As filed with the Securities and Exchange Commission on 26 July, 1999
File Nos. 333-
811-2162
================================================================================
Securities and Exchange Commission
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [x]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [ ]
Amendment No. 16 [x]
(Check appropriate box or boxes)
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)
(314) 231-1700
--------------------------------------------------
Depositor's Telephone Number
William L. Hutton, Esquire
General American Life Insurance Company
700 Market Street
St. Louis, MO 63101
---------------------------------------
(Name and address of Agent for Service)
Copy to:
Steven B. Boehm, Esquire
Sutherland Asbill and Brennan LLP
1275 Pennsylvania Ave., N.W.
Washington, DC 20004-2404
Approximate date of proposed public offering:
As soon as practicable after effectiveness of
the Registration Statement
<PAGE>
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Title of Securities Being Registered: Group Variable Annuity Contracts
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), SHALL DETERMINE.
ii
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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
******************************
<TABLE>
PART A
<CAPTION>
Item of Form N-4 Prospectus Caption
<S> <C>
1. Cover Page Cover Page
2. Definitions Index of Special Terms
3. Synopsis Expense Table
4. Condensed Financial Information Financial Statements
5. General Description of Depositor, Registrant and
Portfolio Companies The Company;
The Funds
6. Deductions and Expenses Charges and
Deductions
7. General Description of the Variable
Annuity Contracts The Contracts
8. Annuity Period The Contracts;
9. Death Benefit Distributions Under
the Contracts
10. Purchases and Contract Value The Contracts
11. Redemptions Distribution Under the Contracts
12. Taxes Federal Tax Matters
13. Legal Proceedings None
14. Table of Contents for the
Statement of Additional
Information Table of Contents for
Statement of Additional Information
</TABLE>
iii
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GENERAL AMERICAN SEPARATE ACCOUNT TWO
PROSPECTUS
FOR THE
GROUP 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 group variable annuity contracts offered by
General American Life Insurance Company ("we, us, our"). The Contracts
are designed to fund retirement plans 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 an initial payment of One
Million Dollars ($1,000,000).
You have significant flexibility in determining the frequency and amount
of each Contribution.
Surrenders or partial withdrawals may be made at any time, although
they may be subject to a withdrawal or surrender charge and tax penalty.
Any amount surrendered or withdrawn may be paid in a lump sum. When a
plan participant retires, the Contract allows you to pay the retirees'
benefits by purchasing an annuity from us in the form that we offer at
that time.
The Contracts have a variety of investment choices (six different
"Funds"). The six Funds available are portfolios of General American
Capital Company and Russell Insurance Funds, which are listed below.
General American Capital Company Russell Insurance Funds
-------------------------------- -----------------------
S&P 500 Index Fund Multi-Style Equity Fund
Money Market Fund Aggressive Equity Fund
Non-U.S. Fund
Core Bond Fund
You can put your money in any of these Funds, which are offered through
our separate account, General American Separate Account Two. A separate
account is not a separate legal entity but is used to segregate the
various types of products we offer and the investments made by owners of
those products. Separate Account Two is used for investments in our
annuity products.
The value of amounts accumulated under the Contract will vary in
accordance with the investment performance of the Funds you select.
Because you select the investment funds and allocations, you bear the
entire investment risk under the contract for amounts invested in the
Funds.
Please read this Prospectus before investing. A Statement of Additional
Information ("SAI") about the Contracts and the Separate Account is
available free by writing us at the address above or by calling
800-449-6447. The SAI, dated ____________, 1999, has been filed with
the Securities and Exchange Commission and is legally part of the
Prospectus. The table of contents of the SAI is on page ____ of this
Prospectus.
===========================================================================
<PAGE>
<PAGE>
THIS PROSPECTUS MUST BE ACCOMPANIED BY CURRENT PROSPECTUSES FOR GENERAL
AMERICAN CAPITAL COMPANY AND RUSSELL INSURANCE FUNDS.
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
THIS PROSPECTUS IS DATED ___________, 1999
THE CONTRACT IS NOT AVAILABLE IN ALL STATES.
2
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<PAGE>
===========================================================================
TABLE OF CONTENTS
===========================================================================
INDEX OF SPECIAL TERMS 4
HIGHLIGHTS 4
EXPENSE TABLE 5
THE COMPANY AND THE SEPARATE ACCOUNT
The Company 8
Separate Account Two 8
THE FUNDS 9
RUSSELL INSURANCE FUNDS 10
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS 11
THE CONTRACTS 12
Contract Application 12
Allocation of Contributions 12
Accumulated Value 13
Net Investment Factor 13
Transfers 14
Contract Owner Inquiries 14
CHARGES AND DEDUCTIONS 14
Surrender Charges (Contingent Deferred Sales Charge) 14
Asset Charge 15
Exchange Adjustment 16
Premium Tax 17
Federal Income Tax 18
Expenses - Capital Company and Russell Insurance Funds 18
DISTRIBUTIONS UNDER THE CONTRACTS 18
Surrenders and Partial Withdrawals 18
Deferment of Payment 19
FEDERAL TAX MATTERS 19
Introduction 19
Taxation of General American 20
Tax Status of Qualified Contracts 20
Code Section 403(b) Plans 20
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans 21
Deferred Compensation Plans 21
Restrictions Under Qualified Contracts 21
Possible Tax Law Changes 22
DISTRIBUTOR OF THE CONTRACTS 22
VOTING RIGHTS 22
CONDENSED FINANCIAL INFORMATION 23
YEAR 2000 23
LEGAL PROCEEDINGS 24
STATEMENT OF ADDITIONAL INFORMATION
3
<PAGE>
<PAGE>
INDEX OF SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for
you as possible. By the very nature of the contract, however, certain
technical words or terms are unavoidable. We have identified the
following as some of these words or terms. The page that is indicated here
is where we believe you will find the best explanation for the word or term.
Page
Accumulated Value 13
Annuitant 19
Business Day 12
Companion Contract 12
Contract Year 5
Exchange Adjustment 15-16
Fund (or "Funds") 2
Participant 11-12
Qualified Contracts 19
Valuation Period 13
===========================================================================
HIGHLIGHTS
----------
===========================================================================
The Contracts allow a Plan to accumulate funds on a tax-favored basis
and to provide for the payment of annuity benefits when desired, based
on the investment performance of the funds in which you invest. A
"Plan" is a retirement plan that is the purchaser of a Contract. The
Contracts are designed for use in connection with the following
retirement plans: (1) pension and profit sharing plans, (2) annuity
purchase agreements which are adopted for employees by public school
systems and by organizations that are tax exempt under Section 501(c)(3)
of the Code, and (3) plans established under Section 457 of the Internal
Revenue Code of 1986, as amended ("Code").
A Contract may be purchased with an Initial Contribution of at least One
Million Dollars ($1,000,000) from any of these retirement plans.
Additional Contributions after the Initial Contribution are permitted
but not required. The source of the funds affects the way annuity
investments are taxed, but not the operation of the Contracts. (See
"Federal Tax Matters")
If a Plan wants to transfer assets to a Contract from some other fund or
investment, but would lose a portion of the assets as a result of the
termination provisions of the original investment, we may provide an
Exchange Adjustment as a credit to the Accumulated Value to make up all
or a portion of the difference (up to 3% of the original value of the
assets). Contracts with an Exchange Adjustment will also incur an
additional charge. (See "Exchange Adjustment")
4
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You can allocate contributions to six divisions of the Separate Account,
each of which will invest in shares of a corresponding Fund of General
American Capital Company ("Capital Company") or the Russell Insurance
Funds ("Russell Funds"). 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 the Russell Funds. (See "General American Capital
Company" and "Russell Funds"). Contributions may be allocated among one
or more of the Funds or to a Companion Contract in accordance with the
allocation percentages selected by you in your Contract application.
All allocations must be in whole percents and total 100%. Allocations
for additional contributions may be changed by sending written notice to
us. (See "Allocation of Contributions")
We deduct a daily charge equal to a percentage of the value of the net
assets in the Separate Account for the expense risks assumed by us and
for the cost of distributing and administering these Contracts. The
effective annual rate of this charge is .85%. If there is an Exchange
Adjustment, this rate could be as high as 1.60% (see "Exchange
Adjustment").
In order to permit investment of the entire Contribution, we currently
do not deduct sales charges at the time of investment. All or part of
the Accumulated Value of the Contract may be withdrawn before it is
applied to provide annuitization payments. However, amounts withdrawn
may be subject to a surrender charge depending on how long the contract
has been in force to cover certain expenses relating to the sale of the
Contracts, including commissions to registered representatives and other
promotional expenses. (See "Surrender Charges")
===========================================================================
EXPENSE TABLE
===========================================================================
OWNER TRANSACTION EXPENSES
- - --------------------------
Sales Load Imposed on Contributions............. 0%
Maximum Surrender Charge........................ 6%
(as a percentage of amount withdrawn)
Contract Years 1-7 6%
Contract Year 8+ 0%
(The surrender charge applies when amounts are withdrawn. Up to 30% of
the account value may be withdrawn in any Contract Year without
incurring a surrender charge if made due to a Participant's death,
retirement, termination of employment or other distributable event as
permitted under the terms of a Plan. A Contract Year is a period of 12
months starting with the date the Contract becomes effective or the
annual anniversary of such date.)
Transfer Charge........................................ None
5
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SEPARATE ACCOUNT ANNUAL FEES (as a percentage of Accumulated Value)
- - ----------------------------
Daily Asset Charge........................... .85%
Exchange Adjustment Charge percentage ....... 0.00% - 0.75%
The Exchange Adjustment Charge percentage depends on the level of
Exchange Adjustment (if any) and is expressed as a percentage of the
Accumulated Value.
FUND ANNUAL EXPENSES (as a percentage of average net assets of the Fund)
- - --------------------
General American Capital Company Annual Fund Expenses:
------------------------------------------------------
<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%
</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 a 5% annual return:
1 YEAR 3 YEARS
------ -------
S & P 500 Index Fund $74.03 $103.74
Money Market Fund 73.13 100.95
If you do not surrender your Contract or you annuitize after the end of
the specified time period, you would pay the following aggregate
expenses on the same investment:
1 YEAR 3 YEARS
------ -------
S & P 500 Index Fund $11.72 $36.54
Money Market Fund 10.76 33.56
Russell Insurance Funds Annual Fund Expenses:
---------------------------------------------
<TABLE>
<CAPTION>
TOTAL TOTAL NET
ANNUAL EXPENSE ANNUAL
FUND WAIVERS AND FUND
ADVISORY OTHER OPERATING REIMBURSE- OPERATING
FEE EXPENSES EXPENSES MENTS<F*> EXPENSES<F*>
<S> <C> <C> <C> <C> <C>
Multi-Style Equity Fund 0.78% 0.43% 1.21% (0.29%) 0.92%
Aggressive Equity Fund 0.95% 0.72% 1.67% (0.42)% 1.25%
Non-U.S. Fund 0.95% 1.42% 2.37% (1.07)% 1.30%
Core Bond Fund 0.60% 0.68% 1.28% (0.48)% 0.80%
</TABLE>
6
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Multi-Style Equity Fund -- The Fund's Manager, Frank Russell Investment
- - -----------------------
Management Company (FRIMCo) has contractually agreed to waive, at least
until April 30, 2000, a portion of its 0.78% management fee, up to the
full amount of that fee, equal to the total operating expenses that
exceed 0.92% of the average daily net assets on an annual basis and to
reimburse the Fund for all remaining expenses, after fee waivers, that
exceed 0.92% of the average daily net assets on an annual basis.
Aggressive Equity Fund -- FRIMCo has contractually agreed to waive, at
- - ----------------------
least until April 30, 2000, a portion of its 0.95% management fee, up to
the full amount of that fee, equal to the total operating expenses that
exceed 1.25% of the Fund's average daily net assets on an annual basis
and to reimburse the Fund for all remaining expenses, after fee waivers,
that exceed 1.25% of the average daily net assets on an annual basis.
Non-U.S. Fund -- FRIMCo has contractually agreed to waive, at least
- - -------------
until April 30, 2000, a portion of its 0.95% management fee, up to the
full amount of that fee, equal to the total operating expenses that
exceed 1.30% of the Fund's average daily net assets on an annual basis
and to reimburse the Fund for all remaining expenses, after fee waivers,
that exceed 1.30% of the average daily net assets on an annual basis.
Core Bond Fund -- FRIMCo has contractually agreed to waive, at least
- - --------------
until April 30, 2000, a portion of its 0.60% management fee, up to the
full amount of that fee, equal to the total operating expenses that
exceed 0.80% of the Fund's average daily net assets on an annual basis
and to reimburse the Fund for all remaining expenses, after fee waivers,
that exceed 0.80% of the average daily net assets on an annual basis.
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 a 5% annual return:
1 YEAR 3 YEARS
------ -------
Multi-Style Equity Fund $79.92 $121.72
Aggressive Equity Fund 83.04 131.16
Non-U.S. Fund 83.52 132.58
Core Bond Fund 78.79 118.27
If you do not surrender your Contract or you annuitize after the end of
the specified time period, you would pay the following aggregate
expenses on the same investment:
1 YEAR 3 YEARS
------ -------
Multi-Style Equity Fund $17.99 $55.72
Aggressive Equity Fund 21.30 65.78
Non-U.S. Fund 21.81 67.30
Core Bond Fund 16.78 52.03
The purpose of the tables above is to help you understand the costs and
expenses that a you 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. The assumed 5%
annual return is hypothetical and does not represent actual returns,
which may be greater or less than the
7
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assumed rate. 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 any other
contracts that may utilize Separate Account Two. For further details,
see Charges and Deductions.
===========================================================================
THE COMPANY AND THE SEPARATE ACCOUNT
===========================================================================
THE COMPANY
-----------
We are an insurance company that is wholly-owned by GenAmerica
Corporation. GenAmerica Corporation is wholly-owned by General American
Mutual Holding Company ("GAMHC"), a Missouri mutual holding company. We
were chartered in 1933 and since then have continuously engaged in the
business of life insurance, annuities, and accident and health
insurance. Our National Headquarters is located at 700 Market Street,
St. Louis, Missouri 63101. The telephone number is 314-231-1700. We
are licensed to do business in 49 states of the U.S., the District of
Columbia, Puerto Rico, and are 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.
We conduct a conventional life insurance business. Assets derived from
our business should be considered by purchasers of variable annuity
contracts only as bearing upon our ability to meet our obligations under
the variable annuity contracts and should not be considered as bearing
on the investment performance of the Separate Account.
In January 1999, GAMHC announced that it is developing a plan under
which it would convert from a mutual company to a publicly-held stock
company. Conversion to a stock company, or "demutualization", would be
subject to policyholder and regulatory approval, as well as the
satisfaction of certain other conditions. Demutualization would not
affect our contractual obligations. If, and when, GAMHC adopts a
conversion plan, information about the plan will be made available to
policyholders in accordance with applicable law and regulations.
