNT TWO
PROSPECTUS
FOR THE
GROUP AND INDIVIDUAL VARIABLE ANNUITY CONTRACTS
OFFERED BY
GENERAL AMERICAN LIFE INSURANCE COMPANY
(A MISSOURI COMPANY)
700 MARKET STREET
ST. LOUIS, MISSOURI 63101
1-800-449-6447
===============================================================================
This Prospectus describes the variable portion of certain group and
individual variable annuity contracts offered by General American Life
Insurance Company ("General American"). These contracts, collectively
referred to as the "Contract" or the "Contracts" in this Prospectus, are
designed to aid individuals in long-term financial planning and provide for
the accumulation of capital on a tax favored basis for retirement or other
long-term purposes. The Contracts may be purchased with a monthly payment of
$25 ($300 per year).
Prior to the Annuity Date, the Contract Owner ("participant" in group
contracts) may direct that Purchase Payments accumulate on a completely
variable basis, a completely fixed basis, or a combination variable and fixed
basis. The Contract Owner has significant flexibility in determining the
frequency and amount of each Purchase Payment. The Contract Owner may elect
to receive Annuity Payments on a variable basis or fixed basis. The Contract
Owner also has significant flexibility in determining the Annuity Date on
which Annuity Payments are scheduled to commence. Surrenders or partial
withdrawals may be made at any time before the Annuity Date, although in
certain circumstances they are subject to a withdrawal or surrender charge
and tax penalty. Any amount surrendered or withdrawn may be paid in a lump
sum or, after the Contract Owner's election, all or part may be paid out
under an Annuity Income Option. The Contracts provide the flexibility
necessary to permit a Contract Owner to devise an annuity that best fits his
or her needs.
Purchase Payments may be allocated all or in part to one or more of the
Divisions of General American Separate Account Two ("the Separate Account")
or to General American's General Account. Assets of each Division are
invested in corresponding Funds offered by General American Capital Company,
and Variable Insurance Products Fund. A full description of the Funds,
including the investment policies, restrictions, risks, and charges is
contained in the accompanying Prospectuses of the respective Funds. For a
brief discussion of General American's General Account, see "The General
Account" section.
The Contract's Accumulated Value will vary in accordance with the investment
performance of the Divisions selected by the Contract Owner. Therefore, the
Contract Owner bears the entire investment risk under this Contract for any
amounts allocated to the Separate Account.
This Prospectus sets forth the information that a prospective investor should
know before investing. A Statement of Additional Information about the
Contracts and the Separate Account is available free by writing General
American at the address above or by calling (800) 449-6447. The Statement of
Additional Information, which has the same date as this Prospectus, has been
filed with the Securities and Exchange Commission and is incorporated here by
reference. The table of contents of the Statement of Additional Information
is included at the end of this Prospectus.
===============================================================================
This Prospectus Must Be Accompanied by Current Prospectuses for
General American Capital Company and Variable Insurance Products Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
The Date of This Prospectus is May 1, 1998.
The Contract is not available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
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<TABLE>
================================================================================================
TABLE OF CONTENTS
================================================================================================
<S> <C>
DEFINITIONS 4
QUESTIONS AND ANSWERS ABOUT THE CONTRACTS 5
TABLES 7
TABLE 1 SEPARATE ACCOUNT TWO FEES AND EXPENSES 7
- -------
TABLE 2 HISTORICAL TABLE OF UNITS AND UNIT VALUES FOR QUALIFIED PLANS 9
- -------
TABLE 3 HISTORICAL TABLE OF UNITS AND UNIT VALUES FOR NONQUALIFIED PLANS 10
- -------
TABLE 4 TABLE OF UNITS AND UNIT VALUES 10
- -------
FINANCIAL STATEMENTS 12
GENERAL AMERICAN LIFE INSURANCE COMPANY AND SEPARATE ACCOUNT TWO 12
GENERAL AMERICAN 12
SEPARATE ACCOUNT TWO 13
GENERAL AMERICAN CAPITAL COMPANY 13
VARIABLE INSURANCE PRODUCTS FUND 14
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS 15
THE CONTRACTS 15
CONTRACT APPLICATION AND PURCHASE PAYMENTS 16
ALLOCATION OF PURCHASE PAYMENTS 16
ACCUMULATED VALUE 17
NET INVESTMENT FACTOR 17
TRANSFERS 17
CONTRACT OWNER INQUIRIES 18
CHARGES AND DEDUCTIONS 18
SURRENDER CHARGES (CONTINGENT DEFERRED SALES CHARGE) 18
MORTALITY AND EXPENSE RISK CHARGE 19
PREMIUM TAX 20
FEDERAL INCOME TAX 20
EXPENSES - CAPITAL COMPANY AND VARIABLE INSURANCE PRODUCTS FUND 20
DISTRIBUTIONS UNDER THE CONTRACTS 21
SURRENDERS AND PARTIAL WITHDRAWALS 21
TERMINATION BENEFITS 21
ANNUITY DATE 22
DEATH OF ANNUITANT PRIOR TO ANNUITY DATE 22
ANNUITY INCOME OPTIONS 22
(a) Election of Annuity Income Options 22
(b) The Options Available 22
(c) Value of Variable Annuity Payments 23
DEFERMENT OF PAYMENT 23
THE BENEFICIARY 23
DEATH BENEFITS 24
ASSIGNMENTS AND TRANSFERS 24
FEDERAL TAX MATTERS 25
INTRODUCTION 25
TAXATION OF GENERAL AMERICAN 25
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TAX STATUS OF THE CONTRACTS 25
(a) Diversification 25
(b) Investor Control 25
(c) Required Distributions 26
TAXATION OF ANNUITIES 26
(a) In General 26
(b) Withdrawals and Surrenders 27
(c) Annuity Payments 27
(d) Penalty Tax 27
(e) Taxation of Death Benefit Proceeds 27
(f) Transfers, Assignments or Exchanges of the Contract 27
(g) Multiple Contracts 28
(h) Withholding 28
(i) Possible Changes in Taxation 28
(j) Other Tax Consequences 28
(k) Qualified Contracts 28
INDIVIDUAL RETIREMENT ANNUITIES AND ACCOUNTS 29
CODE SECTION 403(B) PLANS 29
CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS 29
DEFERRED COMPENSATION PLANS 30
RESTRICTIONS UNDER QUALIFIED CONTRACTS 30
DISTRIBUTOR OF THE CONTRACTS 30
VOTING RIGHTS 30
THE GENERAL ACCOUNT 31
GENERAL ACCOUNT ACCUMULATIONS 31
SURRENDER CHARGES 31
TRANSFERS TO THE SEPARATE ACCOUNT 31
GENERAL MATTERS 31
STATEMENT OF ADDITIONAL INFORMATION 32
</TABLE>
3
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===============================================================================
DEFINITIONS
===============================================================================
Accumulated Value -- The value of all amounts accumulated under the Contract
prior to the Annuity Date.
Annuitant -- The person or persons whose life is used to determine the
duration of any Annuity Payments and, subject to the provision dealing with
Joint Annuitants, upon whose death, prior to the Annuity Date, benefits under
the Contract are paid.
Annuity Date -- The date on which Annuity Payments begin.
Annuity Income Option -- One of several ways in which Annuity Payments may be
made.
Annuity Payment -- One of a series of payments made under an Annuity Income
Option.
Annuity Unit -- An accounting unit of measure used to calculate Variable
Annuity Payments.
Beneficiary -- The person or legal entity that may receive benefits due upon
the Annuitant's death are paid.
Business Day -- A day when both General American and the New York Stock
Exchange are open for business. The following days are not Business Days for
General American: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Friday after Thanksgiving, and Christmas Day.
Capital Company -- General American Capital Company, an open-end,
diversified, management investment company which is advised by Conning Asset
Management Company (formerly General American Investment Management Company)
and in which the Separate Account invests.
Code -- The Internal Revenue Code of 1986, as amended.
Contract -- The document for each Contract Owner which evidences the coverage
of the Contract Owner. The Contract, its riders, endorsements, and
amendments, if any, and the Contract Application, a copy of which is attached
to and made a part hereof, are the entire Contract.
Contract Anniversary -- Any anniversary of the Contract Date.
Contract Date -- The date of issue of the Contract.
Contract Year -- A period of 12 months starting with the Contract Date or any
Contract Anniversary.
Contract Owner (or "owner" or "you") -- With respect to individual Contracts,
the person or persons designated as the Contract Owners in the Contract
application, or as subsequently changed by the designated Contract Owner.
With respect to group Contracts, an individual participant under the
Contract.
Division -- A division of Separate Account Two. Each Division invests
exclusively in the shares of a corresponding Fund of either General American
Capital Company or Variable Insurance Products Fund.
Fund (or "Funds") -- A separate investment portfolio of either General
American Capital Company or Variable Insurance Products Fund.
General Account -- All assets owned by General American other than those in
separate accounts.
General American ("We, Us, Our") -- General American Life Insurance Company,
a Missouri company.
Home Office -- The service office of General American Life Insurance Company,
the mailing address of which is P.O. Box 14490, St. Louis, Missouri 63178.
Initial Purchase Payment -- The first payment which the Contract Owner makes.
This payment can be periodic or a single payment provided the minimum amounts
specified in the Contract are satisfied.
Nonqualified Contracts -- Contracts that do not receive favorable treatment
under Sections 401, 403, 408, 408A, or 457 of the Code. Earnings on these
contracts currently receive special Federal income tax treatment.
Payee -- The Contract Owner, Annuitant, Beneficiary, or any other person,
estate, or legal entity to whom benefits are to be paid.
Proof of Death -- (a) a certified death certificate, (b) a certified decree
of a court of competent jurisdiction as to the finding of death; (c) a
written statement by a medical doctor who attended the deceased; or (d) any
other proof satisfactory to General American.
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<PAGE> 10
Purchase Payment -- Any premium paid by the Contract Owner.
Qualified Contracts -- Contracts purchased in connection with a retirement
plan that receives favorable tax treatment under section 401, 403, 408,
408A, or 457 of the Code.
Right to Examine Period -- The period during which the Contract can be
cancelled and treated as void from the Contract Date.
Separate Account -- Refers to the General American Separate Account Two which
is a separate investment account of General American consisting of assets set
aside by General American, the investment performance of which is kept
separate from that of the general assets of General American.
Valuation Period -- A period between two successive Business Days commencing
at the close of business of the first Business Day and ending at the close of
business of the following Business Day.
Written Notice (or Written Request) --- A notice or request in writing by the
Contract Owner to General American. It is how the Contract Owner lets
General American know of any requests or changes to make to the Contract.
Such a request must be in a format and content acceptable to General
American.
===============================================================================
QUESTIONS AND ANSWERS ABOUT THE CONTRACTS
===============================================================================
NOTE: The following section contains brief questions and answers about the
Contracts. Reference should be made to the body of this Prospectus for more
detailed information. With respect to Qualified Contracts, it should be
noted that the requirements of a particular retirement plan, an endorsement
to the Contract, or limitations or penalties imposed by the Code may impose
limits or restrictions on premiums, surrenders, distributions, or benefits,
or on other provisions of the Contracts, and this Prospectus does not
describe any such limitations or restrictions. (See "Federal Tax Matters").
"You" or "your" refer to the Contract Owner; "we", "us", or "our" refer to
General American Life Insurance Company.
1. What is the purpose of the Contracts?
The Contracts allow you to accumulate funds on a tax favored basis and to
receive Annuity Payments when desired, based on the investment experience of
the assets underlying the Contracts. The Contracts are designed for use in
connection with nonqualified and the following qualified retirement plans:
(1) pension and profit sharing plans established by self-employed individuals
for themselves and their employees (HR-10 [Keogh] Plans), (2) traditional
Individual Retirement Annuity (IRA) Plans under Section 408(a) and Section
408(b) of the Code, and (3) annuity purchase arrangements which are adopted
for employees by public school systems and by organizations that are
tax-exempt under Section 501(c)(3) of the Code.
A Contract may be purchased with the proceeds from such plans or from sources
which do not qualify for special tax treatment. The nature of the source of
the funds affects the way annuity investments are taxed but not the operation
of the Contracts. (See "Federal Tax Matters")
The Contract Owner can allocate Purchase Payments to one or more Divisions of
the General American Life Insurance Company Separate Account Two (the
"Separate Account"), each of which will invest in shares of a corresponding
Fund of General American Capital Company ("Capital Company") or Variable
Insurance Products Fund ("VIP"). Because Annuity Payments and Accumulated
Values depend on the investment experience of the selected Divisions, the
Contract Owner bears the entire investment risk under these Contracts for
amounts allocated to the Separate Account. Purchase Payments may also be
allocated, in whole or in part, to the General Account.
2. What is an annuity and why may benefits vary?
An annuity provides for a series of Annuity Payments beginning on the Annuity
Date. The Contract Owner may select from a number of Annuity Income Options,
including Annuity Payments for the life of an Annuitant (or an Annuitant and
another person, the "Joint Annuitant") with or without a guaranteed number of
Annuity Payments, or for a designated period. Annuity Payments which are
guaranteed throughout the payment period are referred to in this Prospectus
as "Guaranteed Annuity Payments." Annuity Payments which vary in accordance
with the investment experience of the Division selected by the Contract Owner
are referred to in this Prospectus as "Variable Annuity Payments."
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<PAGE> 11
3. What types of investments underlie the Separate Account?
Currently, the Separate Account consists of eight divisions, each of which
invests in shares of a corresponding Fund of Capital Company or VIP. Capital
Company is an open-end, diversified, management company advised by Conning
Asset Management Company (formerly General American Investment Management
Company). Capital Company currently offers purchaser of these Contracts five
of its seven established separate Funds: the S & P 500 Index Fund; the Money
Market Fund; the Bond Index Fund; the Managed Equity Fund; and the Asset
Allocation Fund.
VIP is an open-end, diversified, management investment company. Fidelity
Management & Research Company is the manager of several funds. The three VIP
portfolios currently available are VIP: Equity-Income Portfolio, VIP:
Growth Portfolio, and VIP: Overseas Portfolio.
The assets of each Fund are held separately from the other Funds and each has
distinct investment objectives and policies which are described in the
accompanying Prospectuses of either Capital Company or VIP. (See "General
American Capital Company" and "Variable Insurance Products Fund")
4. How do I purchase a Contract?
A Contract may be purchased with a planned monthly payment of at least $25.
Subsequent Purchase Payments generally may be made at any time prior to the
Annuity Date as long as the Annuitant is living. You may establish a
schedule of planned Purchase Payments and we will send reminder notices at
the scheduled intervals. The failure to make a planned Purchase Payment will
not itself cause the Contract to lapse. The minimum Purchase Payment
permitted is $25, and the total of all Purchase Payments made in one year for
the same Contract may not exceed twice the annual equivalent of the Initial
Purchase Payment. (See "Contract Application and Purchase Payments")
5. How do I allocate Purchase Payments?
Purchase Payments may be allocated among one or more of the Divisions of the
Separate Account or to the General Account in accordance with the allocation
percentages selected by you in your Contract application. All allocations
must be in whole percents, involve amounts of at least $25, and total 100%.
Allocations for Additional Purchase Payments may be changed by sending
Written Notice to us. (See "Allocation of Purchase Payments")
Purchase Payments or portions of Purchase Payments allocated to the General
Account will accrue interest at a rate of at least 4% compounded annually
independent of the actual investment experience of the General Account. (See
"The General Account")
6. Can I transfer amounts among the Divisions?
Transfers among the Divisions or to the General Account can be made at any
time. Transfers from the General Account to the Separate Account are subject
to certain limitations. (See "Transfers")
7. Can I get to my money if I need it?
All or part of the Accumulated Value of the Contract may be withdrawn before
the earlier of the Annuitant's death or the Annuity Date. However, amounts
surrendered may be subject to a surrender charge depending on how long the
withdrawn Purchase Payments have been invested in the Contract. WE GUARANTEE
THAT THE AGGREGATE SURRENDER CHARGES WILL NEVER EXCEED 9% OF THE PURCHASE
PAYMENTS. (See "Surrenders and Partial Withdrawals" and "Surrender Charges")
In addition, certain surrenders may be subject to a penalty tax. (See
"Surrenders and Partial Withdrawals" and "Federal Tax Matters")
8. What are the charges and deductions under the Contracts?
We deduct a daily charge equal to a percentage of the value of the net assets
in the Separate Account for the mortality and expense risks assumed by us and
for the cost of administering these Contracts. The effective annual rate of
this charge is 1.00% (estimated at .80% for mortality risk and .20% for
expense risk).
In order to permit investment of the entire Purchase Payment, we currently do
not deduct sales charges at the time of investment. However, a surrender
charge, as described in question #7 above, is imposed on certain full or
partial surrenders of the Contracts to cover certain expenses relating to the
sale of the Contracts, including commissions to registered representatives
and other promotional expenses. (See "Surrender Charges")
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9. What Annuity Income Options are available under the Contracts?
The Contract Owner may receive Annuity Payments on a variable basis or a
fixed basis. The Contract Owner also has flexibility in choosing the Annuity
Date.
Seven Annuity Income Options are included in the Contract: (l) life annuity;
(2) life annuity, with 60, l20, 180, or 240 monthly installments guaranteed;
(3) unit refund life annuity; (4) joint and last survivor income for life;
(5) income for a fixed period which may be from 3 to 30 years; (6) income of
a fixed amount, not less than $75 per annum per $1,000 of the original amount
due; and (7) interest income (available only to Nonqualified contracts). (See
"Annuity Income Options")
10. Can a Contract be returned after one is delivered?
The Contracts contain a provision for a Right to Examine Period which permits
a Contract Owner to cancel the Contract by returning it to us at our Home
Office, or to the agent through whom it was purchased, within 20 days of
receipt of the Contract (this period is normally 20 days, but some states
require a different time for the Right to Examine). The Contract Owner will
then receive from us the Purchase Payments made on the Contract. In some
states, applicable law requires that the refund equal the Accumulated Value
in any Separate Account and any Purchase Payments allocated to the General
Account.
11. Who do I call if I have questions about my annuity?
Any questions about procedures or your Contract will be answered by our
Variable Annuity Administration Department, P.0. Box 14490, St. Louis,
Missouri 63178-4490, (800) 449-6447. All inquiries should include the
Contract number and the Annuitant's name. In addition, confirmations will be
mailed to the Contract Owner for any cash transactions that take place, and
quarterly reports will be sent showing the Accumulated Value in each
Division, the Accumulated Value in the General Account, and any Purchase
Payments, charges, transfers, or surrenders during the time period covered.
===============================================================================
TABLES
===============================================================================
The tables which follow reflect certain historical information for the
Separate Account throughout the periods indicated. The investment policies,
objectives and restrictions applicable to the Separate Account prior to its
reorganization into a unit investment trust on February 23, 1988 are
virtually identical to those of the Managed Equity Fund of Capital Company.
Accordingly this historical information is substantially identical to the
results which would have occurred if the Separate Account had invested its
net assets in the Managed Equity Fund of Capital Company from its inception.
TABLE 1
-------
SEPARATE ACCOUNT TWO FEES AND EXPENSES
FOR GENERAL AMERICAN CAPITAL COMPANY AND
VARIABLE INSURANCE PRODUCTS FUND
SURRENDER CHARGES (Expressed as a percentage of amount withdrawn):
<TABLE>
<S> <C> <C>
First year 9.00%
Second year 8.00%
Third year 7.00%
Fourth year 6.00% The surrender charge is levied only when sums are withdrawn from
Fifth year 5.00% any Division of Separate Account Two or the General Account.
Sixth year 4.00% The first 10% of the account value withdrawn in any Contract Year
Seventh year 3.00% will not have a surrender charge applied to it.
Eighth year 2.00%
Ninth year 1.00%
</TABLE>
SEPARATE ACCOUNT ANNUAL FEES (all Divisions)
Mortality and expense risk: 1.00%
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<PAGE> 13
GENERAL AMERICAN CAPITAL COMPANY ANNUAL FUND OPERATING EXPENSES (expressed as
a percentage of average net assets):
<TABLE>
<CAPTION>
Investment Administration Total Fund
Fund Advisory Fees Fees Operating Expenses
- ---- ------------- ---- ------------------
<S> <C> <C> <C>
S & P 500 Index Fund 0.250% 0.050% 0.300%
Money Market Fund 0.125% 0.080% 0.205%
Bond Index Fund 0.250% 0.050% 0.300%
Managed Equity Fund<F*> 0.400% 0.100% 0.500%
Asset Allocation Fund 0.500% 0.100% 0.600%
<FN>
<F*> Investment advisory fees applicable to the Managed Equity Fund decline
ratably on the average daily net assets in excess of $10 million (see the
General American Capital Company Prospectus).
</TABLE>
EXAMPLES
If you surrendered your Contract after the end of the specified time period,
you would pay the following aggregate expenses on a $1,000 investment,
assuming 5% annual return:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
S & P 500 Index Fund $ 97.24 $111.46 $125.25 $156.77
Money Market Fund 96.35 108.70 120.45 146.03
Bond Index Fund 97.24 111.46 125.25 156.77
Managed Equity Fund 99.10 117.26 135.29 179.05
Asset Allocation Fund 100.03 120.14 140.27 190.01
</TABLE>
If you do not surrender your Contract after the end of the specified time
period, you would pay the following aggregate expenses on the same
investment:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
S & P 500 Index Fund $13.24 $41.21 $71.29 $156.77
Money Market Fund 12.28 38.25 66.23 146.03
Bond Index Fund 13.24 41.21 71.29 156.77
Managed Equity Fund 15.26 47.41 81.84 179.05
Asset Allocation Fund 16.27 50.49 87.08 190.01
</TABLE>
If you annuitize after the end of the specified time period, you would pay
the following aggregate expenses on the same investment:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
S & P 500 Index Fund $ 97.24 $111.46 $71.29 $156.77
Money Market Fund 96.35 108.70 66.23 146.03
Bond Index Fund 97.24 111.46 71.29 156.77
Managed Equity Fund 99.10 117.26 81.84 179.05
Asset Allocation Fund 100.03 120.14 87.08 190.01
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND ANNUAL EXPENSES:
<TABLE>
<CAPTION>
Management Other Total
Fund Fee Expenses Annual Expenses
- ---- --- -------- ---------------
<S> <C> <C> <C>
VIP: Equity-Income Portfolio 0.50% 0.08% 0.58%
VIP: Growth Portfolio 0.60% 0.09% 0.69%
VIP: Overseas Portfolio 0.75% 0.17% 0.92%
</TABLE>
The above fees reflect charges incurred by these portfolios in 1997. Fees
assessed against the portfolios are based on the monthly average net assets
of all the mutual funds advised by Fidelity Management & Research Company
("FMR") and may fluctuate from year to year (See the Variable Insurance
Products Funds' Prospectus).
8
<PAGE> 14
EXAMPLES
If you surrendered your Contract after the end of the specified time period,
you would pay the following aggregate expenses on a $1,000 investment,
assuming 5% annual return:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP: Equity-Income Portfolio $ 99.84 119.57 139.28 187.83
VIP: Growth Portfolio 100.86 122.73 144.73 199.78
VIP: Overseas Portfolio 102.99 129.31 156.04 224.32
</TABLE>
If you do not surrender your Contract after the end of the specified time
period, you would pay the following aggregate expenses on the same
investment:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP: Equity-Income Portfolio $16.07 49.88 86.04 187.83
VIP: Growth Portfolio 17.18 53.26 91.78 199.78
VIP: Overseas Portfolio 19.50 60.31 103.67 224.32
</TABLE>
If you annuitize after the end of the specified time period, you would pay
the following aggregate expenses on the same investment:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP: Equity-Income Portfolio $ 99.84 119.57 86.04 187.83
VIP: Growth Portfolio 100.86 122.73 91.78 199.78
VIP: Overseas Portfolio 102.99 129.31 103.67 224.32
</TABLE>
The purpose of the table above is to help you understand the costs and
expenses that a variable annuity contract owner will bear directly or
indirectly. The examples above are not a representation of actual, past or
future expenses, and actual expenses may be higher or lower than those shown.
Note that the expense amounts in the examples are aggregate amounts for the
total number of years indicated. Neither the table nor the examples reflect
any premium taxes that may be applicable to a Contract; such taxes currently
range from 0% to 3.5%. The above table and examples reflect only the charges
for contracts currently offered by this Prospectus and not other contracts
that may be mentioned in the discussion of Prior Contracts. For further
details, see Charges and Deductions.
The initial value of an accumulation unit in the Separate Account was set at
$10.00 as of May 28, 1971. Tables 2 and 3 show accumulation unit values and
the numbers of units outstanding for the period from January 1, 1980 through
February 23, 1988. During that time, the Separate Account invested solely
and directly in common stocks. On February 23, 1988, the net assets of the
Separate Account were exchanged for shares in the Managed Equity Fund of
General American Capital Company, and the investment advisory fee for these
assets was increased from .25% to a sliding scale with a maximum of .50%, as
an annual percentage of net assets (see the General American Capital Company
Prospectus). There can be no assurance that the investment experience of the
Managed Equity Fund in the future will be comparable to past experience.
<TABLE>
TABLE 2
-------
HISTORICAL TABLE OF UNITS AND UNIT VALUES FOR QUALIFIED PLANS
FOR SEPARATE ACCOUNT 2
<CAPTION>
1980 1981 1982 1983 1984 1985 1986 1987 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $8.23 $9.94 $ 9.92 $12.09 $13.25 $13.15 $16.68 $19.73 $20.03
----- ----- ------ ------ ------ ------ ------ ------ ------
End of period $9.94 $9.92 $12.09 $13.25 $13.15 $16.68 $19.73 $20.03 $21.30<F*>
===== ===== ====== ====== ====== ====== ====== ====== ======
Number of units
outstanding at end of
period (in thousands) 175 169 138 162 162 148 170 255 263<F*>
</TABLE>
9
<PAGE> 15
<TABLE>
TABLE 3
-------
HISTORICAL TABLE OF UNITS AND UNIT VALUES FOR NONQUALIFIED PLANS
FOR SEPARATE ACCOUNT 2
<CAPTION>
1980 1981 1982 1983 1984 1985 1986 1987 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $ 9.30 $10.73 $10.91 $12.63 $13.77 $14.30 $18.16 $21.47 $21.80
------ ------ ------ ------ ------ ------ ------ ------ ------
End of period $10.73 $10.91 $12.63 $13.77 $14.30 $18.16 $21.47 $21.80 $23.18<F*>
====== ====== ====== ====== ====== ====== ====== ====== ======
Number of units
outstanding at end of
period (in thousands) 27 49 50 52 50 48 49 49 28<F*>
<FN>
<F*> Unit values and units outstanding represent the values and number of units
at the date of reorganization, February 23, 1988.
</TABLE>
TABLE 4
-------
TABLE OF UNITS AND UNIT VALUES
FOR SEPARATE ACCOUNT 2
Table 4 shows unit values and the number of units of the Separate Account
invested in the Funds of General American Capital Company and Variable
Insurance Products Fund. There can be no assurance that the investment
experience of these Funds in the future will be comparable to past
experience.
<TABLE>
<CAPTION>
Accumulation Qualified Plan Nonqualified Plan
Unit Value Accumulation Units Outstanding Units Outstanding
Beginning Unit Value End of Period End of Period
of Period<F*> End of Period (in thousands) (in thousands)
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
S & P 500 Index Fund Division<F**>
1997 33.17 43.62 935 366
- ---- ----- ----- --- ---
1996 27.27 33.17 808 325
1995 20.12 27.27 657 297
1994 20.09 20.12 636 265
1993 18.48 20.09 599 241
1992 17.37 18.48 366 152
1991 13.47 17.37 236 109
1990 14.15 13.47 133 67
1989 11.01 14.15 97 23
1988 10.00 11.01 36 7
Money Market Fund Division
1997 15.14 15.85 102 74
- ---- ----- ----- --- --
1996 14.50 15.14 117 62
1995 13.82 14.50 106 57
1994 13.39 13.82 93 58
1993 13.12 13.39 115 73
1992 12.78 13.12 181 85
1991 12.16 12.78 179 101
1990 11.33 12.16 188 79
1989 10.44 11.33 28 15
1988 10.00 10.44 6 5
10
<PAGE> 16
Bond Index Fund Division <F***>
1997 18.01 19.50 163 80
- ---- ----- ----- --- --
1996 17.66 18.01 163 70
1995 14.99 17.66 146 85
1994 15.78 14.99 146 58
1993 14.43 15.78 161 61
1992 13.68 14.43 116 48
1991 12.12 13.68 50 67
1990 11.22 12.12 33 58
1989 10.27 11.22 22 17
1988 10.00 10.27 5 2
Managed Equity Fund Division
Qualified
1997 59.73 72.99 136 N/A
- ---- ----- ----- --- ---
1996 49.83 59.73 153 N/A
1995 37.68 49.83 164 N/A
1994 39.42 37.68 188 N/A
1993 36.54 39.42 210 N/A
1992 34.56 36.54 217 N/A
1991 27.62 34.56 216 N/A
1990 28.73 27.62 192 N/A
1989 22.11 28.73 194 N/A
1988 21.30 22.11 207 N/A
Managed Equity Fund Division
Nonqualified
1997 64.99 79.43 N/A 2
- ---- ----- ----- --- --
1996 54.22 64.99 N/A 2
1995 41.00 54.22 N/A 17
1994 42.90 41.00 N/A 20
1993 39.76 42.90 N/A 24
1992 37.61 39.76 N/A 25
1991 30.05 37.61 N/A 25
1990 31.27 30.05 N/A 25
1989 24.06 31.27 N/A 25
1988 23.18 24.06 N/A 26
Managed Equity Fund Division
88 Series
1997 30.94 37.77 280 67
- ---- ----- ----- --- --
1996 25.84 30.94 240 58
1995 19.56 25.84 215 75
1994 20.48 19.56 204 68
1993 19.00 20.48 197 56
1992 17.99 19.00 158 40
1991 14.39 17.99 101 27
1990 14.99 14.39 56 20
1989 11.54 14.99 21 7
1988 10.83 11.54 6 0
Asset Allocation Fund Division
1997 24.14 28.38 496 187
- ---- ----- ----- --- ---
1996 21.08 24.14 375 178
1995 16.52 21.08 317 168
1994 17.37 16.52 320 180
1993 16.01 17.37 332 166
1992 15.16 16.01 223 119
1991 12.78 15.16 140 66
1990 12.60 12.78 94 35
1989 10.61 12.60 33 16
1988 10.00 10.61 9 4
11
<PAGE> 17
VIP: Equity-Income Portfolio Division
1997 15.98 20.27 838 351
- ---- ----- ----- --- ---
1996 14.12 15.98 767 317
1995 10.55 14.12 552 207
1994 10.00 10.55 315 82
VIP: Growth Portfolio Division
1997 15.07 18.42 1,064 343
- ---- ----- ----- ----- ---
1996 13.27 15.07 974 362
1995 9.90 13.27 646 261
1994 10.00 9.90 356 116
VIP: Overseas Portfolio Division
1997 12.11 13.37 363 124
- ---- ----- ----- --- ---
1996 10.80 12.11 346 107
1995 9.95 10.80 266 77
1994 10.00 9.95 240 52
<F*> At the date of first deposits into Separate Account on May 16, 1988,
except for the Managed Equity Fund Division, which began on February
24, 1988; the VIP: Equity-Income Portfolio Division and the VIP:
Growth Portfolio Division which began on January 6, 1994; and the VIP:
Overseas Portfolio Division which began on January 11, 1994.
<F**> The name of the S & P 500 Index Fund was changed from "Equity Index
Fund" effective May 1, 1994.
<F***> The name of the Bond Index Fund was changed from "Intermediate Bond
Fund" effective October 1, 1992. The name change reflects a change in
investment policies and objectives of the Fund.
</TABLE>
===============================================================================
FINANCIAL STATEMENTS
===============================================================================
The consolidated financial statements for General American (as well as the
auditors' report thereon) are in the Statement of Additional Information.
Financial statements for the Separate Account are also in the Statement of
Additional Information.
===============================================================================
GENERAL AMERICAN LIFE INSURANCE COMPANY AND
SEPARATE ACCOUNT TWO
===============================================================================
General American
General American Life Insurance Company ("General American") is a stock
insurance company wholly-owned by GenAmerica Corporation. GenAmerica
Corporation is wholly-owned by General American Mutual Holding Company, a
mutual holding company organized under Missouri law. General American was
chartered in 1933 and since then has continuously engaged in the business of
life insurance, annuities, and accident and health insurance. General
American's National Headquarters (Home Office) is located at 700 Market
Street, St. Louis. Missouri 63101. The telephone number is 314-231-1700. It
is licensed to do business in 49 states of the U.S., the District of
Columbia, Puerto Rico, and is registered in Canada and licensed in the
Provinces of Alberta, British Columbia, Manitoba, New Brunswick,
Newfoundland, Nova Scotia, Ontario, Prince Edward Island, Quebec, and
Saskatchewan.
12
<PAGE> 18
General American conducts a conventional life insurance business. Assets
derived from such business should be considered by purchasers of variable
annuity contracts only as bearing upon the ability of General American to
meet its obligations under the variable annuity contracts and should not be
considered as bearing on the investment performance of the Separate Account.
Separate Account Two
The Separate Account was established on October 22, 1970, pursuant to
authorization by the Board of Directors of General American. Although it is
an integral part of General American and not a separate corporation, the
Separate Account is registered as a unit investment trust with the Securities
and Exchange Commission under the Investment Company Act of 1940 (the "1940
Act"). Such registration does not involve supervision of the management or
investment practices or policies of the Separate Account or of General
American by the Securities and Exchange Commission.
Payments are received into the Separate Account from individual and group
variable annuity contracts entitled to tax benefits under Sections 401,
403(b), and 408 of the Code and also from individual variable annuity
contracts not entitled to any special tax benefits. Such payments are pooled
together and invested separately from the General Account of General American
(the general assets of the insurance company other than separate account
assets). The persons participating in the variable portion of these
Contracts look to the investment experience of the assets in the Separate
Account.
Under Missouri law and the Investment Company Act of 1940, the net assets of
the Separate Account are held for the exclusive benefit of the Contract
Owners and the persons entitled to installments that reflect the investment
results of the Separate Account. The net assets of the Separate Account with
respect to the Contracts issued in connection therewith are not chargeable
with liabilities due to any other business General American conducts.
On February 23, 1988, pursuant to the vote of Contract Owners, the Separate
Account was changed from a management investment company with a single equity
investment portfolio, to a unit investment trust with various Divisions. As
a unit investment trust, the Separate Account no longer has a Management
Committee. Additional Divisions may be established at the discretion of
General American.
===============================================================================
GENERAL AMERICAN CAPITAL COMPANY
===============================================================================
General American Capital Company ("Capital Company") is an open-end,
diversified, management investment company that was organized as a Maryland
corporation on November 5, 1985, and commenced operations on October 1, 1987.
Conning Asset Management Company ("Investment Adviser") is the adviser to
Capital Company. On August 1, 1996, General American Investment Management
Company changed its name to Conning Asset Management Company. Investment
Adviser provides investment advisory services to Capital Company in
accordance with the policies, programs, and guidelines established by the
Board of Directors of Capital Company. Each Fund pays Investment Adviser a
monthly fee for managing its investments and business affairs.
Capital Company currently operates eight separate investment Funds, but only
the five listed below are available as Separate Account Two Division choices:
the S & P 500 Index Fund; the Money Market Fund; the Bond Index Fund; the
Managed Equity Fund; and the Asset Allocation Fund. Five of the eight
Divisions of the Separate Account invest in Funds of Capital Company. The
assets of each Fund are separate from the others and each Fund has separate
investment objectives and policies. As a result, each Fund operates as a
separate investment portfolio and the investment performance of one Fund has
no effect on the investment performance of any other Fund.
The names and investment objectives of the Funds are as follows:
S & P 500 Index Fund: The investment objective of this Fund is to provide
investment results that parallel the price and yield performance of publicly
traded common stocks in the aggregate. The Fund uses the Standard and Poor's
500 Stock Price Index<F*> as its standard for performance comparison. The Fund
attempts to duplicate the performance of the index and includes dividend
income as the other component of the Fund's total return.
[FN]
<F*> The term Standard and Poor's 500 Stock Price Index is a registered
trademark of the Standard and Poor's Corporation.
13
<PAGE> 19
Money Market Fund: The investment objective of this Fund is the highest level
of current income that is consistent with the preservation of capital and
maintenance of liquidity. This Fund invests primarily in high-quality,
short-term money market instruments.
Bond Index Fund: The investment objective of this Fund is to provide a rate
of return that reflects the performance of the publicly traded bond market as
a whole. The Fund uses the Lehman Brothers Government/Corporate Bond Index
as its standard for performance comparison.
Managed Equity Fund: The investment objective of this Fund is long-term
growth of capital, obtained by investing primarily in common stocks.
Securing moderate current income is a secondary objective.
Asset Allocation Fund: The investment objective of this Fund is a high rate
of long-term total return composed of capital growth and income payments.
Preservation of capital is the secondary objective and chief limit on
investment risk. The Fund will invest only in those types of securities that
are suitable investments for the other Capital Company Funds. The Asset
Allocation Fund may invest solely in common stocks, bonds, money market
instruments, or in combinations consistent with guidelines established from
time to time by Capital Company's Board of Directors.
THERE IS NO ASSURANCE THAT ANY OF THESE FUNDS WILL ATTAIN ITS STATED
OBJECTIVE, OR THAT ATTAINMENT CAN BE SUSTAINED.
Additional information concerning the investment objectives and policies of
the Funds and the investment advisory services and charges can be found in
the current Prospectus for Capital Company, which is attached to this
Prospectus. Capital Company's Prospectus should be read carefully before any
decision is made concerning the allocation of Purchase Payments to a Division
that corresponds to a particular Fund.
Capital Company is registered with the SEC as an open-end, diversified,
management investment company. Registration with the SEC does not involve
supervision of the management or investment practices or policies of Capital
Company by the SEC. Shares of Capital Company will be sold to separate
accounts of General American other than the Separate Account, including those
which receive and invest premiums under variable life insurance policies
issued by General American. It is conceivable that in the future it may be
disadvantageous for both variable annuity separate accounts and variable life
insurance separate accounts to invest simultaneously in Capital Company,
although currently neither General American nor Capital Company foresees any
such disadvantages to owners of either variable annuity contracts or variable
life insurance policies. Capital Company's Board of Directors intends to
monitor events in order to identify any material conflicts between such
owners and to determine what action, if any, should be taken in response
thereto. See the Prospectus for General American Capital Company for more
details.
===============================================================================
VARIABLE INSURANCE PRODUCTS FUND
===============================================================================
Variable Insurance Products Fund ("VIP") is an open-end, diversified,
management investment company organized as a Massachusetts business trust on
November 13, 1981. It currently has five separate investment portfolios, but
only the three listed below are currently available as Separate Account Two
Division choices. VIP shares are purchased by many different insurance
companies to fund benefits under variable insurance and annuity policies.
Fidelity Management & Research Company ("FMR") of Boston, Massachusetts, is
the Manager of the Portfolios.
The names and investment objectives and policies of each VIP fund available
through the Separate Account are summarized below:
VIP: Equity-Income Portfolio: The investment objective of this Fund is to
seek reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, FMR will also consider the
potential for capital appreciation. The Fund's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the Standard &
Poor's 500 Composite Stock Price Index.
VIP: Growth Portfolio: The investment objective of this Fund is to seek
capital appreciation. It normally does so through purchases of common
stocks, although its investments are not restricted to any one type of
security. Capital appreciation may also be found in other types of
securities, including bonds and preferred stocks.
14
<PAGE> 20
VIP: Overseas Portfolio: The investment objective of this Fund is to seek
long-term growth of capital primarily through investments in foreign
securities. The VIP: Overseas Portfolio provides a means to diversify a
Fund by participating in companies and economies outside of the United
States.
THERE IS NO ASSURANCE THAT ANY OF THESE FUNDS WILL ATTAIN ITS STATED
OBJECTIVE, OR THAT ATTAINMENT CAN BE SUSTAINED.
It is conceivable that in the future it may be disadvantageous for Funds to
offer shares to separate accounts of various insurance companies to serve as
the investment medium for their respective variable products. The Board of
Trustees of FMR, the respective advisors of each Fund, and the Company and
any other insurance companies participating in VIP are required to monitor
events to identify any material irreconcilable conflicts that may possibly
arise, and to determine what action, if any, should be taken in response to
those events or conflicts. A more detailed description of the VIP Funds,
including the investment policies, restrictions, risks, and charges of each,
is in the Prospectus for Variable Insurance Products Fund, which must
accompany or precede this Prospectus and which should be read carefully.
===============================================================================
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
===============================================================================
General American reserves the right, subject to applicable law, to make
additions to, deletions from, or substitutions for the shares that are held
by the Separate Account or that the Separate Account may purchase. General
American reserves the right to eliminate the shares of any of the Funds of
Capital Company or VIP and to substitute shares of another Fund of Capital
Company, or VIP, or of another registered open-end, diversified, management
investment company. Such a change might occur if the shares of a Fund are no
longer available for investment, or if in its judgment further investment in
any Fund becomes inappropriate in view of the purposes of the Separate
Account. General American will not replace any shares attributable to a
Contract Owner's interest in a Division of the Separate Account without
notice to the Contract Owner and prior approval of the SEC, to the extent
required by the 1940 Act or other applicable law. Nothing contained in this
Prospectus shall prevent the Separate Account from purchasing other
securities for other series or classes of policies, or from permitting a
conversion between series or classes of policies on the basis of requests
made by Contract Owners.
General American also reserves the right to establish additional Divisions of
the Separate Account, each of which would invest in a new Fund of Capital
Company, or in shares of another investment company, with a specified
investment objective. New Divisions may be established when, in the sole
discretion of General American, marketing needs or investment conditions
warrant, and any new Division will be made available to existing Contract
Owners on a basis to be determined by General American. To the extent
approved by the SEC, General American may also eliminate or combine one or
more Divisions, substitute one Division for another Division, or transfer
assets between Divisions if, in its sole discretion, marketing, tax, or
investment conditions warrant.
In the event of a substitution or change, General American may make such
changes it considers necessary in the Contracts by appropriate endorsement.
General American will notify all Contract Owners of any such changes.
If deemed by General American to be in the best interests of persons having
voting rights under the Contracts, and to the extent any necessary SEC
approvals or Contract Owner votes are obtained, the Separate Account may be:
(a) operated as a management company under the 1940 Act; (b) deregistered
under that Act in the event such registration is no longer required; or (c)
combined with other separate accounts of General American. To the extent
permitted by applicable law, General American may also transfer the assets of
the Separate Account associated with the Contracts to another separate
account.
===============================================================================
THE CONTRACTS
===============================================================================
The Contracts consist of a group variable annuity contract for use in Tax
Sheltered Annuity (Section 403[b] annuity) Plans, and individual variable
annuity contracts for use in HR-10 (Keogh) Plans, traditional Individual
Retirement Annuity (IRA) Plans, Simplified Employee Pension Plans, and
nonqualified retirement plans. The group Contract is a master group contract
issued to either an employer or trust and covers all participants, each of
whom receives a certificate which summarizes the provisions of the master
group Contract and evidences participation in the plan adopted by the
particular employer or trust.
15
<PAGE> 21
Individual Contracts are complete within themselves and are issued to
self-employed individuals and their employees (HR-10 Plans), to individuals
purchasing an IRA Plan or Simplified Employee Pension Plan, and to individuals
as annuity contracts that are not entitled to any special tax benefits. The
rights and benefits of the Contracts are described below and in the Contracts;
however, General American reserves the right to make any modification to conform
the Contracts to, or to give the Contract Owner the benefit of, any Federal or
state statute or any rule or regulation of the United States Treasury
Department.
The Contracts contain a provision which permits the Contract Owner to cancel
the Contract during the Right to Examine Period by returning the Contract to
General American's Home Office, or to the agent through whom it was
purchased. This Right to Examine Period extends for the 20 days after the
Contract Owner receives the Contract (this period is normally 20 days, but
some states require a different time for the Right to Examine). Upon
cancellation, the Contract is treated as void from the Contract Date and the
Contract Owner will receive the Purchase Payments made on the Contract. In
some states, applicable law requires that the refund equal the Accumulated
Value in any Separate Account and any Purchase Payments allocated to the
General Account.
Contract Application and Purchase Payments
Individuals wishing to purchase a Contract must complete an application and
provide an Initial Purchase Payment. If the application can be accepted in the
form received, the Initial Purchase Payment will be credited within two Business
Days after receipt of the application. Acceptance is subject to General
American's rules, and General American reserves the right to reject any
application or Initial Purchase Payment. In addition, the Annuitant's age on
the Contract Date can not be greater than insurance age 79 (actual attained age
79 1/2).
General American may retain the Initial Purchase Payment for up to five
Business Days, plus the trade date, while attempting to complete an
application that is not in good order (missing information, etc.). If the
application cannot be made in good order within five Business Days, plus the
trade date, the Initial Purchase Payment will be returned immediately unless
the prospective Contract Owner consents in writing to General American's
retaining the Initial Purchase Payment until the application is in good
order.
All Purchase Payments received at the Home Office before the close of the New
York Stock Exchange (3:00 p.m. St. Louis time) on any business day, will be
considered received on that business day.
The Initial Purchase Payment for a Contract must be a planned monthly payment
of at least $25. Purchase Payments after the first may be made at any time
prior to the Annuity Date as long as the Annuitant is living.
Purchase Payments after the first must be paid to General American at its
Home Office. A Contract Owner may establish a schedule of planned Purchase
Payments for which he or she will be billed by General American at regular
intervals. Failure to pay planned Purchase Payments, however, will not
itself cause the Contract to lapse.
A Contract Owner may make unscheduled Purchase Payments at any time in any
amount, or skip planned Purchase Payments, subject to the minimum and maximum
Purchase Payment limitations described below. A Contract Owner may elect to
make Purchase Payments by means of a pre-authorized check ("PAC") procedure.
Under a PAC procedure, amounts will be deducted each month from the Contract
Owner's checking account and applied as a Purchase Payment under a Contract.
The minimum Purchase Payment permitted is $25. The maximum Purchase Payment
is the annual equivalent of twice the Initial Purchase Payment. For example,
if you established a Planned Purchase Payment of $50.00 per month, the total
of all Purchase Payments in any Contract Year could not exceed $1200. Any
Purchase Payments in excess of this amount will be accepted only after notice
to and written consent from General American.
Additional Purchase Payments on Qualified Contracts are limited to proceeds
from certain qualified plans. Additional Purchase Payments are credited to
the Contract and increase the amount of the Accumulated Value as of the next
close of business (on a Business Day) following receipt of the payment to
General American at its Home Office.
Allocation of Purchase Payments
The Contract Owner specifies in the Contract application how Purchase
Payments will be allocated. The Contract Owner may allocate each Purchase
Payment to one or more of the Divisions and the General Account as long as
such portions are in whole number percentages, total 100%, and involve
amounts of at least $25. The Contract Owner may choose to allocate nothing
to a particular Division or the General Account. The Contract Owner may
change the allocation instructions for future additional Purchase Payments by
sending a Written Notice.
16
<PAGE> 22
The Purchase Payment will then be allocated among the Divisions and General
Account in accordance with the Contract Owner's instructions.
Accumulated Value
The Accumulated Value will be determined on a daily basis. On the investment
start date (the date the Initial Purchase Payment is applied to the General
Account and/or the Divisions of the Separate Account, which is the date the
Initial Purchase Payment is received at General American's Home Office), the
Accumulated Value in a Division will equal the portion of any Purchase
Payment allocated to the Division.
Thereafter, on each Business Day, the Accumulated Value in a Division of the
Separate Account will equal:
(i) The Accumulated Value in the Division on the preceding Business Day,
multiplied by the Division Net Investment Factor (defined below) for
the current Valuation Period; plus
(ii) Any Purchase Payments received during the current Valuation Period
which are allocated to the Division; plus
(iii) Any amounts transferred to the Division from the General Account or
from another Division during the current Valuation Period; minus
(iv) That portion transferred from the Division to the General Account, or
another Division during the current Valuation Period (including any
transfer charges); minus
(v) Any partial withdrawals from the Division during the current Valuation
Period; minus
(vi) Any withdrawal or surrender charges incurred during the current
Valuation Period in connection with a partial withdrawal.
Net Investment Factor
The Net Investment Factor measures the investment performance of a Division
during a Valuation Period. The Net Investment Factor for each Division for a
Valuation Period is calculated as follows:
(i) The value of the assets at the end of the preceding Valuation Period;
plus
(ii) The investment income and capital gains-realized or unrealized-credited
to the assets in the Valuation Period for which the Net Investment
Factor is being determined; minus
(iii) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
(iv) Any amount charged against each Division for taxes, or any amount set
aside during the Valuation Period as a reserve for taxes attributable
to the operation or maintenance of each Division; minus
(v) A charge not to exceed 0.002740% of the assets for each day in the
Valuation Period. This corresponds to 1% per year for mortality and
expense risk; divided by
(vi) The value of the assets at the end of the preceding Valuation Period.
The Accumulated Value is expected to change from Valuation Period to
Valuation Period, reflecting the investment experience of the selected Funds
of Capital Company or Variable Insurance Products Fund as well as the daily
deduction of charges.
For Contracts issued prior to the reorganization of the Separate Account into
a unit investment trust, a daily adjustment to values held in the Division of
the Separate Account that invests in the Managed Equity Fund will be made to
offset fully the effect of any and all additional expenses (other than
advisory expenses for the Managed Equity Fund) of a type or in an amount
which would not have been borne by the Separate Account prior to the
reorganization.
Transfers
You may transfer amounts as follows:
1) Between the General Account and one or more of the Divisions of the
Separate Account; or
2) Among the Divisions of the Separate Account.
These transfers will be subject to the following rules:
1) Transfers must be made by Written Request or by Telephone, provided we
have a Telephone Authorization Form in good order completed by the
Contract Owner.
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2) Transfers from or among the Divisions of the Separate Account may be
made at any time and must be at least $100.00 or the entire amount of a
Division, if smaller.
3) Transfers from the General Account to the Separate Account may be made
once each year on the Contract's anniversary date and must be at least
$100.00 but no more than 25% of the amount in the General Account prior
to the transfer.
We may revoke or modify the transfer privilege at any time, including the
minimum amount for a transfer and the transfer charge, if any.
Contract Owner Inquiries
General American performs all administrative functions in connection with the
Contracts such as underwriting, record keeping, Contract Owner service, and
reporting. Contract Owner inquiries should be addressed to General
American's Variable Annuity Administration Department, P.0. Box 14490, St.
Louis, Missouri 63178-4490, or made by calling (800) 449-6447. All inquiries
should include the Contract number and the name of the Contract Owner and/or
the Annuitant.
===============================================================================
CHARGES AND DEDUCTIONS
===============================================================================
No deductions are made from the Initial Purchase Payment unless a state
premium tax is due. (See "Taxes") Therefore, the full amount of the Initial
Purchase Payment less any applicable state tax is invested in one or more of
the Divisions of the Separate Account and/or the General Account to increase
the potential for investment gain.
Surrender Charges (Contingent Deferred Sales Charge)
In May of 1982, or shortly thereafter depending on date of approval from
state regulatory authorities, General American began offering Contracts which
imposed surrender charges (sometimes referred to as a contingent deferred
sales charge). Prior to that time, Contracts offered by General American
imposed sales charges on Purchase Payments. For the older Contracts sold
prior to May of 1982, a sales charge equal to 4.75% on all Purchase Payments
is imposed to cover sales and distribution expenses. An administrative
charge of $10 per year is also imposed during the accumulation period, and a
$5 charge is imposed whenever funds are transferred between the General
Account and Separate Account.
For the newer Contracts, since no deduction for a sales charge is made from
Purchase Payments, a surrender charge is imposed on certain surrenders and
withdrawals to cover certain expenses relating to the sale of the Contracts,
including commissions to registered representatives and other promotional
expenses.
Upon surrender of the Contract or partial withdrawal of funds on deposit,
General American will apply surrender charge. The surrender charge
percentage is based on the age of the Contract as shown in the following
schedule:
Surrender Charge
Contract Year Percentage
------------- ----------
1 9%
2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
For partial withdrawals, the surrender charge is calculated by multiplying
the surrender charge percentage by the actual amount disbursed to the
Contract Owner. The total amount deducted from the Accumulated Value of the
Contract is the sum of the surrender charge and the disbursed amount. If the
sum of the disbursed amount and the surrender charge exceed the Accumulated
Value of the Contract, the withdrawal will be considered a full surrender.
Upon full surrender, the surrender charge is calculated by multiplying the
surrender charge percentage by the Contract's Accumulated Value. The
difference between the Accumulated Value and the surrender charge is
disbursed to the Contract Owner.
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The surrender charge will never exceed 9% of total net Purchase Payments.
There will be no surrender charge after the ninth Contract Year. In
addition, surrender charges are not applied in the event of death,
disability, or annuitization after five Contract years. If a Contract Owner
is within the nine year surrender charge period (the first nine Contract
Years), an amount may be withdrawn up to 10% of the account value (determined
as of the date we receive the withdrawal request) per Contract year without
incurring a surrender charge. Any percentages of account value previously
withdrawn during a Contract Year are subtracted from 10% in calculating the
remaining percentage of account value that is available for withdrawal during
the same Contract Year.
The age of the Contract, rather than the length of time a certain sum has
been in the General Account or Separate Account, determines the amount of the
surrender charge in cases of withdrawal, so no attempt is made to identify
which dollars are being withdrawn.
The surrender charge may not initially be adequate to recover all
distribution costs. Any shortfall will be borne by General American from its
general assets, including profits derived from the Separate Account mortality
and expense risk, if any.
General American offers to its officers and full time employees, (including
employees of its subsidiary companies), individual variable annuity contracts
available with a surrender charge of six percent the first Contract Year
declining by one percent per year until it disappears.
The surrender charge will be allocated pro rata among the Divisions and the
General Account, based on the values held in the Divisions and the General
Account prior to the withdrawal. In the case of a surrender, the surrender
charge is deducted from the amount paid to the Contract Owner.
Reduction of Surrender Charge for Group or Sponsored Arrangements. Contracts
may be sold to members of a class of associated individuals or to a trustee,
an employer, or some other entity representing such a class. The Company may
waive or reduce the surrender charge on such policies in recognition of the
fact that sales efforts and administrative costs are generally lower for such
groups and sales compensation may be adjusted. The amount of any reduction
will depend upon factors such as: the expected number of participants and
the amount of premium payments anticipated; the nature of the group or
association; the expected persistency and the possibility of favorable
mortality; and the amount and timing of the payment and any selling costs.
General American will determine the amount of reduction which is appropriate
and may change the surrender charge attributable to future premiums if it
does so on a basis which is uniform with respect to all similar Contract
Owners. The Company may also modify the criteria for qualification for sales
charge reductions as experience is gained, subject to the limit that such
reductions will not be unfavorably discriminatory against the interest of any
Contract Owner.
Mortality and Expense Risk Charge
During both the accumulation period and the annuity period, charges to cover
mortality and expense risk are made each business day as a percentage of the
Accumulated Value of the Contract. The charge for mortality and expense risk
is 1% annually (estimated at .8% for mortality risk and .2% for expense
risk).
The mortality risk assumed by General American is that Annuitants may live
longer than the time estimated when the risk in the Contract is established.
General American agrees to continue to pay annuity installments, determined
in accordance with the annuity tables and other provisions contained in the
Contract, and in accordance with the option selected (See "Annuity Income
Options"), to each Annuitant regardless of how long he lives and regardless
of how long all Annuitants as a group live.
The expense risk assumed by General American is that if the charge for
mortality and expenses is not sufficient to cover administrative expenses,
the deficiency will be met from General American's General Account.
Further, General American can modify a group Contract prospectively, with
respect to future participants, after the Contract has been in force for at
least three years. No modifications can affect the Annuitants in any manner
without an Annuitant's written consent, unless such modification is deemed
necessary to give the Contract Owner or Annuitants the benefit of Federal or
state statutes or Treasury Department rules or regulations.
In addition, General American assures that the Separate Account will not be
charged with any further expenses other than taxes applicable to the Separate
Account. There are currently no taxes assessed against the Separate Account
with respect to funds held under Qualified and Nonqualified Contracts (See
"Federal Tax Matters").
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Premium Tax
Under the laws of certain jurisdictions, taxes are charged on so-called
"annuity considerations." In the case of applicable Contracts, "annuity
considerations" could include either the Purchase Payment or the Accumulated
Value of such contracts. Such taxes range from 0% to 3.50%. The list of
jurisdictions imposing premium tax follows:
STATE ANNUITY PREMIUM TAX RATES
State Qualified Contracts Nonqualified Contracts
----- ------------------- ----------------------
California .50% 2.35%
District of Columbia 2.25% 2.25%
Kentucky 2.00% 2.00%
Maine 0% 2.00%
Nevada 0% 3.50%
Puerto Rico 1.00% 1.00%
South Dakota 0% 1.25%
West Virginia 1.00% 1.00%
Wyoming 0% l.00%
Note: The above premium tax rates are in effect as of January 1, 1998.
States not listed above currently have no premium tax on the purchase of
group and individual variable annuity contracts. However, premium tax
statutes are subject to amendment by legislative act and to judicial and
administrative interpretations, both of which may affect the above list of
states levying such taxes and the applicable tax rates. Particularly because
a portion of the premium tax charge may be made at the time Annuity Payments
commence, the above list of tax rates may not be those in effect at the time
the premium tax charge is made.
Laws relating to premium taxes and the interpretations of such laws are
subject to changes that may affect the deductions, if any, made under
Contracts for such taxes. Some jurisdictions permit payment of premium tax
on the Accumulated Value that is applied to provide an Annuity. In those
places, General American does not make any separate deductions for premium
tax from Purchase Payments, as it is permitted to do under the Contracts, but
defers any separate deductions for such taxes until the Accumulated Value is
applied to provide Annuity Payments. (Although General American may be
required in some of these jurisdictions to pay premium tax currently on
surrender charges, it presently intends to pay the taxes out of the
deductions and charges made against all Contracts.) General American plans,
where permissible, to defer any separate deductions for premium tax until the
Accumulated Value is applied to provide Annuity Payments, at which time the
amount of any applicable premium tax will be measured by the Accumulated
Value. However, in many jurisdictions the premium tax are applied to Purchase
Payments, and in those cases the deductions for such taxes will be made when
the payments are received. Thus, General American reserves the right to make
a separate deduction from each Purchase Payment, or from the Accumulated
Value, depending on which method or combination of methods results in the
appropriate deduction for applicable premium tax.
Federal Income Tax
General American does not expect to incur any Federal income tax liability
attributable to investment income or capital gains retained as part of the
reserves under the Contracts. (See "Federal Tax Matters") Based upon these
expectations, no charge is being made currently to the Separate Account for
corporate Federal income taxes which may be attributable to the Separate
Account.
General American will periodically review the question of a charge to the
Separate Account for corporate Federal income taxes related to the Separate
Account. Such a charge may be made in future years for any Federal income
taxes incurred by General American. This might become necessary if the tax
treatment of General American is ultimately determined to be other than what
General American currently believes it to be, if there are changes made in
the Federal income tax treatment of annuities at the corporate level, or if
there is a change in General American's tax status. In the event that
General American should incur Federal income taxes attributable to investment
income or capital gains retained as part of the reserves under the Contracts,
the Unit Values of the Divisions would be correspondingly adjusted by any
provision or charge for such taxes.
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Expenses - Capital Company and Variable Insurance Products Fund
The value of the assets in the Separate Account will reflect the value of the
applicable Capital Company or VIP Fund shares and, therefore, the fees and
expenses paid by them. A complete description of the expenses and deductions
from the Funds is in the applicable Capital Company or VIP Fund prospectus.
===============================================================================
DISTRIBUTIONS UNDER THE CONTRACTS
===============================================================================
Surrenders and Partial Withdrawals
The Contract Owner may surrender the Contract or make a partial withdrawal to
receive all or part of the Accumulated Value, at any time before the Annuity
Date and while the Annuitant is living, by sending a Written Request. The
amount available for surrender or partial withdrawal is the Accumulated Value
at the time of the Valuation Period during which the Written Request is
received, less any surrender or withdrawal charges. In the event of a
partial withdrawal, the amount of any withdrawal charge will be deducted from
the remaining Accumulated Value and not from the amount withdrawn. The
amount payable upon surrender or withdrawal may be paid in a lump sum to the
Contract Owner, or, if elected, all or any part may be paid out under an
Annuity Income Option. (See "Annuity Income Options")
The minimum amount that can be withdrawn is $100. In the absence of specific
direction from the Contract Owner, amounts will be withdrawn from the
Divisions and the General Account on a pro rata basis.
A partial withdrawal results in cancellation of an appropriate number of
accumulation units; a surrender requires surrender of the Contract and
cancellation of all accumulation units. Any surrender or withdrawal within
the first nine Contract Years will result in the application of a surrender
charge except that the Contract Owner may withdraw up to 10% of the
Accumulated Value without the application of the surrender charge (See
"Charges and Deductions").
The amount payable on surrender or withdrawal will ordinarily be paid within
seven days after receipt by General American at its Home Office of the
Written Request on a duly executed form which may be obtained from the Home
Office or by a letter signed by the Annuitant (or the Contract Owner if other
than Annuitant) exactly as his or her name appears on the Contract, stating
his or her address, the Contract number and the amount of the payment
requested. The letter must be signed by any person whose consent is required
by reason of any special endorsement. If the Contract Owner's address of
record has been changed within the preceding thirty days, all signatures on
the letter must be guaranteed by a bank or trust company or by a member firm
of a national securities exchange. Payment may be postponed and the right of
redemption suspended as described under "Deferment of Payment".
If, at the time the Contract Owner makes a surrender or withdrawal request,
he or she has not provided General American with a written election not to
have Federal income taxes withheld, General American must by law withhold
such taxes from the taxable portion of any surrender or withdrawal.
Moreover, the Code provides that a 10% penalty tax may be imposed on certain
early surrenders or withdrawals. (See "Federal Tax Matters-Taxation of
Annuities.")
Since the Contract Owner assumes the investment risk with respect to amounts
allocated to the Separate Account and because certain surrenders and
withdrawals are subject to a surrender or withdrawal charge, the total amount
paid under surrender of the Contract (taking into account any prior
withdrawals) may be more or less than the total Purchase Payments made.
Termination Benefits
Participants under a Tax Sheltered Variable Annuity Contract have certain
rights if they terminate their participation prior to the Annuity Date. Upon
termination of participation prior to the Annuity Date, the participant may
elect with respect to the Accumulation Value in his or her individual
account:
(a) to have the Accumulated Value applied to provide Annuity Payments under
one of the annuity income options described below, or
(b) to leave the Accumulated Value in the Contract, in which case the
number of accumulation units in his or her Individual Account will
remain fixed, but the value thereof will vary as described in the
Section "Accumulated Value", or
(c) to receive the Accumulated Value on the basis of the accumulation unit
value next determined after the Written Request for surrender is
received by General American at its Home Office; or
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(d) to convert to an Individual Variable Annuity Contract, if appropriate
individual Contracts are issued by General American on the effective
date of termination, on the basis set forth by General American at the
time of such conversion.
Annuity Date
The Contract Owner should specify an Annuity Date in the application. The
Annuity Date is the date that Annuity Payments are scheduled to commence
under the Contract, unless the Contract has been surrendered or an amount has
been paid as proceeds to the designated Beneficiary prior to that date.
The Contract Owner may advance or defer the Annuity Date. An Annuity Date
may be changed only by Written Request during the Annuitant's lifetime, and
such a request must be made at least 30 days before the then-scheduled
Annuity Date. The Annuity Date and Annuity Income Options available for
Qualified Contracts may also be controlled by endorsements, the Plan, or
applicable law.
Death of Annuitant Prior to Annuity Date
If the Annuitant dies prior to the Annuity Date, the Accumulated Value of the
Contract or individual account will be paid to the Beneficiary. The
Accumulated Value will be the value next determined following receipt by
General American of due Proof of Death of the Annuitant as well as proof that
the Annuitant died prior to the Annuity Date. The Beneficiary may receive
the amount payable in a lump sum cash benefit or under one of the Annuity
Income Options.
Annuity Income Options
(a) Election of Annuity Income Options
The Annuity Income Options, with the exception of Option 7, may be selected
on either a variable annuity or a guaranteed annuity basis, or a combination
of the two. In the absence of an election to the contrary, the variable
Accumulated Value will be applied to provide variable annuity installments
and the guaranteed Accumulated Value will be applied to provide guaranteed
annuity installments.
The minimum amount which may be applied under an option is $5,000 and the
minimum annuity installment is $50 (or any lower amount required by state
law). If the Accumulated Value is less than $5,000 when the Annuity Date
arrives, General American will make a lump sum payment of such amount to the
Contract Owner. If at any time installments are, or become less than $50,
General American has the right to change the frequency of payments to
intervals that will result in installments of at least $50.
(b) The Options Available
Option 1 - Life Annuity - An Annuity payable monthly during the lifetime of
the Payee, ceasing with the last payment due prior to the death of the Payee.