SEPARATE ACCOUNT TWO
--------------------
Separate Account Two was established on October 22, 1970. Although the
Separate Account is an integral part of our corporation, it is not a
separate legal entity. The Separate Account is registered as a unit
investment trust with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940 (the "1940 Act"). This
registration does not involve supervision by the SEC of our management
or investment practices or policies or those of the Separate Account.
Payments are made into the Separate Account from individual and group
variable annuity contracts entitled to tax benefits under Sections 401,
403(b), 408, and 457 of the Internal Revenue Code ("Code"), and also from
individual variable annuity contracts not entitled to any special tax benefits.
Such payments are pooled together and invested separately from our General
Account (the general assets of the insurance company other than separate
account assets). The persons participating in these Contracts look to
the investment experience of the assets in the Separate Account.
8
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The net assets of the Separate Account are held for the exclusive
benefit of you and the persons entitled to payments under the Contract
or other contracts with funds in Separate Account Two. The net assets
of the Separate Account are not chargeable with liabilities due to any
other business conducted by us.
On February 23, 1988, pursuant to the vote of the 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. Each division invests its assets in shares of the
corresponding Funds described below. We may establish additional
divisions as the need arises.
===========================================================================
THE FUNDS
===========================================================================
GENERAL AMERICAN CAPITAL COMPANY
--------------------------------
General American Capital Company is a "series mutual fund" 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.
The 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 the Investment Adviser a monthly fee for managing its investments
and business affairs.
Capital Company currently operates eight separate investment Funds, but
only the S & P 500 Index Fund and the Money Market Fund are available
to you under a Contract. The assets of each Fund are held separate from
the assets of the other Funds 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 available 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.
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.
THERE IS NO ASSURANCE THAT ANY OF THESE FUNDS WILL ATTAIN ITS STATED
OBJECTIVE, OR THAT THE OBJECTIVE CAN BE SUSTAINED IF ATTAINED.
9
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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
Contributions 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 our separate accounts other than the Separate Account,
including those which receive and invest premiums under variable life
insurance policies issued by us. 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 we 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 Capital
Company for more details.
RUSSELL INSURANCE FUNDS
-----------------------
Russell Insurance Funds ("Russell Funds") is a "series mutual fund" with
four different investment portfolios referred to individually as
"Funds." Russell Funds offers shares of each of the four Funds to
qualified insurance company separate accounts offering variable
insurance products. Shares will be sold to the insurance company
separate accounts at net asset value.
Each Fund's assets are invested by one or more investment management
organizations researched and recommended by Frank Russell Company
("Russell") and an affiliate of Russell, Frank Russell Investment
Management Company ("FRIMCo"), which also advises, operates and
administers Russell Funds.
The names and investment objectives of the available Funds are as
follows:
MULTI-STYLE EQUITY FUND---Seeks income and capital growth by investing
principally in equity securities.
AGGRESSIVE EQUITY FUND---Seeks to provide capital appreciation by
assuming a higher level of volatility than is ordinarily expected from
the Multi-Style Equity Fund, by investing in equity securities.
NON-U.S. FUND---Seeks favorable total return and additional
diversification for United States investors by investing primarily in
equity and debt securities of non -United States companies and non-
United States governments.
CORE BOND FUND---Seeks to maximize total return through capital
appreciation and income by assuming a level of volatility consistent
with the broad fixed-income market, by investing in fixed-income
securities.
THERE IS NO ASSURANCE THAT ANY OF THESE FUNDS WILL ATTAIN ITS STATED
OBJECTIVE, OR THAT THE OBJECTIVE CAN BE SUSTAINED IF ATTAINED.
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 Russell Funds, which is attached to
this Prospectus. Russell Funds' Prospectus should be read carefully
before any
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decision is made concerning the allocation of contributions to a
Division that corresponds to a particular Fund.
Russell Funds 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 Russell Funds by the SEC. Shares of Russell Funds will be
sold to our separate accounts other than the Separate Account, including
those which receive and invest premiums under variable life insurance
policies issued by us, as well as separate accounts of other insurance
companies. Russell Funds' Board of Directors intends to monitor events
in order to identify any material irreconcilable conflicts which may
arise and to determine what action, if any, should be taken in response
thereto. See the Prospectus for Russell Funds for more details.
===========================================================================
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
===========================================================================
We reserve 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. We also
reserve the right to eliminate the shares of any of the Funds of Capital
Company or Russell Funds and to substitute shares of another Fund of
Capital Company, or Russell Funds, 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
our judgment further investment in any Fund becomes inappropriate in
view of the purposes of the Separate Account. We will not replace any
shares attributable to your interest in a division of the Separate
Account without notice to you 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 you.
We also reserve 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 our
discretion, marketing needs or investment conditions warrant, and any
new division will be made available to you on a basis to be determined
by us. To the extent approved by the SEC (as required), we may also
eliminate or combine one or more divisions, substitute one division for
another division, or transfer assets between divisions if, in our sole
discretion, marketing, tax, or investment conditions warrant.
In the event of a substitution or change, we may make such changes it
considers necessary in the Contracts by appropriate endorsement. We
will notify you of any such changes.
If we deem it to be in the best interests of persons having voting
rights under the Contracts, and to the extent any necessary SEC
approvals or votes from you are obtained, the Separate Account may be:
(a) operated as a management company under the 1940 Act; (b) de-
registered under that Act in the event such registration is no longer
required; or (c) combined with our other separate accounts. To the
extent permitted by applicable law, we may also transfer the assets of
the Separate Account associated with the Contracts to another separate
account.
11
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===========================================================================
THE CONTRACTS
===========================================================================
The Contracts consist of a group variable annuity contract for use in
qualified pension and profit sharing plans including Tax Sheltered
Annuity (Section 403(b) annuity) Plans and also deferred compensation
plans under Code Section 457. The Contracts are to be sold to Plan
trustees on an unallocated basis. A Participant is an eligible employee
of the employer for whom benefits are to be provided under the Contract
in accordance with the terms of the Plan. The accounts of individual
Participants' may be administered by the Plan or by a third party, but
the contractual relationship is between us and the Plan. Any benefits
for individual participants are governed by the terms of the Plan. The
purpose of the Contracts is to provide a funding vehicle at the Plan
level. The rights and benefits of the Contracts are described below and
in the Contracts; however, we reserve the right to make any modification
to conform the Contracts to, or to give you the benefit of, any Federal
or state statute or any rule or regulation of the United States Treasury
Department.
CONTRACT APPLICATION
If you wish to purchase a Contract, you must complete an application and
provide an Initial Contribution. If the application can be accepted in
the form received, the Initial Contribution will be credited within two
Business Days after receipt of the application. A Business Day is any
day on which we are open for business and the Funds are open for
valuation. Acceptance is subject to our rules, and we reserve the right
to reject any application or Initial Contribution. We may retain the
Initial Contribution 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
Contribution will be returned immediately unless you consent in writing
to our retention of the Initial Contribution until the application is in
good order.
All Contributions received by us before 10:30 a.m. St. Louis time on any
Business Day, will be considered received on that Business Day.
Contributions are limited to contributions under and proceeds from
certain qualified plans. Additional contributions 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 us.
For some contracts, we may credit an Exchange Adjustment, which is an
amount credited to the Contract to make up for a decrease in the amount
of Plan assets following the liquidation or surrender of another
investment for the purpose of investing in the Contract. An Exchange
Adjustment has the same effect as a Contribution, except that if there
is an Exchange Adjustment, there will be additional charges (see
"Exchange Adjustment").
ALLOCATION OF CONTRIBUTIONS
You specify in the Contract application how contributions will be
allocated. You may allocate each contribution to one or more of the
divisions and any Companion Contracts as long as such portions are in
whole number percentages and total 100%. A "Companion Contract" is an
additional contract that provides for fixed benefits. If a Companion
Contract is available to you, it will be listed on the contract
specifications page of your Contract. You may choose to allocate
nothing to a particular division or
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Companion Contract. You may change the allocation instructions for
future additional contributions by sending a Written Notice.
The contributions (and Exchange Adjustment, if any) then will be
allocated among the divisions and Companion Contracts in accordance with
the instructions.
ACCUMULATED VALUE
The Accumulated Value will be determined on a daily basis. On the
investment start date (the date the Initial Contribution is applied to
the divisions of the Separate Account, which is the date the Initial
Contribution is received by us, the Accumulated Value in a division will
equal the portion of any Contribution or Exchange Adjustment 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 Contributions received or Exchange Adjustment credited during
the current Valuation Period which are allocated to the division;
plus
(iii) Any amounts transferred to the division from a Companion Contract
or from another division during the current Valuation Period;
minus
(iv) That portion transferred from the division to a Companion
Contract, 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.
A Valuation Period is any 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.
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 .0043836% of the assets for each day in the
Valuation Period. This corresponds to 1.60% per year (including
the maximum Exchange Adjustment Charge percentage); divided by
(vi) The value of the assets at the end of the preceding Valuation
Period.
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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 Russell Insurance Funds as well as the daily
deduction of charges.
TRANSFERS
You may transfer amounts as follows:
1) Between one or more of the divisions of the Separate Account and a
Companion Contract; 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 such other means
as is acceptable to both you and us.
2) Transfers from or among the divisions of the Separate Account may
be made at any time.
3) Transfers from a Companion Contract will be subject to the terms
of that contract.
We may revoke or modify the transfer privilege at any time, including
the minimum amount for a transfer and the transfer charge, if any.
INQUIRIES FROM YOU
We perform all administrative functions in connection with the Contracts
such as underwriting, record keeping, and reporting. Any questions or
inquiries you have should be addressed to General American Retirement
Plans Group, Recordkeeping & Accounting Department, 9735 Landmark
Parkway Drive, St. Louis, Missouri 63127-1690 or made by calling (800)
446-5763. All inquiries should include your contract number and name.
===========================================================================
CHARGES AND DEDUCTIONS
===========================================================================
No deductions are made from the Initial Contribution unless a state
premium tax or other tax is due. (See "Taxes"). Therefore, the full
amount of the Initial Contribution less any applicable state or other
tax is invested in one or more of the divisions of the Separate Account
and/or a Companion Contract to increase the potential for investment
gain.
SURRENDER CHARGES (CONTINGENT DEFERRED SALES CHARGE)
Since no deduction for a sales charge is made from Contributions, 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 a withdrawal of funds on deposit, we
will deduct a surrender charge. The surrender charge percentage is
based on the age of the Contract as shown in the following schedule:
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SURRENDER CHARGE
CONTRACT YEAR PERCENTAGE
------------- ----------
1-7 6%
8+ 0%
The surrender charge is calculated by multiplying the applicable
surrender charge percentage by the gross withdrawal amount. The total
amount deducted from the Accumulated Value of the Contract is the sum of
the surrender charge and the amount disbursed to you. 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 you.
There will be no surrender charge after the seventh Contract Year. In
addition, surrender charges are not applied to withdrawals made in the
event of a Participant's death, disability or retirement, or other
distributable event permitted by the Plan, unless the sum of such
withdrawals within a Contract Year exceeds 30% of the Accumulated Value
at the beginning of the Contract Year.
The age of the Contract, rather than the length of time a certain sum
has been in the 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 us from our general
assets, including profits derived from the Separate Account daily asset
charge, if any.
The surrender charge will be allocated pro rata among the divisions
based on the values held in the divisions prior to the withdrawal. In
the case of a surrender, the surrender charge is deducted from the
amount paid to you.
ASSET CHARGE
Asset charges cover the expense of administering the Contracts and
mortality and expense risks. Asset charges are made each Business Day
as a percentage of the Accumulated Value of the Contract. A portion of
the asset charge also may be used for distribution expenses of the
Contracts. The charge for mortality and expense risk is 0.85% annually.
The mortality risk we assume is that Annuitants may live longer than the
time estimated when the risk in the Contract is established. We agree to
continue to pay annuity installments, determined in accordance with
administrative rules in effect at the time of annuitization, to each
Annuitant regardless of how long he lives and regardless of how long all
Annuitants as a group live.
The expense risk we assume is that if the charge for mortality and
expenses is not sufficient to cover administrative expenses, the
deficiency will be met from our General Account assets.
Further, we can modify a group Contract prospectively. However,
modifications cannot affect an Annuitant in any manner without the
Annuitant's written consent, unless such modification is
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deemed necessary to give you or Annuitants the benefit of Federal or
state statutes or Treasury Department rules or regulations.
In addition, we assure that the Separate Account will not be charged
with any further expenses other than taxes applicable to the Separate
Account. There currently are no taxes assessed against the Separate
Account with respect to funds held under the Contracts (See "Federal Tax
Matters").
EXCHANGE ADJUSTMENT
We may elect to credit qualifying Contract owners with an "Exchange
Adjustment" if the net amount your Plan receives as a result of the
liquidation or surrender of the Plan's old contract to obtain funds for
deposit into our Contract reflects a reduction in value imposed due to
the liquidation or surrender. The Exchange Adjustment will be in an
amount equal to all or a portion of the charges incurred by the Plan as
a result of the liquidation or surrender of its previous contract. We
will determine the availability and amount of the Exchange Adjustment
based upon an analysis of each potential Contract. We are not offering
Exchange Adjustments greater than 3% under our current administrative
rules.
As discussed above under "Asset Charge," we impose a daily asset charge
to cover certain expenses. If your Contract is credited with an
Exchange Adjustment, we attribute a portion of the daily asset charge to
cover the cost of the Exchange Adjustment. Contracts credited with an
Exchange Adjustment will incur a deduction for this "Additional Charge,"
which is based upon a percentage of the Accumulated Value. On an annual
basis, the Additional Charge will be as follows:
Additional Charge Exchange Adjustment<F*>
----------------- -----------------------
.25% 0-1%
.50% more than 1% up to 2%
.75% more than 2% up to 3%
[FN]
<F*>As a percent of the sum of the Plan's Initial Contribution and the
dollar amount of the Exchange Adjustment.
The Additional Charge will be the same for all Contract owners who
receive the same level of Exchange Adjustment. For example, all
Contract owners who receive an Exchange Adjustment of 2% will incur the
same Additional Charge of .50%.
The Additional Charge will not be assessed for more than seven (7) years
after the Contract's issue date, and in some situations may be assessed
for less than seven (7) years. In order to determine when to stop
assessing the Additional Charge, we will perform a separate calculation
at the end of each quarter to estimate the amount that was deducted
from your Contract during the quarter as a result of the application of
the Additional Charge. We estimate this amount by multiplying the
quarterly equivalent of the Additional Charge by the average Accumulated
Value for the quarter. The Average Accumulated Value is the sum of
the Accumulated Values as of the end of each of the three months in the
quarter, divided by three.
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The Additional Charge is discontinued when the cumulative estimated
amount of Additional Charges, with accrued interest at the rate
specified in your Contract, equals or exceeds the dollar amount of your
Exchange Adjustment, with interest accumulated at the same rate.
In the future, we may change the Additional Charge and adjust the
interest rate offered to new Contract owners to reflect market
conditions.
PREMIUM TAX
Under the laws of certain jurisdictions, taxes are charged on so-called
"annuity considerations." Such taxes range from 0% to 3.50%. The list
of jurisdictions imposing premium tax follows:
<TABLE>
STATE ANNUITY PREMIUM TAX RATES
-------------------------------
<CAPTION>
State Qualified Contracts Nonqualified Contracts
----- ------------------- ----------------------
<S> <C> <C>
California .50% 2.35%
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% 1.00%
</TABLE>
Note: The above premium tax rates are in effect as of January 1, 1999.