However, since there is no provision for a minimum number of payments or for
payments to a survivor, it would be possible under this form of settlement
for the Annuitant to receive only one payment if he or she died prior to the
due date of the second payment, two if he or she died prior to the due date
of the third payment, etc.
Option 2 - Life Annuity with 60, 120, l80, or 240 Monthly Payments Guaranteed
- - An Annuity payable monthly during the lifetime of the Payee, including the
risk that if, at the death of the Payee, payments have been made for less
than 60 months, 120 months, 180 months, or 240 months, as elected, payments
shall be continued to the Beneficiary during the remainder of the elected
period. A Beneficiary entitled to receive payments may elect that the
present value of the current dollar amount of the remaining assured number of
annuity payments, commuted on the basis of 4% interest compounded annually,
be paid in a lump sum.
Option 3 - Unit Refund Life Annuity - An Annuity payable monthly during the
lifetime of the Payee ceasing with the last payment due prior to the death of
the Payee, provided that, at the death of the Payee, the Beneficiary will
receive an additional payment of the then dollar value of the number of
Annuity Units equal to the excess, if any of (a) over (b) where (a) is the
total amount applied under the option divided by the annuity unit value at
the Annuity Date and (b) is the number of Annuity Units represented by each
payment multiplied by the number of payments made.
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For example, if $19,952.07 were applied under this option for a male at age
65 on the Annuity Date, the annuity unit value in the appropriate Division on
such date was $12.071, the number of Annuity Units represented by each
payment was ten, thirteen Annuity payments were paid prior to the date of
death, and the value of an Annuity Unit on the date of death was $12.818, the
amount paid to the Beneficiary would be $19,520.44.
Option 4 - Joint and Survivor Income for Life - An Annuity payable monthly
during the joint lifetime of the Payee and a secondary Payee, and thereafter
during the remaining lifetime of the survivor, ceasing with the last payment
due prior to the death of the survivor. Since there is no provision for a
minimum number of payments, it would be possible under this form of
settlement for the Annuitants to receive only one payment if both died prior
to the due date of the second payment, two if both died prior to the due date
of the third payment, etc.
Option 5 - Income for a Fixed Period - The amount due may be paid in annual,
semiannual, quarterly, or monthly payments over a specified number of years,
not less than three (3) nor more than thirty (30). When a variable annuity
basis is selected, a mortality and expense risk charge continues to be
assessed, even though General American incurs no mortality risk under this
option. The person considering this option should consult his tax adviser
about the possibility that such selection might be held to be "constructive
receipt" of the entire Accumulated Value and result in adverse tax treatment.
Option 6 - Income of a Fixed Amount - The amount due may be paid in equal
annual, semiannual, quarterly, or monthly payments of a designated dollar
amount (not less than $75 per annum per $1,000 of the original amount due)
until the proceeds applied under this option, with interest credited at the
current annual rate, are exhausted. The final installment will be for the
then remaining balance only. To determine the remaining balance at the end
of any Business Day, such balance at the end of the previous Business Day is
decreased by the amount of any payment paid since the last Business Day and
the result multiplied by the net investment factor for each Division involved
for the current Business Day. When a variable annuity basis is selected, a
mortality and expense risk charge continues to be assessed, even though
General American incurs no mortality risk under this option. The person
considering this option should consult his tax adviser about the possibility
that such selection might be held to be "constructive receipt" of the entire
Accumulated Value and result in adverse tax treatment.
Option 7 - Interest Income (may be available to Nonqualified Annuities only)
- - The amount due may be left on deposit with General American in its General
Account and a sum will be paid annually, semiannually, quarterly, or monthly,
as selected, which shall not be less than 4% per annum for the period
multiplied by the amount remaining on deposit. Under this option,
contributions may continue.
(c) Value of Variable Annuity Payments
The value of Variable Annuity Payments will reflect the investment experience
of the chosen Division. The annuity tables that are contained in the
Contract, and are used to calculate the value of Variable Annuity Payments,
are based on an assumed interest rate of 4%. If the actual net investment
experience exactly equals the assumed interest rate, then the Variable
Annuity Payments will remain the same (equal to the first Annuity Payment).
However, if actual investment experience exceeds the assumed interest rate,
the Variable Annuity Payments will increase; conversely, they will decrease
if the actual experience is lower.
The value of all payments (both guaranteed and variable) will be greater for
shorter guaranteed periods than for longer guaranteed periods, and greater
for life annuities than for joint and survivor annuities, because they are
expected to be made for a shorter period.
The method of computation of Variable Annuity Payments is described in more
detail in the Statement of Additional Information.
Deferment of Payment
Payment of any cash withdrawal or lump sum death benefit due from the
Separate Account will occur within seven days from the date the election
becomes effective, except that General American may be permitted to defer
such payment if: (l) the New York Stock Exchange is closed for other than
usual weekends or holidays, or trading on the Exchange is otherwise
restricted; or (2) an emergency exists as defined by the Securities and
Exchange Commission or the Commission requires that trading be restricted; or
(3) the Securities and Exchange Commission permits a delay for the protection
of Contract Owners.
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The Beneficiary
The Beneficiary is the person or persons who will receive any proceeds
payable in the event of the death of the Annuitant, in accordance with this
provision. The original Beneficiary is shown in the application. Subject to
any assignment of a Contract, the Beneficiary designation may be changed
during the lifetime of the Annuitant by filing a proper Written Request
acceptable to General American at its Home Office. If the joint and survivor
option is selected, the Annuitant may not change the designation of a joint
Annuitant after payments begin. General American reserves the right to
require the Contract for endorsement. A change of Beneficiary designation
will not become effective unless accepted in writing by General American at
its Home Office, at which time it will be effective as of the date of the
request, but without prejudice to General American on account of any benefit
paid before receipt of such request at its Home Office. A Beneficiary who
becomes entitled to receive benefits under this Contract may also designate,
in the same manner, a Beneficiary to receive any benefits which may become
payable under this Contract by reason of death. If a Beneficiary has not
been designated by a Payee or if a Beneficiary designated by a Payee is not
living on the date a lump sum death benefit is payable, or on the date any
payments are to be continued, as a result of the death of such Payee, the
Company will pay the lump sum death benefit for the commuted value of the
payments to the former Payee's spouse. If the spouse is not living at the death
of the Payee, then payments will be made equally to the Payee's children who
survive the Payee. If the children are not surviving, then payments will be
made to either the surviving father or mother or to both equally if both
survive. If none of the above survive the Payee, then payments will be made to
his or her executors or administrators.
Death Benefits
When General American receives due proof of the death of the Annuitant that
occurs before the Annuity Date, it will pay to the Beneficiary the
Accumulated Value of the Contract. If the Contract Owner dies before the
retirement date, this Contract will no longer be in force. General American
will pay the Contract Owner's interest in the Contract to the Beneficiary in
a lump sum upon receiving proof of the Contract Owner's death.
This payment must be made within five (5) years after the date of the death
of the Annuitant.
If, however, the Contract Owner or the Beneficiary make a written choice of
one of the two options described below, and if the Contract Owner's choice is
clear to General American, the company will treat the proceeds as the
Contract Owner or the Beneficiary have chosen. The two options are:
(i) Leave the proceeds of the Contract with General American as provided
under Option 6 of the Annuity Provisions Section of this Contract. Any
amount remaining unpaid under Option 6 will, however, be paid in a lump sum
to the Beneficiary before the end of the fifth year after the Contract
Owner's death.
(ii) Buy an immediate annuity for the Beneficiary, who will be the owner and
Annuitant. Payments under the Annuity, or under any other method of payment
General American makes available, must be for the life of the Beneficiary, or
for a number of years that is not more than the life expectancy of the
Beneficiary at the time of the Contract Owner's death (as determined for
Federal tax purposes), and must begin within one year after the Contract
Owner's death.
However, if the Contract Owner dies before the Annuity Date and the Contract
Owner's spouse is the Beneficiary, no proceeds will be paid to him or her.
Instead, this Contract may continue with the Contract Owner's surviving
spouse as the new owner.
If the Contract Owner dies and no Beneficiary survives him or her before the
Annuity Date, payment of the proceeds will be made in a lump sum to the
Contract Owner's estate.
Assignments and Transfers
With respect to individual Nonqualified Contracts, an assignment or transfer
of the Contract or of any interest in it will not bind General American
unless (1) it is made as a written instrument, (2) the original instrument or
a certified copy is filed at our Home Office, and (3) we send the Contract
Owner a receipt. General American is not responsible for the validity of the
assignment. If a claim is based on an assignment or transfer, proof of
interest of the claimant may be required. A valid assignment will take
precedence over any claim of a Beneficiary.
With respect to all other Contracts, the Contract Owner may not transfer,
sell, assign, discount or pledge a Contract for a loan or a security for the
performance of an obligation or any other purpose, to any person other than
to us at our Home Office.
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===============================================================================
FEDERAL TAX MATTERS
===============================================================================
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE.
Introduction
The following discussion is a general description of the Federal income tax
considerations relating to the Contract and is not intended as tax advice.
This discussion is not intended to address the tax consequences resulting
from all of the situations in which a person may be entitled to or may
receive a distribution under the Contract. Any person concerned about these
tax implications should consult a competent tax adviser before initiating any
transaction. The discussion is based upon General American's understanding
of the present Federal income tax laws as they are currently interpreted by
the Internal Revenue Service. No representation is made as to the likelihood
of the continuation of the present Federal income tax laws or of the current
interpretation by the Internal Revenue Service. Moreover, no attempt has
been made to consider any applicable state or other tax laws.
The Contract may be purchased on a nonqualified basis ("Nonqualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("Qualified Contract"). Qualified Contracts are
intended to be purchased in connection with plans entitled to special income
tax treatment under Sections 401, 408, 408A, and 457 of the Code or as tax
sheltered annuities under Section 403(b) of the Code. The ultimate effect of
Federal income taxes on the amounts held under a contract, on Annuity
Payments, and on the economic benefit to the Contract Owner, the Annuitant,
or the Beneficiary depends on the type of retirement plan and on the tax and
employment status of the individual concerned. In addition, certain
requirements must be satisfied in purchasing a Qualified Contract and
receiving distributions from a Qualified Contract in order to continue
receiving favorable tax treatment. Therefore, a purchaser of a Qualified
Contract should seek competent legal and tax advice regarding the suitability
of the Contract for his or her situation, the applicable requirements and the
tax treatment of the rights and benefits of a Contract. The following
discussion assumes that a Qualified Contract is purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special Federal income tax treatment.
Taxation of General American
General American is taxed as a life insurance company under Part I of
Subchapter L of the Code. Since the operations of the Separate Account form
a part of General American, the Separate Account will not be taxed separately
as a "regulated investment company" under Subchapter M of the Code.
Investment income and realized capital gains are automatically applied to
increase reserves under the Contract. Under existing Federal income tax law,
General American believes that the investment income and realized net capital
gains of the Separate Account will not be taxed to the extent that such
income and gains are applied to increase the reserves under the Contract.
Accordingly, General American does not anticipate that it will incur any
Federal income tax liability attributable to the Separate Account and,
therefore, General American does not intend to make provisions for any such
taxes. However, if changes in the Federal tax laws or interpretations
thereof result in General American being taxed on income or gains
attributable to the Separate Account, then General American may impose a
charge against the Separate Account (with respect to some or all Contracts)
in order to set aside amounts to pay such taxes.
Tax Status of the Contracts
(a) Diversification.
Section 817(h) of the Code requires that with respect to Nonqualified
Contracts, the investments of the Divisions be "adequately diversified" in
accordance with Treasury Department regulations in order for the Contracts to
qualify as annuity contracts under Federal tax law. General American intends
for the Separate Account, through the Funds, to comply with the
diversification requirements prescribed by the Treasury Department in Treas.
Reg. Sec. 1.817-5.
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<PAGE> 31
(b) Investor Control.
The Treasury Department has from time to time suggested that under some
circumstances the owner of a variable contract will be deemed to be in
control over the investments of a separate account supporting the contract,
which may cause the owner, rather than the insurance company, to be treated
as the owner of the assets in the separate account. If a contract owner is
considered the owner of the assets of a separate account, income and gains
from that account would be included in the owner's gross income. The Treasury
Department also has stated on past occasions that it will issue regulations or
rulings addressing this issue.
The ownership rights under the Contract are different in certain respects
from those described by the IRS in rulings in which it was determined that
Contract Owners were not owners of separate account assets. For example, a
Contract owner has the choice of more Divisions and narrower investment
strategies in which to allocate net purchase Payments and Accumulation Value,
and may be able to transfer among Divisions more frequently than in such
rulings. These differences could result in a Contract Owner being treated as
the owner of the assets of the Separate Account. In addition, General
American does not know what standards will be set forth, if any, in the
additional regulations or rulings which the Treasury Department has stated it
expects to issue. General American therefore reserves the right to modify
the Contract as necessary to attempt to prevent a Contract Owner from being
considered the owner of a pro rata share of the assets of the Separate
Account.
(c) Required Distributions.
In order to be treated as an annuity contract for federal income tax
purposes, Section 72(s) of the Code requires any Nonqualified Contract to
provide that (a) if any Contract Owner dies on or after the Annuity Date but
prior to the time the entire interest in the Contract has been distributed,
the remaining portion of such interest will be distributed at least as
rapidly as under the method of distribution being used as of the date of that
Contract Owner's death; and (b) if any Contract Owner dies prior to the
Annuity Date, the entire interest in the Contract will be distributed within
five years after the date of that Contract Owner's death. These requirements
will be considered satisfied as to any portion of the Contract Owner's
interest which is payable to or for the benefit of a "designated beneficiary"
and which is distributed over the life of such "designated beneficiary" or
over a period not extending beyond the life expectancy of that beneficiary,
provided that such distributions begin within one year of that Contract
Owner's death. The Contract Owner's "designated beneficiary" is the person or
entity designated by such Owner as a Beneficiary and to whom ownership of the
Contract passes by reason of death. If the Contract Owner's "designated
beneficiary" is the surviving spouse of the Contract Owner, the Contract may
be continued with the surviving spouse as the new Owner.
The Nonqualified Contracts contain provisions which are intended to comply
with the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. General American
intends to review such provisions and modify them if necessary to assure that
they comply with the requirements of Code Section 72(s) when clarified by
regulation or otherwise. There are other rules that apply to Qualified
Contracts.
The following discussion is based on the assumption that the Contract
qualifies as an annuity contract for Federal income tax purposes.
Taxation of Annuities
(a) In General.
Section 72 of the Code governs taxation of annuities in general. General
American believes that a Contract Owner who is a natural person generally is
not taxed on increases in the value of a Contract until distribution occurs
by withdrawing all or part of the account value (e.g., partial withdrawals,
surrenders or Annuity Payments under the Annuity Income Option elected). For
this purpose, the assignment, pledge, or agreement to assign or pledge any
portion of the account value (and in the case of a Qualified Contract, any
portion of an interest in the qualified plan) generally will be treated as a
distribution. The taxable portion of a distribution (in the form of a single
sum payment or an annuity) is taxable as ordinary income.
Any Contract Owner who is not a natural person generally must include in
income any increase in the excess of the Contract's account value over the
"investment in the Contract" (discussed below) during the taxable year.
There are some exceptions to this rule and a prospective Contract Owner that
is not a natural person may wish to discuss these with a competent tax
adviser.
The following discussion generally applies to a Contract owned by a natural
person.
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<PAGE> 32
(b) Withdrawals and Surrenders.
In the case of a withdrawal under a Qualified Contract, a ratable portion of
the amount received is taxable, generally based on the ratio of the
"investment in the Contract" to the individual's total accrued benefit or the
balance under the retirement plan. The "investment in the Contract"
generally equals the amount of any premium payments paid by or on behalf of
any individual with after-tax dollars. For a Contract issued in connection
with qualified plans, the "investment in the Contract" can be zero. This
general rule does not apply to certain types of individual retirement
annuities, and other special tax rules may be available for certain
distributions from a Qualified Contract.
With respect to Nonqualified Contracts, partial withdrawals - including any
withdrawals under the systematic withdrawal plan - are generally treated as
taxable income to the extent that the account value immediately before the
withdrawal exceeds the "investment in the Contract" at that time. Full
surrenders are treated as taxable income to the extent that the amount
received exceeds the "investment in the Contract".
(c) Annuity Payments.
Although the tax consequences may vary depending on the Annuity Payment
elected under the Contract, in general, only the portion of the Annuity
Payment that represents the amount by which the Accumulated Value exceeds the
"investment in the Contract" will be taxed; after the investment in the
Contract is recovered, the full amount of any additional Annuity Payments is
taxable. This general rule does not apply to certain types of individual
retirement annuities, and other special rules may apply to Qualified
Contracts.
For variable Annuity Payments, the taxable portion is generally determined by
an equation that establishes a specific dollar amount of each payment that is
not taxed. The dollar amount is determined by dividing the "investment in
the Contract" by the total number of expected periodic payments. However,
the entire distribution will be taxable once the recipient has recovered the
dollar amount of his or her "investment in the Contract".
For fixed Annuity Payments, in general, there is no tax on the portion of
each payment which represents the same ratio that the "investment in the
Contract" bears to the total expected value of the Annuity Payments for the
term of the payments; however, the remainder of each Annuity Payment is
taxable. In all cases, after the "investment in the Contract" is recovered,
the full amount of any additional Annuity Payment is taxable.
(d) Penalty Tax.
In the case of a distribution pursuant to a Nonqualified Contract, there may
be imposed a Federal penalty tax equal to 10% of the amount treated as
taxable income. In general, however, there is no penalty tax on
distributions: (1) made on or after the date on which the Contract Owner
attains age 59 1/2; (2) made as a result of death or disability of the
Contract Owner; (3) received in substantially equal periodic payments as a
life annuity or a joint and survivor annuity for the lives or life
expectancies of the Contract Owner and a "designated beneficiary;" (4) from a
qualified plan; (5) allocable to investment in the Contract before August 14,
1982; (6) under a qualified funding asset (as defined in Code Section
130(d)); or (7) under an immediate annuity (as defined in Code Section
(u)(4)). Other tax penalties may apply to certain distributions under a
Qualified Contract, including a penalty similar to the penalty for
distributions from Nonqualified Contracts described above.
(e) Taxation of Death Benefit Proceeds.
Amounts may be distributed from a Contract because of the death of a Contract
Owner or an Annuitant. Generally, such amounts are includable in the income
of the recipient as follows: (1) if distributed in a lump sum, they are
taxed in the same manner as a full surrender of the Contract, as described
above, or (2) if distributed under an annuity option, they are taxed in the
same manner as annuity payments, as described above. For these purposes, the
investment in the contract is not affected by the owner's or annuitant's
death. That is, the investment in the contract remains the amount of any
purchase payments paid which were not excluded from gross income.
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<PAGE> 33
(f) Transfers, Assignments or Exchanges of the Contract.
In general, a transfer of ownership of a Contract, the collateral assignment
of a Contract, the designation of an Annuitant or Beneficiary who is not also
the Contract Owner, or the exchange of a Contract may result in certain tax
consequences to the Contract Owner. For example, when a Contract is assigned
as collateral for a loan, the entire excess of the Contract's account value
over the investment in the contract becomes taxable as ordinary income, and,
if the Contract Owner is under the age of 59 1/2, a penalty tax equal to 10%
of the taxable amount may also be imposed.
Increases in the value of a Contract that has been assigned will continue to be
taxable annually to the Contract Owner until the assignment is released.
Any Contract Owner contemplating any such transfer, assignment, designation,
or exchange should contact a competent tax adviser for advice with respect to
the potential tax effects of such a transaction.
(g) Multiple Contracts.
All Nonqualified Annuity contracts that are issued by General American (or
its affiliates) to the same Contract Owner during any calendar year are
treated as one annuity contract for purposes of determining the amount
includable in gross income under Section 72(e) of the Code. In addition, the
Treasury Department has specific authority to issue regulations that prevent
the avoidance of Section 72(e) through the serial purchase of annuity
contracts or otherwise.
(h) Withholding.
Pension and annuity distributions generally are subject to withholding from
the recipient's Federal income tax liability at rates that vary according to
the type of distribution and the recipient's tax status. Recipients,
however, generally are provided the opportunity to elect not to have tax
withheld from distributions. Different rules may apply to United States
citizens or expatriates living abroad and, effective January 1, 1993, to
certain distributions under Qualified Contracts. In addition, some states
have enacted legislation requiring withholding.
(i) Possible Changes in Taxation.
In past years, legislation has been proposed that would have adversely
modified the Federal taxation of certain annuities. As of the date of this
Prospectus, the President's budget for fiscal year 1999 includes proposals
that would directly affect variable annuities, and there is always the
possibility that the tax treatment of annuities could change by legislation
or other means (such as the IRS regulations, revenue rulings, judicial
decisions, etc.). Moreover, it is also possible that any change could be
effective prior to the date of any such change.
(j) Other Tax Consequences.
As noted above, the foregoing discussion of the Federal income tax
consequences under the Contract is not exhaustive and special rules are
provided with respect to other tax situations not discussed in the
Prospectus. Further, the Federal income tax consequences discussed here
reflect General American's understanding of current law and the law may
change. Federal estate and state and local estate, inheritance, and other
tax consequences of ownership or receipt of distributions under the Contract
depend on the individual circumstances of each Contract Owner or recipient of
the distribution. A competent tax adviser should be consulted for further
information.
(k) Qualified Contracts.
The Qualified Contract is designed for use with several types of retirement
plans. The tax rules applicable to participants and beneficiaries in
retirement plans vary according to the type of plan and the terms and
conditions of the plan. Special favorable tax treatment may be available for
certain types of contributions and distributions. Adverse tax consequences
may result from contributions in excess of specified limits; distributions
prior to age 59 1/2 (subject to certain exceptions); distributions that do
not conform to specified commencement and minimum distribution rules;
aggregate distributions in excess of a specified annual amount; and in other
specified circumstances.
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<PAGE> 34
We make no attempt to provide more than general information about use of the
Contracts with the various types of retirement plans. Owners and
participants under retirement plans, as well as Annuitants and Beneficiaries,
are cautioned that the rights of any person to any benefits under Qualified
Contracts may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract issued in connection
with such a plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated in the administration of the
Contracts. Contract Owners are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts satisfy applicable law. Purchasers of Contracts for use with any
retirement plan should consult a competent legal counsel and tax adviser
regarding the suitability of the Contract.
Individual Retirement Annuities and Accounts
The Contract is designed for use with individual retirement annuities and
individual retirement accounts. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program know as an
individual retirement annuity or individual retirement account (each
hereinafter referred to as "IRA"). Also, distributions from certain other
types of qualified plans may be "rolled over" on a tax-deferred basis into an
IRA. The sale of a Contract for use with an IRA may be subject to special
disclosure requirements of the Internal Revenue Service. Purchasers of the
Contract for use with IRAs will be provided with supplemental information
required by the Internal Revenue Service or other applicable agencies. Such
purchasers will have the right to revoke the purchase within seven days of
the earlier of the establishment of the IRA or the purchase. If a Qualified
Contract is issued in connection with an employer's Simplified Employee
Pension ("SEP") or Simple Retirement Account ("SIMPLE") plan, Contract
Owners, Annuitants and Beneficiaries are cautioned that the rights of any
person to any benefits under employer plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. A Qualified Contract will be amended as necessary to conform
to the requirements of the Code.
Effective January 1, 1998, section 408A of the Code permits certain eligible
individuals to contribute to a Roth IRA, although Roth IRA's are not
available as part of the Contract. Contributions to a Roth IRA, which are
subject to certain limitations, are not deductible and must be made in cash
or as a rollover or transfer from another Roth IRA or other IRA. A rollover
from or conversion of an IRA to a Roth IRA may be subject to tax and other
special rules may apply. You should consult a tax adviser before combining
any converted amounts with any other Roth IRA contributions, including any
other conversion amounts from other tax years. Distributions from a Roth IRA
generally are not taxed, except that, once aggregate distributions exceed
contributions to the Roth IRA, income tax and a ten percent (10%) penalty tax
may apply to distributions made (1) before age 59 - (subject to certain
exceptions) or (2) during the five taxable years starting with the year in
which the first contribution is made to the Roth IRA.
Code Section 403(b) Plans
Under Code Section 403(b), payments made by public school systems and certain
tax exempt organizations to purchase annuity contracts for their employees
are excludable from the gross income of the employee, subject to certain
limitations. However, these payments may be subject to FICA (Social
Security) taxes.
Code Section 403(b) (11) restricts the distribution under Code Section 403(b)
annuity contracts of: (1) elective contributions made in years beginning
after December 31, 1988; (2) earnings on those contributions; and (3)
earnings in such years on amounts held as of the last year beginning before
January 1, 1989. Distribution of those amounts may only occur upon death of
the employee, attainment of age 59 1/2, separation from service, disability,
or financial hardship. Income attributable to elective contributions may not
be distributed in the case of hardship. Distributions prior to age 59 1/2
due to separation from service or financial hardship are subject to the
nondeductible 10% penalty tax for premature distributions, in addition to
income tax.
The Investment Company Act of 1940 has distribution requirements which differ
from the requirements of Code Section 403(b) set forth above. However, these
Contracts are being offered in reliance upon, and in compliance with, the
provisions of no-action letter number IP-6-88 issued by the Securities and
Exchange Commission to the American Council of Life Insurance. The no-action
letter allows the Separate Account to apply the restrictions created by Code
Section 403(b)(11) as long as specified steps, such as this disclosure, are
taken to ensure Contract Owners are aware of the Code restrictions. General
American believes it is in compliance with the provisions of the no-action
letter.
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<PAGE> 35
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans
Code Section 401(a) permits employers to establish various types of
retirement plans for employees, and permit self-employed individuals to
establish retirement plans for themselves and their employees. These
retirement plans may permit the purchase of the Contracts to provide benefits
under the plans. Adverse tax consequences to the plan, to the participant or
to both may result if this Contract is assigned or transferred to any
individual as a means to provide benefit payments.
Deferred Compensation Plans
Code Section 457 provides for certain deferred compensation plans. These
plans may be offered with respect to service for state governments, local
governments, political subdivisions, agencies, instrumentalities and certain
affiliates of such entities, and tax exempt organizations. With respect to
non-governmental Section 457 plans, all investments are owned by the
sponsoring employer and are subject to the claims of the general creditors of
the employer. Distributions are taxable in full. Depending on the terms of
the particular plan, the employer may be entitled to draw on deferred amounts
for purposes unrelated to its Section 457 plan obligations. These plans
are subject to various restrictions on contributions and distributions.
Restrictions under Qualified Contracts
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Contracts or under the
terms of the plans in respect of which Qualified Contracts are issued.
===============================================================================
DISTRIBUTOR OF THE CONTRACTS
===============================================================================
Walnut Street Securities, Inc. ("Walnut Street"), 400 South Fourth Street,
Suite 1000, St. Louis, Missouri 63102 is the principal underwriter and the
distributor of the Contracts. Walnut Street is a wholly owned subsidiary of
General American. Walnut Street has entered into contracts with various
broker-dealers and registered representatives affiliated with Walnut Street
to aid in the distribution of the Contracts. Commissions paid to dealer(s)
in varying amounts are not expected to exceed 3.75% of Purchase Payments for
such Contracts, under normal circumstances. For distribution of the
Contracts, General American paid commissions of $843,979.40 to Walnut Street
in 1997.
===============================================================================
VOTING RIGHTS
===============================================================================
To the extent required by law, the General American Capital Company Fund or
the Variable Insurance Products Fund shares held in the Divisions of the
Separate Account will be voted by General American at shareholder meetings of
such Funds in accordance with instructions received from persons having
voting interests in the corresponding Divisions of the Separate Account. The
Contract Owner holds a voting interest in each Division to which the
Accumulated Value is allocated or Annuity Payments are generated. If,
however, the 1940 Act or any regulation thereunder should be amended, or if
the present interpretation thereof should change, and, as a result, General
American determines that it is allowed to vote the Fund shares in its own
right, General American may elect to do so.
The number of votes which are available to a Contract Owner will be
calculated separately for each Division of the Separate Account. That number
will be determined by applying his or her percentage interest, if any, in a
particular Division to the total number of votes attributable to the
Division.
The number of votes is equal to the number of dollars: (a) during the
accumulation period, in the Accumulated Value attributable to a Division
divided by the net asset value of a share of the corresponding Fund; and (b)
during the annuity period, in the reserve credited to the Annuity Units held
in the Division(s) under the variable annuity settlement option in effect
divided by the net asset value of a share of the corresponding Fund.
Generally, during the annuity period the number of votes applicable to the
Annuitant will decrease.
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<PAGE> 36
At most Fund shareholder meetings, votes may be cast in person or by proxy
and fractional votes will be counted.
The number of votes of a Division which are available will be determined as
of the date established by the corresponding Fund for determining
shareholders eligible to vote at the meeting. Voting instructions will be
solicited by written communication from us prior to such meeting in
accordance with procedures established.
Fund shares as to which no timely instructions are received or shares held by
General American as to which Contract Owners have no beneficial interest will
be voted in proportion to the voting instructions which are received with
respect to all Contracts participating in that Fund. Voting instructions to
abstain on any item to be voted upon will be applied on a pro rata basis to
reduce the votes eligible to be cast.
Each person having a voting interest in a Division will receive proxy
material, reports, and other materials relating to the appropriate Fund.
To the extent that General American, as shareholder of the Funds, is entitled
to vote any Fund's interest in the Trust, it will do so on the same basis as
described above.
===============================================================================
THE GENERAL ACCOUNT
===============================================================================
Contributions and transfers to the General Account under the Contracts become
part of the assets of General American which support annuity and insurance
obligations. The General Account includes all of General American's assets,
except those assets segregated in separate accounts. General American has
sole discretion to invest the assets of the General Account, subject to
applicable law. Because of exemptive rules and exclusionary provisions in
the law, interests in the General Account have not been registered under the
Securities Act of 1933, nor is the General Account registered as an
investment company under the 1940 Act. Accordingly, neither the General
Account nor any interests therein are subject to the provisions of these
statutes and, the staff of the Securities and Exchange Commission has not
reviewed the disclosures in this Prospectus relating to the General Account.
Disclosures about the General Account may be subject to certain generally
applicable provisions of the Federal securities laws relating to the accuracy
and completeness of statements made in Prospectuses.
General Account Accumulations
General American guarantees that it will credit interest at an effective
annual rate of at least 4% to Purchase Payments or portions of Purchase
Payments allocated or transferred to the General Account under the Contracts.
General American may, AT ITS SOLE DISCRETION, credit a higher rate of
interest to the General Account, or to amounts allocated or transferred to
the General Account. Subject to any applicable surrender charges, General
American guarantees that the Accumulated Value held in the General Account
will equal all amounts allocated or transferred to the General Account, plus
any interest credited thereto, less any amounts surrendered or transferred
from the General Account. Any interest held in the General Account does not
entitle a Contract Owner to share in the investment experience of the General
Account.
Surrender Charges
Surrender charges may be applied to withdrawals from the General Account.
(See "Surrender Charges")
Transfers to the Separate Account
Transfers from the General Account to the Divisions of the Separate Account
may be made only to the extent allowed by General American. (See "Transfers")
General Matters
General American may delay the payment of a surrender or partial withdrawal
from the General Account for up to six months from receipt of Written
Request. If payment is delayed, the amount due will continue to be credited
with the rate of interest then credited to the General Account until the
payment is made.
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===============================================================================
STATEMENT OF ADDITIONAL INFORMATION
===============================================================================
A Statement of Additional Information is available which contains more
details concerning the subjects discussed in this Prospectus. The following
is the Table of Contents for that Statement:
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
THE CONTRACTS S-3
Computation of Variable Annuity Income Payments S-3
Joint Annuitant S-5
IRS Required Distributions S-5
MONEY MARKET YIELD CALCULATION S-5
GENERAL MATTERS S-6
Participating S-7
Incorrect Age or Sex S-7
Annuity Data S-7
Quarterly Reports S-7
Incontestability S-7
Ownership S-7
Reinstatement S-8
DISTRIBUTION OF THE CONTRACT S-8
SAFEKEEPING OF ACCOUNT ASSETS S-8
STATE REGULATION S-8
RECORDS AND REPORTS S-9
LEGAL PROCEEDINGS S-9
OTHER INFORMATION S-9
FINANCIAL STATEMENTS S-9
</TABLE>
32
<PAGE> 38
PART B Registration No. 2-39272
811-2162
GENERAL AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT TWO
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
GROUP AND INDIVIDUAL VARIABLE ANNUITY CONTRACT
Offered by
General American Life Insurance Company
(A Missouri Insurance Company)
700 Market Street
St. Louis, MO 63101
***********************
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the group and individual variable annuity
contracts ("Contracts" or "Contract" as syntax requires) offered by General
American Life Insurance Company. You may obtain a copy of the current
Prospectus by calling 800-449-6447 or writing to: Variable Annuity
Administration Department, P.O. Box 14490, St. Louis, MO 63178-4490. Terms
defined in the current Prospectus for the Contract are used in the same way
in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACTS.
Dated: 1 May 1998
S-1
<PAGE> 39
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
THE CONTRACTS S-3
Computation of Variable Annuity Income Payments S-3
Joint Annuitant S-5
IRS Required Distribution S-5
MONEY MARKET YIELD CALCULATION S-5
GENERAL MATTERS S-6
Participating S-6
Incorrect Age or Sex S-7
Annuity Data S-7
Quarterly Reports S-7
Incontestability S-7
Ownership S-7
Reinstatement S-8
DISTRIBUTION OF THE CONTRACT S-8
SAFEKEEPING OF ACCOUNT ASSETS S-8
STATE REGULATION S-8
RECORDS AND REPORTS S-9
LEGAL PROCEEDINGS S-9
OTHER INFORMATION S-9
FINANCIAL STATEMENTS S-9
</TABLE>
S-2
<PAGE> 40
THE CONTRACTS
The following provides additional information about the Contracts which
supplements the description in the Prospectus and may be of interest to the
Contract Owners.
Computation of Variable Annuity Income Payments
(a) Computation of the Value of an Annuity Unit
The table of contractual guaranteed annuity rates is based on an assumed
interest rate. The assumed interest rate is 4% for all contracts issued on
or after 1 May 1982; 3.5% for tax-qualified contracts issued prior to 1 May
1982; and 3% for non-tax-qualified contracts issued prior to 1 May 1982.
As a starting point, the value of a Separate Account Two annuity unit was
established at $10.00 as of the end of the business day on 4 January 1971.
For contracts issued prior to 1 May 1982, the value of the annuity unit at
the end of any subsequent business day is determined by multiplying such
value for the preceding business day by the product of (a) the daily
reduction factor (described below) once for each calendar day expiring
between the end of the sixth preceding business day and the end of the fifth
preceding business day and (b) the net investment factor for the fifth
business day preceding such business day.
The daily reduction factors referred to above are .99989256 for all contracts
issued on or after 1 May 1982; .99990575 for tax-qualified contracts issued
prior to 1 May 1982; and .99991902 for non-tax-qualified contracts issued
before 1 May 1982.
These daily reduction factors are necessary to neutralize the assumed net
investment rate built into the annuity tables. Calculations are performed as
of the fifth preceding business day to permit calculation of amounts and the
mailing of checks in advance of their due date.
This may be illustrated by the following hypothetical example. Assuming that
the net investment factor for the fifth preceding business day was
1.00176027, and assuming that the annuity unit value for the preceding
business day was $10.20, then the annuity unit for the current business day
is $10.22, determined as follows:
1.00176027 $10.200000
X .99989256 X 1.00165264
1.00165264 $10.216857
S-3
<PAGE> 41
(b) Determination of the Amount of the First Annuity
Installment
When annuity installments begin, the accumulated value of the Contract is
established. This is the sum of the products of the values of an
accumulation unit in each Division on the fifth business day preceding the
annuity commencement date and the number of accumulation units credited to
the Contract as of the annuity commencement date.
The Contract contains tables indicating the dollar amount of the first
annuity installment under each form of variable annuity for each $1,000 of
value of the Contract. The amount of the first annuity installment depends
on the option chosen and the sex (if applicable) and age of the annuitant.
The first annuity installment is determined by multiplying the benefit per
$1,000 of value shown in the tables in the contract by the number of
thousands of dollars of accumulated value of the contract (individual
account).
If a greater first installment would result, General American will compute
the first installment on the same mortality basis as is used in determining
such installments under individual variable annuity contracts then being
issued for a similar class of annuitants.
(c) Determination of the Fluctuating Values of the Annuity
Installments
The dollar amount of the first annuity installment, determined as described
above, is translated into annuity units by dividing that dollar amount by the
value of an annuity unit on the due date of the first annuity installment.
The number of annuity units remains fixed and the amount of each subsequent
annuity installment is determined by multiplying this fixed number of annuity
units by the value of an annuity unit on the date the installment is due.
If in any month after the first the application of the above net investment
factors produces a net investment increment exactly equivalent to the assumed
annualized rate of 4%, then the payment in that month will not change. Since
it is unlikely that it will be exactly equivalent, installments will vary up
or down depending upon whether such investment increment is greater or less
than the assumed annualized rate of 4%. A higher assumption would mean a
higher initial annuity payment but a more slowly rising series of
S-4
<PAGE> 42
subsequent annuity payments (or a more rapidly falling series of subsequent
annuity payments if the value of an annuity unit is decreasing). A lower
assumption would have the opposite effect.
Joint Annuitant
The Contract Owner may, by Written Request at least 30 days prior to the
Annuity Date, name a Joint Annuitant. An Annuitant or Joint Annuitant may
not be replaced.
The Annuity Date shall be specified in the application. If the Annuitant or
Joint Annuitant dies after the Annuity Date, the survivor shall be the sole
Annuitant. Another Joint Annuitant may not be designated. Payment to a
Beneficiary shall not be made until the death of the surviving Annuitant.
IRS Required Distributions
If any Contract Owner dies before the entire interest in the Contract is
distributed, the value of the Contract must be distributed to the designated
Beneficiary as described in this section so that the Contracts qualify as
annuities under the Internal Revenue Code.
If the death occurs on or after the Annuity Date, the remaining portion of
such interest will be distributed at least as rapidly as under the method of
distribution being used as of the date of death. If the death occurs before
the Annuity date, the entire interest in the Contract will be distributed
within five years after date of death or be used to purchase an immediate
annuity under which payments will begin within one year of the Contract
Owner's death and will be made for the life of the "Owner's Designated
Beneficiary" or for a period not extending beyond the life expectancy of that
beneficiary.
If any portion of the deceased Contract Owner's interest is payable to (or
for the benefit of) the surviving spouse of the Contract Owner, the Contract
may be continued with the surviving spouse as the New Contract Owner.
MONEY MARKET YIELD CALCULATION
In accordance with regulations adopted by the Securities and Exchange
Commission, General American is required to disclose the current annualized
yield for the Division investing in the Money Market Fund of Capital Company
(the "Money Market Division") for a seven-day period in a manner which does
not take into consideration any realized or unrealized gains or losses on
shares of the Money Market
S-5
<PAGE> 43
Fund or on its portfolio securities. This current annualized yield is
computed by determining the net change (exclusive of realized gains and
losses on the sale of securities and unrealized appreciation and
depreciation) in the value of a hypothetical account having a balance of one
unit of the Money Market Division at the beginning of such seven-day period,
dividing such net change in account value by the value of the account at the
beginning of the period to determine the base period return and annualizing
this quotient on a 365-day basis. The net change in account value reflects
the deductions for administrative expenses of services and the mortality and
expense risk charge and income and expenses accrued during the period.
Because of these deductions, the yield for the Money Market Division of the
Separate Account will be lower than the yield for the Money Market Fund of
Capital Company.
The Securities and Exchange Commission also permits General American to
disclose the effective yield of the Money Market Division for the same
seven-day period, determined on a compounded basis. The effective yield is
calculated by compounding the unannualized base period return by adding one
to the base period return, raising the sum to a power equal to 365 divided by
seven, and subtracting one from the result.
The yield on amounts held in the Money Market Division normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates
of return. The Money Market Division's actual yield is affected by changes
in interest rates on money market securities, average portfolio maturity of
the Money Market Fund, the types and quality of portfolio securities held by
the Money Market Fund, and its operating expenses.
GENERAL MATTERS
Participating
The Contracts share in General American's divisible surplus while they are in
force prior to the annuity commencement date. Each year General American
will determine the share of divisible surplus, if any, accruing to the
Contracts. Investment results are credited directly through the changes in
the value of the accumulation units and annuity units. Also, most mortality
and expense savings are credited directly through decreases in the
appropriate charges. Therefore, the Company expects little or no divisible
surplus to be credited to a contract. If any divisible surplus is credited
to a contract, the Contract Owner may
S-6
<PAGE> 44
choose to take the distribution in cash, reduce the stipulated payment, or
leave the distribution with General American to accumulate with interest.
Incorrect Age or Sex
If the age at issue or sex of the Annuitant as shown in the Contract is
incorrect, any benefit payable under a supplemental agreement will be such as
the premiums paid would have purchased at the correct age at issue and sex.
After General American begins paying monthly income installments, appropriate
adjustment will be made in any remaining installments.
Annuity Data
General American will not be liable for obligations which depend on receiving
information from a Payee until such information is received in a form
satisfactory to General American.
Quarterly Reports
Quarterly, General American will give the Contract Owner a report of the
current Accumulated Value allocated to each Division; the current Accumulated
Value allocated to the General Account; and any Purchase Payments, charges,
transfers, or surrenders during that period. This report will also give the
Contract Owner any other information required by law or regulation. The
Contract Owner may ask for a report like this at any time. The quarterly
reports will be distributed without charge. General American reserves the
right to charge a fee for additional reports.
Incontestability
General American cannot contest this Contract, except for nonpayment of
stipulated payments or premiums, after it has been in force during the
lifetime of the Annuitant for a period of two years from the date of issue.
This provision will not apply to any supplemental agreement relating to total
and permanent disability benefits.
Ownership
The Owner of the Contract on the Contract Date is the Annuitant, unless
otherwise specified in the application. The Owner may specify a new Owner by
Written Notice at any time thereafter. During the Annuitant's lifetime all
rights and privileges under this Contract may be exercised solely by the
Owner.
S-7
<PAGE> 45
Reinstatement
A Contract may be reinstated if a stipulated payment is in default and if the
Accumulated Value has not been applied under the surrender provision.
Reinstatement may be made during the lifetime of the Annuitant but before the
Annuity Date by the payment of one stipulated payment. Benefits provided by
any supplemental agreement attached to this Contract may be reinstated by
providing evidence of insurability satisfactory to General American. The
reinstatement provisions incorporated in such supplemental agreement must be
complied with.
DISTRIBUTION OF THE CONTRACT
Walnut Street Securities, Inc. ("Walnut Street"), the principal underwriter
of the Contracts, is registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934 as a broker-dealer and is a member
of the National Association of Securities Dealers, Inc.
The Contracts are offered to the public through individuals licensed under
the federal securities laws and state insurance laws who have entered into
agreements with Walnut Street. The offering of the Contracts is continuous
and Walnut Street does not anticipate discontinuing the offering of the
Contracts. However, Walnut Street does reserve the right to discontinue the
offering of the Contracts.
SAFEKEEPING OF ACCOUNT ASSETS
Title to assets of the Separate Account is held by General American. The
assets are kept physically segregated and held separate and apart from
General American's general account assets. Records are maintained of all
purchases and redemptions of eligible Fund shares held by each of the
Divisions of the Separate Account.
STATE REGULATION
General American is a life insurance company organized under the laws of
Missouri, and is subject to regulation by the Missouri Division of Insurance.
An annual statement is filed with the Missouri Commissioner of Insurance on
or before March 1 of each year covering the operations and reporting on the
financial condition of General American as of December 31 of the preceding
calendar year. Periodically, the Missouri Commissioner of Insurance examines
the financial condition of General American, including the liabilities and
reserves of the Separate Account.
S-8
<PAGE> 46
In addition, General American is subject to the insurance laws and
regulations of all the states where it is licensed to operate. The
availability of certain contract rights and provisions depends on state
approval and filing and review processes. Where required by state law or
regulation, the Contracts will be modified accordingly.
RECORDS AND REPORTS
All records and accounts relating to the Separate Account will be maintained
by General American. As presently required by the Investment Company Act of
1940 and regulations promulgated thereunder, General American will mail to
all Contract Owners at their last known address of record, at least
semi-annually, reports containing such information as may be required under
that Act or by any other applicable law or regulation.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. General American is
not involved in any litigation that is of material importance in relation to
its total assets or that relates to the Separate Account.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration Statement, amendments, and
exhibits thereto has been included in this Statement of Additional
Information. Statements contained in this Statement of Additional
Information concerning the content of the Contracts and other legal
instruments are intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed
with the Securities and Exchange Commission.
FINANCIAL STATEMENTS
The audited financial statements of General American and the Separate Account
have been included in this Prospectus in reliance on the reports of KPMG Peat
Marwick LLP, independent certified public accountants, and on the authority
of said firm as experts in accounting and auditing.
S-9
<PAGE> 47
The report of KPMG Peat Marwick LLP covering the December 31, 1997, financial
statements, of General American, refers to the Adoption of Statement of
Financial Accounting Standards No. 120, Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts.
S-10
<PAGE> 48
Independent Auditors' Report
----------------------------
The Board of Directors
General American Life Insurance Company
and Contractholders of General American
Separate Account Two:
We have audited the statements of assets and liabilities, including the
schedule of investments, of the S & P 500 Index, Money Market, Bond Index,
Managed Equity, Asset Allocation, Equity- Income, Growth, and Overseas Fund
Divisions of General American Separate Account Two as of December 31, 1997,
and the related statements of operations for the year then ended, changes in
net assets for each of the years in the two year period then ended, and
financial highlights information for the periods presented. These financial
statements and financial highlights information are the responsibility of the
management of General American Separate Account Two. Our responsibility is
to express an opinion on these financial statements and financial highlights
information 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 and
financial highlights information are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Investments owned as of December
31, 1997, were verified by audit of the statements of assets and liabilities
of the underlying portfolios of General American Capital Company and
confirmation by correspondence with respect to the Variable Insurance
Products Fund sponsored by Fidelity Investments. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights information
referred to above present fairly, in all material respects, the financial
position of the S & P 500 Index, Money Market, Bond Index, Managed Equity,
Asset Allocation, Equity-Income, Growth, and Overseas Fund Divisions of
General American Separate Account Two as of December 31, 1997, the results of
their operations for the year then ended, the changes in their net assets for
each of the years in the two year period then ended , and financial
highlights information for the periods presented, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
February 9, 1998
<PAGE> 49
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<CAPTION>
S & P 500 MONEY BOND MANAGED ASSET
INDEX MARKET INDEX EQUITY ALLOCATION
FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in General American Capital
Company, at market value (see Schedule
of Investments) $56,579,385 $2,782,515 $4,775,960 $23,127,305 $19,679,897
Receivable from General American Life
Insurance Company 167,740 0 0 69,153 0
----------- ---------- ---------- ----------- -----------
Total assets 56,747,125 2,782,515 4,775,960 23,196,458 19,679,897
----------- ---------- ---------- ----------- -----------
Liabilities:
Payable to General American Life
Insurance Company 0 525 12,463 0 293,529
----------- ---------- ---------- ----------- -----------
Total net assets $56,747,125 $2,781,990 $4,763,497 $23,196,458 $19,386,368
=========== ========== ========== =========== ===========
Net assets represented by:
Tax sheltered annuities in accumulation
period 40,776,034 1,616,101 3,184,596 23,014,484 14,087,038
Individually purchased annuities in
accumulation period 15,971,091 1,165,889 1,578,901 146,472 5,299,330
Variable annuities in payment period 0 0 0 35,502 0
----------- ---------- ---------- ----------- -----------
Total net assets $56,747,125 $2,781,990 $4,763,497 $23,196,458 $19,386,368
=========== ========== ========== =========== ===========
Tax sheltered units held - 88 Series 934,778 101,982 163,308 280,198 496,334
Individually purchased units held - 88 Series 366,132 73,572 80,967 67,082 186,713
Tax sheltered units held - 82 Series -- -- -- 136,105 --
Individually purchased units held - 82 Series -- -- -- 1,844 --
Tax sheltered accumulation unit value - 88
Series $ 43.62 $ 15.85 $ 19.50 $ 37.77 $ 28.38
Individually purchased accumulation unit value
- 88 Series 43.62 15.85 19.50 37.77 28.38
Tax sheltered accumulation unit value - 82
Series -- -- -- 72.99 --
Individually purchased accumulation unit value
- 82 Series -- -- -- 79.43 --
Cost of investments $37,724,635 $2,800,835 $4,744,353 $19,628,648 $16,989,984
=========== ========== ========== =========== ===========
<CAPTION>
See accompanying notes to financial statements.
<PAGE> 50
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF ASSETS AND LIABILITIES (continued)
DECEMBER 31, 1997
EQUITY- INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
-------------- ------------- -------------
<S> <C> <C> <C>
Assets:
Investments in Fidelity Variable Insurance Products
Fund, at market value (see Schedule of Investments) $23,853,477 $25,702,395 $6,428,606
Receivable from General American Life Insurance Company 245,540 223,410 79,567
----------- ----------- ----------
Total assets 24,099,017 25,925,805 6,508,173
----------- ----------- ----------
Liabilities:
Payable to General American Life
Insurance Company 0 0 0
----------- ----------- ----------
Total net assets $24,099,017 $25,925,805 $6,508,173
=========== =========== ==========
Net assets represented by:
Tax sheltered annuities in accumulation period 16,988,925 19,600,819 4,848,447
Individually purchased annuities in accumulation period 7,110,092 6,324,986 1,659,726
Variable annuities in payment period 0 0 0
----------- ----------- ----------
Total net assets $24,099,017 $25,925,805 $6,508,173
=========== =========== ==========
Tax sheltered units held - 88 Series 838,126 1,063,906 362,556
Individually purchased units held - 88 Series 350,767 343,312 124,111
Tax sheltered units held - 82 Series -- -- --
Individually purchased units held - 82 Series -- -- --
Tax sheltered accumulation unit value - 88 Series $ 20.27 $ 18.42 $ 13.37
Individually purchased accumulation unit value - 88 Series 20.27 18.42 13.37
Tax sheltered accumulation unit value - 82 Series -- -- --
Individually purchased accumulation unit value - 82 Series -- -- --
Cost of investments $18,561,128 $20,270,625 $5,838,191
=========== =========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 51
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
S & P 500 MONEY BOND MANAGED ASSET
INDEX MARKET INDEX EQUITY ALLOCATION
FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Investment income<F*> $ -- $ -- $ -- $ -- $ --
Expenses:
Mortality and expense charge (480,811) (26,955) (41,815) (203,453) (166,957)
----------- -------- --------- ---------- ----------
Net investment expense (480,811) (26,955) (41,815) (203,453) (166,957)
----------- -------- --------- ---------- ----------
Net realized gain on investments:
Realized gain from distributions 2,537,864 88,057 223,300 1,380,369 572,540
Realized gain (loss) on sales 1,740,932 18,998 (62,449) 618,283 563,836
----------- -------- --------- ---------- ----------
Net realized gain on investments 4,278,796 107,055 160,851 1,998,652 1,136,376
----------- -------- --------- ---------- ----------
Net unrealized gain (loss) on investments:
Unrealized gain (loss) on investments,
beginning of year 9,966,392 (61,065) (180,283) 1,125,441 1,018,101
Unrealized gain (loss) on investments,
end of year 18,854,750 (18,321) 31,607 3,498,658 2,689,912
----------- -------- --------- ---------- ----------
Net unrealized gain (loss) on
investments 8,888,358 42,744 211,890 2,373,217 1,671,811
----------- -------- --------- ---------- ----------
Net gain on investments 13,167,154 149,799 372,741 4,371,869 2,808,187
----------- -------- --------- ---------- ----------
Net increase in net assets resulting
from operations $12,686,343 $122,844 $ 330,926 $4,168,416 $2,641,230
=========== ======== ========= ========== ==========
<FN>
<F*>See Note 2C
<CAPTION>
See accompanying notes to financial statements.
<PAGE> 52
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF OPERATIONS (continued)
FOR THE YEAR ENDED DECEMBER 31, 1997
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
------------- ------------- -------------
<S> <C> <C> <C>
Investment income:
Dividend income <F*> $ 302,283 $ 142,321 $ 99,153
Expenses:
Mortality and expense charge (211,639) (240,477) (64,392)
---------- ---------- --------
Net investment expense 90,644 (98,156) 34,761
---------- ---------- --------
Net realized gain on investments:
Realized gain from distributions 1,519,811 637,057 393,608
Realized gain on sales 827,926 1,737,873 244,352
---------- ---------- --------
Net realized gain on investments 2,347,737 2,374,930 637,960
---------- ---------- --------
Net unrealized gain on investments:
Unrealized gain on investments,
beginning of year 2,775,434 2,921,001 661,302
Unrealized gain on investments, end of year 5,292,349 5,431,769 590,415
---------- ---------- --------
Net unrealized gain (loss) on investments 2,516,915 2,510,768 (70,887)
---------- ---------- --------
Net gain on investments 4,864,652 4,885,698 567,073
---------- ---------- --------
Net increase in net assets resulting
from operations $4,955,296 $4,787,542 $601,834
========== ========== ========
<FN>
<F*>See Note 2C
See accompanying notes to financial statements.
</TABLE>
<PAGE> 53
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
S & P 500 MONEY BOND
INDEX MARKET INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
------------------------- ---------------------- -----------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment expense $ (480,811) $ (321,470) $ (26,955) $ (28,783) $ (41,815) $ (41,660)
Net realized gain on investments 4,278,796 2,706,713 107,055 149,010 160,851 290,019
Net unrealized gain (loss) on
investments 8,888,358 3,928,022 42,744 5,126 211,890 (164,213)
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets
resulting from operations 12,686,343 6,313,265 122,844 125,353 330,926 84,146
Net deposits into (withdrawals from)
Separate Account 6,489,502 5,241,770 (51,313) 222,631 226,314 52,563
----------- ----------- ---------- ---------- ---------- ----------
Increase in net assets 19,175,845 11,555,035 71,531 347,984 557,240 136,709
Net assets, beginning of year 37,571,280 26,016,245 2,710,459 2,362,475 4,206,257 4,069,548
Net assets, end of year $56,747,125 $37,571,280 $2,781,990 $2,710,459 $4,763,497 $4,206,257
=========== =========== ========== ========== ========== ==========
<CAPTION>
MANAGED ASSET
EQUITY ALLOCATION
FUND DIVISION FUND DIVISION
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment expense $ (203,453) $ (168,639) $ (166,957) $ (118,459)
Net realized gain on investments 1,998,652 2,536,967 1,136,376 1,110,691
Net unrealized gain (loss) on investments 2,373,217 800,891 1,671,811 623,498
----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations 4,168,416 3,169,219 2,641,230 1,615,730
Net deposits into (withdrawals from)
Separate Account 579,352 (1,345,142) 3,375,210 1,536,787
----------- ----------- ----------- -----------
Increase in net assets 4,747,768 1,824,077 6,016,440 3,152,517
Net assets, beginning of year 18,448,690 16,624,613 13,369,928 10,217,411
Net assets, end of year $23,196,458 $18,448,690 $19,386,368 $13,369,928
=========== =========== =========== ===========
<CAPTION>
See accompanying notes to financial statements.
<PAGE> 54
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF CHANGES IN NET ASSETS (continued)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
------------------------- ------------------------- -----------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (expense) $ 90,644 $ (123,368) $ (98,156) $ (132,093) $ 34,761 $ (3,333)
Net realized gain on investments 2,347,737 862,468 2,374,930 1,298,164 637,960 100,993
Net unrealized gain (loss) on
investments 2,516,915 1,019,791 2,510,768 825,082 (70,887) 440,476
----------- ----------- ----------- ----------- ---------- ----------
Increase in net assets resulting
from operations 4,955,296 1,758,891 4,787,542 1,991,153 601,834 538,136
Net deposits into Separate Account 1,834,497 4,820,832 1,017,526 6,088,025 415,281 1,249,521
----------- ----------- ----------- ----------- ---------- ----------
Increase in net assets 6,789,793 6,579,723 5,805,068 8,079,178 1,017,115 1,787,657
Net assets, beginning of year 17,309,224 10,729,501 20,120,737 12,041,559 5,491,058 3,703,401
Net assets, end of year $24,099,017 $17,309,224 $25,925,805 $20,120,737 $6,508,173 $5,491,058
=========== =========== =========== =========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 55
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 1 - Organization
General American Life Insurance Company (General American) markets life
insurance and health and pension arrangements to the public. General
American Separate Account Two (the Separate Account) is a part of General
American and is available to tax qualified and non-tax qualified retirement
plans for investment purposes in variable annuity contracts. The Separate
Account was reorganized as a unit investment trust, registered under the
Investment Company Act of 1940, pursuant to a plan of reorganization approved
by its contractholders on February 23, 1988. To provide Separate Account
contractholders the opportunity to invest in a more diversified mutual fund
portfolio, four additional fund divisions were also established on this date.
Existing contractholders' units in the Separate Account remained unchanged
after the reorganization.
Each Fund Division invests exclusively in shares of a single fund of either
General American Capital Company (the Capital Company) or Variable Insurance
Products Fund, which are open-end diversified management investment
companies. The funds of the General American Capital Company, sponsored by
General American, are the S & P 500 Index Fund, Money Market Fund, Bond Index
Fund, Managed Equity Fund, and Asset Allocation Fund Divisions. The name of
the Bond Index Fund was changed from the Intermediate Bond Fund effective
October 1, 1992. The name change reflected a change in investment policies
and objectives of the Fund. The name of the S & P 500 Index Fund was changed
from the Equity Index Fund effective May 1, 1994. The funds of the Variable
Insurance Products Fund, sponsored by Fidelity Investments, are the Equity-
Income, Growth, and the Overseas Fund Divisions. Contractholders have the
option of directing their deposits into one or all of these Funds as well as
into the general account of General American. The unit values for the
Separate Account 88 Series for the above divisions began at $10.00 on May 16,
1988 (date of first deposits into these fund divisions), except for the
Managed Equity Fund Division, which began at $10.00 on February 23, 1988; the
Equity-Income and Growth Fund Divisions which began at $10.00 on January 6,
1994; and the Overseas Fund Division which began at $10.00 on January 11,
1994.
Note 2 - Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Separate Account in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
(Continued)
<PAGE> 56
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
A. Investments
The Separate Account's investments in the eight Funds are valued
daily based on the net asset values of the respective Fund shares
held as reported to General American by General American Capital
Company and Variable Insurance Products. The specific
identification method is used in determining the cost of shares
sold on withdrawals by the Separate Account. Share transactions
are recorded on the trade date, which is the same as the
settlement date.
B. Federal Income Taxes
Under current Federal income tax law, the investment income and
capital gains from sales of investments of the Separate Account
are not taxable. Therefore, no Federal income tax expense has
been provided.
C. Distribution of Income and Realized Capital Gains
General American Capital Company follows the federal income tax
practice known as consent dividending, whereby substantially all
of its net investment income and realized gains are deemed to be
passed through to the Separate Account. As a result, General
American Capital Company does not pay any dividends or capital
gain distributions. During December of each year, accumulated
investment income and capital gains of the underlying Capital
Company Fund are allocated to the Separate Account by increasing
the cost basis and recognizing a capital gain in the Separate
Account. This adjustment has no impact on the net assets of the
Separate Account.
The Variable Insurance Products Funds intends to pay out all of
its net investment income and net realized capital gains for each
year. Dividends from the funds are distributed at least annually
on a per share basis and are recorded on the ex dividend date.
Normally, net realized capital gains, if any, are distributed
each year for each fund. Such income and capital gain
distributions are automatically reinvested in additional shares
of the funds.
(Continued)
<PAGE> 57
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
D. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from
those estimates.
Note 3 - Policy Charges
General American assumes the mortality and expense risks and provides certain
administrative services related to operating the Separate Account, for which
the Separate Account is charged a daily rate of .002740% of net assets of
each Fund Division of the Separate Account, which equals an annual rate of 1%
for those net assets. For contracts issued prior to the date of
reorganization and invested in the Managed Equity Fund, daily adjustments to
values in the Separate Account are made to offset fully the effect of a .10%
administrative fee charged to the Managed Equity Fund by General American.
Since the Separate Account invests in shares of the Capital Company, as
opposed to direct investments in publicly traded common stocks, the Separate
Account is not charged an investment advisory fee.
Under Separate Account contractual arrangements, General American is entitled
to collect payment for sale charges and annuity taxes. Variable annuity
contracts written prior to May 1, 1982 have a front-end sales charge of 4.75%
applied to each contribution. Contracts written after April 30, 1982 are
subject to a contingent deferred sales charge upon surrender of the contract
or partial withdrawal of funds on deposit. The sales charge is 9% during the
first contract year, decreasing by 1% per year thereafter; the contingent
deferred sales charge is waived in the event of death, disability or
annuitization after the fifth contract year. The amount of sales charges,
transfer charges, surrender charges and premium taxes for 1997 and 1996 are
disclosed in Note 6.
(Continued)
<PAGE> 58
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENT
Note 4 - Purchases and Sales of Capital Company Shares
During the year ended December 31, 1997, purchases including net realized
gain and income from distribution and proceeds from sales of General
American Capital Company shares were as follows:
<TABLE>
<CAPTION>
S & P 500 Money Managed Asset
Index Market Bond Index Equity Allocation
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Purchases $11,989,097 $ 2,062,407 $ 1,509,576 $ 4,328,322 $ 7,183,672
----------- ------------ ------------ ------------ ------------
Sales $3,662,935 $ 2,054,034 $ 1,074,990 $ 2,657,222 $ 3,138,563
----------- ------------ ------------ ------------ ------------
</TABLE>
During the year ended December 31, 1997, purchases (including dividend
reinvestment) and proceeds from sales of Variable Insurance Products Fund
shares were as follows:
<TABLE>
<CAPTION>
Equity-
Income Growth Overseas
Fund Fund Fund
---- ---- ----
<S> <C> <C> <C>
Purchases $ 5,835,233 $ 5,593,676 $ 2,306,472
----------- ----------- ------------
Sales $ 2,603,087 $ 4,327,213 $ 1,537,462
----------- ----------- ------------
</TABLE>
<PAGE> 59
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 5 - Accumulation Unit Activity
The following is a summary of the accumulation unit activity for the year
ended December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
S & P 500 INDEX MONEY MARKET BOND INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
------------------- ------------------- -----------------
Tax sheltered annuities: 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net deposits 268 243 89 197 41 57
Net withdrawals (141) (92) (104) (186) (41) (40)
Outstanding units, beginning of year 808 657 117 106 163 146
---- --- ---- ---- --- ---
Outstanding units, end of year 935 808 102 117 163 163
==== === ==== ==== === ===
Individually purchased annuities:
Net deposits 70 108 54 65 36 16
Net withdrawals (29) (80) (42) (60) (25) (31)
Outstanding units, beginning of year 325 297 62 57 70 85
---- --- ---- ---- --- ---
Outstanding units, end of year 366 325 74 62 81 70
==== === ==== ==== === ===
<CAPTION>
MANAGED EQUITY ASSET ALLOCATION
FUND DIVISION FUND DIVISION
------------------------------------------------ -----------------
88 Series Other
Tax sheltered annuities: 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net deposits 77 62 9 11 179 96
Net withdrawals (37) (37) (26) (22) (58) (38)
Outstanding units, beginning of year 240 215 153 164 375 317
--- --- --- --- --- ---
Outstanding units, end of year 280 240 136 153 496 375
=== === === === === ===
Individually purchased annuities:
Net deposits 14 12 0 0 30 50
Net withdrawals (5) (29) 0 (15) (21) (40)
Outstanding units, beginning of year 58 75 2 17 178 168
--- --- --- --- --- ---
Outstanding units, end of year 67 58 2 2 187 178
=== === === === === ===
<PAGE> 60
<CAPTION>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 5 - Accumulation Unit Activity (continued)
The following is a summary of the accumulation unit activity for the year
ended December 31, 1997 and 1996 (in thousands):
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
-------------------- --------------------- ------------------
Tax sheltered annuities: 1997 1996 1997 1996 1997 1996
---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net deposits 215 308 291 424 140 139
Net withdrawals (144) (93) (201) (96) (123) (59)
Outstanding units, beginning of year 767 552 974 646 346 266
---- --- ----- --- ---- ---
Outstanding units, end of year 838 767 1,064 974 363 346
==== === ===== === ==== ===
Individually purchased annuities:
Net deposits 70 169 75 190 26 44
Net withdrawals (36) (59) (94) (89) (9) (14)
Outstanding units, beginning of year 317 207 362 261 107 77
---- --- ----- --- ---- ---
Outstanding units, end of year 351 317 343 362 124 107
==== === ===== === ==== ===
</TABLE>
<PAGE> 61
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 6 - Summary of Gross and Net Deposits into Separate Account
Deposits into the Separate Account are used to purchase shares in the Capital
Company or Fidelity's Variable Insurance Products Funds. Net deposits
represent the amounts available for investment in such shares after the
deduction of sales charges, premium taxes, transfer charges, and surrender
charges.