States not listed above currently have no premium tax on the purchase of
group 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, we do not make any separate deductions for premium tax
from Contributions, as we are permitted to do under the Contracts, but
defer any separate deductions for such taxes until the Accumulated Value
is applied to provide annuity payments. (Although we 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.) We plan, 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 some jurisdictions the premium tax rate may be applied to
Contributions, and in those cases the deductions for such taxes will be
made when the payments are received. Thus, we reserve the right to make
a separate deduction from each Contribution, or from the Accumulated
Value, depending on which method or combination of methods results in
the appropriate deduction for applicable premium tax.
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FEDERAL INCOME TAX
We do 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.
We 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 us. This might become necessary if our tax
treatment is ultimately determined to be other than what we currently
believe 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 our tax status. In the event that we 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.
EXPENSES - CAPITAL COMPANY AND RUSSELL INSURANCE FUNDS
The value of the assets in the Separate Account will reflect the value
of the applicable Capital Company or Russell Funds 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 Russell Funds prospectus.
===========================================================================
DISTRIBUTIONS UNDER THE CONTRACTS
===========================================================================
SURRENDERS AND PARTIAL WITHDRAWALS
You may surrender the Contract or make a partial withdrawal to receive
all or part of the Accumulated Value at any time by sending a Written
Request or by such other form as is acceptable to you and us. 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 you. In the absence of specific direction from you,
amounts will be withdrawn from the divisions 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 seven Contract Years will result in the application of
a surrender charge except that you may withdraw up to 30% of the
Accumulated Value without the application of the surrender charge, if
such withdrawals are due to a Participant's death, retirement,
termination of employment, or other distributable event permitted by the
Plan (See "Charges and Deductions").
The amount payable on surrender or withdrawal will ordinarily be paid
within seven days after receipt by us of the Written Request on a duly
executed form which may be obtained from us. Payment may be postponed
and the right of redemption suspended as described under "Deferment of
Payment".
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Because you assume 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 Contributions made.
DEFERMENT OF PAYMENT
Payment of any cash withdrawal or lump sum benefit due from the Separate
Account will occur within seven days from the date the election becomes
effective, except that we 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
you.
===========================================================================
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
our 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 and used in connection with plans
qualifying for favorable tax treatment ("Qualified Contract").
Qualified Contracts are intended to be purchased in connection with
retirement plans entitled to special income tax treatment under Sections
401(a), 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 you, the Annuitant, or the beneficiary depends
on the type of retirement plan and on the tax and employment status of
the individual concerned. An Annuitant is a Participant who may receive
annuity payments from the Plan. 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.
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TAXATION OF OUR COMPANY
We are 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
our company, 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, we believe 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, we do not anticipate that we will incur any Federal income
tax liability attributable to the Separate Account and, therefore, we do
not intend to make provisions for any such taxes. However, if changes
in the Federal tax laws or interpretations of those laws result in us
being taxed on income or gains attributable to the Separate Account,
then we 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 QUALIFIED CONTRACTS
The 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;
and in other specified circumstances.
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. You are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts satisfy applicable law.
Because this Contract will be used with a retirement plan, you should
consult a competent legal counsel and tax adviser regarding the
suitability of the Contract.
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
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prior to age 59 1/2 may be 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 that you
are aware of the Code restrictions. We believe that we are in
compliance with the provisions of the no-action letter.
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, a non-governmental 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
Qualified Contracts have minimum distribution rules that govern the
timing and amount of distributions. You should refer to your retirement
plan, adoption agreement, or consult a tax advisor for more information
about these distribution rules. Certain distributions from Section
401(a) qualified plans and Section 403(b) annuities are subject to
mandatory Federal income tax withholding unless directly rolled over
into another qualified retirement plan or individual retirement account
or annuity. Distributions from Section 457 plans are subject to
withholding unless the recipient elects otherwise.
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.
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POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Contracts could
change by legislation or otherwise. Consult a tax adviser with respect
to legislative developments and their effect on the Contract.
We have the right to modify the Contract in response to legislative
changes that could otherwise diminish the favorable tax treatment that
annuity contract owners currently receive. We make no guarantee
regarding the tax status of any contract and do not intend the above
discussion as tax advice.
===========================================================================
DISTRIBUTOR OF THE CONTRACTS
===========================================================================
Walnut Street Securities, Inc. ("Walnut Street"), Suite 1000, 400 South
Fourth Street, St. Louis, Missouri 63132, is the principal underwriter
and the distributor of the Contracts. Walnut Street is a subsidiary of
GenAmerica Corporation, which owns all of our outstanding stock. 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 .50% of Accumulated Value per year
for such Contracts, under normal circumstances.
===========================================================================
VOTING RIGHTS
===========================================================================
To the extent required by law, we will vote the Capital Company or the
Russell Funds shares held in the divisions of the Separate Account at
shareholder meetings of such Funds in accordance with instructions
received from persons having voting interests in the corresponding
divisions of the Separate Account. You hold 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, we determine that we are allowed to vote the
Fund shares in our own right, we may elect to do so.
The number of votes which are available to you will be calculated
separately for each division of the Separate Account. That number will
be determined by applying the 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.
At most Fund shareholder meetings, votes may be cast in person or by
proxy and fractional votes will be counted.
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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
that we hold as to which you 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
materials, reports, and other materials relating to the appropriate
Fund.
To the extent that we, as shareholder of the Funds, are entitled to vote
any Fund's interest in the Trust, we will do so on the same basis as
described above.
===========================================================================
CONDENSED FINANCIAL INFORMATION
===========================================================================
Our consolidated financial statements (as well as the auditors' report)
are in the Statement of Additional Information. Financial statements for
the Separate Account are also in the Statement of Additional Information.
===========================================================================
YEAR 2000
===========================================================================
Like all financial services providers, we utilize systems that may be
affected by Year 2000 transition issues and rely on service providers,
including the Funds, that also may be affected. We and our affiliates
have developed, and are in the process of implementing, a Year 2000
transition plan, and are confirming that our service providers are also
so engaged. The resources that are being devoted to this effort are
substantial. It is difficult to predict with precision whether the
amount of resources ultimately devoted, or the outcome of these efforts,
will have any negative impact on us. However, as of the date of this
Prospectus, it is not anticipated that you will experience negative
effects on your investment, or on the services provided in connection
therewith, as a result of Year 2000 transition implementation. We
currently anticipate that our systems will be Year 2000 compliant prior
to the end of 1999, but there can be no assurance that we will be
successful, or that interaction with other service providers will not
impair our services at that time.
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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.
24
<PAGE>
<PAGE>
===========================================================================
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 OF CONTENTS
PAGE
----
THE CONTRACTS S-2
MONEY MARKET YIELD CALCULATION S-2
GENERAL MATTERS S-2
Participating S-2
Incorrect Age or Sex S-3
Annuity Data S-3
Quarterly Reports S-3
Incontestability S-3
Ownership S-3
DISTRIBUTION OF THE CONTRACT S-3
SAFEKEEPING OF ACCOUNT ASSETS S-4
STATE REGULATION S-4
RECORDS AND REPORTS S-4
OTHER INFORMATION S-4
FINANCIAL STATEMENTS S-4
<PAGE>
<PAGE>
PART B Registration No. -____
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
GROUP 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 variable annuity contracts
("Contracts" or "Contract" as the context 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:____________, 1999
S-1
<PAGE>
<PAGE>
THE CONTRACTS
The following provides information about the Contracts that supplements
the description in the Prospectus and may be of interest to the Contract
Owners.
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 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 SEC 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
choose to take the distribution in cash, or leave the distribution with
General American to accumulate with interest.
S-2
<PAGE>
<PAGE>
Incorrect Age or Sex
If the age at issue or sex of the Annuitant 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 Date
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 Separate Account or
division; and any Contributions, 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 of premiums, after it has been in force for a period
of two years from the date of issue.
Ownership
The Contractholder is the owner of this contract and all rights of
ownership are vested in the Contractholder unless otherwise provided
herein. The contract may be changed or amended from time to time
without the consent of any participant, beneficiary, or other person
claiming rights or benefits hereunder.
No assignment of this contract by the Contractholder shall be binding
upon General American unless in writing and until filed at its Home
Office. General American assumes no responsibility for the validity of
any assignment.
DISTRIBUTION OF THE CONTRACT
Walnut Street Securities, Inc. ("Walnut Street"), the principal
underwriter of the Contracts, is registered with the SEC under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of
the National Association of Securities Dealers, Inc. Walnut Street is a
subsidiary of GenAmerica Corporation.
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.
S-3
<PAGE>
<PAGE>
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.
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.
OTHER INFORMATION
A Registration Statement has been filed with the SEC, 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 SEC.
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 LLP, independent certified public accountants, and on the
authority of said firm as experts in accounting and auditing.
The financial statements of General American should be considered only
as bearing upon its ability to meet its obligations under the Contracts.
They should not be considered as bearing on the investment performance
of the assets held in the Separate Account.
S-4
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Members 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, 1998
and 1997, and the related consolidated statements of operations,
comprehensive income, stockholder equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. 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 audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 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, 1998 and 1997, and the results of their operations and
their cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
March 4, 1999
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(dollars in thousands)
<CAPTION>
ASSETS 1998 1997
----------- ----------
<S> <C> <C>
Fixed maturities:
Available for sale, at fair value $11,068,283 9,115,519
Mortgage loans, net 2,337,542 2,140,262
Real estate, net 129,851 140,145
Equity securities, at fair value 48,550 24,211
Policy loans 2,151,028 2,073,152
Short-term investments 195,346 190,374
Other invested assets 457,645 243,921
----------- ----------
Total investments 16,388,245 13,927,584
Cash and cash equivalents 591,107 358,879
Accrued investment income 205,645 168,592
Reinsurance recoverables 904,998 718,717
Other contract deposits 4,094,777 3,336,328
Deferred policy acquisition costs 773,762 695,253
Other assets 602,965 488,582
Separate account assets 5,287,456 4,118,860
----------- ----------
Total assets $28,848,955 23,812,795
=========== ==========
LIABILITIES AND STOCKHOLDER EQUITY
Policy and contract liabilities:
Future policy benefits $5,516,869 4,933,787
Policyholder account balances:
Universal life 2,960,940 2,534,744
Annuities 3,714,526 4,161,946
Pension funds and interest sensitive
contract liabilities 7,581,276 4,732,400
Policy and contract claims 591,088 458,606
Dividends payable to policyholders 121,740 113,525
----------- ----------
Total policy and contract liabilities 20,486,439 16,935,008
Amounts payable to reinsurers 201,395 247,679
Long-term debt and notes payable 221,850 214,477
Other liabilities and accrued expenses 912,291 826,868
Deferred tax liability, net 75,429 89,046
Separate account liabilities 5,267,553 4,112,666
----------- ----------
Total liabilities 27,164,957 22,425,744
----------- ----------
Minority interests 383,085 216,555
Stockholder equity:
Common stock, $1 par value, 5,000,000 shares
authorized, 3,000,000 shares issued and
outstanding 3,000 3,000
Additional paid-in capital 3,000 3,000
Retained earnings 1,242,004 1,057,613
Accumulated other comprehensive income 52,909 106,883
----------- ----------
Total stockholder equity 1,300,913 1,170,496
----------- ----------
Total liabilities and stockholder equity $28,848,955 23,812,795
=========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
Insurance premiums and other considerations $2,244,156 1,768,169 1,623,228
Net investment income 1,135,838 945,542 806,883
Ceded commissions 39,921 44,902 27,538
Other income 330,731 362,160 280,803
Net realized investment gains 13,646 28,538 24,531
---------- --------- ---------
Total revenues 3,764,292 3,149,311 2,762,983
Benefits and expenses:
Policy benefits 1,992,997 1,528,333 1,379,803
Interest credited to policyholder account balances 426,806 345,937 262,532
---------- --------- ---------
Total policyholder benefits 2,419,803 1,874,270 1,642,335
Dividends to policyholders 192,085 182,146 171,904
Policy acquisition costs 240,640 168,045 143,094
Other insurance and operating expenses 711,901 739,814 642,636
---------- --------- ---------
Total benefits and expenses 3,564,429 2,964,275 2,599,969
---------- --------- ---------
Income before provision for income taxes
and minority interest 199,863 185,036 163,014
---------- --------- ---------
Income tax provision (benefit):
Current 35,226 65,778 45,902
Deferred 18,351 (113) 13,992
---------- --------- ---------
Total provision for income taxes 53,577 65,665 59,894
---------- --------- ---------
Income before minority interest 146,286 119,371 103,120
Minority interest in earnings of consolidated
subsidiaries (29,220) (22,134) (19,888)
---------- --------- ---------
Net income $117,066 97,237 83,232
========== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Net income $117,066 97,237 83,232
Other comprehensive (loss) income (53,974) 75,583 (49,705)
-------- ------- -------
Comprehensive income $63,092 172,820 33,527
======== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Consolidated Statements of Stockholder Equity
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER
STOCK CAPITAL EARNINGS INCOME EQUITY
------ ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- -- 876,078 81,005 957,083
Net income -- -- 83,232 -- 83,232
Other comprehensive (loss) income -- -- -- (49,705) (49,705)
Other, net -- -- 7,177 -- 7,177
------ ----- --------- ------- ---------
Balance at December 31, 1996 -- -- 966,487 31,300 997,787
Net income -- -- 97,237 -- 97,237
Other comprehensive income -- -- -- 75,583 75,583
Issuance of common stock 3,000 3,000 (6,000) -- --
Dividend to parent -- -- (4,480) -- (4,480)
Other, net -- -- 4,369 -- 4,369
------ ----- --------- ------- ---------
Balance at December 31, 1997 3,000 3,000 1,057,613 106,883 1,170,496
Net income -- -- 117,066 -- 117,066
Other comprehensive (loss) income -- -- -- (53,974) (53,974)
Parent's share of subsidiary's
issuance of nonvoting stock -- -- 68,609 -- 68,609
Other, net -- -- (1,284) -- (1,284)
------ ----- --------- ------- ---------
Balance at December 31, 1998 $3,000 3,000 1,242,004 52,909 1,300,913
====== ===== ========= ======= =========
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 117,066 97,237 83,232
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in:
Accrued investment income (37,424) (20,568) (16,275)
Reinsurance recoverables and other contract deposits (942,384) (838,390) (159,713)
Deferred policy acquisition costs (102,050) (113,040) (87,249)
Other assets (99,506) (61,796) (51,444)
Future policy benefits 582,899 693,052 330,511
Policy and contract claims 132,481 105,503 14,652
Other liabilities and accrued expenses 48,220 319,787 65,184
Deferred income tax provision 18,351 (113) 13,992
Policyholder considerations (219,295) (137,163) (144,748)
Interest credited to policyholder account balances 426,806 345,937 262,532
Amortization and depreciation 34,578 32,744 28,375
Net realized investment gains (13,646) (28,538) (24,531)
Other, net 7,380 372 (14,554)
----------- ---------- ----------
Net cash (used in) provided by operating
activities (46,524) 395,024 299,964
----------- ---------- ----------
Cash flows from investing activities:
Proceeds from investments sold or redeemed:
Fixed maturities available for sale 2,027,415 2,070,743 1,822,169
Mortgage loans 370,418 594,151 182,650
Equity securities 2,065 31,602 13,427
Cost of investments purchased:
Fixed maturities available for sale (4,251,065) (4,463,100) (3,428,943)
Mortgage loan originations (594,480) (438,959) (593,438)
Equity securities (17,396) (47,283) (39,553)
Maturity of fixed maturities available for sale 145,247 281,736 225,087
Increase in policy loans, net (77,876) (153,399) (210,624)
Increase in short-term and other invested assets, net (215,142) (130,464) (12,678)
Investments in subsidiaries (24,531) (6,032) (4,807)
----------- ---------- ----------
Net cash used in investing activities (2,635,345) (2,261,005) (2,046,710)
----------- ---------- ----------
Cash flows from financing activities:
Net policyholder account and contract deposits 2,682,959 2,121,488 1,632,495
Proceeds from subsidiary stock offering 221,837 -- --
Issuance of debt 2,281 1,857 106,903
Repayment of debt (411) (80,606) (19,497)
Dividends (3,839) (2,112) (1,832)
Other, net 27,577 46,829 26,770
----------- ---------- ----------
Net cash provided by financing activities 2,930,404 2,087,456 1,744,839
----------- ---------- ----------
Effect of exchange rate changes (16,307) (5,320) (266)
----------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 232,228 216,155 (2,173)
Cash and cash equivalents at beginning of year 358,879 142,724 144,897
----------- ---------- ----------
Cash and cash equivalents at end of year $ 591,107 358,879 142,724
=========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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.