<TABLE>
<CAPTION>
S & P 500 INDEX MONEY MARKET BOND INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
------------------------- ---------------------- ---------------------
Tax sheltered annuities: 1997 1996 1997 1996 1997 1996
----------- ----------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 4,992,488 $ 4,801,588 $ 531,080 $1,573,029 $ 370,466 $ 644,473
Transfers between fund divisions
and General American 2,216,752 1,297,472 (559,259) (977,208) (113,635) (123,200)
Surrenders and withdrawals (2,348,697) (1,612,048) (207,516) (442,144) (241,262) (212,773)
----------- ----------- --------- ---------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions 4,860,543 4,487,012 (235,695) 153,677 15,569 308,500
Deductions:
Sales charges and premium taxes 565 220 25 25 3 0
Transfer charges 0 0 0 0 0 0
Surrender charges 18,035 15,859 5,180 2,116 2,527 4,533
----------- ----------- --------- ---------- --------- ---------
18,600 16,079 5,205 2,141 2,530 4,533
Total deposits into (withdrawals from)
Seperate Account $ 4,841,943 $ 4,470,933 $(240,900) $ 151,536 $ 13,039 $ 303,967
=========== =========== ========= ========== ========= =========
<CAPTION>
S & P 500 INDEX MONEY MARKET BOND INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
------------------------- ---------------------- ---------------------
Individually purchased annuities: 1997 1996 1997 1996 1997 1996
----------- ----------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 2,053,502 $ 2,175,114 $ 479,380 $ 218,102 $ 120,453 $ 217,664
Transfers between fund divisions
and General American 192,907 624,117 (281,502) 287,057 214,861 (129,113)
Surrenders and withdrawals (590,196) (2,023,782) (8,262) (432,702) (120,139) (337,899)
----------- ----------- --------- ---------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions 1,656,213 775,449 189,616 72,457 215,175 (249,348)
Deductions:
Sales charges and premium taxes 70 107 0 0 0 26
Transfer charges 0 0 0 0 0 0
Surrender charges 8,584 4,505 29 1,362 1,900 2,030
----------- ----------- --------- ---------- --------- ---------
8,654 4,612 29 1,362 1,900 2,056
Total deposits into (withdrawals from)
Seperate Account $ 1,647,559 $ 770,837 $ 189,587 $ 71,095 $ 213,275 $(251,404)
=========== =========== ========= ========== ========= =========
<CAPTION>
MANAGED EQUITY ASSET ALLOCATION
FUND DIVISION FUND DIVISION
-------------------------------------------------- ----------------------
88 Series Other
Tax sheltered annuities: 1997 1996 1997 1996 1997 1996
---------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $1,603,980 $1,279,028 $ 231,756 $ 353,664 $3,211,321 $1,660,566
Transfers between fund divisions
and General American 466,770 (39,630) (241,531) 33,983 742,510 163,028
Surrenders and withdrawals (688,564) (524,564) (1,127,831) (996,893) (802,650) (502,107)
---------- ---------- ----------- --------- ---------- ----------
Total gross deposits, transfers, and
surrenders between fund divisions 1,382,186 714,834 (1,137,606) (609,246) 3,151,181 1,321,487
Deductions:
Sales charges and premium taxes 27 32 1,050 457 2 38
Transfer charges 0 0 5 0 0 0
Surrender charges 8,235 5,803 0 519 7,246 8,924
---------- ---------- ----------- --------- ---------- ----------
8,262 5,835 1,055 976 7,248 8,962
Total deposits into (withdrawals from)
Seperate Account $1,373,924 $ 708,999 $(1,138,661) $(610,222) $3,143,933 $1,312,525
========== ========== =========== ========= ========== ==========
<CAPTION>
MANAGED EQUITY ASSET ALLOCATION
FUND DIVISION FUND DIVISION
-------------------------------------------------- ----------------------
88 Series Other
Individually purchased annuities: 1997 1996 1997 1996 1997 1996
---------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 455,178 $ 236,060 $ 0 $ 10,784 $ 588,279 $ 771,054
Transfers between fund divisions
and General American 19,302 (127,389) 0 2,476 80,471 101,742
Surrenders and withdrawals (124,273) (635,428) (2,121) (926,791) (424,166) (647,356)
---------- ---------- ----------- --------- ---------- ----------
Total gross deposits, transfers, and
surrenders between fund divisions 350,207 (526,757) (2,121) (913,531) 244,584 225,440
Deductions:
Sales charges and premium taxes 30 108 0 6 60 15
Transfer charges 0 0 0 0 0 0
Surrender charges 3,967 3,517 0 0 13,247 1,163
---------- ---------- ----------- --------- ---------- ----------
3,997 3,625 0 6 13,307 1,178
Total deposits into (withdrawals from)
Seperate Account $ 346,210 $ (530,382) $ (2,121) $(913,537) $ 231,277 $ 224,262
========== ========== =========== ========= ========== ==========
<PAGE> 62
<CAPTION>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 6 - Summary of Gross and Net Deposits into Separate Account, (continued)
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
------------------------- ------------------------ ---------------------
Tax sheltered annuities: 1997 1996 1997 1996 1997 1996
----------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 1,976,947 $2,826,679 $ 3,448,982 $4,167,351 $ 861,766 $ 899,345
Transfers between fund divisions
and General American 898,692 889,311 (2,045) 1,299,236 328,379 263,567
Surrenders and withdrawals (1,625,061) (526,930) (2,073,804) (802,978) (998,672) (239,737)
----------- ---------- ----------- ---------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions 1,250,578 3,189,060 1,373,133 4,663,609 191,473 923,175
Deductions:
Sales charges and premium taxes 42 73 79 154 10 37
Transfer charges 0 0 0 0 0 0
Surrender charges 20,372 11,385 17,214 13,731 4,773 4,239
----------- ---------- ----------- ---------- --------- ---------
20,414 11,458 17,293 13,885 4,783 4,276
Total deposits into
Seperate Account $ 1,230,164 $3,177,602 $ 1,355,840 $4,649,724 $ 186,690 $ 918,899
=========== ========== =========== ========== ========= =========
<CAPTION>
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
------------------------- ------------------------ ---------------------
Individually purchased annuities: 1997 1996 1997 1996 1997 1996
----------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 915,674 $1,660,280 $ 718,567 $1,675,877 $ 192,673 $ 316,565
Transfers between fund divisions
and General American (51,474) 68,897 (286,628) (33,352) 87,209 69,225
Surrenders and withdrawals (251,063) (83,837) (759,171) (201,305) (50,134) (54,297)
----------- ---------- ----------- ---------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions 613,137 1,645,340 (327,232) 1,441,220 229,748 331,493
Deductions:
Sales charges and premium taxes 22 0 23 0 0 0
Transfer charges 0 0 0 0 0 0
Surrender charges 8,782 2,110 11,059 2,919 1,157 871
----------- ---------- ----------- ---------- --------- ---------
8,804 2,110 11,082 2,919 1,157 871
Total deposits into
Seperate Account $ 604,333 $1,643,230 $ (338,314) $1,438,301 $ 228,591 $ 330,622
=========== ========== =========== ========== ========= =========
</TABLE>
<PAGE> 63
<TABLE>
General American Separate Account Two
Financial Highlights Information
December 31, 1997
<CAPTION>
Tax Qualified Plan Non-Tax Qualified Plan
Units outstanding, Units outstanding,
Accumulation unit value: Accumulation unit value: end of period end of period
Beginning of period<F*> End of period (in thousands) (in thousands)
------------------------ ------------------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
S & P 500 Index Fund Division <F**>
1997 33.17 43.62 935 366
1996 27.27 33.17 808 325
1995 20.12 27.27 657 297
1994 20.09 20.12 636 265
1993 18.48 20.09 599 241
1992 17.37 18.48 366 152
1991 13.47 17.37 236 109
1990 14.15 13.47 133 67
1989 11.01 14.15 97 23
1988 10.00 11.01 36 7
Money Market Fund Division
1997 15.14 15.85 102 74
1996 14.50 15.14 117 62
1995 13.82 14.50 106 57
1994 13.39 13.82 93 58
1993 13.12 13.39 115 73
1992 12.78 13.12 181 85
1991 12.16 12.78 179 101
1990 11.33 12.16 188 79
1989 10.44 11.33 28 15
1988 10.00 10.44 6 5
Bond Index Fund Division <F***>
1997 18.01 19.50 163 80
1996 17.66 18.01 163 70
1995 14.99 17.66 146 85
1994 15.78 14.99 146 58
1993 14.43 15.78 161 61
1992 13.68 14.43 116 48
1991 12.12 13.68 50 67
1990 11.22 12.12 33 58
1989 10.27 11.22 22 17
1988 10.00 10.27 5 2
Managed Equity Fund Division
Tax Qualified
1997 59.73 72.99 136 N/A
1996 49.83 59.73 153 N/A
1995 37.68 49.83 164 N/A
1994 39.42 37.68 188 N/A
1993 36.54 39.42 210 N/A
1992 34.56 36.54 217 N/A
1991 27.62 34.56 216 N/A
1990 28.73 27.62 192 N/A
1989 22.11 28.73 194 N/A
1988 21.30 22.11 207 N/A
Non-Tax Qualified
1997 64.99 79.43 N/A 2
1996 54.22 64.99 N/A 2
1995 41.00 54.22 N/A 17
1994 42.90 41.00 N/A 20
1993 39.76 42.90 N/A 24
1992 37.61 39.76 N/A 25
1991 30.05 37.61 N/A 25
1990 31.27 30.05 N/A 25
1989 24.06 31.27 N/A 25
1988 23.18 24.06 N/A 26
<FN>
<F*> At the date of first deposits into Separate Account on May 16, 1988,
except for the Managed Equity Fund, which began on February 24, 1988;
the Equity Fund and the Growth Fund which began on January 6, 1994; and
the Overseas Fund which began on January 11, 1994.
<F**> The name of the S&P 500 Index Fund was changed from the Equity Fund
effective May 1, 1994.
<F***>The name of the Bond Index Fund was changed from the Intermediate Bond
Fund effective October 1,1992. The name change reflects a change in
investment policies and objectives of the Fund.
<CAPTION>
See accompanying independent auditors report.
<PAGE> 64
General American Separate Account Two
Financial Highlights Information (continued)
December 31, 1997
<CAPTION>
Tax Qualified Plan Non-Tax Qualified Plan
Units outstanding, Units outstanding,
Accumulation unit value: Accumulation unit value: end of period end of period
Beginning of period<F*> End of period (in thousands) (in thousands)
------------------------ ------------------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
Managed Equity Fund Division (continued)
88 Series
1997 30.94 37.77 280 67
1996 25.84 30.94 240 58
1995 19.56 25.84 215 75
1994 20.48 19.56 204 68
1993 19.00 20.48 197 56
1992 17.99 19.00 158 40
1991 14.39 17.99 101 27
1990 14.99 14.39 56 20
1989 11.54 14.99 21 7
1988 10.83 11.54 6 0
Asset Allocation Fund Division
1997 24.14 28.38 496 187
1996 21.08 24.14 375 178
1995 16.52 21.08 317 168
1994 17.37 16.52 320 180
1993 16.01 17.37 332 166
1992 15.16 16.01 223 119
1991 12.78 15.16 140 66
1990 12.60 12.78 94 35
1989 10.61 12.60 33 16
1988 10.00 10.61 9 4
Equity-Income Fund Division
1997 15.98 20.27 838 351
1996 14.12 15.98 767 317
1995 10.55 14.12 552 207
1994 10.00 10.55 315 82
Growth Fund Division
1997 15.07 18.42 1,064 343
1996 13.27 15.07 974 362
1995 9.90 13.27 646 261
1994 10.00 9.90 356 116
Overseas Fund Division
1997 12.11 13.37 363 124
1996 10.80 12.11 346 107
1995 9.95 10.80 266 77
1994 10.00 9.95 240 52
<FN>
<F*> At the date of first deposits into Separate Account on May 16, 1988,
except for the Managed Equity Fund, which began on February 24, 1988;
the Equity Fund and the Growth Fund which began on January 6, 1994; and
the Overseas Fund which began on January 11, 1994.
<F**> The name of the S&P 500 Index Fund was changed from the Equity Fund
effective May 1, 1994.
<F***>The name of the Bond Index Fund was changed from the Intermediate Bond
Fund effective October 1,1992. The name change reflects a change in
investment policies and objectives of the Fund.
See accompanying independent auditors report.
</TABLE>
<PAGE> 65
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
<CAPTION>
No. of Shares Market Value
------------- ------------
<S> <C> <C>
S&P 500 Index Fund
General American Capital Company <F*> 1,436,171 $56,579,385
Money Market Fund
General American Capital Company <F*> 152,662 $ 2,782,515
Bond Index Fund
General American Capital Company <F*> 205,921 $ 4,775,960
Managed Equity Fund
General American Capital Company <F*> 741,245 $23,127,305
Asset Allocation Fund
General American Capital Company <F*> 617,698 $19,679,897
Equity-Income Fund
Variable Insurance Products Fund 982,433 $23,853,477
Growth Fund
Variable Insurance Products Fund 692,787 $25,702,395
Overseas Fund
Variable Insurance Products Fund 334,823 $ 6,428,606
<FN>
<F*> These funds use consent dividending. See Note 2C.
See accompanying independent auditors report.
</TABLE>
<PAGE> 66
LEGAL COUNSEL
Stephen E. Roth
Sutherland, Asbill & Brennan, Washington, D.C.
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
If distributed to prospective investors, this report must be preceded or
accompanied by a current prospectus.
The prospectus is incomplete without reference to the financial data
contained in the annual report.
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder of General American Life Insurance Company:
We have audited the accompanying consolidated balance sheets of General American
Life Insurance Company and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholder equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General American
Life Insurance Company and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company adopted Statement of Financial Accounting Standards No. 120, ACCOUNTING
AND REPORTING BY MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES
FOR CERTAIN LONG-DURATION PARTICIPATING CONTRACTS.
St. Louis, Missouri
March 5, 1998
<PAGE> 68
GENERAL AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
ASSETS 1997 1996
<S> <C> <C>
Fixed maturities:
Available-for-sale, at fair value $ 9,115,519 6,758,309
Mortgage loans, net 2,140,262 2,273,627
Real estate, net 140,145 203,767
Equity securities, at fair value 24,211 20,905
Policy loans 2,073,152 1,917,861
Short-term investments 190,374 55,594
Other invested assets 243,921 183,612
----------- ----------
Total investments 13,927,584 11,413,675
Cash and cash equivalents 358,879 142,724
Accrued investment income 168,592 148,419
Reinsurance recoverables and other contract deposits 4,117,958 3,264,644
Deferred policy acquisition costs 695,253 652,251
Other assets 488,582 442,139
Separate account assets 4,118,860 2,833,258
----------- ----------
Total assets $23,875,708 18,897,110
=========== ==========
LIABILITIES AND STOCKHOLDER EQUITY
Policy and contract liabilities:
Future policy benefits $ 4,933,787 4,238,033
Policyholder account balances:
Universal life 2,534,744 1,960,726
Annuities 4,161,946 4,321,241
Pension funds 4,732,400 2,778,834
Policy and contract claims 458,606 352,433
Dividends payable to policyholders 113,525 103,019
----------- ----------
Total policy and contract liabilities 16,935,008 13,754,286
Amounts payable to reinsurers 310,592 142,661
Long-term debt and notes payable 214,477 295,614
Other liabilities and accrued expenses 826,868 670,109
Deferred tax liability 89,046 43,277
Separate account liabilities 4,112,666 2,810,907
----------- ----------
Total liabilities 22,488,657 17,716,854
Minority interests 216,555 182,469
Stockholder equity:
Common stock, $1 par value, 5,000,000 shares
authorized, 3,000,000 shares issued and
outstanding in 1997 and 0 in 1996 3,000 -
Additional paid in capital 3,000 -
Retained earnings 1,055,233 963,230
Foreign currency translation adjustments,
net of taxes (19,481) (15,810)
Unrealized gain on investments, net of taxes 128,744 50,367
----------- ----------
Total stockholder equity 1,170,496 997,787
----------- ----------
Total liabilities and stockholder equity $23,875,708 18,897,110
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 69
GENERAL AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
REVENUES 1997 1996 1995
<S> <C> <C> <C>
Insurance premiums and other considerations $1,768,169 1,623,228 1,498,013
Net investment income 945,542 806,883 676,404
Ceded commissions 44,902 27,538 18,523
Other income 362,160 280,803 182,193
Net realized investment gains 28,538 24,531 280,756
--------- --------- ---------
Total revenues 3,149,311 2,762,983 2,655,889
BENEFITS AND EXPENSES
Policy benefits 1,528,333 1,379,803 1,150,188
Interest credited to policyholder account balances 345,937 262,532 192,522
--------- --------- ---------
Total policyholder benefits 1,874,270 1,642,335 1,342,710
Dividends to policyholders 182,146 171,904 264,658
Policy acquisition costs 168,045 143,094 138,811
Other insurance and operating expenses 739,814 642,636 522,986
--------- --------- ---------
Total benefits and expenses 2,964,275 2,599,969 2,269,165
--------- --------- ---------
Income before provision for income taxes
and minority interest 185,036 163,014 386,724
--------- --------- ---------
Income tax provision (benefit):
Current 65,778 45,902 115,769
Deferred (113) 13,992 29,411
--------- --------- ---------
Total provision for income taxes 65,665 59,894 145,180
--------- --------- ---------
Income before minority interest 119,371 103,120 241,544
Minority interest in earnings of consolidated subsidiaries (22,134) (19,888) (17,512)
--------- --------- ---------
Net income $ 97,237 83,232 224,032
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 70
GENERAL AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Foreign
currency Unrealized
translation gain (loss) on Total
Common Additional Retained adjustments, investments, stockholder
stock paid in capital earnings net of taxes net of taxes equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ - - 646,727 (20,175) (65,409) 561,143
Net income 224,032 224,032
Foreign currency translation adjustments 5,908 5,908
Change in unrealized gain (loss) on
investments, net of tax 162,864 162,864
Other, net 3,136 3,136
--------------------------------------------------------------------------------
Balance at December 31, 1995 - - 873,895 (14,267) 97,455 957,083
Net income 83,232 83,232
Foreign currency translation adjustments (1,543) (1,543)
Change in unrealized gain (loss) on
investments, net on tax (47,088) (47,088)
Other, net 6,103 6,103
--------------------------------------------------------------------------------
Balance at December 31, 1996 - - 963,230 (15,810) 50,367 997,787
Net income 97,237 97,237
Foreign currency translation adjustments (3,671) (3,671)
Change in unrealized gain (loss) on
investments, net of tax 78,377 78,377
Issuance of common stock 3,000 3,000 (6,000) -
Dividend to parent (4,480) (4,480)
Other, net 5,246 5,246
--------------------------------------------------------------------------------
Balance at December 31, 1997 $3,000 3,000 1,055,233 (19,481) 128,744 1,170,496
================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 71
<TABLE>
<CAPTION>
GENERAL AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995
Net income $ 97,237 83,232 224,032
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in:
Accrued investment income (20,568) (16,275) (22,202)
Reinsurance recoverables and other contract deposits (838,390) (159,713) 262,054
Deferred policy acquisition costs (113,040) (87,249) (23,141)
Other assets (61,796) (51,444) (67,650)
Future policy benefits 693,052 330,511 399,261
Policy and contract claims 105,503 14,652 74,173
Other liabilities and accrued expenses 319,787 65,184 184,756
Deferred income taxes (113) 13,992 29,411
Policyholder considerations (137,163) (144,748) (140,475)
Interest credited to policyholder account balances 345,937 262,532 192,522
Amortization and depreciation 32,744 28,375 19,196
Net realized investment (gains) (28,538) (24,531) (280,756)
Other, net 372 (14,554) 2,488
----------- ---------- ----------
Net cash provided by operating activities 395,024 299,964 853,669
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold or redeemed:
Fixed maturities available-for-sale 2,070,743 1,822,169 1,482,122
Mortgage loans 594,151 182,650 206,520
Equity securities 31,602 13,427 468,143
Short-term and other invested assets 163,393 84,748 414,102
Cost of investments purchased:
Fixed maturities available-for-sale (4,463,100) (3,428,943) (3,010,016)
Fixed maturities held-to-maturity - - (3,068)
Equity securities (47,283) (39,553) (89,062)
Short-term and other invested assets (293,857) (97,426) (16,471)
Mortgage loan originations (438,959) (593,438) (431,043)
Maturity of fixed maturities held-to-maturity - - 6,365
Maturity of fixed maturities available-for-sale 281,736 225,087 75,518
Increase in policy loans, net (153,399) (210,624) (211,526)
Investments in subsidiaries (6,032) (4,807) (126,363)
----------- ---------- ----------
Net cash used in investing activities (2,261,005) (2,046,710) (1,234,779)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net policyholder account and contract deposits 2,121,488 1,632,495 294,685
Issuance of debt 1,857 106,903 100,219
Repayment of debt (80,606) (19,497) (4,800)
Dividends (2,112) (1,832) (4,376)
Other, net 46,829 26,770 17,498
----------- ---------- ----------
Net cash provided by financing activities 2,087,456 1,744,839 403,226
----------- ---------- ----------
Effect of exchange rate changes (5,320) (266) 5,908
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 216,155 (2,173) 28,024
----------- ---------- ----------
Cash and cash equivalents at beginning of year 142,724 144,897 116,873
----------- ---------- ----------
Cash and cash equivalents at end of year $ 358,879 142,724 144,897
=========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 72
GENERAL AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION
In September 1996, the Board of Directors of General American Life Insurance
Company (General American) adopted the Reorganization Plan (Plan) which
authorized the reorganization (Reorganization) of General American into a mutual
insurance holding company structure. The Missouri Department of Insurance held
a public hearing on the Reorganization on December 19, 1996 and approved the
Plan on January 24, 1997. The policyholders of General American approved the
Plan on January 28, 1997 and the Reorganization became effective on April 24,
1997 (effective date). General American was the first company to obtain
approval and to form a mutual insurance holding company under the Missouri
Mutual Holding Company Statute.
Pursuant to the Reorganization, General American (the Company) (i) formed
General American Mutual Holding Company (GAMHC) as a mutual insurance holding
company under the insurance laws of the State of Missouri, (ii) formed
GenAmerica Corporation (GenAmerica) as an intermediate stock holding company
under the general laws of the State of Missouri, and (iii) amended and restated
its Charter and Articles of Incorporation to authorize the issuance of capital
stock and the continuance of its existence as a stock life insurance company
under the same name. GAMHC may, among other things, elect all of the directors
of GenAmerica and approve matters submitted for shareholder approval. As of the
effective date of the Reorganization, the membership interests and the
contractual rights of the policyholders of the Company were separated - the
membership interests automatically became, by operation of law, membership
interests in GAMHC and the contractual rights remained with the Company. Each
person who becomes the owner of a designated policy or contract of insurance or
annuity issued by the Company after the effective date of the Reorganization
(subject to certain exceptions and conditions set forth in the Articles of
Incorporation of GAMHC) will become a member of GAMHC and have a membership
interest in GAMHC by operation of law so long as such policy or contract remains
in force. The membership interests in GAMHC follow, and are not severable, from
the insurance policy or annuity contract from which the membership interest in
GAMHC is derived.
The Company issued 3 million shares of its authorized shares of capital stock to
GAMHC in 1997. GAMHC then contributed all of these to GenAmerica in exchange
for 1 thousand shares of its common stock. As a result, GenAmerica directly
owns the Company, and GAMHC indirectly owns the Company, through GenAmerica. In
addition, the Company capitalized $3 million of its unassigned surplus to paid
in capital.
The consolidated financial statements include the assets, liabilities, and
results of operations of the Company and its wholly owned subsidiaries, General
American Holding Company, a non-insurance holding company; Cova Corporation, an
insurance holding company; Paragon Life Insurance Company; Security Equity Life
Insurance Company; General Life Insurance Company of America; General Life
Insurance Company, its 63.8 percent owned subsidiary, Reinsurance Group of
America, Incorporated (RGA), an insurance holding company, and its 62.7 percent
owned subsidiary, Conning Corporation.
The Company's principal lines of business, conducted through General American or
one of its subsidiaries, are: Individual Life Insurance, Annuities, Group Life
and Health Insurance, Asset Management, and Reinsurance. The Company
distributes its products and services primarily through a nationwide network of
general agencies, independent brokers, and group sales and claims offices. The
Company (including its subsidiaries) is licensed to do business in all fifty
states, twelve Canadian provinces, Puerto Rico, and the District of Columbia.
Through its subsidiaries, the Company has operations in Europe, Pacific Rim
countries, and Latin America.
INITIAL PUBLIC OFFERING
In December 1997, the Company's subsidiary, Conning Corporation (Conning)
successfully completed an Initial Public Offering (IPO) of 2.875 million shares
of its common stock. Conning received net proceeds of approximately $34.5
million from the offering. After the IPO, the Company owns 62.7 percent of the
total shares outstanding of Conning's common stock. The publicly held stock of
Conning is listed on the NASDAQ National Market System
SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared on the basis of
generally accepted accounting principles (GAAP) and include the accounts of the
Company and its majority owned subsidiaries. Less than majority-owned entities
in which the Company has at least a 20 percent interest are reported on the
equity basis. All significant intercompany accounts and transactions have been
eliminated in consolidation. The preparation of financial statements requires
the use of estimates by management which affect the amounts reflected in the
financial statements. Actual results could differ from those estimates.
Accounts that the Company deems to be sensitive to changes in estimates include
future policy benefits and policy and contract claims, deferred acquisition
costs, and investment and deferred tax valuation allowances.
In April 1993, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 40, APPLICABILITY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
TO MUTUAL LIFE INSURANCE AND OTHER ENTERPRISES. This Interpretation requires
mutual life insurance enterprises which had traditionally issued statutory based
financial statements that had been reported to be in conformity with GAAP, to
apply all authoritative accounting pronouncements in preparing those statements,
effective for periods beginning after December 31, 1994. In January 1995, the
FASB issued Statement of Financial Accounting Standards No. 120 (SFAS 120),
ACCOUNTING AND REPORTING BY MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE
ENTERPRISES FOR CERTAIN LONG DURATION PARTICIPATING CONTRACTS, and the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
95-1 (SOP 95-1), ACCOUNTING FOR CERTAIN INSURANCE ACTIVITIES OF MUTUAL LIFE
ENTERPRISES, which together define the GAAP model for mutual life insurance
enterprises. These pronouncements define the enterprises and method of
accounting for certain participating life insurance contracts of mutual and
stock life insurance companies that meet the criteria defined in SOP 95-1. SFAS
120 also deferred implementation of Interpretation No. 40 to be concurrent with
implementation of SFAS 120. SFAS 120 and SOP 95-1 are effective for financial
statements issued for fiscal years beginning after December 15, 1995. The
effect of initially applying this new accounting model has been reported
retroactively through restatement of all periods presented.
<PAGE> 73
The significant accounting policies of the Company are as follows:
RECOGNITION OF REVENUE
For traditional life policies, including participating businesses, premiums are
recognized when due, less allowances for estimated uncollectible balances. For
limited payment contracts, net premiums are recorded as revenue, and the
difference between the gross premium and the net premium is deferred and
recognized in income in a constant relationship to insurance in force over the
estimated policy life. For universal life and annuity products, contract charges
for mortality, surrender, and expense, other than front-end expense charges, are
reported as income when charged to policyholders' accounts.
Other income represents the fees generated from the Company's non-insurance
operations, primarily service and contract fees relating to asset management,
system development, and third-party administration. Amounts are recognized when
earned.
INVESTED ASSETS
FIXED MATURITY AND EQUITY SECURITIES: Investment securities are accounted for
in accordance with SFAS 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. SFAS 115 requires debt and equity securities to be
classified into categories of available-for-sale, trading securities, or held-
to-maturity depending on an entity's ability and positive intent to hold a
security to maturity. All of the Company's securities are classified as
available-for-sale. Fixed maturities available-for-sale are reported at fair
value and are so classified based on the possibility that such securities could
be sold prior to maturity if that action enables the Company to execute its
investment philosophy and appropriately match investment results to operating
and liquidity needs. Equity securities are carried at fair value.
Realized gains or losses on the sale of securities are determined on the basis
of specific identification. Unrealized gains and losses are recorded, net of
related income tax effects, in a separate component of stockholder equity.
MORTGAGE LOANS: Mortgage loans on real estate are stated at an unpaid principal
balance, net of unamortized discounts and valuation allowances for possible
impairment in value. The Company discontinues the accrual of interest on
mortgage loans which are more than 90 days delinquent. Interest received on
nonaccrual mortgage loans is generally reported as interest income.
POLICY LOANS, REAL ESTATE AND OTHER INVESTED ASSETS: Policy loans are carried at
an unpaid principal balance and are generally secured by the cash surrender
value. Investment real estate which the Company has the intent to hold for the
production of income is carried at depreciated cost, net of writedowns for other
than temporary declines in fair value and encumbrances. Properties held for
sale (primarily acquired through foreclosure) are carried at the lower of
depreciated cost (fair value at foreclosure plus capital additions less
accumulated depreciation and encumbrances) or fair value. Adjustments to
carrying value of properties held for sale are recorded in a valuation reserve
when the fair value is below depreciated cost. The accumulated depreciation and
encumbrances on real estate amounted to $47.0 million and $53.0 million at
December 31, 1997 and 1996, respectively. Direct valuation allowances amounted
to $6.7 million and $15.7 million at December 31, 1997 and 1996, respectively.
Other invested assets are principally recorded at fair value.
SHORT-TERM INVESTMENTS: Short-term investments, consisting primarily of money
market instruments and other debt issues purchased with an original maturity of
less than a year, are carried at amortized cost, which approximates fair value.
INVESTED ASSET IMPAIRMENT AND VALUATION ALLOWANCES: Invested assets are
considered impaired when the Company determines that collection of all amounts
due under the contractual terms is doubtful. The Company adjusts invested
assets to their estimated net realizable value at the point at which it
determines an impairment is other than temporary. In addition, the Company has
established valuation allowances for mortgage loans and other invested assets.
Valuation allowances for other than temporary impairments in value are netted
against the asset categories to which they apply. Additions to valuation
allowances are included in realized gains and losses.
The Company recognizes its proportionate share of the resultant gains or losses
on the issuance or repurchase of its subsidiaries' stock as a direct credit or
charge to retained earnings.
CASH AND CASH EQUIVALENTS: For purposes of reporting, cash and cash equivalents
represent cash, demand deposits and highly liquid short-term investments, which
include U.S. Treasury bills, commercial paper, and repurchase agreements with
original or remaining maturities of 90 days or less when purchased.
INVESTMENT INCOME
Bond premium and discounts are amortized into income using the scientific yield
method over the term of the security. Amortization of the premium or discount
on mortgage-backed securities is recognized using a scientific yield method
which considers the estimated timing and amount of prepayments of underlying
mortgage loans. Actual prepayment experience is periodically reviewed and
effective yields are adjusted when differences arise between the prepayments
originally anticipated and the actual prepayments received and currently
anticipated. When such differences occur, the net investment in the
mortgage-backed security is adjusted to the amount that would have existed had
the new effective yield been applied since the acquisition of the security with
a corresponding charge or credit to interest income (the "retrospective
method").
POLICY AND CONTRACT LIABILITIES
For traditional life insurance policies, future policy benefits are computed
using a net level premium method with actuarial assumptions as to mortality,
persistency, and interest established at policy issue. Assumptions established
at policy issue as to
<PAGE> 74
mortality and persistency are based on industry standards and the Company's
historical experience which, together with interest and expense assumptions,
provide a margin for adverse deviation. Interest rate assumptions generally
range from 2.5 percent to 11.0 percent.
For participating policies, future policy benefits are computed using a net
level premium method based on the guaranteed cash value basis for mortality and
interest. Mortality rates are similar to those used for statutory valuation
purposes. Interest rates generally range from 2.5 percent to 6.0 percent.
Dividend liabilities are established when earned.
When the liabilities for future policy benefits plus the present value of
expected future gross premiums are insufficient to provide for expected policy
benefits and expenses, unrecoverable deferred policy acquisition costs are
written off and thereafter a premium deficiency reserve is established through a
charge to earnings.
Policyholder account balances for universal life and annuity policies are equal
to the policyholder account value before deduction of any surrender charges.
The policyholder account value represents an accumulation of gross premium
payments plus credited interest less expense and mortality charges and
withdrawals. These expense charges are recognized in income as earned.