On the effective date, the Company issued three million shares of
its authorized shares of capital stock to GAMHC. GAMHC then
contributed all of these to GenAmerica in exchange for one
thousand shares of its common stock. As a result, GenAmerica
directly owns the Company, and GAMHC indirectly owns the Company,
through GenAmerica. The Reorganization was accounted for at
historical cost in a manner similar to a pooling of interests.
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
noninsurance 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 53.3 percent owned
subsidiary, Reinsurance Group of America, Incorporated (RGA), an
insurance holding company, and its 62.7 percent owned subsidiary,
Conning Corporation.
(Continued)
7
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company's principal lines of business, conducted through
itself 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 and its subsidiaries are licensed to do business in all
fifty states, ten Canadian provinces, Puerto Rico, and the
District of Columbia. Through its subsidiaries, the Company has
operations in Europe, Pacific Rim countries, Latin America, and
Africa.
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. The Company owned 62.7 percent of the total shares
outstanding of Conning's common stock at December 31, 1998 and
1997. The publicly held stock of Conning is listed on the NASDAQ
National Market System.
SUBSEQUENT OFFERINGS
At the Company's subsidiary, RGA's annual stockholders' meeting
on May 27, 1998, a new class of non-voting common stock was
authorized. In June 1998, RGA completed a secondary public
offering in which it sold 4.945 million shares of non-voting
common stock traded on the New York Stock Exchange under the
symbol RGA.A. The offering provided net proceeds of
approximately $221.8 million which have been utilized to finance
the continued growth of RGA's operations domestically and
internationally. After the subsequent offering, the Company's
ownership percentage decreased from 63.8 percent to 53.3 percent.
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.
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.
(Continued)
8
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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
noninsurance operations, primarily service and contract fees
relating to concessions, asset management, system development,
and third-party administration. Amounts are recognized when
earned.
INVESTED ASSETS
FIXED MATURITIES AND EQUITY SECURITIES: 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 accumulated other comprehensive
income, a separate component of stockholders' 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 $52.4 million and $47.0 million at December 31,
1998 and 1997, respectively. Direct valuation allowances
amounted to $7.3 million and $6.7 million at December 31,
1998 and 1997, 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
(Continued)
9
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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
unassigned funds.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash
flows, 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
Fixed maturity 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 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. 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.
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.
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.
(Continued)
10
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The range of weighted average interest crediting rates used by
the Company's life insurance subsidiaries were as follows:
1998 1997 1996
---------- ---------- -----------
Universal life 5.25-7.10% 6.00-7.10% 6.00-7.56%
Annuities 4.00-9.20% 5.70-9.30% 5.70-13.00%
========== ========== ===========
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 incurred but not reported
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 precisely determined 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 and renewal 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 utilizing
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.
(Continued)
11
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The range of average rates of assumed interest used by the
Company's life insurance subsidiaries in estimated gross margins
were as follows:
1998 1997 1996
---------- ---------- ----------
Participating life 8.25% 8.17% 8.70%
Universal life 6.25-7.50% 6.25-7.79% 6.00-8.20%
Annuities 7.00-7.83% 7.00-7.84% 7.83%
========== ========== ==========
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. 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 AND OTHER CONTRACT DEPOSITS
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 other contract deposits in the consolidated balance
sheets. The amount of revenue reported on these contracts
represents fees and the cost of insurance under the terms of the
reinsurance agreement.
Reinsurance activities are accounted for consistent with terms of
the underlying 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
consolidated federal income tax returns. 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
foreign subsidiaries are taxed under applicable local statutes.
No deferred tax liabilities have been recognized for the foreign
subsidiaries per Accounting Principles Board (APB) Opinion 23,
Accounting for Income Taxes - Special Areas. The Company uses
the asset and liability method to record deferred income taxes.
(Continued)
12
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 account 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 contractholders. The Company
charges the separate account for cost of insurance and
administrative expense associated with a contract and charges
related to early withdrawals by contractholders. The assets and
liabilities of the separate account are carried at fair value.
The Company's participation in the separate account (seed money)
is carried at fair value in the separate account, and amounted to
$19.9 million and $6.2 million at December 31, 1998 and 1997,
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 a 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.
(Continued)
13
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: The
carrying amount approximates 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 3 for additional information on fair value of
financial instruments.
RECLASSIFICATION
The Company has reclassified the presentation of certain prior
period information to conform to the 1998 presentation.
(2) INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The amortized cost and estimated fair value of fixed maturities
and equity securities at December 31, 1998 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 20,708 424 -- 21,132
Government agency
obligations 1,151,467 122,506 (11,176) 1,262,797
Corporate securities 6,889,983 380,072 (164,130) 7,105,925
Mortgage-backed securities 1,812,376 34,027 (38,553) 1,807,850
Asset-backed securities 861,736 13,027 (4,184) 870,579
----------- ------- -------- ----------
Total fixed maturities
available for sale $10,736,270 550,056 (218,043) 11,068,283
=========== ======= ======== ==========
Equity securities $ 39,041 9,509 -- 48,550
=========== ======= ======== ==========
</TABLE>
(Continued)
14
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<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>
The Company manages its credit risk associated with fixed
maturities by diversifying its portfolio. At December 31, 1998,
the Company held no corporate debt securities or foreign
government debt securities of a single issuer which had a
carrying value in excess of ten percent of stockholders' equity.
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 1998 are shown by contractual
maturity for all securities except, U.S. Government agencies
mortgage-backed securities which are distributed by maturity year
based on the Company's estimate of the rate of future prepayments
of principal over the remaining lives of the securities (in
thousands). These estimates are developed using prepayment
speeds provided in broker consensus data. Such estimates are
derived from prepayment speed experience at the interest rate
levels projected for the applicable underlying collateral and can
be expected to vary from actual experience. 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 $ 201,267 201,307
Due after one year through five years 1,794,887 1,821,575
Due after five years through ten years 2,479,699 2,528,321
Due after ten years through twenty years 4,448,041 4,709,231
Mortgage-backed securities 1,812,376 1,807,849
----------- ----------
Total $10,736,270 11,068,283
=========== ==========
</TABLE>
(Continued)
15
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The sources of net investment income follow (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------- -------
<S> <C> <C> <C>
Fixed maturities $ 744,347 561,709 464,512
Mortgage loans 188,775 194,504 171,781
Real estate 25,682 34,164 39,062
Equity securities 1,195 1,317 755
Policy loans 152,247 148,316 133,511
Short-term investments 22,380 16,600 13,979
Other 18,938 13,943 9,705
---------- ------- -------
Investment revenue 1,153,564 970,553 833,305
Investment expenses (17,726) (25,011) (26,422)
---------- ------- -------
Net investment income $1,135,838 945,542 806,883
========== ======= =======
</TABLE>
Net realized gains (losses) from sales of investments consist of
the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Fixed maturities:
Realized gains $19,027 23,969 27,928
Realized losses (13,978) (16,796) (10,398)
Equity securities:
Realized gains 1,985 1,835 6,146
Realized losses (164) (1,457) (288)
Other investments, net 6,776 20,987 1,143
------- ------- -------
Net realized investment gains $13,646 28,538 24,531
======= ======= =======
</TABLE>
Included in the net realized losses are permanent write-downs of
approximately $5.5 million and $4.8 million during 1998 and 1997,
respectively.
(Continued)
16
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 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>
1998 1997
--------- --------
<S> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available for sale $ 332,015 388,267
Equity securities and short-term investments 9,561 658
Derivatives (5,261) 888
Effect of unrealized appreciation (depreciation) on:
Deferred policy acquisition costs (155,713) (142,187)
Present value of future profits (473) (2,901)
Deferred income taxes (69,135) (91,779)
Other (2,931) 139
Minority interest, net of taxes (19,561) (24,341)
--------- --------
Net unrealized appreciation $ 88,502 128,744
========= ========
</TABLE>
The Company has securities on deposit with various state
insurance departments and regulatory authorities with an
amortized cost of approximately $545.7 million and $346.6 million
at December 31, 1998 and 1997, 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>
1998 1997
--------------------------- ---------------------------
CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Arizona $ 167,628 7.1% $ 156,453 7.2%
California 395,329 16.6 358,443 16.5
Colorado 228,096 9.6 228,797 10.5
Florida 171,608 7.2 153,174 7.0
Georgia 176,090 7.4 131,861 6.1
Illinois 162,168 6.8 155,184 7.1
Maryland 102,915 4.3 104,567 4.8
Missouri 93,528 3.9 100,815 4.6
Texas 197,375 8.3 191,619 8.8
Washington 99,615 4.2 84,140 3.9
Other 581,717 24.6 513,213 23.5
---------- ----- ---------- -----
Subtotal 2,376,069 100.0% 2,178,266 100.0%
===== =====
Valuation reserve (38,527) (38,004)
---------- ----------
Total $2,337,542 $2,140,262
========== ==========
</TABLE>
(Continued)
17
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Property type:
Apartment $ 77,069 3.2% $ 101,038 4.6%
Retail 872,205 36.7 903,438 41.5
Office building 747,824 31.5 622,185 28.6
Industrial 422,553 17.8 445,253 20.4
Other commercial 256,418 10.8 106,352 4.9
---------- ----- ---------- -----
Subtotal 2,376,069 100.0% 2,178,266 100.0%
===== =====
Valuation reserve (38,527) (38,004)
---------- ----------
Total $2,337,542 $2,140,262
========== ==========
</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 $20.1 million and $8.7 million at
December 31, 1998 and 1997, respectively. At December 31, 1998
and 1997, the recorded investment in mortgage loans that were
considered impaired was $100.7 million and $119.7 million,
respectively, with related allowances for credit losses of
$12.6 million and $12.7 million, respectively. The average
recorded investment in impaired loans during 1998 and 1997 was
$110.2 million and $103.1 million, respectively.
For the years ended December 31, 1998, 1997, and 1996, the
Company recognized $6.8 million, $9.7 million, and $6.6 million,
respectively, of interest income on those impaired loans, which
included $7.0 million, $9.9 million, and $6.7 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, 1998 totaling $429.5 million.
SECURITIES LENDING
The Company participates in a securities lending program. The
amount on loan at December 31, 1998 was $122.5 million and was
appropriately collateralized.
(Continued)
18
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 of 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, 1998, the Company had 35 outstanding
interest rate swap agreements which expire at various dates
through 2025. Under 15 of the agreements, the Company
receives a fixed rate ranging from 5.79 percent to 7.57
percent on a notional amount of $80.5 million and pays a
floating rate based on London Interbank Offered Rate
(LIBOR). Under 19 outstanding interest rate swap
agreements, the Company receives a floating rate based on
LIBOR on a notional amount of $116.0 million and pays a
fixed rate ranging from 3.13 percent to 8.56 percent. On
the remaining swap agreement, the Company receives a
floating rate based on LIBOR on a notional amount of $5
million and pays a floating rate based on LIBOR. The
estimated fair value of the agreements at December 31, 1998
was a net loss of approximately $4.7 million, which is
recognized in accumulated other comprehensive income.
At December 31, 1997, the Company had 30 outstanding
interest rate swap agreements which expire at various dates
through 2025. Under 13 of the agreements, the Company
receives a fixed rate ranging from 5.98 percent to 7.51
percent on a notional amount of $68.6 million and pays a
floating rate based on LIBOR. Under the remaining 17
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
6.50 percent to 8.56 percent. The estimated fair value of
the agreements was a net loss of approximately $2.5
million, which is not recognized in accumulated other
comprehensive income.
CURRENCY SWAPS AND CROSS 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. Under cross currency swaps, the Company swaps the
difference between two currencies and between floating and
fixed-rate interest amounts calculated by reference to
notional amounts. 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.
(Continued)
19
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company had one outstanding currency swap agreement and
five outstanding cross currency swaps at December 31, 1998
and 1997, respectively, which expire at various dates
through 2016. The notional amount was $34.2 million and
$34.3 million, respectively. The 1998 estimated fair value
of the agreements was a net loss of $5.5 million and is
recognized in accumulated other comprehensive income and
the 1997 net loss of $1.3 million is not recognized in
accumulated other comprehensive income.
TOTAL RETURN SWAP: The Company uses the total return swap
to construct a structured product that resembles an equity
linked note. The total return swap is used to obtain the
equity participation. The Company agrees with other
parties to pay at specified intervals, floating-rate
interest amounts calculated by reference to an agreed
notional principal amount. In return the Company receives
equity participation, which is calculated by reference to
an agreed equity market index and a notional principal
amount. If the amount is positive at the termination date,
the Company receives such amount. If the amount is
negative at the termination date, the Company pays out such
amount to the counterparty.
At December 31, 1998, the Company had one outstanding total
return swap which expires in 2028. The notional amount was
$14.0 million and the estimated fair value of the agreement
was a net profit of $1.9 million, which is recognized in
accumulated other comprehensive income. At December 31,
1997, the Company held no return swap agreements.
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.
The 1998 unrealized gain was recognized in accumulated
other comprehensive income and the 1997 unrealized loss was
not recognized in accumulated other comprehensive income.
Futures contracts outstanding as of December 31, 1998 and
1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Net sold Notional Fair Unrealized
position amount value gain (loss)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998 (259) $33,117 $32,923 $194
December 31, 1997 (510) $51,000 $60,940 ($907)
</TABLE>
CALL 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 contracts. 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. At December 31,
1998 and 1997, the amounts involved were not material.
(Continued)
20
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
PUT OPTION: The Company uses a put option to construct a
structured product that resembles an equity linked note. A
put option is used to hedge equity exposure that is
associated with the total return swap. The put option
helps protect the downside exposure. A lump sum payment is
made at the outset. The notional amount of the put is
based on the notional amount associated with the total
return swap. The termination date for the put option is
set to match the termination date of the total return swap.
At December 31, 1998 and 1997, the amounts involved were
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. At December 31,
1998 and 1997, there were not any significant
concentrations with counterparties.
(3) 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, 1998 and 1997. 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>
1998 1997
-------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $11,068,283 11,068,283 9,115,519 9,115,519
Mortgage loans 2,337,542 2,472,485 2,140,262 2,333,895
Policy loans 2,151,028 2,151,028 2,073,152 2,073,152
Short-term investments 195,346 195,346 190,374 190,374
Other invested assets 457,645 457,645 243,921 243,921
Separate account assets 5,287,456 5,287,456 4,118,860 4,118,860
Liabilities:
Policyholder account
balances related to
investment contracts $ 6,675,466 6,781,053 6,696,690 6,608,068
Long-term debt and
notes payable 221,850 235,367 214,477 222,419
Separate account liabilities 5,267,553 5,267,553 4,112,666 4,112,666
</TABLE>
(Continued)
21
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(4) REINSURANCE
The Company is a reinsurer to the life and health industry. The
effect of reinsurance on premiums and other considerations is as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Direct $1,253,409 1,120,169 1,097,340
Assumed 1,422,262 996,861 827,171
Ceded (431,515) (348,861) (301,283)
---------- --------- ---------
Net insurance premiums and
other considerations $2,244,156 1,768,169 1,623,228
========== ========= =========
</TABLE>
Reinsurance assumed represents approximately $313.7 billion,
$212.5 billion, and $160.0 billion of insurance in force at
December 31, 1998, 1997, and 1996, respectively. The amount of
ceded insurance in force, including retrocession, was
$31.4 billion, $50.4 billion, and $53.2 billion, for 1998, 1997,
and 1996, respectively.
(5) FEDERAL INCOME TAXES
Income tax expense (benefit) attributable to income from
operations consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current income tax expense $35,226 65,778 45,902
Deferred income tax expense (benefit) 18,351 (113) 13,992
------- ------ ------
Provision for income taxes $53,577 65,665 59,894
======= ====== ======
</TABLE>
(Continued)
22
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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>
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense $ 69,952 64,763 57,055
Increase (decrease) in income tax resulting from:
Surplus tax on mutual life insurance companies (7,505) 5,325 4,777
Foreign tax rate in excess of U.S. tax rate 752 556 941
Tax preferred investment income (10,949) (6,583) (7,318)
State tax net of federal benefit 1,660 830 971
Corporate owned life insurance (3,575) -- --
Foreign tax credit (1,261) (594) --
Goodwill amortization 1,471 956 895
Difference in book vs. tax basis in
domestic subsidiaries 2,751 2,166 2,230
Other, net 281 (1,754) 343
-------- ------ ------
Provision for income taxes $ 53,577 65,665 59,894
======== ====== ======
</TABLE>
Total income taxes were allocated as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Provision for income taxes $ 53,577 65,665 59,894
Income tax from stockholder equity:
Unrealized investment gain (loss) recognized
for financial reporting purposes (22,619) 55,923 (24,612)
Foreign currency translation (9,370) (12,122) --
Other (1,357) (437) (1,023)
-------- ------- -------
Total income tax $ 20,231 109,029 34,259
======== ======= =======
</TABLE>
(Continued)
23
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities at
December 31, 1998 and 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
Reserve for future policy benefits $151,132 149,496
Deferred acquisition costs capitalized for tax 128,830 110,418
Difference in basis of post retirement benefits 7,747 6,846
Net operating loss 46,609 40,915
Other, net 127,891 132,354
-------- -------
Gross deferred tax assets 462,209 440,029
Less valuation allowance 1,338 1,150
-------- -------
Total deferred tax asset after valuation allowance $460,871 438,879
======== =======
Deferred tax liabilities:
Unrealized gain on investments $ 96,554 123,971
Deferred acquisition costs capitalized for financial reporting 274,483 282,714
Other, net 165,263 121,240
-------- -------
Total deferred tax liabilities 536,300 527,925
-------- -------
Net deferred tax liability $ 75,429 89,046
======== =======
</TABLE>
The Company has not recognized a deferred tax liability for the
undistributed earnings of its wholly owned domestic and 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, 1998, 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 NaviSys Insurance Solution's Mexican subsidiary.
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. Management
believes that it is more likely than not that results of future
operations will generate sufficient taxable income to realize the
remaining deferred tax assets.
(Continued)
24
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
At December 31, 1998, the Company had capital loss carryforwards of
$0.2 million. During 1998, 1997, and 1996 the Company paid income
taxes totaling approximately $59.6 million, $70.8 million, and $20.7
million, respectively. At December 31, 1998, the Company's
subsidiaries had recognized deferred tax assets associated with net
operating loss carryforwards of approximately $131.8 million. The
net operating loss and capital losses are expected to be utilized
during the period allowed for carryforwards.
(6) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized is
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 695,253 652,251 526,939
Transfer of present value of future profits -- 19,279 --
Prior year adjustment due to change in
reserving method (225) -- --
Policy acquisition costs deferred 332,899 267,008 206,790
Policy acquisition costs amortized (280,061) (211,979) (182,038)
Interest credited 39,421 40,843 38,944
Deferred policy acquisition costs relating to
change in unrealized (gain) loss on
investments available for sale (13,525) (72,149) 61,616
--------- -------- --------
Balance at end of year $ 773,762 695,253 652,251
========= ======== ========
</TABLE>
(7) 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.
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 plans and amortizes its transition obligation for
retirees and fully eligible or vested employees over 20 years.
The unamortized transition obligation was $14.4 million and $16.8
million at December 31, 1998 and 1997, respectively.
(Continued)
25
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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, $10.4 million, and $8.8 million for 1998, 1997,
and 1996 respectively.
The following tables summarize the Company's associate benefit
plans and postretirement benefits (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ---------------------
1998 1997 1998 1997
-------- ------- ------ ------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $129,831 122,551 37,678 41,518
Service cost 5,775 5,915 1,705 1,665
Interest cost 9,269 8,597 2,898 2,488
Participant contributions -- -- 216 207
Plan amendments (423) (547) (1,317) --
Curtailments -- (1,046) -- --
Benefits paid (6,640) (5,903) (1,438) (1,577)
Actuarial (gain) or loss 11,281 264 5,962 (6,623)
-------- ------- ------ ------
Benefit obligation at end of year $149,093 129,831 45,704 37,678
======== ======= ====== ======
Change in plan assets:
Fair value of plan assets at beginning
of year 150,498 125,742 -- --
Actual return on plan assets 29,183 29,043 -- --
Employer contributions 1,703 1,616 -- --
Benefits paid (6,640) (5,903) -- --
-------- ------- ------ ------
Fair value of plan assets at
end of year $174,744 150,498 -- --
======== ======= ====== ======
</TABLE>
(Continued)
26
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of funded status:
Funded status $ 25,652 20,668 3,192 (45,704) (37,678) (41,518)
Unrecognized actuarial
(gain) or loss (14,455) (8,237) 9,826 (1,862) (7,824) (1,361)
Unrecognized transition
obligation 298 1,098 1,396 14,404 16,766 17,884
Unrecognized prior
service cost (780) (2,184) (580) -- -- --
-------- ------- ------- ------- ------- -------
Net amount recognized
at end of year 10,715 11,345 13,834 (33,162) (28,736) (24,995)
-------- ------- ------- ------- ------- -------
Amounts recognized in the
statement of financial
position consist of:
Prepaid benefit cost 37,921 35,850 35,335 -- -- --
Accrued benefit liability (32,208) (28,183) (26,377) (33,162) (28,736) (24,995)
Intangible asset 869 868 1,608 -- -- --
Accumulated other
comprehensive loss 4,133 2,810 3,268 -- -- --
-------- ------- ------- ------- ------- -------
Net amount recognized
at end of year 10,715 11,345 13,834 (33,162) (28,736) (24,995)
-------- ------- ------- ------- ------- -------
Other comprehensive loss
(income) attributable to
change in additional
minimum liability recognition $ 1,324 (458) (84) -- -- --
======== ======= ======= ======= ======= =======
</TABLE>
(Continued)
27
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------- --------------------------
1998 1997 1996 1998 1997 1996
-------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Additional year-end information
for plans with benefit obliga-
tions in excess of plan assets:
Benefit obligation $ 36,587 32,239 29,077 45,704 37,378 41,518
Fair value of plan assets 81 41 -- -- -- --
Additional year-end information
for pension plans with accumu-
lated benefit obligations in
excess of plan assets:
Projected benefit obligation 36,587 32,239 29,077 -- -- --
Accumulated benefit
obligation 32,078 28,019 26,241 -- -- --
Fair value of plan assets 81 41 -- -- -- --
Components of net periodic
benefit cost:
Service cost 5,775 5,915 5,421 1,705 1,665 1,921
Interest cost 9,269 8,597 8,047 2,898 2,488 2,729
Expected return on plan
assets (13,261) (11,108) (10,447) -- -- --
Amortization of prior
service cost (71) (51) 58 -- -- --
Amortization of transitional
obligation 98 298 338 1,045 1,118 1,118
Recognized actuarial (gain)
or loss 432 455 491 -- (160) --
-------- ------- ------- ------ ------ ------
Net periodic benefit cost $ 2,242 4,106 3,908 5,648 5,111 5,768
======== ======= ======= ====== ====== ======
Additional loss recognized due to:
Curtailment 91 -- -- -- -- --
Settlement -- -- 192 -- -- --
Weighted average assumptions
as of December 31:
Discount rate 6.75% 7.25% 7.25% 6.75% 7.25% 7.25%
Expected long-term rate of
return on plan assets 9.00% 9.00% 9.25% -- -- --
Rate of compensation
increase (qualified plan) 4.20% 4.20% 4.50% -- -- --
======== ======= ======= ====== ====== ======
</TABLE>
(Continued)
28
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
ASSUMED HEALTH CARE COST TREND: For measurement purposes, a 7.5
percent annual rate of increase in the per capita cost of covered
health care benefits was assumed for 1998. The rate assumed to
decrease gradually to 5 percent for 2000 and remain at that level
thereafter.
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one percentage
point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total service and interest cost
components for 1998 $ 834 (643)
Effect on end of year 1998 postretirement
benefit obligation $6,608 (5,272)
</TABLE>
(8) DEBT
The Company's long-term debt and notes payable consist of the
following (in millions):
<TABLE>
<CAPTION>
FACE VALUE AT
DECEMBER 31,
----------------
DESCRIPTION RATE MATURITY 1998 1997
----------- ---- -------- ---- ----
<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:
RGA Australia Hldgs. 5.180% April 1999 8.9 7.8
===== ============ ------ -----
Total long-term debt and
notes payable $215.9 214.8
====== =====
</TABLE>
The difference between the face value of debt and the carrying
value per the consolidated balance sheets is unamortized
discount.
The Company'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.
(Continued)
29
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 RGA is subject to applicable insurance
laws and regulations.
Principal repayments are due in April 1999 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 1998, 1997, and 1996 amounted to
$17.0 million, $20.0 million, and $19.9 million, respectively.
As of December 31, 1998, the Company was in compliance with all
covenants under its debt agreements.
(9) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, Reporting Comprehensive Income, effective for
years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income but
does not affect results of operations. Effective January 1,
1998, the Company adopted SFAS 130. The components of
comprehensive income, other than net income, are as follows (in
thousands):
<TABLE>
<CAPTION>
1998
-------------------------------------
BEFORE- TAX NET-OF-
TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
-------- ------- --------
<S> <C> <C> <C>
Foreign currency translation adjustments $(20,597) 7,200 (13,397)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (56,603) 19,327 (37,276)
Less reclassification adjustment
for gains (losses) realized in
net income 4,654 (1,688) 2,966
-------- ------ -------
Net unrealized gains (losses)
on securities (61,257) 21,015 (40,242)
Minimum benefit liability (335) -- (335)
-------- ------ -------
Total other comprehensive
(loss) income $(82,189) 28,215 (53,974)
======== ====== =======
</TABLE>
(Continued)
30
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1997
-------------------------------------
BEFORE- TAX NET-OF-
TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
-------- ------- --------
<S> <C> <C> <C>
Foreign currency translation adjustments $(14,254) 10,583 (3,671)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period 132,329 (49,140) 83,189
Less reclassification adjustment for gains
(losses) realized in net income 7,432 (2,620) 4,812
-------- ------- ------
Net unrealized gains (losses)
on securities 124,897 (46,520) 78,377
Minimum benefit liability 877 -- 877
-------- ------- ------
Total other comprehensive
(loss) income $111,520 (35,937) 75,583
======== ======= ======
<CAPTION>
1996
-------------------------------------
BEFORE- TAX NET-OF-
TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
-------- ------- --------
<S> <C> <C> <C>
Foreign currency translation adjustments $ (1,543) -- (1,543)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (48,303) 16,081 (32,222)
Less reclassification adjustment for gains
(losses) realized in net income 23,033 (8,167) 14,866
-------- ------ -------
Net unrealized gains (losses)
on securities (71,336) 24,248 (47,088)
Minimum benefit liability (1,074) -- (1,074)
-------- ------ -------
Total other comprehensive
(loss) income $(73,953) 24,248 (49,705)
======== ====== =======
</TABLE>
The following schedule reflects the change in net accumulated
other comprehensive (loss) income for the periods ending
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
BALANCE CURRENT BALANCE
AS OF PERIOD AS OF
12/31/97 CHANGE 12/31/98
-------- ------- --------
<S> <C> <C> <C>
Foreign currency translation adjustments $(19,481) (13,397) (32,878)
Unrealized gains (losses) on securities 128,744 (40,242) 88,502
Minimum benefit liability (2,380) (335) (2,715)
-------- ------- -------
Total accumulated other comprehensive
(loss) income $106,883 (53,974) 52,909
======== ======= ======
</TABLE>
(Continued)
31
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
BALANCE CURRENT BALANCE
AS OF PERIOD AS OF
12/31/96 CHANGE 12/31/97
-------- ------ --------
<S> <C> <C> <C>
Foreign currency translation adjustments $(15,810) (3,671) (19,481)
Unrealized gains on securities 50,367 78,377 128,744
Minimum benefit liability (3,257) 877 (2,380)
-------- ------ -------
Total accumulated other comprehensive
income $ 31,300 75,583 106,883
======== ====== =======
</TABLE>
(10) REGULATORY MATTERS
The Company, as well as its insurance subsidiaries, are subject
to financial statement filing requirements in their respective
states 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 statutorily determined
formulas; and (5) valuation of investments in bonds at amortized
cost.