The range of weighted average interest crediting rates used by the Company and
its life insurance subsidiaries were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Universal life 6.00-7.10% 6.00-7.56% 6.00-7.87%
Annuities 5.70-6.20% 5.70-6.20% 5.69-6.29%
</TABLE>
Accident and health benefits for active lives are calculated using the net level
premium method and assumptions as to future morbidity, withdrawals, and interest
which provide a margin for adverse deviation. Benefit liabilities for disabled
lives are calculated using the present value of future benefits and experience
assumptions for claim termination, expense, and interest which also provide a
margin for adverse deviation.
POLICY AND CONTRACT CLAIMS
The Company establishes a liability for unpaid claims based on estimates of the
ultimate cost of claims incurred, which is comprised of aggregate case basis
estimates, average claim costs for reported claims, and estimates of unreported
losses based on past experience. Policy and contract claims include a provision
for both life and accident and health claims. Management believes the
liabilities for unpaid claims are adequate to cover the ultimate liability;
however, due to the underlying risks and the high degree of uncertainty
associated with the determination of the liability for unpaid claims, the
amounts which will ultimately be paid to settle these liabilities cannot be
determined precisely and may vary from the estimated amount included in the
consolidated balance sheets.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, which vary with and are primarily related
to the production of new business, have been deferred to the extent that such
costs are deemed recoverable from future profitability of the underlying
business. Such costs include commissions, premium taxes, as well as certain
other costs of policy issuance and underwriting.
For limited payment and other nonparticipating traditional life insurance
policies, the deferred policy acquisition costs are amortized with interest in
proportion to the ratio of the expected annual premium revenue to the expected
total premium revenue. Expected future premium revenue is estimated with the
same assumptions used for computing liabilities for future policy benefits for
these policies.
For participating life insurance, universal life, and annuity type contracts,
the deferred policy acquisition costs are amortized over a period of not more
than thirty years in relation to the present value of estimated gross profits
arising from interest margin, cost of insurance, policy administration, and
surrender charges.
The range of average rates of assumed interest used by the Company and its
insurance subsidiaries in estimated gross margins were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Participating life 8.17% 8.70% 7.81%
Universal life 6.25-7.79% 6.00-8.20% 6.00-7.56%
Annuities 7.00-7.84% 7.83% 8.04%
</TABLE>
The estimates of expected gross margins are evaluated regularly and are revised
if actual experience or other evidence indicates that revision is appropriate.
Upon revision, total amortization recorded to date is adjusted by a charge or
credit to current earnings. Under SFAS 115, deferred policy acquisition costs
are adjusted for the impact on estimated gross margins as if the net unrealized
gains and losses on securities had actually been realized.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured by ceding risks to other insurance enterprises or
reinsurers under various types of contracts including coinsurance and excess
coverage. The Company's retention level per individual life ranges between $50
thousand and $2.5 million depending on the entity writing the policy.
The Company assumes and retrocedes financial reinsurance contracts which
represent low mortality risk reinsurance treaties. These contracts are reported
as deposits and are included in reinsurance recoverable/payable in the
accompanying consolidated balance sheet. The amount of revenue reported on these
contracts represents fees and the cost of insurance under the terms of the
reinsurance agreement.
<PAGE> 75
Reinsurance activities are accounted for consistent with terms of the risk
transfer reinsurance contracts. Premiums ceded to other companies have been
reported as a reduction of premiums. Amounts applicable to reinsurance ceded
for future policy benefits and claim liabilities have been reported as assets
for these items and commissions and expense allowances received in connection
with reinsurance ceded have been accounted for in income as earned. Reinsurance
does not relieve the Company from its primary responsibility to meet claim
obligations. The Company evaluates the financial conditions of its reinsurers
annually.
FEDERAL INCOME TAXES
The Company and certain of its U.S. subsidiaries file a consolidated federal
income tax return. In order to consolidate, the Company must possess both 80
percent of the total voting power and 80 percent of the value of the stock of
the subsidiary. Further, even if it meets the 80 percent test, any acquired
life insurance company is not included in the consolidated return until the
acquired company has been a member of the group for five years. Prior to
satisfying the five-year requirement, the subsidiary files a separate federal
return. RGA Barbados, a subsidiary of RGA, also files a U.S. tax return. The
Company's Canadian, Argentine, Australian, Chilean, Mexican, Spanish, and United
Kingdom subsidiaries are taxed under applicable local statutes. The Company
uses the asset and liability method to record deferred income taxes.
Accordingly, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, using enacted tax rates, expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable life
insurance and annuity contracts for the exclusive benefit of the contract
holders. The Company charges the separate accounts for cost of insurance and
administrative expense associated with a contract and charges related to early
withdrawals by contract holders. The assets and liabilities of the separate
account are carried at fair value. The Company's participation in the separate
accounts (seed money) is carried at its fair value in the separate account, and
amounted to $6.2 million and $22.3 million at December 31, 1997 and 1996,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Although fair value estimates are calculated using assumptions that
management believes are appropriate, changes in assumptions could significantly
affect the estimates and such estimates should be used with care. The following
assumptions were used to estimate the fair value of each class of financial
instrument for which it was practicable to estimate fair value:
INVESTMENT SECURITIES: Fixed maturities are valued using quoted market prices,
if available. For securities not actively traded, fair values are estimated
using values obtained from independent pricing services or, in the case of
private placements, are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality, and
maturity of investments. The fair values of equity securities are based on
quoted market prices.
MORTGAGE LOANS: The fair values of mortgage loans are estimated using discounted
cash flow analyses and interest rates currently being offered for similar loans
to borrowers with similar credit ratings. Loans with similar characteristics
are aggregated for purposes of the calculations.
POLICY LOANS: The fair value of policy loans approximates the carrying value.
The majority of these loans are indexed, with yield tied to a stated return.
POLICYHOLDER ACCOUNT BALANCES ON INVESTMENT TYPE CONTRACTS: Fair values for the
Company's liabilities under investment-type contracts are estimated using
discounted cash flow calculations based on interest rates currently being
offered for similar contracts with maturities consistent with those remaining
for the contracts being valued. For contracts with no defined maturity date, the
carrying value approximates fair value.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The separate account assets and
liabilities are carried at fair value as determined by the market value of the
underlying segregated investments.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: The carrying amount is
considered a reasonable estimate of fair value.
LONG-TERM DEBT AND NOTES PAYABLE: The fair value of long-term debt and notes
payable is estimated using discounted cash flow calculations based on interest
rates currently being offered for similar instruments.
Refer to Note 4 for additional information on fair value of financial
instruments.
RECLASSIFICATION
The Company has reclassified the presentation of certain prior period
information to conform with the 1997 presentation.
<PAGE> 76
(2) SIGNIFICANT ACQUISITIONS AND DIVESTITURES
On June 1, 1995, the Company acquired Xerox Life Insurance Companies, now known
as Cova Corporation (Cova). At acquisition, Cova had total assets of
approximately $635.6 million. The purchase price of approximately $107.7
million was funded from the Company's operations.
Effective July 31, 1995, the Company entered into a merger arrangement with
Conning Corporation and Subsidiaries (Conning), an investment management firm,
whereby the Company acquired Conning and subsequently contributed Conning and
General American Investment Management Company, a wholly owned subsidiary, to
form Conning Asset Management Company (CAM). At acquisition, Conning had total
assets of approximately $16.0 million. The purchase price consisted of
approximately $12.0 million in cash (from the Company's operations) and 3.2
million shares of CAM convertible redeemable preferred stock, with fair value of
approximately $17.0 million.
These transactions were accounted for using the purchase method of accounting.
The results of operations of the acquired entities are included in the
consolidated financial statements subsequent to the respective acquisition
dates. The excess of cost over fair value of net assets acquired amounted to
approximately $56.6 million and $23.1 million for Cova and Conning,
respectively, and is being amortized over approximately 20 years.
On January 3, 1995, the Company sold its 72 percent ownership in GenCare Health
Systems, Inc. to United HealthCare Corporation. Proceeds received net of
expenses were $365.0 million and the net realized gain on sale was $170.2
million.
The Company distributed its ownership of its wholly owned subsidiary, Walnut
Street Securities, Inc. (WSS), at December 31, 1997 to GenAmerica. The net book
value of WSS, was $4.48 million at the time of distribution. The revenue and
expenses of WSS are included in the Company's consolidated statement of
operations for 1997.
<PAGE> 77
(3) INVESTMENTS
Fixed maturities and equity securities
The amortized cost and estimated fair value of fixed maturity and equity
securities at December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. Treasury securities $ 48,074 1,125 (27) 49,172
Government agency
obligations 378,002 84,425 (1,281) 461,146
Corporate securities 5,491,210 319,682 (45,790) 5,765,102
Mortgage-backed securities 2,544,241 45,211 (17,832) 2,571,620
Asset-backed securities 265,725 3,380 (626) 268,479
---------- ---------- ---------- ---------
Total fixed maturities
available-for-sale $8,727,252 453,823 (65,556) 9,115,519
========== ========== ========== =========
Equity securities $ 23,558 653 - 24,211
========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. Treasury securities $ 28,980 368 (151) 29,197
Government agency
obligations 343,945 41,324 (970) 384,299
Corporate securities 4,071,775 158,361 (39,623) 4,190,513
Mortgage-backed securities 1,949,717 18,927 (14,386) 1,954,258
Asset-backed securities 198,934 1,599 (491) 200,042
---------- ---------- ---------- ---------
Total fixed maturities
available-for-sale $6,593,351 220,579 (55,621) 6,758,309
========== ========== ========== =========
Equity securities $ 21,460 1,137 (1,692) 20,905
========== ========== ========== =========
</TABLE>
The Company manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1997 and 1996, the Company held no
corporate debt securities or foreign government debt securities of a single
issuer which had a carrying value in excess of 10 percent of stockholder equity.
The amortized cost and estimated fair value of fixed maturities at December 31,
1997, by contractual maturity, are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
<S> <C> <C>
Due in one year or less $ 67,409 67,921
Due after one year through five years 1,279,675 1,303,178
Due after five years through ten years 1,816,231 1,855,188
Due after ten years through twenty years 3,019,696 3,317,612
Mortgage-backed securities 2,544,241 2,571,620
------------- ---------
Total $ 8,727,252 9,115,519
============= =========
</TABLE>
<PAGE> 78
The sources of net investment income follow (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Fixed maturities $ 561,709 464,512 368,033
Mortgage loans 194,504 171,781 143,047
Real estate 34,164 39,062 37,108
Equity securities 1,317 755 622
Policy loans 148,316 133,511 127,920
Short-term investments 16,600 13,979 26,920
Other 13,943 9,705 (368)
-------- ------- -------
Investment revenue 970,553 833,305 703,282
Investment expenses (25,011) (26,422) (26,878)
-------- ------- -------
Net investment income $ 945,542 806,883 676,404
======== ======= =======
</TABLE>
Net realized gains (losses) from sales of investments consist of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Fixed maturities:
Realized gains $ 23,969 27,928 30,139
Realized losses (16,796) (10,398) (9,000)
Equity securities:
Realized gains 1,835 6,146 306,142
Realized losses (1,457) (288) (5,259)
Other investments, net 20,987 1,143 (41,266)
------- ------- -------
Net realized investment gains $ 28,538 24,531 280,756
======= ======= =======
</TABLE>
Included in the net realized losses are permanent write-downs of approximately
$4.8 million during 1997.
A summary of the components of the net unrealized appreciation (depreciation) on
invested assets carried at fair value is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale $ 388,267 164,957
Equity securities and short-term investments 658 605
Derivatives 888 -
Effect of unrealized appreciation (depreciation) on:
Deferred policy acquisition costs (142,187) (70,038)
Present value of future profits (2,901) 1,986
Deferred income taxes (91,779) (36,705)
Other 139 -
Minority interest, net of taxes (24,341) (10,438)
---------- ---------
Net unrealized appreciation $ 128,744 50,367
========== =========
</TABLE>
The Company and its insurance subsidiaries have securities on deposit with
various state insurance departments and regulatory authorities with an amortized
cost of approximately $ 293.5 million and $278.6 million at December 31, 1997
and 1996, respectively.
MORTGAGE LOANS
The Company originates mortgage loans on income-producing properties, such as
apartments, retail and office buildings, light warehouses, and light industrial
facilities. Loan to value ratios at the time of loan approval are 75 percent or
less. The Company minimizes risk through a thorough credit approval process and
through geographic and property type diversification.
The Company's mortgage loans were distributed as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
Carrying Percent of Carrying Percent of
Value Total Value Total
<S> <C> <C> <C> <C>
Arizona $ 156,453 7.2% $ 185,575 8.0%
California 358,443 16.5 378,376 16.4
Colorado 228,797 10.5 226,531 9.8
Florida 153,174 7.0 193,570 8.4
Georgia 131,861 6.1 141,442 6.1
Illinois 155,184 7.1 183,883 8.0
Maryland 104,567 4.8 99,944 4.3
Missouri 100,815 4.6 102,111 4.4
Texas 191,619 8.8 225,697 9.8
Virginia 84,140 3.9 92,663 4.0
Other 513,213 23.5 481,546 20.8
----------- --------- ----------- --------
Subtotal 2,178,266 100.0% 2,311,338 100.0%
Valuation reserve (38,004) (37,711)
----------- --------- ----------- --------
Total $ 2,140,262 $ 2,273,627
=========== ========= =========== ========
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
1997 1996
Carrying Percent of Carrying Percent of
Value Total Value Total
<S> <C> <C> <C> <C>
Property Type
Apartment $ 101,038 4.6% $ 131,352 5.7%
Retail 903,438 41.5 966,298 41.8
Office building 622,185 28.6 641,204 27.7
Industrial 445,253 20.4 479,755 20.8
Other commercial 106,352 4.9 92,729 4.0
----------- --------- ----------- --------
Subtotal 2,178,266 100.0% 2,311,338 100.0%
Valuation reserve (38,004) (37,711)
----------- --------- ----------- --------
Total $ 2,140,262 $ 2,273,627
=========== ========= =========== ========
</TABLE>
An impaired loan is measured at the present value of expected future cash
flows or, alternatively, the observable market price or the fair value of the
collateral.
Mortgage loans which have been non-income producing for the preceding twelve
months were $8.7 million and $5.1 million at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, the recorded investment in
mortgage loans that were considered impaired under SFAS 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, was $119.7 million and $86.5 million,
respectively, with related allowances for credit losses of $12.7 million and
$8.0 million, respectively. The average recorded investment in impaired
loans during 1997 and 1996 was $103.1 million and $107.9 million,
respectively. For the years ended December 31, 1997, 1996, and 1995, the
Company recognized $9.7 million, $6.6 million, and $11.9 million,
respectively, of interest income on those impaired loans, which included $9.9
million, $6.7 million, and $12.0 million, respectively, of interest income
recognized using the cash basis method of income recognition.
The Company has outstanding mortgage loan commitments as of December 31, 1997
totaling $284.6 million. During 1995, the Company entered into an agreement
whereby approximately $109.8 million of mortgage loans were sold by the
Company for securitization and resale by a financial institution as mortgage
pass-through certificates. In conjunction with this transaction, the Company
entered into futures positions to hedge against interest rate risk. The sale
of these mortgage loans resulted in a net loss of approximately $.4 million.
In addition, the close-out of the futures positions related to this
transaction resulted in a net loss of approximately $6.4 million.
DERIVATIVES The Company has a variety of reasons to use derivative
instruments, such as to attempt to protect the Company against possible
changes in the market value of its portfolio as a result of interest rate
changes and to manage the portfolio's effective yield, maturity, and
duration. The Company does not invest in derivatives for speculative
purposes. Upon disposition, a realized gain or loss is recognized
accordingly, except when exercising an option contract or taking delivery of
a security underlying a futures contract. In these instances, the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.
Summarized below are the specific types of derivative instruments used by the
Company.
INTEREST RATE SWAPS: The Company manages interest rate risk on certain
contracts, primarily through the utilization of interest rate swaps. Under
interest rate swaps, the Company agrees with counterparties to exchange, at
specified intervals, the payments between floating and fixed-rate interest
amounts calculated by reference to notional amounts. Net interest payments are
recognized within net investment income in the consolidated statements of
operations.
At December 31, 1997, the Company had thirty outstanding interest rate swap
agreements which expire at various dates through 2025. Under thirteen of the
agreements, the Company receives a fixed rate ranging from 5.975 percent to
7.51 percent on a notional amount of $68.6 million and pays a floating rate
based on London Interbank Offered Rate (LIBOR). Under the remaining
seventeen outstanding interest rate swap agreements, the Company receives a
floating rate based on LIBOR on a notional amount of $93 million and pays a
fixed rate ranging from 6.495 percent to 8.562 percent. The estimated fair
value of the agreements was a net loss of approximately $2.5 million which is
not recognized in the accompanying consolidated balance sheet.
At December 31, 1996, the Company had eight outstanding interest rate swap
agreements which expire at various dates through 2025. Under six of the
agreements, the Company receives a fixed rate ranging from 5.825 percent to
8.31 percent on a notional amount of $25.4 million and pays a floating rate
based on LIBOR. Under the remaining two outstanding interest rate swap
agreements, the Company receives a floating rate based on LIBOR on a notional
amount of $15 million and pays a fixed rate ranging from 6.52 percent to 6.90
percent. The estimated fair value of the agreements was a net gain of
approximately $0.3 million which is not recognized in the accompanying
consolidated balance sheet.
<PAGE> 80
CURRENCY SWAPS: Under foreign currency swaps, the Company agrees with
other parties to exchange at specified intervals, the difference between two
currencies on an exchange rate basis the interest amounts calculated by
reference to an agreed notional principal amount. The Company uses this
technique for foreign denominated assets to match dollar denominated
liabilities of various fixed income products. Net interest payments are
recognized within net investment income in the consolidated statements of
operations.
At December 31, 1997 and 1996, the Company had six and two outstanding
currency swap agreements, respectively, which expire at various dates through
2026. The notional amount was $34.3 million and $13.9 million, respectively.
The estimated fair value of the agreements was a net loss of $1.3 million
and $2.3 million, respectively, which is not recognized in the accompanying
consolidated balance sheet.
FUTURES: A futures contract is an agreement involving the delivery of a
particular asset on a specified future date at an agreed upon price. The
Company generally invests in futures on U.S. Treasury Bonds, U.S. Treasury
Notes, and the S&P 500 Index and typically closes the contract prior to the
delivery date. These contracts are generally used to manage the portfolio's
effective maturity and duration.
<PAGE> 81
Futures contracts outstanding as of years ending 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
($ in thousands)
NET (SOLD)
PURCHASE NOTIONAL FAIR UNREALIZED
POSITION AMOUNT VALUE GAIN(LOSS)
<S> <C> <C> <C> <C>
December 31, 1997 (510) $51,000 60,940 ($907)
December 31, 1996 50 12,500 14,653 404
</TABLE>
OPTIONS: Currently, the Company buys both exchange-traded and
over-the-counter options based on the S&P 500 Index to support equity indexed
annuity policies. An equity indexed annuity is a product under which
contractholders receive a minimum guaranteed value and also participate in
stock market appreciation. Options are marked to market value quarterly. The
change in value is reflected in investment income to assure proper matching
of the hedge to changes in the liability. The amounts involved are not
material.
The Company is exposed to credit related risk in the event of nonperformance
by counterparties to financial instruments but does not expect any
counterparties to fail to meet their obligations. Where appropriate, master
netting agreements are arranged and collateral is obtained in the form of
rights to securities to lower the Company's exposure to credit risk. It is
the Company's policy to deal only with highly rated companies. There are not
any significant concentrations with counterparties.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1997 and 1996. SFAS
107, DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS, defines fair
value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties (in thousands):
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $ 9,115,519 9,115,519 6,758,309 6,758,309
Mortgage loans 2,140,262 2,333,895 2,273,627 2,354,072
Policy loans 2,073,152 2,073,152 1,917,861 1,917,861
Short-term investments 190,374 190,374 55,594 55,594
Other invested assets 243,921 243,921 183,612 183,628
Separate account assets 4,118,860 4,118,860 2,833,258 2,833,258
Liabilities:
Policyholder account
balances relating to
investment contracts $ 6,696,690 6,608,068 6,281,967 6,190,919
Long term debt and
notes payable 214,477 222,419 295,614 293,913
Separate account
liabilities 4,112,666 4,112,666 2,810,907 2,810,907
</TABLE>
(5) REINSURANCE
The Company is a major reinsurer to the life and health industry. The effect
of reinsurance on premiums and other considerations is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Direct $ 1,120,169 1,097,340 1,069,248
Assumed 996,861 827,171 700,152
Ceded (348,861) (301,283) (271,387)
----------- --------- ---------
Net insurance premiums and other
considerations $ 1,768,169 1,623,228 1,498,013
=========== ========= =========
</TABLE>
Reinsurance assumed represents approximately $212.5 billion, $160.0 billion,
and $157.9 billion, of insurance in force at December 31, 1997, 1996, and
1995, respectively. The amount of ceded insurance in force, including
retrocession, was $50.4 billion, $53.2 billion, and $48.7 billion, for 1997,
1996, and 1995, respectively.
<PAGE> 82
(6) FEDERAL INCOME TAXES
Income tax expense (benefit) attributable to income from operations consists
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current income tax expense $ 65,778 45,902 115,769
Deferred income tax expense
(benefit) (113) 13,992 29,411
---------- ------- -------
Provision for income taxes $ 65,665 59,894 145,180
========== ======= =======
</TABLE>
Income tax expense attributable to income from operations differed from the
amounts computed by applying the U.S. federal income tax rate of 35 percent
to pre-tax income as a result of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Computed "expected" tax expense $ 64,763 57,055 135,353
Increase (decrease) in income tax
resulting from:
Surplus tax on mutual life
insurance companies 5,325 4,777 -
Foreign tax rate in excess
of U.S. tax rate 556 941 763
Tax preferred investment
income (6,583) (7,318) (5,784)
State tax net of federal benefit 830 971 292
GAAP/tax basis difference
on GenCare sale - - 15,710
Foreign tax credit (594) - -
Goodwill amortization 956 895 567
Difference in book vs. tax
basis in domestic
subsidiaries 2,166 2,230 1,547
Other, net (1,754) 343 (3,268)
---------- ------- -------
Provision for income taxes $ 65,665 59,894 145,180
========== ======= =======
</TABLE>
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Provision for income taxes $ 65,665 59,894 145,180
Income tax from stockholder equity:
Unrealized holding gain
or loss on debt and
equity securities
recognized for financial
reporting purposes 55,923 (24,612) 99,871
Foreign currency translation (12,122) - -
Other (437) (1,023) -
---------- ------- -------
Total income tax $ 109,029 34,259 245,051
========== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997 and 1996
are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Reserve for future policy benefits $ 149,496 138,848
Deferred acquisition costs capitalized
for tax 110,418 95,332
Difference in basis of post retirement
benefits 6,846 13,993
Net operating loss 40,915 22,789
Other, net 132,354 106,263
---------- -------
Gross deferred tax assets 442,029 377,225
Less valuation allowance 1,150 1,299
---------- -------
Total deferred tax asset after valuation
allowance $ 438,879 375,926
========== =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on investments $ 78,420 63,204
Deferred acquisition costs capitalized
for financial reporting 282,714 246,858
Difference in the tax basis of
cash and invested assets 45,551 19,222
Other, net 121,240 89,919
---------- -------
Total deferred tax liabilities 527,925 419,203
---------- -------
Net deferred tax liability $ 89,046 43,277
========== =======
</TABLE>
<PAGE> 83
The Company has not recognized a deferred tax liability for the
undistributed earnings of its wholly owned foreign subsidiaries because the
Company currently does not expect those unremitted earnings to become taxable
to the Company in the foreseeable future. This is because the unremitted
earnings will not be repatriated in the foreseeable future, or because those
unremitted earnings that may be repatriated will not be taxable through the
application of tax planning strategies that management would utilize.
As of December 31, 1997, the Company has provided for a 100 percent valuation
allowance against the deferred tax asset related to the net operating losses
of RGA's Australian, Argentine, and UK subsidiaries and Genelco's Spanish and
Mexican subsidiaries. The Company has provided for a 50 percent valuation
allowance against the deferred tax asset related to International
Underwriting Services' net operating losses which were incurred in separate
return limitation years. Based on income projections for future years, a 50
percent valuation allowance is appropriate.
At December 31, 1997, the Company had capital loss carryforwards of $.8
million. During 1997, 1996, and 1995 the Company paid income taxes totaling
approximately $70.8 million, $20.7 million, and $121.7 million, respectively.
At December 31, 1997, the Company's subsidiaries had recognized deferred tax
assets associated with net operating loss carryforwards of approximately
$115.7 million. The net operating loss and capital losses are expected to be
utilized during the period allowed for carryforwards.
(7) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized is as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 652,251 526,939 664,452
Transfer of present value of future
profits 19,279 - -
Policy acquisition costs deferred 267,008 206,790 163,218
Policy acquisition costs amortized (211,979) (182,038) (176,216)
Interest credited 40,843 38,944 37,405
Deferred policy acquisition costs relating
to change in unrealized (gain) loss on
investments available for sale (72,149) 61,616 (161,920)
---------- ------- --------
Balance at end of year $ 695,253 652,251 526,939
========== ======= ========
</TABLE>
(8) ASSOCIATE BENEFIT PLANS AND POSTRETIREMENT BENEFITS
The Company has a defined benefit plan covering substantially all associates.
The benefits are based on years of service and each associate's compensation
level. The Company's funding policy is to contribute annually the maximum
amount deductible for federal income tax purposes. Contributions provide for
benefits attributed to service to date and for those expected to be earned in
the future.
The Company also has several non-qualified, defined benefit, and defined
contribution plans for directors and management associates. The plans are
unfunded and are deductible for federal income tax purposes when the benefits
are paid.
Net periodic defined benefit plan costs consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost $ 5,915 5,421 4,074
Interest 8,597 8,047 7,160
Return on plan assets (29,043) (14,207) (27,984)
Amortization and deferral 18,637 4,646 19,841
Other - 192 -
---------- --------- ---------
Pension costs $ 4,106 4,099 3,091
========== ========= =========
</TABLE>
<PAGE> 84
The following table presents the plans' funded status and amount
recognized in the Company's consolidated balance sheets at December 31, 1997
and 1996 based on the actuarial valuations as of December 31, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
1997 1996
Qualified Other Qualified Other
Plans Plans Plans Plans
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit
obligation, including vested
benefits of $79,995 and
$19,057 for 1997 and
$74,223 and $18,560
for 1996 82,758 27,965 76,928 26,897
--------- ------ --------- ------
Projected benefit obligation for
service rendered to date 97,662 32,168 92,825 29,726
Plan assets at fair value primarily
listed stocks and bonds 133,477 128,545
Plan assets in excess (less than)
projected benefit obligations 35,815 (32,168) 35,720 (29,726)
Unrecognized net transition obligation
at December 31 4,021 2,701
Pension cost funded in advance $ 35,815 35,720
========= =======
Accrued pension liability (28,147) (27,025)
======== ========
</TABLE>
Assumptions used for the December 31, 1997 and 1996 projected benefit obligation
included a 7.25 percent current discount rate, a same age-based salary scale and
4.50 percent increase rate, respectively, for future compensation levels, and a
9.25 percent projected return on plan assets.
The Board of Directors has adopted an associate incentive plan applicable to
full-time salaried associates with at least one year of service. Contributions
to the plan are determined annually by the Board of Directors and are based upon
salaries of eligible associates. Full vesting occurs after five years of
continuous service. The Company's contribution to the plan was $10.4 million,
$8.8 million, and $9.2 million for 1997, 1996, and 1995, respectively
In addition to pension benefits, the Company provides certain health care and
life insurance benefits for retired employees. Substantially all employees may
become eligible for these benefits if they reach retirement age while working
for the Company. Alternatively, retirees may elect certain prepaid health care
benefit plans.
The Company uses the accrual method to account for the costs of its retiree
benefit plans and amortizes its transition obligation for retirees and fully
eligible or vested employees over 20 years. The unamortized transition
obligation was $16.8 million and $17.8 million at December 31, 1997 and 1996,
respectively. Net postretirement benefit costs for the years ended December 31,
1997, 1996, and 1995 were $5.1 million, $5.8 million, and $5.4 million,
respectively, and include the expected cost of such benefits for newly eligible
or vested employees, interest cost, gains and losses arising from difference
between actuarial assumptions and actual experience, and amortization of the
transition obligation. The liability for the Company as of December 31, 1997 and
$27.8 million and $25.6 million, respectively.
Assumptions used were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Discount rate in determining benefit obligations 7.25% 7.25%
Healthcare cost trend
First year:
Indemnity plan 8.0% 9.0%
HMO plan 8.0% 8.0%
Dental plan 8.0% 9.0%
Ultimate 5.00% 5.25%
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amount reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by $4.7 million or
12.5 percent. The aggregate of the service cost and interest cost components of
net periodic postretirement benefit cost for 1997 would increase by $.6 million
or 15.5 percent.
<PAGE> 85
(9) DEBT
The Company's long-term debt and notes payable consists of the following
($ in millions):
<TABLE>
<CAPTION>
Face value
at December 31,
Description Rate Maturity 1997 1996
<S> <C> <C> <C> <C>
Long-term debt:
General American surplus note 7.625% January 2024 $107.0 $107.0
RGA senior note 7.250% April 2006 100.0 100.0
Notes payable
General American 5.555% March 1997 - 80.5
RGA Australia Hldgs. 5.460% April 1998 7.8 7.6
------ ------
Total long-term debt and notes payable $214.8 $295.1
====== ======
</TABLE>
The difference between the face value of debt and the carrying value per the
consolidated balance sheets is unamortized discount.
General American's surplus note pays interest on January 15 and July 15 of
each year. The note is not subject to redemption prior to maturity. Payment
of principal and interest on the note may be made only with the approval of
the Missouri Director of Insurance.
The RGA senior note pays interest semiannually on April 1 and October 1. The
ability of RGA to make debt principal and interest payments as well as make
dividend payments to shareholders is ultimately dependent on the earnings and
surplus of its subsidiaries and the investment earnings on the undeployed
debt proceeds. The transfer of funds from the insurance subsidiaries to
Reinsurance Group of America, Incorporated is subject to applicable insurance
laws and regulations.
The General American note payable was retired during December of 1997.
The RGA Australian note had drawdowns for the respective years of $2.0
million in January 1997, $5.6 million in January 1996, and $2.0 million in
July 1996. Principal repayments are due in April 1998 and are expected to be
renewed under the terms of the line of credit. This agreement contains
various restrictive covenants which primarily pertain to limitations on the
quality and types of investments, minimum requirements of net worth, and
minimum rating requirements.
Interest paid on debt during 1997, 1996, and 1995 amounted to $20.0 million,
$19.9 million, and $9.0 million, respectively.
As of December 31, 1997, the Company was in compliance with all covenants
under its debt agreements.
(10) REGULATORY MATTERS
The Company and its insurance subsidiaries are subject to financial statement
filing requirements in their respective state of domicile, as well as the
states in which they transact business. Such financial statements, generally
referred to as statutory financial statements, are prepared on a basis of
accounting which varies in some respects from GAAP. Statutory accounting
practices include: (1) charging of policy acquisition costs to income as
incurred; (2) establishment of a liability for future policy benefits
computed using required valuation standards; (3) nonprovision of deferred
federal income taxes resulting from temporary differences between financial
reporting and tax bases of assets and liabilities; (4) recognition of
statutory liabilities for asset impairments and yield stabilization on fixed
maturity dispositions prior to maturity with asset valuation reserves based
on a statutorily determined formulas; and (5) valuation of investments in
bonds at amortized cost.
Net income and policyholders' surplus of the Company for the years ended
December 31, 1997, 1996, and 1995, as determined in accordance with statutory
accounting practices, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income $ 39,737 18,464 236,962
Policyholders' surplus 844,110 636,260 589,783
</TABLE>
Under Risk-Based Capital (RBC) requirements, General American and its
insurance subsidiaries are required to measure its solvency against certain
parameters. As of December 31, 1997, the Company and its insurance
subsidiaries exceeded the established RBC minimums. In addition, the Company
and its insurance subsidiaries exceeded the minimum statutory capital and
surplus requirements of their respective states of domicile.
The Company and its insurance subsidiaries are subject to limitations on the
payment of dividends. Generally, dividends during any year may not be paid
without prior regulatory approval, in excess of the lessor of (and with
respect to life and health subsidiaries in Missouri, in excess of the greater
of): (a) 10 percent of the statutory surplus as of the preceding December 31
or (b) the statutory gain from operations for the preceding year.
<PAGE> 86
(11) LEASE COMMITMENTS
The Company has entered into operating leases for office space and other
assets, principally office furniture and equipment. Future minimum lease
obligations under noncancelable leases are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C>
1998 $ 17,583
1999 15,510
2000 12,621
2001 8,680
2002 6,276
Thereafter 3,107
</TABLE>
Operating lease expense totaled $16.4 million, $17.0 million, and $11.6 million
in 1997, 1996, and 1995, respectively
(12) PARTICIPATING POLICIES AND DIVIDENDS TO POLICYHOLDERS
Over 27.5 percent and 31.2 percent of the Company's business in force relates
to participating policies as of December 31, 1997 and 1996, respectively.