Combined net income and policyholders' surplus of the Company
and its insurance subsidiaries, for the years ended and at
December 31, 1998, 1997, and 1996, as determined in accordance
with statutory accounting practices, are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------- -------
<S> <C> <C> <C>
Net income $ 60,793 39,737 18,464
Policyholders' surplus 1,147,411 844,110 636,260
========== ======= =======
</TABLE>
Under Risk-Based Capital (RBC) requirements, the Company and its
insurance subsidiaries are required to measure their solvency
against certain parameters. As of December 31, 1998, 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's life insurance subsidiaries are subject to
limitations on the payment of dividends to the Company.
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) ten percent of the insurance
subsidiaries' statutory surplus as of the preceding December 31
or (b) the insurance subsidiaries' statutory gain from
operations for the preceding year.
(Continued)
32
<PAGE>
<PAGE>
GENERAL AMERICAN LIFE INSURANCE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(11) PARTICIPATING POLICIES AND DIVIDENDS TO POLICYHOLDERS
Over 22.8 percent and 27.5 percent of the Company's business in
force relates to participating policies as of December 31, 1998
and 1997, 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.
(12) CONTINGENT LIABILITIES
The Company was named as a defendant in a lawsuit that was filed
in 1996 in Arizona State Court. The lawsuit claimed benefits
under a disability policy and damages for bad faith termination
of such benefits. In November 1998, the jury entered a verdict
against the Company, awarding the plaintiff approximately $59
million in damages, including $58 million in punitive damages.
In January 1999, the Company filed a motion for judgment
notwithstanding the verdict, a motion for a new trial, and a
request for reduction of the punitive damages awarded. The
Company intends to press vigorously for the Court to eliminate
the bad faith claim, reduce the punitive damage award, grant a
new trial, and vigorously appeal the verdict if it is allowed to
stand.
The Company was named as defendant in the following purported
class action lawsuits: Chain v. General American Life Insurance
Company (filed in the U.S. District Court for the Northern
District of Mississippi in 1996); Newburg Trust v. General
American Life Insurance Company (filed in the U.S. District
Court for the District of Massachusetts in 1996); and Ludwig,
Sippil, D'Allesandro and Cunningham v. General American Life
Insurance Company (filed in the U.S. District Court for the
Southern District of Illinois in 1997). These lawsuits allege
that the Company engaged in deceptive sales practices in
connection with the sale of certain life insurance policies.
None of these lawsuits has been certified as a class action.
Although the claims asserted in each lawsuit are not identical,
the plaintiffs seek unspecified actual and punitive damages
under similar claims, including breach of contract, fraud,
intentional or negligent misrepresentation, breach of fiduciary
duty, and unjust enrichment. The Company filed a motion to
dismiss all of the claims in each of the lawsuits.
The Court in each of these lawsuits has dismissed certain of the
plaintiffs' claims while allowing others to proceed. These
three cases have been consolidated with one individual case in
the U.S. District Court for the Eastern District of Missouri.
The Company intends to oppose these lawsuits vigorously.
In addition to the matters discussed above, the Company is
involved in pending and threatened litigation in the normal
course of its business. While the outcome of these matters
cannot be predicted with certainty, at the present time and
based on information currently available, management does not
believe that the Company's liability arising from pending or
threatened litigation will have a material adverse affect on the
Company's financial condition or results of operations.
(13) SUBSEQUENT EVENTS
On January 28, 1999, the Board of Directors of GenAmerica
Corporation authorized the development of a demutualization plan
for GAMHC to convert from a mutual holding company to a publicly
traded stock company. The demutualization plan will be subject
to approval by the Board of Directors, regulators, and
policyholders.
33
<PAGE>
<PAGE>
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, 1998, 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, 1998, 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, 1998, 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 LLP
St. Louis, Missouri
February 12, 1999
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<CAPTION>
S & P 500 MONEY
INDEX MARKET
FUND DIVISION FUND DIVISION
--------------------- ---------------------
<S> <C> <C>
Assets:
Investments in General American Capital Company,
at market value (see Schedule of Investments) $ 73,937,535 $ 3,458,843
--------------------- ---------------------
Total assets 73,937,535 3,458,843
--------------------- ---------------------
Liabilities:
Payable to General American Life
Insurance Company 359,402 102,936
--------------------- ---------------------
Total net assets $ 73,578,133 $ 3,355,907
===================== =====================
Net assets represented by:
Tax sheltered annuities in accumulation period 54,623,366 2,046,952
Individually purchased annuities in accumulation period 18,954,767 1,308,955
Variable annuities in payment period 0 0
--------------------- ---------------------
Total net assets $ 73,578,133 $ 3,355,907
===================== =====================
Tax sheltered units held - 88 Series 986,856 123,523
Individually purchased units held - 88 Series 342,447 78,989
Tax sheltered units held - 82 Series -- --
Individually purchased units held - 82 Series -- --
Tax sheltered accumulation unit value - 88 Series $ 55.35 $ 16.57
Individually purchased accumulation unit value - 88 Series 55.35 16.57
Tax sheltered accumulation unit value - 82 Series -- --
Individually purchased accumulation unit value - 82 Series -- --
Cost of investments $ 48,232,980 $ 3,534,896
===================== =====================
<CAPTION>
See accompanying notes to financial statements.
BOND MANAGED ASSET
INDEX EQUITY ALLOCATION
FUND DIVISION FUND DIVISION FUND DIVISION
--------------------- --------------------- ---------------------
<S> <C> <C>
$ 5,779,017 $ 24,149,175 $ 22,412,431
--------------------- --------------------- ---------------------
5,779,017 24,149,175 22,412,431
--------------------- --------------------- ---------------------
22,569 14,190 67,755
--------------------- --------------------- ---------------------
$ 5,756,448 $ 24,134,985 $ 22,344,676
===================== ===================== =====================
4,185,132 24,003,865 16,139,849
1,571,316 90,579 6,204,827
0 40,541 0
--------------------- --------------------- ---------------------
$ 5,756,448 $ 24,134,985 $ 22,344,676
===================== ===================== =====================
199,586 266,033 487,279
74,935 53,862 187,330
-- 125,802 --
-- 1,008 --
$ 20.97 $ 42.70 $ 33.12
20.97 42.70 33.12
-- 82.60 --
-- 89.89 --
$ 5,658,374 $ 21,214,142 $ 18,809,547
===================== ===================== =====================
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF ASSETS AND LIABILITIES (continued)
DECEMBER 31, 1998
<CAPTION>
EQUITY- INCOME GROWTH
FUND DIVISION FUND DIVISION
--------------------- ----------------------
<S> <C> <C>
Assets:
Investments in Fidelity Variable Insurance Products
Fund, at market value (see Schedule of Investments) $ 27,457,497 $ 37,409,371
--------------------- ----------------------
Total assets 27,457,497 37,409,371
--------------------- ----------------------
Liabilities:
Payable to General American Life
Insurance Company 112,820 19,712
--------------------- ----------------------
Total net assets $ 27,344,677 $ 37,389,659
===================== ======================
Net assets represented by:
Tax sheltered annuities in accumulation period 19,450,612 28,694,829
Individually purchased annuities in accumulation period 7,894,065 8,694,830
Variable annuities in payment period 0 0
--------------------- ----------------------
Total net assets $ 27,344,677 $ 37,389,659
===================== ======================
Tax sheltered units held - 88 Series 868,148 1,127,328
Individually purchased units held - 88 Series 352,340 341,592
Tax sheltered units held - 82 Series -- --
Individually purchased units held - 82 Series -- --
Tax sheltered accumulation unit value - 88 Series $ 22.41 $ 25.45
Individually purchased accumulation unit value - 88 Series 22.41 25.45
Tax sheltered accumulation unit value - 82 Series -- --
Individually purchased accumulation unit value - 82 Series -- --
Cost of investments $ 21,852,397 $ 26,171,457
===================== ======================
<CAPTION>
See accompanying notes to financial statements.
OVERSEAS
FUND DIVISION
---------------------
<C>
$ 6,853,414
---------------------
6,853,414
---------------------
87,545
---------------------
$ 6,765,869
=====================
5,299,578
1,466,291
0
---------------------
$ 6,765,869
=====================
354,955
98,209
--
--
$ 14.93
14.93
--
--
$ 6,213,911
=====================
</TABLE>
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
S & P 500 MONEY
INDEX MARKET
FUND DIVISION FUND DIVISION
--------------------- ---------------------
<S> <C> <C>
Investment income* $ -- $ --
Expenses:
Mortality and expense charge (650,414) (30,761)
--------------------- ---------------------
Net investment expense (650,414) (30,761)
--------------------- ---------------------
Net realized gain on investments:
Realized gain from distributions 4,333,989 178,728
Realized gain on sales 5,014,580 46,891
--------------------- ---------------------
Net realized gain on investments 9,348,569 225,619
--------------------- ---------------------
Net unrealized gain (loss) on investments:
Unrealized gain (loss) on investments,
beginning of year 18,854,750 (18,321)
--------------------- ---------------------
Unrealized gain (loss) on investments, end of year 25,704,555 (76,053)
--------------------- ---------------------
Net unrealized gain (loss) on investments 6,849,805 (57,732)
--------------------- ---------------------
Net gain on investments 16,198,374 167,887
--------------------- ---------------------
Net increase in net assets resulting
from operations $ 15,547,960 $ 137,126
===================== =====================
<CAPTION>
*See Note 2C
See accompanying notes to financial statements.
BOND MANAGED ASSET
INDEX EQUITY ALLOCATION
FUND DIVISION FUND DIVISION FUND DIVISION
--------------------- --------------------- ---------------------
<C> <C> <C>
$ -- $ -- $ --
<S> <C> <C>
(54,543) (223,158) (203,860)
--------------------- --------------------- ---------------------
(54,543) (223,158) (203,860)
--------------------- --------------------- ---------------------
318,185 2,805,178 1,948,079
43,907 829,696 567,655
--------------------- --------------------- ---------------------
362,092 3,634,874 2,515,734
--------------------- --------------------- ---------------------
31,607 3,498,658 2,689,912
--------------------- --------------------- ---------------------
120,643 2,935,033 3,602,884
--------------------- --------------------- ---------------------
89,036 (563,625) 912,972
--------------------- --------------------- ---------------------
451,128 3,071,249 3,428,706
--------------------- --------------------- ---------------------
$ 396,585 $ 2,848,091 $ 3,224,846
===================== ===================== =====================
</TABLE>
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF OPERATIONS (continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
EQUITY-INCOME GROWTH
FUND DIVISION FUND DIVISION
--------------------- ----------------------
<S> <C> <C>
Investment income:
Dividend income * $ 342,191 $ 134,543
Expenses:
Mortality and expense charge (260,566) (305,459)
--------------------- ----------------------
Net investment income (expense) 81,625 (170,916)
--------------------- ----------------------
Net realized gain on investments:
Realized gain from distributions 1,217,796 3,519,371
Realized gain on sales 938,387 1,012,887
--------------------- ----------------------
Net realized gain on investments 2,156,183 4,532,258
--------------------- ----------------------
Net unrealized gain on investments:
Unrealized gain on investments,
beginning of year 5,292,349 5,431,769
--------------------- ----------------------
Unrealized gain on investments, end of year 5,605,100 11,237,914
--------------------- ----------------------
Net unrealized gain on investments 312,751 5,806,145
--------------------- ----------------------
Net gain on investments 2,468,934 10,338,403
--------------------- ----------------------
Net increase in net assets resulting
from operations $ 2,550,559 $ 10,167,487
===================== ======================
<CAPTION>
*See Note 2C
See accompanying notes to financial statements.
OVERSEAS
FUND DIVISION
---------------------
<C>
$ 128,360
(68,094)
---------------------
60,266
---------------------
378,326
239,759
---------------------
618,085
---------------------
590,415
---------------------
639,503
---------------------
49,088
---------------------
667,173
---------------------
$ 727,439
=====================
*See Note 2C
See accompanying notes to financial statements
</TABLE>
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
S & P 500 MONEY
INDEX MARKET
FUND DIVISION FUND DIVISION
----------------------------------- --------------------------------
1998 1997 1998 1997
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment expense $ (650,414) $ (480,811) $ (30,761) $ (26,955)
Net realized gain on investments 9,348,569 4,278,796 225,619 107,055
Net unrealized gain (loss) on investments 6,849,805 8,888,358 (57,732) 42,744
---------------- ---------------- -------------- --------------
Net increase in net assets
resulting from operations 15,547,960 12,686,343 137,126 122,844
Net deposits into (withdrawals from)
Separate Account 1,283,048 6,489,502 436,791 (51,313)
---------------- ---------------- -------------- --------------
Increase in net assets 16,831,008 19,175,845 573,917 71,531
Net assets, beginning of year 56,747,125 37,571,280 2,781,990 2,710,459
Net assets, end of year $ 73,578,133 $ 56,747,125 $ 3,355,907 $ 2,781,990
================ ================ ============== ==============
<CAPTION>
See accompanying notes to financial statements.
BOND MANAGED ASSET
INDEX EQUITY ALLOCATION
FUND DIVISION FUND DIVISION FUND DIVISION
------------------------------- ----------------------------------- -----------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ (54,543) $ (41,815) $ (223,158) $ (203,453) $ (203,860) $ (166,957)
362,092 160,851 3,634,874 1,998,652 2,515,734 1,136,376
89,036 211,890 (563,625) 2,373,217 912,972 1,671,811
-------------- -------------- --------------- ---------------- ---------------- ---------------
396,585 330,926 2,848,091 4,168,416 3,224,846 2,641,230
596,366 226,314 (1,909,564) 579,352 (266,538) 3,375,210
-------------- -------------- --------------- ---------------- ---------------- ---------------
992,951 557,240 938,527 4,747,768 2,958,308 6,016,440
4,763,497 4,206,257 23,196,458 18,448,690 19,386,368 13,369,928
$ 5,756,448 $ 4,763,497 $ 24,134,985 $ 23,196,458 $ 22,344,676 $ 19,386,368
============== ============== =============== ================ ================ ===============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF CHANGES IN NET ASSETS (continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
EQUITY-INCOME
FUND DIVISION
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Operations:
Net investment income (expense) $ 81,625 $ 90,644
Net realized gain on investments 2,156,183 2,347,737
Net unrealized gain (loss) on investments 312,751 2,516,915
---------------- ----------------
Increase in net assets resulting
from operations 2,550,559 4,955,296
Net deposits (withdrawls) into Separate Account 695,101 1,834,497
---------------- ----------------
Increase in net assets 3,245,660 6,789,793
Net assets, beginning of year 24,099,017 17,309,224
Net assets, end of year $ 27,344,677 $ 24,099,017
================ ================
<CAPTION>
See accompanying notes to financial statements.
GROWTH OVERSEAS
FUND DIVISION FUND DIVISION
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$ (170,916) $ (98,156) $ 60,266 $ 34,761
4,532,258 2,374,930 618,085 637,960
5,806,145 2,510,768 49,088 (70,887)
---------------- ---------------- ---------------- ----------------
10,167,487 4,787,542 727,439 601,834
1,296,367 1,017,526 (469,743) 415,281
---------------- ---------------- ---------------- ----------------
11,463,854 5,805,068 257,696 1,017,115
25,925,805 20,120,737 6,508,173 5,491,058
$ 37,389,659 $ 25,925,805 $ 6,765,869 $ 6,508,173
================ ================ ================ ================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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>
<PAGE>
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>
<PAGE>
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 1998 and 1997 are disclosed in Note 6.