These participating policies allow the policyholders to receive dividends
based on actual interest, mortality, and expense experience for the related
policies. These dividends are distributed to the policyholders through an
annual dividend, using current dividend scales which are approved by the
Board of Directors.
(13) CONTINGENT LIABILITIES
From time to time, the Company is subject to litigation related to its
insurance business and to employment related matters in the normal course of
business. Management does not believe that the Company is party to any such
pending litigation which would have a material adverse effect on its
financial position or future operations.
<PAGE> 87
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) Financial Statements
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits
(1) Resolutions of the Board of Directors of General
American Life Insurance Company ("General American")
authorizing establishment of the Separate Account <F1>
(2) Not Applicable
(3) (a) Form of Distribution Agreement <F4>
(b) Form of Selling Agreement <F2>
(4) (a) Form of tax sheltered group variable
annuity contract (No. V82-300) <F12>
(b) Form of tax sheltered individual
variable annuity certificate (No. V82-301) <F12>
(c) Form of variable annuity (tax
qualified)(No. V82-400) <F12>
(d) Form of individual variable annuity
(non-tax qualified)(No. 10013) <F12>
(e) Form of individual variable annuity (tax
qualified)(No. 10014) <F12>
(f) Form of tax sheltered group variable
annuity contract (No. 10015) <F12>
(g) Form of tax sheltered group variable
annuity certificate (No. 10016) <F12>
(h) Endorsement related to the reorganization of
Separate Account <F11>
(i) Form of endorsement relating to
requirements of Section 408(b) (IRA's)
Internal Revenue Code IRC (No. 1096900) <F11>
(j) Form of endorsement allowing other Fund
sponsors (No. 1098900) <F11>
(k) Form of endorsement relating tax
sheltered annuities, Section 403(b) IRC (No.
1098600) <F11>
(l) Form of endorsement relating to tax
sheltered annuities with employer
contribution (No. 1098800) <F11>
(m) Form of endorsement relating to the
Unemployment Compensation Amendments
(No. 1 E6) <F11>
(5) Form of application <F7>
(6) (a) Amended and Restated Charter and Articles of
Incorporation of General American Life Insurance
Company <F12>
(b) By-laws of General American <F12>
C-1
<PAGE> 88
(7) Not applicable
(8) Not applicable
(9) Opinion and Consent of Counsel <F6>
(10) Consent of Independent Accountants with financial
statements
(11) No financial statements are omitted from Item <F23>
(12) Not applicable
(13) Not applicable
(14) Copies of manually signed powers of attorney for General American Life
Insurance Company directors August A. Busch, III, William E. Cornelius,
John C. Danforth <F10>, Bernard A. Edison, Richard A. Liddy, William E.
Maritz, Craig D. Schnuck <F9>, William P. Stiritz, Andrew C. Taylor <F8>,
H. Edwin Trusheim, Robert L. Virgil, Jr., Virginia V. Weldon, and Ted C.
Wetterau <F4>.
[FN]
- ----------------
<F1> Incorporated by reference to initial registration
statement, File No. 2-39272
<F2> Incorporated by reference to Pre-Effective Amendment
No. 1 to registration statement of General American
Separate Account Eleven, File No. 33-10146
<F3> Incorporated by reference to initial registration
statement of the Separate Account and General American
Capital Company, File No. 33-15347
<F4> Incorporated by reference to Post-Effective Amendments
No. 29 and 34 to this Registration Statement
<F5> Incorporated by reference to Pre-Effective Amendment
No. 2 to this Registration Statement
<F6> Incorporated by reference to Post-Effective Amendment
No. 31 to this Registration Statement
<F7> Incorporated by reference to Post-Effective Amendment
No. 33 to this Registration Statement
<F8> Incorporated by reference to Post-Effective Amendment
No. 37 to this Registration Statement
<F9> Incorporated by reference to Post-Effective Amendment
No. 39 to this Registration Statement
<F10> Incorporated by reference to Post-Effective Amendment
No. 40 to this Registration Statement
<F11> Incorporated by reference to Post-Effective Amendment
No. 41 to this Registration Statement
<F12> Filed herewith
C-1a
<PAGE> 89
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Officer's Name and Principal Positions and Offices
Business Address<F*> with Depositor
<S> <C>
Robert J. Banstetter, Sr. Vice President, General
700 Market Street Counsel & Secretary, Feb.
St. Louis, MO 63101 1991 to present. Vice President
and General Counsel, Jan. 1983 -
Feb. 1991.
John W. Barber Vice President and Controller, Dec.
1984 to present.
Kevin C. Eichner President and Chairman of
the Board, Collaborative
Strategies, Inc.
E. Thomas Hughes Corporate Actuary and
700 Market Street Treasurer, Oct. 1994 to
St. Louis, MO 63101 present. Formerly Executive Vice
President - Group Pensions, March
1990 - Oct. 1994.
Richard A. Liddy Chairman, President, and
700 Market Street Chief Executive Officer,
St. Louis, MO 63101 Jan. 1995 to present. Formerly,
President and Chief Executive
Officer, May 1992 - Jan.
1995. President and Chief
Operating Officer, May 1988 -
May 1992.
Warren J. Winer Executive Vice President-Group Life
& Health, Aug. 1995 to
present. Formerly Managing
Director for William M.
Mercer, Inc. July 1993 to
Aug. 1995 and President
and Chief Operating Officer,
W.F. Corroon, 1986 - July
1993.
C-2
<PAGE> 90
<CAPTION>
Officer's Name and Principal Positions and Offices
Business Address<F*> with Depositor
<S> <C>
Bernard H Wolzenski Executive Vice President-
Individual, Oct. 1991 to present.
Formerly Vice President, Individual
Life Products, May 1986 - Oct. 1991.
A. Greig Woodring President and Chief
660 Mason Ridge Center Drive Executive Officer,
St. Louis, MO 63141 Reinsurance Group of America, Dec.
1992 to present. Also, Executive
Vice President Reinsurance.
Richard A. Liddy, listed as a Principal Officer, is also a Director of the
Company.
<FN>
******
<F*> The principal business address of each person listed is General
American Life Insurance Company, 13045 Tesson Ferry Road, St. Louis,
MO 63128, unless otherwise indicated.
</TABLE>
C-3
<PAGE> 91
<TABLE>
<CAPTION>
Positions and Offices
Directors with Depositor
<S> <C>
August A. Busch III Director
Anheuser-Busch Companies, Inc.
One Busch Place
St. Louis, Missouri 63118
William E. Cornelius Director
Union Electric Company
1901 Chouteau Street
St. Louis, MO 63103
John C. Danforth Director
Bryan Cave
One Metropolitan Square, Suite 3600
St. Louis, Missouri 63102
Bernard A. Edison Director
Edison Brothers Stores, Inc.
P.O. Box 14020
St. Louis, Missouri 63178
William E. Maritz Director
Maritz, Inc.
1375 North Highway Drive
Fenton, Missouri 63099
Craig D. Schnuck Director
Schnuck Markets, Inc.
11420 Lackland Road
P.O. Box 46928
St. Louis, Missouri 63146
William P. Stiritz Director
Ralston Purina Company
Checkerboard Square
St. Louis, Missouri 63164
Andrew C. Taylor Director
Enterprise Rent-A-Car
600 Corporate Park Drive
St. Louis, Missouri 63105
C-4
<PAGE> 92
<CAPTION>
Positions and Offices
Directors with Depositor
<S> <C>
H. Edwin Trusheim Director
General American Life Insurance Company
700 Market Street
St. Louis, Missouri 63101
Robert L. Virgil Director
Edward Jones and Company
12555 Manchester Road
St. Louis, Missouri 63131-3729
Virginia V. Weldon, M.D. Director
Monsanto Company
800 North Lindbergh Boulevard
St. Louis, Missouri 63167
Ted C. Wetterau Director
Wetterau Associates
7000 Bonhomme, Suite 750
St. Louis, Missouri 63105
</TABLE>
Item 26. Persons Controlled by or Under Common Control With the Depositor
or Registrant
General American Mutual Holding Company: a mutual holding company.
- ---------------------------------------
GenAmerica Corporation: formed to hold all of the stock of General
----------------------
American Life Insurance Company.
Walnut Street Securities, Inc.: wholly-owned, third-tier
------------------------------
subsidiary engaged in the process of selling variable life
insurance and variable annuities and other securities.
Walnut Street Advisers, Inc.: wholly-owned subsidiary of
----------------------------
Walnut Street Securities engaged in the business of giving
investment advice.
WSS Insurance Agencies (Alabama, Massachusetts, Ohio,
-----------------------------------------------------
Texas), Inc.: formed to act as insurance agencies.
------------
C-5
<PAGE> 93
Collaborative Strategies, Inc.: wholly-owned business management
------------------------------
consulting company.
GenAmerica Capital I: Wholly-owned Delaware trust formed for the
--------------------
purpose of issuing securities as an investment vehicle for
GenAmerica Corporation.
Missouri Reinsurance (Barbados), Inc.: wholly-owned Barbados
-------------------------------------
exempt life, accident and health reinsurance company.
General American Life Insurance Company: an insurance company
---------------------------------------
selling life and health insurance and pensions.
Cova Corporation: wholly-owned subsidiary formed to own
----------------
the former Xerox Life companies.
Cova Financial Services Life Insurance Company:
----------------------------------------------
wholly-owned by Cova Corporation, engaged in the
business of selling annuities and life insurance.
First Cova Life Insurance Company: wholly-owned by
---------------------------------
Cova Financial Services Life Insurance Company,
engaged in the sale of life insurance in New York.
Cova Financial Life Insurance Company: wholly-owned
-------------------------------------
by Cova Financial Services Life Insurance Company,
engaged in the sale of life insurance and annuities
in California.
Cova Life Management Company: wholly-owned by Cova
----------------------------
Corporation. Employer of the individuals operating the
Cova companies.
Cova Investment Advisory Corporation: wholly-owned
------------------------------------
by Cova Life Management Company. Intended to provide
investment advice to Cova Life insureds and annuity
owners.
C-6
<PAGE> 94
Cova Investment Allocation Corporation: wholly-owned
--------------------------------------
by Cova Life Management Company. Intended to provide
advice on allocation of premiums to Cova Life
insureds and annuity owners.
Cova Life Sales Company: wholly-owned by Cova Life
-----------------------
Management Company. Broker-dealer established to
supervise sales of Cova Life contracts.
Cova Life Administration Services Company: 49% owned
-----------------------------------------
by Cova Life Management Company. Provides
administrative services for Cova annuities. (51%
owned by Genelco Incorporated.)
General Life Insurance Company: wholly-owned subsidiary,
------------------------------
domiciled in Texas, engaged in the business of selling life
insurance and annuities.
General Life Insurance Company of America: wholly-
-----------------------------------------
owned subsidiary, domiciled in Illinois, engaged in
the business of selling life insurance and annuities.
Paragon Life Insurance Company: wholly-owned subsidiary
------------------------------
engaged in employer sponsored sales of life insurance.
Equity Intermediary Company: wholly-owned subsidiary
---------------------------
holding company formed to own stock in subsidiaries.
Reinsurance Group of America, Incorporated:
------------------------------------------
subsidiary, of which approximately 64% is owned by
Equity Intermediary and the balance by the public.
RGA Sudamerica S.A.: Chilean subsidiary, of
-------------------
which all but one share is owned by RGA and one
share is owned by RGA Reinsurance Company,
existing to hold Chilean reinsurance
operations.
C-7
<PAGE> 95
BHIF America Sequros de Vida S.A.:
---------------------------------
Chilean subsidiary, of which 50% is owned
by RGA Sudamerica S.A. and 50% is owned
by Chilean interests, engaged in business
as a life/annuity insurer.
RGA Reinsurance Company Chile S.A.: 100%
----------------------------------
owned by RGA, engaged in business of
reinsuring life and annuity business of
BHIF America.
Manantial Sequros de Vida S.A.: Argentinean
------------------------------
subsidiary 100% owned by RGA, engaged in
business as a life, annuity, disability and
survivorship insurer.
RGA Reinsurance Company: subsidiary of
-----------------------
Reinsurance Group of America engaged in the
reinsurance business.
Fairfield Management Group, Inc. (fka
-------------------------------------
Great Rivers Holding Company): 100%
-----------------------------
owned subsidiary.
Reinsurance Partners, Inc. (fka
-------------------------------
Adrian Baker Reinsurance
------------------------
Intermediaries, Inc.): wholly-
---------------------
owned subsidiary of Fairfield
Management Group, Inc., engaged in
business as a reinsurance brokerage
company.
Great Rivers Reinsurance
------------------------
Management, Inc.: wholly-owned
----------------
subsidiary of Fairfield Management
Group, Inc., acting as a
reinsurance manager.
RGA (U.K.) Underwriting Agency
------------------------------
Limited: 80% owned by Fairfield
-------
Management Group, Inc.
C-8
<PAGE> 96
RGA Reinsurance Company (Barbados) Ltd.:
---------------------------------------
subsidiary of Reinsurance Group of
America, Incorporated formed to engage in
the exempt insurance business.
RGA/Swiss Financial Group, L.L.C.:
---------------------------------
40% owned subsidiary formed to
market and manage financial
reinsurance business to be assumed
by RGA Reinsurance Company.
RGA International Ltd.: a New Brunswick
----------------------
corporation wholly-owned by Reinsurance
Group of America, existing to hold
Canadian reinsurance operations.
RGA Canada Management Company,
------------------------------
Ltd.: a New Brunswick corporation
----
wholly-owned by G.A. Canadian
Holdings, existing to accommodate
Canadian investors.
RGA Life Reinsurance Company
----------------------------
of Canada: wholly-owned by
---------
RGA Canada Management
Company, Ltd.
RGA Holdings Limited: holding company formed
--------------------
in the United Kingdom to own two operating
companies: RGA Managing Agency Limited and RGA
Capital Limited.
RGA Managing Agency Limited: company has
---------------------------
applied to Lloyd's of London for
registration as a managing agent or
underwriter.
RGA Capital Limited: company has applied
-------------------
to Lloyd's of London for admission as the
sole corporate member of a new Lloyd's
syndicate which will underwrite accident
and health business.
C-9
<PAGE> 97
RGA Insurance Company (Bermuda) Limited:
---------------------------------------
subsidiary formed to engage in insurance
business.
RGA Australian Holdings Pty Limited:
-----------------------------------
holding company formed to own RGA
Reinsurance Company of Australia Limited.
RGA Reinsurance Company of
--------------------------
Australia Limited: formed to
-----------------
reinsure the life, health and
accident business of non-affiliated
Australian insurance companies.
Security Equity Life Insurance Company:
--------------------------------------
wholly-owned subsidiary, domiciled in New York,
engaged in the business of selling life
insurance and annuities.
General American Holding Company: wholly-owned
--------------------------------
subsidiary owning non-insurance subsidiaries.
Conning Corporation: 63% owned, second-
-------------------
tier subsidiary formed to own the Conning
companies (with the remainder owned by
the public).
Conning, Inc.: a holding company
-------------
organized under Delaware law.
Conning & Company: a
-----------------
Connecticut corporation
engaged in providing asset
management and investment
advisory services as well as
insurance research services.
Conning Asset
-------------
Management Company: a
------------------
Missouri corporation
engaged in providing
investment advice.
Consultec, Inc.: wholly-owned, second-
---------------
tier subsidiary engaged in providing data
processing services for government
entities.
C-10
<PAGE> 98
Genelco Incorporated: wholly-owned,
--------------------
second-tier subsidiary engaged in the
sale of computer software and in
providing third party administrative
services.
International Underwriting
--------------------------
Services, Incorporated: 88.3%
----------------------
owned by Genelco. Provides third
party underwriting services to
insurance companies.
Genelco de Mexico: 99% owned by
-----------------
Genelco Incorporated, engaged in
licensing of Genelco software
products in Latin America.
Genelco Software, S.A.: 99% owned
----------------------
by Genelco Incorporated, engaged in
licensing of Genelco software
products in Spain.
Cova Life Administration Services
---------------------------------
Company: 51% owned. Provides
-------
administrative services for Cova
annuities. (49% owned by Cova Life
Management Company.)
Red Oak Realty Company: wholly-owned,
----------------------
second-tier subsidiary formed for the
purpose of investing in and operating
real estate.
GenMark Incorporated: wholly-owned,
--------------------
second-tier subsidiary company acting as
distribution company.
Stan Mintz Associates, Inc.: wholly-
---------------------------
owned subsidiary purchased to maintain a
significant marketing presence in the
Madison, Wisconsin area upon the
retirement of General Agent Stan Mintz.
White Oak Royalty Company: wholly-owned,
-------------------------
second-tier subsidiary formed to own mineral
interests.
C-11
<PAGE> 99
Symbience, L.L.C.: 60% owned by General
-----------------
American; administers notification, billing,
and collection of insurance premiums for group
employee welfare benefit plans.
Mutual funds associated with General American Life Insurance Company:
General American Capital Company
The Walnut Street Funds, Inc.
C-12
<PAGE> 100
Item 27. Number of Contract Owners
As of 31 March 1998 there were: 8,485
Title of Class Number of Owners of Record
Qualified 7,052
Non-Qualified 1,433
Item 28. Indemnification
Section 351.355 of the Missouri General and Business Corporation Law, in
brief, allows a corporation to indemnify any person who is a party or is
threatened to be made a party to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement actually and
reasonably incurred by him in connection with such action if he acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation. Where any person was or is a party or is
threatened to be made a party in an action or suit by or in the right of the
corporation to procure a judgment in its favor, indemnification may not be
paid where such person shall have been adjudged to be liable for negligence
or misconduct in the performance of his duty to the corporation, unless a
court determines that the person is fairly and reasonably entitled to
indemnity. A corporation has the power to give any further indemnity, to any
person who is or was a director, officer, employee or agent, provided for in
the articles of incorporation or as authorized by any by-law which has been
adopted by vote of the shareholders, provided that no such indemnity shall
indemnify any person's conduct which was finally adjudged to have been
knowingly fraudulent, deliberately dishonest, or willful misconduct.
In accordance with Missouri law, General American's Board of Directors, at
its meeting on 19 November 1987 and the policyholders of General American at
the annual meeting held on 26 January 1988 adopted the following resolutions:
"BE IT RESOLVED THAT
C-13
<PAGE> 101
1. The company shall indemnify any person who is or was a director,
officer, or employee of the company, or is or was serving at the request of
the company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him or her in connection with
any civil, criminal, administrative or investigative action, proceeding or
claim (including an action by or in the right of the company) by reason of
the fact that he or she was serving in such capacity if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the company; provided that such person's
conduct is not finally adjudged to have been knowingly fraudulent,
deliberately dishonest or willful misconduct.
2. The indemnification provided herein shall not be deemed exclusive
of any other rights to which a director, officer, or employee may be entitled
under any agreement, vote of policyholders or disinterested directors, or
otherwise, both as to action in his or her official capacity and as to action
in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, or employee and shall inure
to the benefit of the heirs, executors and administrators of such a person."
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
C-14
<PAGE> 102
Item 29. Principal Underwriters
(a) Walnut Street Securities, Inc., serves as the principal
underwriter for the variable annuity contracts funded by Separate Account
Two. Walnut Street Securities also serves as the principal underwriter for
variable life insurance policies funded by Separate Account Eleven of General
American.
(b) Directors and Officers
<TABLE>
<CAPTION>
Name and Principal Business Positions and Offices
Address<F*> with Underwriter
Officers
<S> <C>
Richard J. Miller President, Chief
Executive Officer
Nancy L. Gucwa Executive Vice President
and Chief Operating
Officer
Milton F. Svetanics, Jr. Vice President,
Secretary, and General
Counsel
Don P. Wuller Senior Vice President,
Administration
Steven D. Anderson Vice President & Chief
Financial Officer
Stephen E. Abbey Vice President,
Compliance and Assistant
Secretary
E. Thomas Hughes, Jr. Treasurer
<CAPTION>
Directors
<S> <C>
Dona L. Barber Director
Kevin C. Eichner Director, Chairman
Nancy L. Gucwa Director
Matthew P. McCauley Director
Richard J. Miller Director
Michael N. Nicholson Director
Steven C. Palmitier Director
Milton F. Svetanics, Jr. Director
Bernard H Wolzenski Director
<FN>
<F*> Messrs. Hughes, McCauley, and Svetanics are at 700 Market Street, St.
Louis, Missouri 63101. Mr. Wolzenski is at 13045 Tesson Ferry Road, St.
Louis, Missouri 63128. Messrs. Abbey, Anderson, Miller, M.M. Nicholson,
Palmitier, Wuller and Ms. Gucwa are at 400 South Fourth Street, Suite 1000,
St. Louis, Missouri 63102.
</TABLE>
(c) Principal Underwriter
Walnut Street
1997 Brokerage 1997 Compensation
$843,979.40 $843,979.40
C-15
<PAGE> 103
Item 30. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of the
1940 Act and the rules under it are maintained by General American at its
administrative offices, 13045 Tesson Ferry Road, St. Louis, Missouri 63128.
Item 31. Management Services
All management contracts are discussed in Part A or Part B.
Item 32. Undertakings and Representations
(a) Registrant undertakes that it will file post-effective amendments to
this registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as payments under the variable annuity
contracts may be accepted.
(b) Registrant undertakes to include, as part of the application to
purchase a contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request to General American at the
address or phone number listed in the prospectus.
(d) Registrant represents that it is relying upon a "no-action" letter (No.
P-6-88) issued to the American Council of Life Insurance concerning the
conflict between the redeemability requirements of sections 22(e), 27(c)(1),
and 27(d) of the Investment Company Act of 1940 and the limits on the
redeemability of variable annuities imposed by section 403(b)(11) of the
Internal Revenue Code. Registrant has included disclosure concerning the
403(b)(11) restrictions in its prospectus and sales literature, and
established a procedure whereby each plan participant will sign a statement
acknowledging these restrictions before the contract is issued. Sales
representatives have been instructed to bring the restrictions to the
attention of potential plan participants.
(e) General American, of which Registrant forms a part, hereby represents
that the fees and charges deducted under the terms of the Contracts are, in
the aggregate, reasonable in relationship to the services rendered, the
expenses expected, and the risks assumed by General American.
C-16
<PAGE> 104
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, General American Separate Account Two certifies that it
meets the requirements of Securities Act Rule 485(b) for effectiveness of the
Registration Statement and has duly caused this amended Registration
Statement to be signed on its behalf in the City of St. Louis, State of
Missouri, on the 14th day of April, 1998.
GENERAL AMERICAN SEPARATE
ACCOUNT TWO (REGISTRANT)
(Seal) By: GENERAL AMERICAN LIFE
INSURANCE COMPANY (for
Registrant and as
Depositor)
Attest:---------------------- By:----------------------
Robert J. Banstetter, Sr. Richard A. Liddy
Secretary Chairman, President, and
Chief Executive Officer
General American Life
Insurance Company
C-17
<PAGE> 105
As required by the Securities Act of 1933 and the Investment Company Act of
1940, this amended Registration Statement has been signed below by the
following persons in their capacities with General American Life Insurance
Company and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
- ---------------------
Richard A. Liddy Chairman, President, and 4/14/98
Chief Executive Officer
(Principal Executive Officer)
- ---------------------
John W. Barber Vice President and Controller 4/14/98
(Principal Accounting Officer and
Principal Financial Officer)
<F*>
August A. Busch, III Director
<F*>
William E. Cornelius Director
<F*>
John C. Danforth Director
<F*>
Bernard A. Edison Director
- ------------------------
Richard A. Liddy Director 4/14/98
<F*>
William E. Maritz Director
<F*>
Craig D. Schnuck Director
<F*>
William P. Stiritz Director
C-18
<PAGE> 106
<CAPTION>
Signature Title Date
<S> <C> <C>
<F*>
Andrew C. Taylor Director
<F*>
H. Edwin Trusheim Director
<F*>
Robert L. Virgil, Jr. Director
<F*>
Virginia V. Weldon Director
<F*>
Ted C. Wetterau Director
<F*>By --------------------- 4/14/98
Matthew P. McCauley
<FN>
<F*> Original powers of attorney authorizing Matthew P. McCauley to sign the
registration statement and amendments thereto on behalf of the Directors of
General American Life Insurance Company have been filed previously.
</TABLE>
C-19
<PAGE> 107
The Board of Directors
General American Life Insurance Company
We consent to the use of our reports included herein on General American Life
Insurance Company and on General American Separate Account Two and to the
reference of our firm under the heading "Financial Statements" in the
Registration Statement and Prospectus for General American Separate Account
Two. Our report on the consolidated financial statements of General American
Life Insurance Company and subsidiaries refers to the adoption of Statement
of Financial Accounting Standards No. 120, Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts in 1996.
KPMG Peat Marwick LLP
St. Louis, Missouri
April 17, 1998
C-20
<PAGE> 1
Exhibit 6(a)
AMENDED AND RESTATED CHARTER and ARTICLES OF INCORPORATION of GENERAL
AMERICAN LIFE INSURANCE COMPANY
ARTICLE I
The name of the Company shall continue to be General American Life
Insurance Company.
ARTICLE II
The principal office of the Company shall continue to be located at 700
Market Street in the City of St. Louis, in the State of Missouri.
ARTICLE III
The Company is incorporated for the purpose of making insurance upon
the lives of individuals and every assurance pertaining thereto or connected
therewith, to grant, purchase and dispose of annuities and endowments of
every kind and description whatsoever, to provide an indemnity against death
and for weekly or other periodic indemnity for disability occasioned by
accident or sickness to the person of the assured and to have all the further
rights, powers and privileges granted or permitted life insurance companies
organized under the provisions of Chapter 376 R.S.Mo., and all Acts
amendatory thereof or additional thereto.
ARTICLE IV
The Company was originally organized as a domestic stock and mutual
life insurance Company in 1933 and, in a process initiated in 1936, converted
to a mutual Company with no capital stock. Pursuant to a Plan of
Reorganization (the "Plan") adopted by the Company as of 26 September 1996,
and in accordance with Senate Bill No. 759 as enacted by the 1996 Session of
the 88th General Assembly of the State of Missouri (Section 376.1300 et seq.
R.S.Mo.)(the "MHC Statute"), the Company converted to a stock form life
insurance Company, without members, and each member of the Company
immediately prior to the consummation of the reorganization described in the
Plan became, automatically by operation of law, a member of General American
Mutual Holding Company in accordance with the provisions of the Articles of
Incorporation and By-laws
<PAGE> 2
of General American Mutual Holding Company and the MHC Statute.
The aggregate number of shares of stock that the Company shall be
authorized to issue shall be thirty thousand (30,000) shares of common stock,
with par value of one dollar ($1.00) per share.
No holder of stock of the Company shall be entitled as a matter of
right to subscribe for or purchase any part of any new or additional issue of
stock, or securities convertible into stock, of any class whatsoever, whether
now or hereafter authorized, and all such additional shares of stock or other
securities convertible into stock may be issued and disposed of by the Board
of Directors to such person or persons and on such terms and for such
consideration (so far as may be permitted by law) as the Board of Directors,
in its absolute discretion, may deem advisable.
The Company shall be a continuation of the original corporation of the
same name whose first Certificate of Authority to transact a life insurance
business was granted by the Superintendent of the Insurance Department on the
5th day of September, 1933.
ARTICLE V
The corporate powers of the Company shall be vested in a Board of
Directors and shall be exercised by the Board and by such officers, agents,
employees and committees, including an Advisory Committee, as the Board may,
in its discretion, from time to time appoint and empower. The Board shall
have the power from time to time to make, amend or repeal such By-laws, rules
and regulations for the transaction of the business of the Company as the
Board may deem expedient and as are not inconsistent with this Amended and
Restated Charter and Articles of Incorporation or the constitution or other
laws of the State of Missouri. The Company shall have perpetual succession
for a term of nine hundred ninety-nine (999) years.
ARTICLE VI
The Board of Directors shall consist of not less than nine (9) and not
more than fifteen (15) persons elected as hereinafter provided. At least one
Director shall be a
<PAGE> 3
citizen and resident of the state of Missouri, and a majority of the Directors
shall be policyholders of the Company. Meetings of the Board of Directors
shall be held at such time and place and upon such notice as shall be
prescribed by the By-laws of the Company. Vacancies in the Board of Directors
may be filled by the shareholders at any regular meeting or at any special
meeting called for that purpose, or by vote of a majority of Directors present
at any regular or special meeting. Vacancies occasioned by death, resignation
or disqualification when filled shall be filled for the unexpired term for
which such Director was elected. Any Director elected by the Board to fill a
vacancy shall have the same qualifications required of the Director whose place
he or she takes. A majority of the members of the Board of Directors, or such
greater number thereof as may from time to time be provided for in the By-laws
of the Company, shall constitute a quorum for the transaction of business, but
a smaller number may meet and adjourn from time to time until a quorum is
present.
ARTICLE VII
The incumbent members of the Board of Directors shall continue to be
Directors of the Company until their respective terms have expired or until
their successors are duly elected and qualified. New Directors will be
elected by class so as to equalize as nearly as possible the number in each
class of Directors. There shall continue to be three classes of Directors,
each class serving for a three year term expiring one year after expiration
of the term of the immediately preceding class (effective at the annual
meeting of the Company for the year in which the term expires), so that the
term of one class will expire each year. Each Director shall serve during
the term for which he or she was elected or until a successor is duly elected
and qualified and nothing in this Amended and Restated Charter and Articles
of Incorporation shall be interpreted to prevent a Director whose term is
expiring from being eligible for re-election.
ARTICLE VIII
The annual meeting of the Company shall be held at the office of the
Company in the City of St. Louis, State of Missouri, on the fourth Thursday
in April in each year or at such other place as may be selected by the Board
of Directors and shall be held at such time as shall be selected by the Board
of Directors or as provided in the By-laws of the
<PAGE> 4
Company. Special meetings of the Company shall be called at any time by the
vote of a majority of the entire number of the members of the Board of
Directors, or upon the written request of five percent of those shareholders of
the Company eligible to vote at such meeting, which request shall specify the
matters proposed to be acted upon. Notice of any annual or special meeting
shall be given in the manner provided in the By-laws.
Each outstanding share of stock shall be entitled to one vote upon each
matter submitted to a vote at any annual or special meeting of the Company.
On all propositions which shall be submitted for decision at any annual or
special meeting of the Company, such matter shall be decided by the vote of
the majority of the shares voting at such meeting.
ARTICLE IX
The policyholders of the Company shall benefit in the earnings and
profits of the Company in such manner as shall be determined from time to
time by the Board of Directors under the laws of the State of Missouri, and
particularly Section 376.360 R.S.Mo. and all Acts amendatory thereof. Any
allocation of earnings and profits as made by the Board of Directors pursuant
to the provisions of this Article shall be binding and conclusive upon every
person who is entitled to share in its profits or earnings.
ARTICLE X
This Amended and Restated Charter and Articles of Incorporation may be
amended at any annual or special meeting of the Company by the majority vote
of the shareholders voting at such meeting; provided that if it is proposed
to amend the same at any special meeting a copy of the proposed amendment and
a copy of the notice of the meeting of the shareholders of the Company called
for that purpose shall be mailed at least ten (10) days before such meeting
to each shareholder as the shareholder's address appears upon the books of
the Company.
If it be proposed to amend Articles IV, V, IX and X of this Amended and
Restated Charter and Articles of Incorporation at any meeting, annual or
otherwise, then the notice and a copy of the proposed amendment, provided in
the
<PAGE> 5
preceding paragraph, shall be mailed at least thirty (30) days before such
meeting and a true and correct list of the shareholders of the Company,
together with the address of each as shown on the books and records of the
Company, shall be filed with the Director of the Department of Insurance of
the State of Missouri at least twenty (20) days before such meeting.
ARTICLE XI
Whenever in this Amended and Restated Charter and Articles of
Incorporation notice is required or permitted to be given by mail, the
affidavit of the person who mailed such notice, filed with the Secretary of
the Company, shall constitute conclusive evidence that such notice has been
given and mailed.