<PAGE>
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENT
Note 4 - Purchases and Sales of Capital Company Shares
During the year ended December 31, 1998, 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 $14,897,804 $ 2,848,509 $ 1,861,643 $ 4,526,574 $ 3,864,126
============ =========== =========== =========== ===========
Sales $9,404,039 $ 2,161,339 $ 991,529 $ 3,770,776 $ 2,612,218
=========== =========== ========= =========== ===========
</TABLE>
During the year ended December 31, 1998, 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 $ 4,962,087 $ 7,325,722 $ 1,371,963
============ =========== ===========
Sales $ 2,609,206 $ 2,437,778 $ 1,236,003
=========== =========== ===========
</TABLE>
<PAGE>
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 5 - Accumulation Unit Activity
The following is a summary of the accumulation unit activity for the year ended
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
S & P 500 INDEX MONEY MARKET BOND INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
----------------------- --------------------- -----------------------
Tax sheltered annuities: 1998 1997 1998 1997 1998 1997
--------- ----------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net deposits 236 268 123 89 61 41
Net withdrawals (184) (141) (101) (104) (24) (41)
Outstanding units, beginning of year 935 808 102 117 163 163
--- --- --- --- --- ---
Outstanding units, end of year 987 935 124 102 200 163
=== === === === === ===
Individually purchased annuities:
Net deposits 53 70 54 54 19 36
Net withdrawals (77) (29) (49) (42) (25) (25)
Outstanding units, beginning of year 366 325 74 62 81 70
--- --- -- -- -- --
Outstanding units, end of year 342 366 79 74 75 81
=== === == == == ==
<CAPTION>
MANAGED EQUITY ASSET ALLOCATION
FUND DIVISION FUND DIVISION
------------------------------------------------- ----------------------------
88 Series Other
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
33 77 7 9 63 179
(47) (37) (17) (26) (72) (58)
280 240 136 153 496 375
--- --- --- --- --- ---
266 280 126 136 487 496
=== === === === === ===
10 14 0 0 17 30
(23) (5) (1) 0 (17) (21)
67 58 2 2 187 178
-- -- - - --- ---
54 67 1 2 187 187
== == = = === ===
</TABLE>
(continued)
<PAGE>
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 5 - Accumulation Unit Activity (continued)
The following is a summary of the accumulation unit activity for the year ended
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
EQUITY-INCOME GROWTH
FUND DIVISION FUND DIVISION
----------------------------------- -----------------------------------
Tax sheltered annuities: 1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net deposits 161 215 205 291
Net withdrawals (131) (144) (142) (201)
Outstanding units, beginning of year 838 767 1,064 974
--- --- ----- ---
Outstanding units, end of year 868 838 1,127 1,064
=== === ===== =====
Individually purchased annuities:
Net deposits 51 70 50 75
Net withdrawals (50) (36) (51) (94)
Outstanding units, beginning of year 351 317 343 362
--- --- --- ---
Outstanding units, end of year 352 351 342 343
=== === === ===
<CAPTION>
OVERSEAS
FUND DIVISION
-----------------------------------
1998 1997
---------------- ----------------
<S> <C>
60 140
(68) (123)
363 346
--- ---
355 363
=== ===
11 26
(37) (9)
124 107
--- ---
98 124
== ===
</TABLE>
<PAGE>
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
FUND DIVISION FUND DIVISION
-----------------------------------------------------------------------------
Tax sheltered annuities: 1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total gross deposits $ 6,468,331 $ 4,992,488 $ 551,562 $ 531,080
Transfers between fund divisions
and General American 1,266,937 2,216,752 309,709 (559,259)
Surrenders and withdrawals (5,208,621) (2,348,697) (514,215) (207,516)
-------------- -------------- -------------- --------------
Total gross deposits, transfers, and
surrenders between fund divisions 2,526,647 4,860,543 347,056 (235,695)
Deductions:
Sales charges and premium taxes 541 565 33 25
Transfer charges 0 0 0 0
Surrender charges 39,730 18,035 2,941 5,180
-------------- -------------- -------------- --------------
40,271 18,600 2,974 5,205
Total deposits into (withdrawals from)
Separate Account $ 2,486,376 $ 4,841,943 $ 344,082 $ (240,900)
============== ============== ============== ==============
<CAPTION>
BOND INDEX MANAGED EQUITY
FUND DIVISION FUND DIVISION
- - ----------------------------------------------------------------------------------------------------------------------------
88 Series Other
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 429,226 $ 370,466 $ 1,031,883 $ 1,603,980 $ 128,121 $ 231,756
574,600 (113,635) (215,453) 466,770 257,403 (241,531)
(277,854) (241,262) (1,211,325) (688,564) (1,191,151) (1,127,831)
-------------- -------------- -------------- -------------- -------------- --------------
725,972 15,569 (394,895) 1,382,186 (805,627) (1,137,606)
3 3 62 27 244 1,050
0 0 0 0 0 5
3,061 2,527 17,119 8,235 0 0
-------------- -------------- -------------- -------------- -------------- --------------
3,064 2,530 17,181 8,262 244 1,055
$ 722,908 $ 13,039 $ (412,076) $ 1,373,924 $ (805,871) $ (610,222)
============== ============== ============== ============== ============== ==============
<CAPTION>
ASSET ALLOCATION
FUND DIVISION
- - -------------------------------------------
1998 1997
-------------- --------------
<S> <C>
$ 1,377,673 $ 3,211,321
(79,296) 742,510
(1,579,937) (802,650)
-------------- --------------
(281,560) 3,151,181
3 2
0 0
12,490 7,246
-------------- --------------
12,493 7,248
$ (294,053) $ 3,143,933
============== ==============
</TABLE>
<TABLE>
<CAPTION>
S & P 500 INDEX MONEY MARKET
FUND DIVISION FUND DIVISION
-----------------------------------------------------------------------------
Individually purchased annuities: 1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total gross deposits $ 1,765,647 $ 2,053,502 $ 120,214 $ 479,380
Transfers between fund divisions
and General American (209,771) 192,907 (22,244) (281,502)
Surrenders and withdrawals (2,726,185) (590,196) (5,242) (8,262)
-------------- -------------- -------------- --------------
Total gross deposits, transfers, and
surrenders between fund divisions (1,170,309) 1,656,213 92,728 189,616
Deductions:
Sales charges and premium taxes 0 70 0 0
Transfer charges 0 0 0 0
Surrender charges 33,019 8,584 19 29
-------------- -------------- -------------- --------------
33,019 8,654 19 29
Total deposits into (withdrawals from)
Separate Account $ (1,203,328) $ 1,647,559 $ 92,709 $ 189,587
============== ============== ============== ==============
<CAPTION>
BOND INDEX MANAGED EQUITY
FUND DIVISION FUND DIVISION
- - -----------------------------------------------------------------------------------------------------------------------------
88 Series Other
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 55,283 $ 120,453 $ 164,355 $ 455,178 $ 1,589 $ 0
67,237 214,861 (24,136) 19,302 0 0
(244,863) (120,139) (739,966) (124,273) (72,481) (2,121)
-------------- -------------- -------------- -------------- -------------- --------------
(122,343) 215,175 (599,747) 350,207 (70,892) (2,121)
0 0 0 30 0 0
0 0 0 0 0 0
4,199 1,900 20,978 3,967 0 0
-------------- -------------- -------------- -------------- -------------- --------------
4,199 1,900 20,978 3,997 0 0
$ (126,542) $ 213,275 $ (620,725) $ 346,210 $ (70,892) $ (2,121)
============== ============== ============== ============== ============== ==============
<CAPTION>
ASSET ALLOCATION
FUND DIVISION
- - ------------------------------------------
1998 1997
-------------- --------------
<S> <C>
$ 265,936 $ 588,279
(71,336) 80,471
(164,660) (424,166)
-------------- --------------
29,940 244,584
0 60
0 0
2,425 13,247
-------------- --------------
2,425 13,307
$ 27,515 $ 231,277
============== ==============
</TABLE>
(continued)
<PAGE>
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 6 - Summary of Gross and Net Deposits into Separate Account, (continued)
<TABLE>
<CAPTION>
EQUITY-INCOME GROWTH
FUND DIVISION FUND DIVISION
------------------------------- --------------------------------
Tax sheltered annuities: 1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Total gross deposits $ 2,099,844 $ 1,976,947 $ 2,854,340 $ 3,448,982
Transfers between fund divisions
and General American 281,676 898,692 665,837 (2,045)
Surrenders and withdrawals (1,685,785) (1,625,061) (2,126,620) (2,073,804)
-------------- -------------- --------------- --------------
Total gross deposits, transfers, and
surrenders between fund divisions 695,735 1,250,578 1,393,557 1,373,133
Deductions:
Sales charges and premium taxes 199 42 229 79
Transfer charges 0 0 0 0
Surrender charges 22,250 20,372 38,955 17,214
-------------- -------------- --------------- --------------
22,449 20,414 39,184 17,293
Total deposits (withdrawls) into
Separate Account $ 673,286 $ 1,230,164 $ 1,354,373 $ 1,355,840
============== ============== =============== ==============
<CAPTION>
OVERSEAS
FUND DIVISION
--------------------------------
1998 1997
-------------- --------------
<S> <C>
$ 599,682 $ 861,766
(134,703) 328,379
(564,009) (998,672)
-------------- --------------
(99,030) 191,473
12 10
0 0
7,586 4,773
-------------- --------------
7,598 4,783
$ (106,628) $ 186,690
============== ==============
</TABLE>
<TABLE>
<CAPTION>
EQUITY-INCOME GROWTH
FUND DIVISION FUND DIVISION
------------------------------- --------------------------------
Individually purchased annuities: 1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Total gross deposits $ 626,962 $ 915,674 $ 674,480 $ 718,567
Transfers between fund divisions
and General American 12,989 (51,474) (55,684) (286,628)
Surrenders and withdrawals (604,051) (251,063) (657,597) (759,171)
-------------- -------------- --------------- --------------
Total gross deposits, transfers, and
surrenders between fund divisions 35,900 613,137 (38,801) (327,232)
Deductions:
Sales charges and premium taxes 5 22 23 23
Transfer charges 0 0 0 0
Surrender charges 14,080 8,782 19,182 11,059
-------------- -------------- --------------- --------------
14,085 8,804 19,205 11,082
Total deposits (withdrawls) into
Separate Account $ 21,815 $ 604,333 $ (58,006) $ (338,314)
============== ============== =============== ==============
<CAPTION>
OVERSEAS
FUND DIVISION
--------------------------------
1998 1997
-------------- --------------
<S> <C>
$ 136,339 $ 192,673
(180,306) 87,209
(308,720) (50,134)
-------------- --------------
(352,687) 229,748
0 0
0 0
10,428 1,157
-------------- --------------
10,428 1,157
$ (363,115) $ 228,591
============== ==============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
General American Separate Account Two
Financial Highlights Information
December 31, 1998
<CAPTION>
Accumulation unit value: Accumulation unit value:
Beginning of period* End of period
----------------------------- -----------------------------
S & P 500 Index Fund Division **
<S> <C> <C> <C>
1998 43.62 55.35
1997 33.17 43.62
1996 27.27 33.17
1995 20.12 27.27
1994 20.09 20.12
1993 18.48 20.09
1992 17.37 18.48
1991 13.47 17.37
1990 14.15 13.47
1989 11.01 14.15
1988 10.00 11.01
Money Market Fund Division
1998 15.85 16.57
1997 15.14 15.85
1996 14.50 15.14
1995 13.82 14.50
1994 13.39 13.82
1993 13.12 13.39
1992 12.78 13.12
1991 12.16 12.78
1990 11.33 12.16
1989 10.44 11.33
1988 10.00 10.44
Bond Index Fund Division ***
1998 19.50 20.97
1997 18.01 19.50
1996 17.66 18.01
1995 14.99 17.66
1994 15.78 14.99
1993 14.43 15.78
1992 13.68 14.43
1991 12.12 13.68
1990 11.22 12.12
1989 10.27 11.22
1988 10.00 10.27
Managed Equity Fund Division
Tax Qualified
1998 72.99 82.60
1997 59.73 72.99
1996 49.83 59.73
1995 37.68 49.83
1994 39.42 37.68
1993 36.54 39.42
1992 34.56 36.54
1991 27.62 34.56
1990 28.73 27.62
1989 22.11 28.73
1988 21.30 22.11
Non-Tax Qualified
1998 79.43 89.89
1997 64.99 79.43
1996 54.22 64.99
1995 41.00 54.22
1994 42.90 41.00
1993 39.76 42.90
1992 37.61 39.76
1991 30.05 37.61
1990 31.27 30.05
1989 24.06 31.27
1988 23.18 24.06
<CAPTION>
Tax Qualified Plan Non-Tax Qualified Plan
Units outstanding, Units outstanding,
end of period end of period
(in thousands) (in thousands)
--------------------------------- -----------------------------
<S> <C>
987 342
935 366
808 325
657 297
636 265
599 241
366 152
236 109
133 67
97 23
36 7
124 79
102 74
117 62
106 57
93 58
115 73
181 85
179 101
188 79
28 15
6 5
200 75
163 80
163 70
146 85
146 58
161 61
116 48
50 67
33 58
22 17
5 2
126 N/A
136 N/A
153 N/A
164 N/A
188 N/A
210 N/A
217 N/A
216 N/A
192 N/A
194 N/A
207 N/A
N/A 1
N/A 2
N/A 2
N/A 17
N/A 20
N/A 24
N/A 25
N/A 25
N/A 25
N/A 25
N/A 26
<CAPTION>
(continued)
* 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.
** The name of the S&P 500 Index Fund was changed from the Equity Fund
effective May 1, 1994.
*** 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.
<PAGE>
<PAGE>
General American Separate Account Two
Financial Highlights Information (continued)
December 31, 1998
Accumulation unit value: Accumulation unit value:
Beginning of period* End of period
----------------------------- -----------------------------
Managed Equity Fund Division (continued)
88 Series
<S> <C> <C> <C>
1998 37.77 42.70
1997 30.94 37.77
1996 25.84 30.94
1995 19.56 25.84
1994 20.48 19.56
1993 19.00 20.48
1992 17.99 19.00
1991 14.39 17.99
1990 14.99 14.39
1989 11.54 14.99
1988 10.83 11.54
Asset Allocation Fund Division
1998 28.38 33.12
1997 24.14 28.38
1996 21.08 24.14
1995 16.52 21.08
1994 17.37 16.52
1993 16.01 17.37
1992 15.16 16.01
1991 12.78 15.16
1990 12.60 12.78
1989 10.61 12.60
1988 10.00 10.61
Equity-Income Fund Division
1998 20.27 22.41
1997 15.98 20.27
1996 14.12 15.98
1995 10.55 14.12
1994 10.00 10.55
Growth Fund Division
1998 18.42 25.45
1997 15.07 18.42
1996 13.27 15.07
1995 9.90 13.27
1994 10.00 9.90
Overseas Fund Division
1998 13.37 14.93
1997 12.11 13.37
1996 10.80 12.11
1995 9.95 10.80
1994 10.00 9.95
<PAGE>
<CAPTION>
Tax Qualified Plan Non-Tax Qualified Plan
Units outstanding, Units outstanding,
end of period end of period
(in thousands) (in thousands)
- - ------------------------------- -----------------------------
<S> <C>
266 54
280 67
240 58
215 75
204 68
197 56
158 40
101 27
56 20
21 7
6 0
487 187
496 187
375 178
317 168
320 180
332 166
223 119
140 66
94 35
33 16
9 4
868 352
838 351
767 317
552 207
315 82
1,127 342
1,064 343
974 362
646 261
356 116
355 98
363 124
346 107
266 77
240 52
* 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.