ARTICLE XII: INDEMNIFICATION
The Company shall indemnify each of its directors, officers, employees,
and agents to the full extent specified by Section 351.355 R.S.Mo., as
amended from time to time (the "Indemnification Statute"), and, in addition,
shall indemnify each of them against all expenses (including, without
limitation, attorneys' fees, judgments, fines, taxes, and amounts paid in
settlement) actually and reasonably incurred by him or her in connection with
any claim (including, without limitation, any threatened, pending, or
completed action, suit, or proceeding whether civil, criminal,
administrative, or investigative and whether or not by or in the right of any
corporation) by reason of the fact that he or she is or was serving the
Company or at the request of the Company in any of the capacities referred to
in the Indemnification Statute or arising out of his or her status in any
such capacity, provided that the Company shall not indemnify any person from
or on account of such person's conduct which was finally adjudged to have
been knowingly fraudulent, deliberately dishonest or willful misconduct.
The Company is authorized to give or supplement any of the aforesaid
indemnifications by By-law, agreement, or otherwise and support them by
insurance to the extent it deems appropriate. Amounts to be paid under this
Article XII shall be disbursed at such times and upon such procedures as the
Company shall determine. All such indemnification shall continue as to any
person who has ceased to serve in any of the aforesaid capacities and shall
inure to the benefit of
<PAGE> 6
the heirs, devisees, and personal representatives of such person.
Indemnification given under this Article XII shall survive elimination or
modification of this Article XII with respect to any such expenses incurred in
connection with claims arising out of acts or omissions occurring prior to such
elimination or modification and persons to whom such indemnification is given
shall be entitled to rely on such indemnification as a contract with the
Company.
<PAGE> 1
Exhibit 6(b)
AMENDED AND RESTATED BY-LAWS
of
GENERAL AMERICAN LIFE INSURANCE COMPANY
ARTICLE I
Shareholders
Section 1. Annual Meeting. The annual meeting of the Company shall be
held on the fourth Thursday in April in each year, if not a legal holiday,
and if a legal holiday, then on the next day not a legal holiday, when
members of the Board of Directors shall be elected to succeed those whose
terms are then expiring and such other business shall be transacted as may
properly be brought before the meeting.
Section 2. Special Meetings. Special meetings of the Company may be
called at any time by the vote of a majority of the entire number of the
members of the Board of Directors. Business transacted at all special
meetings of the Company shall be confined to the purpose or purposes stated
in the notice of the meeting.
Section 3. Place and Hour of Meeting. Every annual meeting of the
Company shall commence immediately after the annual meeting of the members of
General American Mutual Holding Company shall have been concluded. Every
special meeting of the Company shall be held at such time as may be selected
by the Board of Directors. Every meeting of the Company, whether an annual
or a special meeting, shall be continued during at least three hours, unless
the object for which it was called shall be accomplished sooner and shall be
held at the office of the Company in the City of St. Louis, in the State of
Missouri, or at such other place as may be selected by the Board of
Directors.
Section 4. Notice of Meetings; Record Date. Notice of each meeting of
the Company shall be mailed to each shareholder of the Company not less than
ten nor more than fifty days previous to such meeting, and every such notice
shall state the day and hour and the place at which the meeting is to be held
and, in the case of any special meeting, shall indicate briefly the purpose
or purposes thereof. The Board of Directors of the Company shall have the
power to close the transfer books of the Company for a period not exceeding
seventy days preceding the date of any meeting of shareholders or the date of
payment of any
<PAGE> 2
dividend or the date for the allotment of rights or the date when any change or
conversion or exchange of shares goes into effect. In lieu, however, of
closing the stock transfer books, the Board of Directors may fix in advance a
date, not exceeding seventy days preceding the dates of the aforenamed
occurrences, as a record date for the determination of the shareholders
entitled to notice of, and to vote at, any such meeting and any adjournment
thereof, or entitled to receive payment of any such dividend or to any such
allotment of rights, or to exercise the rights in respect of any such change,
conversion or exchange of shares. In such case, such shareholders, and only
such shareholders as are shareholders of the Company of record on the date of
closing the transfer books or on the record date so fixed, are entitled to
notice of, and to vote at, such meeting and any adjournment thereof, or to
receive payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Company after such date of closing of the transfer
books or such record date so fixed. If the Board of Directors shall not close
the transfer books or set a record date for the determination of the
shareholders entitled to notice of, and to vote at, a meeting of shareholders,
only the shareholders who are shareholders of record at the close of business
on the 20th day preceding the date of the meeting are entitled to notice of,
and to vote at, the meeting and any adjournment of the meeting.
Section 5. List of Voters. A complete list of all shareholders
entitled to vote at any annual and special meeting of the Company's
shareholders is to be compiled at least ten days before such meeting by the
officer or agent having charge of the transfer books for shares of stock of
the Company. Such list is to be compiled in alphabetical order with the
address and the number of shares held by each shareholder. The list must be
kept on file in the registered office of the Company for a period of at least
ten days prior to such meeting and must be open to inspection by any
shareholder for such period during usual business hours. Such list must also
be present and kept open at the time and place of such meeting and is subject
to the inspection of any shareholder during such meeting. The original share
ledger or transfer book, or a duplicate thereof kept in Missouri, is prima
facie evidence as to who are the shareholders of the Company entitled to
examine such list or share ledger or transfer book, or to vote at any meeting
of shareholders.
<PAGE> 3
Failure to comply with the requirements of this section does not affect the
validity of any action taken at such meeting.
Section 6. Quorum. A majority of the outstanding shares entitled to
notice of and to vote at a meeting, present in person or by proxy conforming
to Section 9 of this Article I, shall constitute a quorum for the transaction
of any business coming before any regular or special meeting of the Company
duly and properly called, except as provided by law, the Amended and Restated
Charter and Articles of Incorporation of the Company, or these By-Laws. If,
however, such quorum of shareholders shall not be present or represented at
any meeting of the Company, the shareholders entitled to vote thereat,
present in person or by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until
requisite number of shareholders shall be present. At any such adjourned
meeting at which the requisite number of shareholders shall be represented
any business may be transacted which might have been transacted at the
meeting as originally notified.
Section 7. Voting Rights. Each outstanding share of stock shall be
entitled to one vote upon each matter submitted to a vote at any annual or
special meeting of the Company.
Section 8. Inspectors of Election. At every meeting of the Company,
the President shall appoint not less than two persons, who are not Directors,
inspectors to receive and canvass the votes given at the meeting, and certify
the result to him. At the next meeting of the Board of Directors held
thereafter, the President shall lay before the Board the returns so
certified, and thereupon such proceedings shall be had as the subject-matter
decided by the election or the vote may require. Each such inspector, before
he shall enter on the duties of his office, shall take and subscribe the
following oath before any officer authorized by law to administer oaths: "I
do solemnly swear that I will execute the duties of an inspector of the
election now to be held with strict impartiality and according to the best of
my ability."
Section 9. Voting by Proxy. Every person legally entitled to vote as
a shareholder at any election, or on any question relating to the management
or business of the Company may cast such vote by proxy; but said proxy shall
be
<PAGE> 4
a shareholder of the Company otherwise entitled to vote, and the authority
to cast such vote shall be in writing and shall state the name of the person
authorized to cast such vote and the date of the meeting at which such vote
shall be cast. In no event shall a proxy be valid for more than one annual
or special meeting, as the case may be.
Section 10. Voting of Shares by Certain Holders.
(a) Shares of stock in the name of another corporation, foreign
or domestic, are to be voted by such officer, agent, or proxy as the bylaws
of such corporation may prescribe, or in the absence of such provision, as
the Board of Directors of such corporation may determine.
(b) Shares of stock in the name of a deceased person are to be
voted by his executor or administrator in person or by proxy.
(c) Shares of stock in the name of a fiduciary, such as
guardian, curator, or trustee are to be voted by such fiduciary either in
person or by proxy provided the books of the Company show the stock to be in
the name of such fiduciary in such capacity.
(d) Shares of stock in the name of a receiver are to be voted
by such receiver, and shares held by, or in the control of, a receiver are to
be voted by such receiver without the transfer thereof into his name, if such
voting authority is contained in an appropriate order of the court by which
such receiver was appointed.
(e) Shares of stock which have been pledged are to be voted by
the pledgor until the shares of stock have been transferred into the name of
the pledgee, and thereafter, the pledgee is entitled to vote the shares so
transferred.
Section 11. Informal Action by Unanimous Consent of Shareholders. Any
action required by law to be taken at a meeting of the shareholders of the
Company, or any action which may be taken at a meeting of the shareholders,
may be taken without a meeting if all of the shareholders entitled to vote
with respect to the subject matter thereof sign written consents that set
forth the action so taken. Such consents have the same force and effect as a
unanimous vote of the shareholders at a meeting duly held, and may be stated
<PAGE> 5
as such in any certificate or document filed with the Secretary of State of
the State of Missouri or any other state in the United States of America or
other Country. The Secretary of the Company shall file such consents with
the minutes of the meetings of the shareholders of the Company.
Section 12. Shareholder Proposals and Director Nominations. (a) All
shareholder proposals and Director nominations that have not been proposed,
adopted, or ratified by the Company's Board of Directors must be submitted by
certified mail to, and received by, the Company's Secretary no later than
sixty (60) days prior to the date of meeting at which the proposal or
nomination is to be voted upon by the shareholders. All such proposals must
be accompanied by: (i) the proponent's name, address, and telephone number;
(ii) a brief narrative that describes in sufficient detail the purpose and
the anticipated costs and benefits of the proposal; and (iii) the financial
interests, if any, of the proponent in the proposal. All such Director
nominations must be accompanied by the nominee's biographical, background,
and related information as required by federal securities laws in the
solicitation of proxies for the election of directors, as if proxies were
being solicited for the election of the nominee under the federal securities
laws. In addition, all such shareholder proposals and Director nominations
must be accompanied by: (i) a list of shareholders that have signed written
consents in support of the proposal or Director nomination; (ii) an affidavit
attesting that the list of shareholders is accurate and that each person on
the list has submitted a signed written consent in favor of the proposal or
nomination; and (iii) copies of the written consents. The list must contain
at least five percent (5%) of the shares eligible to vote on the proposal or
nomination. The Secretary shall examine the list and written consents in
order to satisfy himself or herself of the validity and level of shareholder
support. If the Secretary determines that the proposal or nomination is
supported by less than five percent (5%) of the Company's shares eligible to
vote, then this requirement will not be met.
(b) All costs associated with complying with this Section 12 of
the Bylaws shall be borne by the proponent of the proposal or nomination.
Shareholder proposals and Director nominations that have not been proposed,
adopted, or ratified by the Company's Board of Directors, and that fail to
comply fully with each of the requirements set forth
<PAGE> 6
in this Section 12 of the Bylaws shall be considered void and of no effect, and
shall not be presented to the shareholders for consideration or vote.
ARTICLE II
Board of Directors
Section 1. Number and Term of Office. The property and the business
of the Company shall be managed by its Board of Directors, at least nine and
not more than fifteen in number, at least one of whom shall be a citizen and
resident of the State of Missouri. Directors will be elected by class so as
to equalize as nearly as possible the number in each class of Directors.
There shall be three classes of Directors, each class serving for a three
year term expiring one year after expiration of the term of the immediately
preceding class (effective at the annual meeting of the Company for the year
in which the term expires), so that the term of one class will expire each
year. All Directors shall serve during the term for which they were elected
or until their successors are duly elected and qualified, except that if any
Director shall fail to attend at least two meetings (either regular or
special) of the Board of Directors during a calendar year, he may be deemed
to have resigned as a Director effective on December 31 of such year, and the
vacancy so created shall be filled by the Board of Directors in the manner
provided in Section 2 of Article II of these By-Laws. Nothing in these
By-Laws shall be interpreted to prevent a Director or Officer whose term is
expiring from being eligible for re-election or reappointment.
Section 2. Filling of Vacancies. Vacancies in the Board of Directors
when not filled by shareholders may be filled by the Directors, as provided
for in Article VI of the Amended and Restated Charter and Articles of
Incorporation. Vacancies occasioned by death, resignation, or
disqualification, when filled, shall be filled for the unexpired term for
which such Director was elected. Any Director elected by the Board to fill
such a vacancy shall have the same qualifications required of the Director
whose seat he fills.
Section 3. Place of Meeting, etc. The Board of Directors may hold
their meetings and have one or more offices, and keep the books of the
Company, except as otherwise required by law, at the office of the Company,
in
<PAGE> 7
the City of St. Louis, Missouri, or at such other place or places as they
may from time to time by resolution determine.
Section 4. Regular Meetings. Regular meetings of the Board of
Directors shall be held on the Thursday following the fourth Tuesday of
January, on the fourth Thursday of February, April, July, October, and on the
third Thursday of December in each year and shall commence immediately after
the meeting of the Board of Directors of General American Mutual Holding
Company shall have been concluded, or at such time or times of day as the
Board may determine.
Section 5. Special Meetings. Special meetings of the Board of
Directors may be called by the President on three days' notice to each
Director specifying the time and place of such meeting, which notice may be
given, either personally or by mail or by facsimile addressed to the
Director; and shall be called by the Secretary in like manner and on like
notice on the written request of any five Directors. Every special meeting
shall be held either at the office of the Company in the City of St. Louis,
Missouri, or at some other place which shall have been previously designated
by resolution of the Board as one of the places at which special meetings of
the Board may be held. Except as herein otherwise provided, or unless
otherwise indicated in the notice thereof, any business may be transacted at
any special meeting, and any business may be transacted at any meeting at
which every Director shall be present, even though without any notice.
Section 6. Quorum. At all meetings of the Board of Directors, a
majority of the Directors then in office shall be necessary and sufficient to
constitute a quorum for the transaction of business, but if, at any meeting,
less than a quorum shall be present, a majority of those present may adjourn
the meeting from time to time, and the act of a majority of the Directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors, except as may be otherwise specifically provided by
statute or by the Amended and Restated Charter and Articles of Incorporation
of the Company or by these By-laws.
Section 7. Compensation of Directors. Members of the Board of
Directors, who are not salaried officers of the Company, shall receive such
annual compensation as shall be fixed from time to time by resolution of the
Board of Directors; and, in addition, the Directors who are not
<PAGE> 8
salaried officers of the Company shall receive a sum in such amount as shall be
fixed from time to time by resolution of the Board of Directors, and the
expenses of attendance, if any, for attendance at each regular or special
meeting of the Board, whether or not an adjournment be had because of the
absence of a quorum.
Section 8. Action by Unanimous Consent of Directors. If all the
Directors severally or collectively consent in writing to any action taken or
to be taken by the Directors, such consents have the same force and effect as
a unanimous vote of the Directors at a meeting duly held, and may be stated
as such in any certificate or document filed with the Secretary of State of
the State of Missouri or any other state in the United States of America or
other Country. The Secretary of the Company shall file such consents with
the minutes of the meetings of the Board of Directors.
ARTICLE III
Executive Committee; Other Committees
Section 1. Executive Committee, Powers. The Chief Executive Officer
of the Company may, subject to the approval of the Board of Directors,
appoint an Executive Committee to consist of himself, the President of the
Company, whether or not he is the Chief Executive Officer, the elected
Chairman of the Executive Committee, if any, and five other Directors. The
Committee shall have and exercise any or all of the powers of the Board of
Directors in the management of the business and affairs of the Company, and
the action of the Chief Executive Officer and any three other members of said
Committee shall for all purposes be and be deemed to be the action of the
Executive Committee whether or not the other members thereof shall have had
notice of such action or of the meeting at which such action shall have been
taken.
The Chief Executive Officer may, for the purpose of completing a
quorum, or to obtain the benefit of the advice and judgment of any Director
or Directors, invite any Director or Directors not a member or members of the
Executive Committee to attend any meeting of the Committee and each Director
so invited shall at such meeting have all the powers and authority of a
member of the Committee, including the right to vote.
Section 2. Term of Office. The members of the Executive Committee
shall hold office until the meeting of
<PAGE> 9
the Board of Directors next following the annual meeting of the Company after
their appointment, and until their successors are appointed, but any member of
the Executive Committee ceasing to be a Director shall forthwith cease to be a
member of the Executive Committee, and all or any of the members of the
Executive Committee may be removed at any time by a majority vote of the Board
of Directors.
Section 3. Organization. The Chairman of the Executive Committee, if
any, shall preside at its meetings but in the absence of the Chairman of the
Executive Committee, the President shall preside. In all other matters the
Executive Committee shall fix its own rules of procedure and shall meet where
and as provided by such rules.
Section 4. Quorum. At all meetings of the Executive Committee four
Directors shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the affirmative vote of four of the regular or
acting members of the Committee in all cases shall be necessary for its
adoption of any resolution. Any resolution adopted by the affirmative vote
of a majority of the regular or acting members of the Executive Committee and
any action taken by such majority shall for all purposes be deemed to be the
act of said Committee, whether or not such vote be had or action taken at a
meeting duly called and held in conformity with these By-laws or with any
rules of procedure adopted by the Committee.
Section 5. Contracts. Any member of the Executive Committee, or of
any other Committee of the Board of Directors, individually, may be a party
to, or may be interested in any contract or transaction of the Company;
provided that such contract or transaction shall be approved or ratified by
the affirmative vote of a majority of the members of such Committee not so
interested (if such majority shall be sufficient to constitute a quorum); and
no such Committee member shall be liable or responsible on account of such
contract or transaction, but the mere ownership of stock in another
corporation by any Director (whether or not a member of the Executive
Committee or of any other Committee of the Board of Directors), shall not
disqualify him to vote as a Director, or as a member of said Committee, in
respect of any transaction between the Company and such other corporation.
<PAGE> 10
Section 6. Minutes. The minutes of all proceedings of the Executive
Committee shall be entered in a book kept for that purpose.
Section 7. Other Committees. The Chief Executive Officer of the
Company may appoint a Compensation Committee to consist of himself and not
less than two other officers of the Company which, to the extent provided by
resolution or resolutions passed by a majority of the Board of Directors,
shall have and exercise the powers of the Board of Directors in compensation
matters. Further, the Board of Directors may, by resolution or resolutions
passed by a majority of the whole Board, designate one or more committees,
each committee to consist of three or more of the Directors of the Company
which, to the extent provided in said resolution or resolutions, shall have
and may exercise the powers of the Board of Directors in the management of
the business and affairs of the Company and may have power to authorize the
seal of the Company to be affixed to all papers which may require it. Each
such committee shall have such name as may be determined from time to time by
resolution adopted by the Board of Directors.
Section 8. Compensation. Members of the Executive Committee, who are
not salaried officers of the Company, shall receive such annual compensation
as shall be fixed from time to time by resolution of the Board of Directors;
and members of the Executive Committee, and of any other committee or
committees of the Board of Directors, including Directors invited by the
Chairman or President to sit thereon at any meeting, except salaried officers
of the Company, may be allowed such additional sum, and the expenses of
attendance, if any, as shall be fixed from time to time by resolution of the
Board of Directors for attendance at each meeting of any committee specified
in any such resolution, whether or not an adjournment be had because of the
absence of a quorum.
ARTICLE IV
Advisory Council
Section 1. Advisory Council. Subject to the approval of the Board of
Directors, the President may appoint annually an Advisory Council to consist
of not more than five members.
Section 2. Term. The members of the Advisory Council shall be
appointed for a term of not to exceed one year, the
<PAGE> 11
term expiring on the date of each annual meeting, and all or any of the members
of the Advisory Council may be removed at any time by a majority vote of the
Board of Directors.
Section 3. Organization. The Board of Directors shall each year
select a Chairman of the Advisory Council; otherwise the Advisory Council
shall fix its own rules of procedure and shall meet where and as provided by
such rules.
Section 4. Duties. The duties and functions of the Advisory Council
shall be advisory only, the purpose of such Council being to secure the
advice of capable and competent people interested in the Company and its
affairs for the benefit of the Board of Directors and officers of the Company
in transacting the business of the Company.
Section 5. Quorum. At all meetings of the Advisory Council, a
majority of those then appointed shall constitute a quorum for the
transaction of business.
Section 6. Chairman. The Chairman of the Advisory Council shall be
invited by the President to attend all meetings of the Board and he shall
receive the same compensation as then prevails as the compensation for
Directors. On the date of his attendance at any such Directors' meeting, if
there be an Executive Committee meeting or meetings, then the Chairman of the
Advisory Council shall be invited to attend such Executive Committee meeting
or meetings and shall receive such attendance fees as are then provided for
the members of the Executive Committee.
ARTICLE V
Officers
Section 1. Officers. The officers of the Company shall be chosen by
the Board of Directors and shall be a Chairman of the Board, unless the Board
of Directors desires the duties of the Chairman of the Board to devolve upon
the President, a Chairman of the Executive Committee, a President, one or
more Executive Vice-Presidents, as deemed necessary, one or more
Vice-Presidents, a Secretary, one or more Assistant Secretaries, an Actuary, a
Medical Director, General Counsel, Treasurer, and such other officers as the
Board of Directors may deem advisable, who shall have such authority and
perform such duties as from time to time may be prescribed by the Board of
Directors, or, in the event of
<PAGE> 12
their failure so to prescribe, then by the President. The Chairman of the
Board, the Chairman of the Executive Committee and the President shall be
chosen from among the Directors and other officers may, but need not, be
Directors. All such officers shall be elected by the Board of Directors at the
regular meeting of the Board held after each annual meeting of the
shareholders. One person may hold more than one office except that no one
person shall hold the offices of President and Secretary and no one person
shall hold the offices of Chairman of the Board and Secretary.
Section 2. Chairman of the Board. The Chairman of the Board or the
President, if it is the desire of the Board of Directors that the duties of
the Chairman of the Board devolve upon him, shall preside at all meetings of
the Board of Directors. The Chairman of the Board shall have such other
duties as may from time to time be provided by a resolution or resolutions of
the Board of Directors and he may be designated as the Chief Executive
Officer of the Company if the Board of Directors shall so determine.
Section 2A. Chairman of the Executive Committee. The Chairman of the
Executive Committee, if any, otherwise the President, shall preside at all
meetings of the Executive Committee. In the absence of the Chairman of the
Executive Committee, the President shall preside. The Chairman of the
Executive Committee shall have such other duties as may from time to time be
provided by resolution or resolutions of the Board of Directors.
Section 2B. Chief Executive Officer. Either the Chairman of the Board
of Directors or the President shall be designated the Chief Executive Officer
of the Company and such designation shall be made by the Board of Directors
by a resolution or resolutions adopted from time to time.
The Chief Executive Officer shall have general charge and control of
all of its business and affairs and shall preside at all meetings of the
Company. He shall be ex-officio a member of all committees of the Board of
Directors and he shall from time to time secure information concerning the
business and affairs of the Company and shall promptly lay such information
before the Board of Directors or any of its committees authorized for such
purpose.
The Chairman of the Board, when he is the Chief Executive Officer of
the Company, shall exercise all powers
<PAGE> 13
and duties otherwise specifically delegated in these By-laws to the President
of the Company, provided that in the absence of the Chairman of the Board of
Directors his duties and responsibilities as Chief Executive Officer of the
Company shall devolve upon the President, as provided for in Article V, Section
3 of these By-laws, notwithstanding the provisions of Article V, Section 4 of
these By-laws, as amended, and provided further that the President of the
Company, regardless of whether he is the Chief Executive Officer, the Chairman
of the Board, if he is the Chief Executive Officer, an Executive Vice-President
or a Vice-President may sign contracts with the Secretary in the name of the
Company, as authorized in Article V, Section 6 of these By-laws.
Section 3. President. The President may be designated as the Chief
Executive Officer of the Company if the Board of Directors shall so
determine.
If he is not designated as Chief Executive Officer, the President shall
perform such duties as may from time to time be assigned to him by resolution
of the Board of Directors or of the Executive Committee or by the Chairman of
the Board. In the absence of the Chairman of the Board of Directors his
duties and responsibilities as Chief Executive Officer of the Company shall
devolve upon the President.
Section 4. Executive Vice-Presidents. Each Executive Vice-President
shall perform such duties as may from time to time be assigned to him by
resolution of the Board of Directors or of the Executive Committee or by the
Chief Executive Officer of the Company or by the President of the Company.
In the absence of the President, his duties should devolve upon the Executive
Vice-Presidents.
Section 5. Vice-Presidents. Each Vice-President shall perform such
duties as may from time to time be assigned to him by resolution of the Board
of Directors or of the Executive Committee or by the President.
Section 6. Secretary. The Secretary shall keep the minutes of all
meetings of the Board of Directors and the minutes of all meetings of the
Company in books provided for that purpose; he shall attend to the giving or
serving of all notices of the Company; he may sign with the President, an
Executive Vice-President, or a Vice-President, in the name of the Company,
all contracts authorized by the Board of
<PAGE> 14
Directors or by any Committee of the Company, having the requisite authority
and, when so ordered by the Board of Directors or such Committee, he shall
affix the seal of the Company thereto; he shall have charge of such books and
papers as the Board of Directors or the Executive Committee shall direct, all
of which shall at all reasonable times be open to the examination of any
Director, upon application at the office of the Company during business hours;
and he shall in general perform all the duties incident to the office of the
Secretary, subject to the control of the Board of Directors, the Executive
Committee, the Chairman of the Board, and the President.
Section 7. Compensation of Officers. The President and the other
officers of the Company shall be entitled to receive such compensation for
their services as may from time to time be determined by the Board of
Directors.
Section 8. Removal of Officers. The President, subject to the
approval of the Board of Directors, may at any time remove any of the
officers of the Company and the salary of any officer so removed by him shall
cease upon the approval of such removal being given by the Board. Except
where otherwise expressly provided in a contract duly authorized by the Board
of Directors, all officers and agents shall be subject to removal at any time
by the affirmative vote of a majority of the whole Board of Directors, and
all officers, agents, and employees other than officers appointed by the
Board of Directors shall hold office at the discretion of the Committee or of
the officers appointing them.
Section 9. Offices to Be Kept in Missouri. The Chairman of the Board,
when he is the Chief Executive Officer, the President, the Executive
Vice-Presidents, the Treasurer, and the Secretary of the Company shall have
and keep their offices in this State.
Section 10. Other Employees. Except as hereinbefore provided, the
President shall have full power to appoint, remove, and fix the compensation
of each and every person employed by the Company.
ARTICLE VI
Indemnification of Officers and Directors
Against Liabilities and Expenses
<PAGE> 15
Section 1. Indemnification with Respect to Third Party Actions. The
Company shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the Company) by reason of the fact that
he is or was a director, officer, employee, or agent of the Company, or is or
was serving at the request of the Company as a director, officer, employee,
partner, trustee or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against expenses (including attorneys' fees),
judgments, fines, taxes, and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit, or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful. Any indemnification under this
Section 1 is to be made by the Company only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee, partner, trustee, or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in this Section 1.
Such determination is to be made (a) by the Board of Directors by a majority
vote of a quorum consisting of Directors who were not parties to such action,
suit, or proceeding, or (b) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested Directors so directs, by independent
legal counsel in a written opinion, or (c) by the shareholders.
Section 2. Indemnification with Respect to Actions by or in the Right
of the Company. The Company shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action or suit by or in the right of the Company to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee,
or agent of the Company, or is or was serving at the request of the Company
as a director,
<PAGE> 16
officer, employee, partner, trustee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against expenses
(including attorneys' fees), judgments, fines, taxes, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company. No indemnification, however, shall be made in respect of any claim,
issue or matter as to which such person has been adjudged to be liable for
gross negligence or willful misconduct in the performance of his duty to the
Company unless and only to the extent that the court in which such action or
suit was brought determines upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
deems proper. Any indemnification under this Section 2 (unless ordered by a
court) is to be made by the Company only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee,
partner, trustee, or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in this Section 2. Such
determination is to be made (a) by the Board of Directors by a majority vote
of a quorum consisting of Directors who were not parties to such action,
suit, or proceeding, or (b) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested Directors so directs, by independent
legal counsel in a written opinion, or (c) by the shareholders.
Section 3. Payment of Expenses in Advance of Disposition of Action.
Expenses incurred in defending any actual or threatened civil or criminal
action, suit, or proceeding shall be paid by the Company in advance of the
final disposition of such action, suit, or proceeding as authorized by the
Board of Directors in the specific case upon receipt of an undertaking by or
on behalf of the Director, officer, employee, partner, trustee, or agent to
repay such amount if it is ultimately determined that he is not entitled to
be indemnified by the Company as authorized in this Article.
Section 4. Indemnification Provided in This Article Non-Exclusive.
The indemnification provided by this Article is not exclusive of any other
rights to which one seeking indemnification may be entitled under any By-law,
agreement,
<PAGE> 17
vote of shareholders or disinterested Directors, or otherwise, both as to
action in his official capacity while holding such office, and as to a person
who has ceased to be a Director, officer, employee, partner, trustee, or agent
and the indemnification inures to the benefit of the heirs, executors, and
administrators of such a person.
Section 5. Definition of "Company". For the purposes of this Article,
references to the "Company" include all constituent corporations absorbed in
a consolidation or merger as well as the resulting or surviving corporation
so that any person who is or was a director, officer, employee, partner,
trustee, or agent of such a constituent corporation or is or was serving at
the request of such constituent corporation as a director, officer, employee,
partner, trustee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise stands in the same position under the
provisions of this Article with respect to the resulting or surviving
corporation in the same capacity.
ARTICLE VII
Miscellaneous Provisions
Section 1. Corporate Seal. The Board of Directors shall provide a
suitable seal, containing the name of the Company, the year of its
incorporation and the words CORPORATE SEAL, MISSOURI, which seal shall be in
charge of the Secretary. Such seal may from time to time, upon the order of
the Board of Directors, expressed by a resolution of said Board, be used by
causing a facsimile thereof to be impressed, affixed, or reproduced. If and
when so directed by the Board of Directors, a duplicate of the seal may be
kept and be used by any Assistant Secretary or other officer.
Section 2. Fiscal Year. The fiscal year of the Company shall begin on
the first day of January and terminate on the thirty-first day of December in
each year.
Section 3. Manner of Giving Notice. Whenever under the provisions of
these By-laws notice is required to be given to any Director or shareholder,
it shall not be construed to mean personal notice, but such notice may be
given in writing, by mail, by depositing the same in a post office or letter
box, in a post-paid sealed wrapper, addressed to such Director or shareholder
at his address as it appears on the records of the Company, and such notice
shall be deemed to be given at the time when the same shall
<PAGE> 18
be thus mailed. Any shareholder of the Company, Director, officer or committee
member may waive any notice required to be given under these By-laws. Whenever
in the Company's Amended and Restated Charter and Articles of Incorporation or
these By-laws notice is required or permitted to be given by mail, the
affidavit of the person who mailed such notice, filed with the Secretary of the
Company, shall constitute conclusive evidence that such notice has been given
and mailed.
Section 4. Certificates for Shares. The Board of Directors is to
prescribe the form of the certificate of stock of the Company. The
certificate is to be signed by the President or Vice-President and by the
Secretary, Treasurer, or Assistant Secretary or Assistant Treasurer, is to be
sealed with the seal of the Company and is to be numbered consecutively. The
name of the owner of the certificate, the number of shares of stock
represented thereby, and the date of issue are to be recorded on the books of
the Company. Certificates of stock surrendered to the Company for transfer
are to be canceled, and new certificates of stock representing the
transferred shares issued. New stock certificates may be issued to replace
lost, destroyed or mutilated certificates upon such terms and with such
security to the Company as the Board of Directors may require.
Section 5. Transfer of Shares. Shares of stock of the Company may be
transferred on the books of the Company by the delivery of the certificates
representing such shares to the Company for cancellation, and with an
assignment in writing on the back of the certificate executed by the person
named in the certificates as the owner thereof, or by a written power of
attorney executed for such purpose by such person. The person registered on
the books of the Company as the owner of shares of stock of the Company is
deemed the owner thereof and is entitled to all rights of ownership with
respect to such shares.
Section 6. Transfer Books. Transfer books are to be maintained under
the direction of the Secretary, showing the ownership and transfer of all
certificates of stock issued by the Company.
Section 7. Construction. Whenever a word in the masculine gender is
used in these By-laws it shall be understood to be in or include the feminine
gender where appropriate under the circumstances. These By-laws are to be
<PAGE> 19
construed to be consistent with applicable law, and if such construction is
not possible then the invalidity of a By-law or a portion thereof shall not
affect the validity of the remainder of the By-laws, which shall remain in
full force and effect.
ARTICLE VIII
Amendments
These By-laws may be altered, amended or repealed, or new By-laws may
be adopted, by vote of a majority of all of the members of the Board of
Directors then in office, at any regular or special meeting of the Board;
provided, no By-law may be adopted or amended so as to be inconsistent with
the Amended and Restated Charter and Articles of Incorporation of the Company
or the Constitution or other laws of the State of Missouri.
Amendments:
Article I, Section 12 added by amendment on 1/29/98
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<TABLE> <S> <C>
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<SERIES>
<NAME> Sep. Acct. 2 - Equity-Income
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> Sep. Acct. 2 - Growth
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<TABLE> <S> <C>
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<SERIES>
<NAME> Sep. Acct. 2 - Overseas
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