** The name of the S&P 500 Index Fund was changed from the Equity Fund
effective May 1, 1994.
*** 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>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<CAPTION>
No. of Shares Market Value
---------------------- -----------------------
<S> <C> <C>
S&P 500 Index Fund
General American Capital Company * 1,464,471 $ 73,937,535
Money Market Fund
General American Capital Company * 179,671 $ 3,458,843
Bond Index Fund
General American Capital Company * 229,420 $ 5,779,017
Managed Equity Fund
General American Capital Company * 677,834 $ 24,149,175
Asset Allocation Fund
General American Capital Company * 596,876 $ 22,412,431
Equity-Income Fund
Variable Insurance Products Fund 1,080,153 $ 27,457,497
Growth Fund
Variable Insurance Products Fund 833,728 $ 37,409,371
Overseas Fund
Variable Insurance Products Fund 341,816 $ 6,853,414
* These funds use consent dividending. See Note 2C.
See accompanying independent auditors report.
</TABLE>
<PAGE>
<PAGE>
LEGAL COUNSEL
Stephen E. Roth
Sutherland, Asbill & Brennan, Washington, D.C.
INDEPENDENT AUDITORS
KPMG 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>
<PAGE>
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 1
(2) Not Applicable
(3) (a) Form of Distribution Agreement [FN ___]
(b) Form of Selling Agreement [FN___]
(4) (a) Form of tax deferred group variable annuity contract
(No. _______)
(b) Endorsement related to the reorganization of Separate
Account [FN___]
(c) Form of endorsement allowing other Fund sponsors
(No. 1098900) [FN___]
(d) Form of endorsement relating to tax sheltered annuities,
Section 403(b) IRC (No. 1098600) [FN___]
(e) Form of endorsement relating to tax sheltered annuities with
employer contribution (No. 1098800) [FN___]
(5) Form of application
(6) (a) Amended and Restated Charter and Articles of Incorporation
of General American Life Insurance Company [FN___]
(b) By-laws of General American [FN___]
(7) Not applicable
(8) Not applicable
(9) Opinion and Consent of Counsel [FN___]
(10) Consent of Independent Accountants with financial statements
(11) No financial statements are omitted from item 23
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) Copies of manually signed powers of attorney for General American
Life Insurance Company directors August A. Busch, III, William E.
Cornelius, John C. Danforth 10, Bernard A. Edison, Richard A.
Liddy, William E. Maritz, Craig D. Schnuck 9, William P. Stiritz,
Andrew C. Taylor 8, H. Edwin Trusheim, Robert L. Virgil, Jr.,
Virginia V. Weldon, and Ted C. Wetterau [FN ____].
- -----------------
C-1
<PAGE>
<PAGE>
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 Counsel & Secretary, Feb.
700 Market Street 1991 to present. Vice President and General
St. Louis, MO 63101 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.
David L. Herzog Vice President and Chief Financial Officer
E. Thomas Hughes Corporate Actuary and Treasurer, Oct. 1994 to
700 Market Street present. Formerly Executive Vice President -
St. Louis, MO 63101 Group Pensions, March 1990 - Oct. 1994.
Richard A. Liddy Chairman, President, and Chief Executive Officer,
700 Market Street Jan. 1995 to present. Formerly, President and
St. Louis, MO 63101 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.
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 Executive Officer,
660 Mason Ridge Center Drive Reinsurance Group of America, Dec. 1992 to
St. Louis, MO 63141 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.
</FN>
C-2
<PAGE>
<PAGE>
<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
Agribrands International, Inc.
9811 South Forty Drive
St. Louis, Missouri 63124
Andrew C. Taylor Director
Enterprise Rent-A-Car
600 Corporate Park Drive
St. Louis, Missouri 63105
H. Edwin Trusheim Director
General American Life Insurance Company
700 Market Street
St. Louis, Missouri 63101
C-3
<PAGE>
<PAGE>
<CAPTION>
Positions and Offices
Directors with Depositor
<S> <C>
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
All entities are 100% owned by General American unless otherwise
noted.
<TABLE>
<S> <C>
Benefit Resource Life Insurance Company (Bermuda)
(Bermuda) Ltd. (fka RGA Insurance Company
(Bermuda) Limited
Collaborative Strategies, Inc. (Management Consulting) (Missouri)
- - ------------------------------
Conning & Company (broker-dealer) (Connecticut)
- - -----------------
Conning Asset Management Company (Missouri)
- - --------------------------------
(registered investment advisor)
Conning Corporation (holding company) (Missouri) (General American owns
- - ------------------- approximately 62% of the
outstanding common shares)
Conning, Inc. (holding company) (Delaware)
- - -------------
Conning Mortgage Investment Trust, Inc. (Maryland)
- - ---------------------------------------
(owned by 100 shareholders, and the assets are managed
by Conning)
C-4
<PAGE>
<PAGE>
Consultec, Inc. (benefits administration) (Georgia)
- - ---------------
Cova Corporation (annuities) (Missouri)
- - ----------------
Cova Financial Services Life Insurance Company (Missouri)
- - ----------------------------------------------
Cova Financial Life Insurance Company (California)
- - -------------------------------------
First Cova Life Insurance Company (New York)
- - ---------------------------------
Cova Investment Advisory Corporation (Illinois)
- - ------------------------------------
Cova Investment Allocation Corporation (Illinois)
- - --------------------------------------
Cova Life Management Company (Delaware)
- - ----------------------------
Cova Life Sales Company (Delaware)
- - -----------------------
Cova Life Administration Services Company (Illinois)
- - -----------------------------------------
Equity Intermediary Company (holding company) (Missouri)
- - ---------------------------
Fairfield Management Group, Inc. (Missouri)
- - --------------------------------
GenAmerica Corporation (holding company) (Missouri)
- - ----------------------
GenAmerica Foundation (Missouri)
- - ---------------------
(fka General American Charitable Foundation)
- - --------------------------------------------
(the charitable foundation is a not-for-profit corporation
formed by GenAmerica Corporation)
GenAmerica Capital I (preferred trust financing) (Delaware)
- - --------------------
GenAmerica Management Corporation (management services) (Missouri)
- - ---------------------------------
C-5
<PAGE>
<PAGE>
Genelco de Mexico, S.A. de C.V. (Mexico)
- - -------------------------------
Genelco Software, S.A. (Spain)
- - ----------------------
General American Capital Company (Maryland)
- - --------------------------------
(this company is owned by its shareholders)
General American Life Insurance Company (Missouri)
- - ---------------------------------------
General American Mutual Holding Company (Missouri)
- - ---------------------------------------
General Life Insurance Company (Texas)
- - ------------------------------
General Life Insurance Company of America (Illinois)
- - -----------------------------------------
GenMark Incorporated (Marketing Services) (Missouri)
- - --------------------
Great Rivers Reinsurance Management, Inc. (Missouri)
- - -----------------------------------------
The Longer Life Foundation
- - --------------------------
(fka RGA/Washington University Longevity (Missouri)
- - ----------------------------------------
Research Foundation)
--------------------
(the charitable foundation is a not-for-profit corporation
formed by Reinsurance Group of America, Incorporated)
Missouri Reinsurance (Barbados), Inc. (Barbados)
- - -------------------------------------
NaviSys Asia Pacific Limited (Hong Kong)
- - ----------------------------
NaviSys Enterprise Solutions, Inc.
- - ----------------------------------
(fka Beacon Software Development
- - --------------------------------
Company, Inc.) (New Jersey)
- - --------------
NaviSys Illustration Solutions, Inc.
- - ------------------------------------
(fka ECTA Corporation) (Pennsylvania)
- - ----------------------
C-6
<PAGE>
<PAGE>
NaviSys Incorporated (Missouri)
- - --------------------
NaviSys Insurance Solutions, Inc.
- - ---------------------------------
(fka Genelco Incorporated) (Missouri)
- - --------------------------
Paragon Life Insurance Company (Missouri)
- - ------------------------------
RGA Americas Reinsurance Company, Ltd. (Barbados)
- - --------------------------------------
RGA Australian Holdings Pty Limited (Australia)
- - -----------------------------------
RGA Reinsurance Company of Australia Limited (Australia)
- - --------------------------------------------
RGA Canada Management Company Ltd. (New Brunswick)
- - ----------------------------------
RGA Capital Limited (U.K.)
- - -------------------
RGA Holdings Limited (U.K.)
- - --------------------
RGA International Ltd. (New Brunswick)
- - ----------------------
RGA Financial Products Limited (Ontario, Canada)
- - ------------------------------
(this company is 50% owned by RGA International Ltd.)
RGA Life Reinsurance Company of Canada (Canadian Federal)
- - --------------------------------------
RGA Reinsurance Company (Missouri)
- - -----------------------
RGA Reinsurance Company (Barbados) Ltd. (Barbados)
- - ---------------------------------------
RGA Reinsurance Company of South Africa Limited (South Africa)
- - -----------------------------------------------
RGA South African Holdings (Pty) Ltd. (South Africa)
- - -------------------------------------
C-7
<PAGE>
<PAGE>
RGA/Swiss Financial Group, L.L.C. (Delaware)
- - ---------------------------------
(this company is 40% owned by RGA Reinsurance Company
(Barbados) Ltd.)
RGA (UK) Underwriting Agency Limited (Great Britain)
- - ------------------------------------
Red Oak Realty Company (Missouri)
- - ----------------------
Reinsurance Company of Missouri, Incorporated (Missouri)
- - ---------------------------------------------
Reinsurance Group of America, Incorporated (Missouri)
- - ------------------------------------------
(approximately 64% of this company's stock is owned by Equity
Intermediary Company, with the rest held by the public.)
Reinsurance Partners, Inc. (Missouri)
- - --------------------------
Security Equity Life Insurance Company (New York)
- - --------------------------------------
Stan Mintz Associates, Inc. (Wisconsin)
- - ---------------------------
(this company is wholly-owned by GenMark Incorporated)
<CAPTION>
SOUTH AMERICAN SUBSIDIARIES OF REINSURANCE GROUP OF AMERICA, INCORPORATED:
- - --------------------------------------------------------------------------
<S> <C>
RGA Sudamerica S.A. (Chile)
- - -------------------
BHIF America Seguros de Vida S.A. (Chile)
- - ---------------------------------
RGA Reinsurance Company Chile S.A. (Chile)
- - ----------------------------------
General American Argentina
- - --------------------------
Seguros de Vida S.A. (Argentina)
- - --------------------
Triad Re, Ltd. (Barbados)
- - --------------
</TABLE>
C-8
<PAGE>
<PAGE>
These insurance agencies/corporations were formed by Walnut Street to
hold resident insurance licenses in these states:
<TABLE>
<S> <C>
WSS Insurance Agency of Alabama, Inc. (Alabama)
- - -------------------------------------
WSS Insurance Agency of Massachusetts, Inc. (Massachusetts)
- - -------------------------------------------
WSS Insurance Agency of Ohio, Inc. (Ohio)
- - ----------------------------------
WSS Insurance Agency of Texas, Inc. (Texas)
- - -----------------------------------
Walnut Street Securities, Inc. (Missouri)
- - ------------------------------
Walnut Street Advisers, Inc. (Missouri)
- - ----------------------------
(this company is a wholly-owned subsidiary of Walnut Street
Securities)
White Oak Royalty Company (Oklahoma)
- - -------------------------
</TABLE>
Item 27. Number of Contract Owners
This prospectus describes a new product which has not been sold to any
contract owners. However, Separate Account Two had the following number
of contract owners for other contracts offered in accordance with the
original prospectus:
As of ________ 1999: ___________
Title of Class Number of Owners of Record
Qualified ______
Non-Qualified ______
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
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<PAGE>
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
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.
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.
C-10
<PAGE>
<PAGE>
(b) Directors and Officers
<TABLE>
<CAPTION>
Name and Principal Business Positions and Offices
Address<F*> with Underwriter
<S> <C>
Officers
Richard J. Miller President, Chief
Executive Officer
Don P. Wuller Senior Vice President,
Administration and Chief
Financial Officer
Stephen E. Abbey Vice President, Special Markets
and Assistant Secretary
E. Thomas Hughes, Jr. Treasurer
Norman R. Lazarus Vice President, Compliance
Directors
Dona L. Barber Director
Kevin C. Eichner Director, Chairman
Matthew P. McCauley Director
Richard J. Miller Director
Steven C. Palmitier Director
Bernard H Wolzenski Director
<FN>
<F*> Messrs. Hughes and McCauley, 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, Palmitier, and Wuller
are at 400 South Fourth Street, Suite 1000, St. Louis, Missouri 63102.
</FN>
</TABLE>
(c) Principal Underwriter
Walnut Street 1998 Brokerage 1998 Compensation
$______ $______
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.
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<PAGE>
<PAGE>
(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.
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<PAGE>
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant, General American Separate Account Two has
caused this Registration Statement to be signed on its behalf in the
City of St. Louis, State of Missouri, on the 16th day of July, 1999.
GENERAL AMERICAN SEPARATE ACCOUNT
TWO (REGISTRANT)
By: GENERAL AMERICAN LIFE
INSURANCE COMPANY (for
Registrant and as Depositor)
By: /s/RICHARD A. LIDDY
-------------------------------
Richard A. Liddy
Chairman, President, and Chief
Executive Officer
General American Life Insurance
Company
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>
/s/RICHARD A. LIDDY 7/16/99
- ------------------------
Richard A. Liddy Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
/s/DAVID L. HERZOG 7/16/99
- ------------------------
David L. Herzog Vice President and Chief
Financial Officer
(Principal Financial Officer)
<F*>
August A. Busch, III Director 7/16/99
<F*>
William E. Cornelius Director 7/16/99
<F*>
John C. Danforth Director 7/16/99
<F*>
Bernard A. Edison Director 7/16/99
/s/RICHARD A. LIDDY 7/16/99
- ------------------------
Richard A. Liddy Director
<F*> 7/16/99
William E. Maritz Director
<F*> 7/16/99
Craig D. Schnuck Director
<F*> 7/16/99
William P. Stiritz Director
<F*> 7/16/99
Andrew C. Taylor Director
<F*> 7/16/99
H. Edwin Trusheim Director
<F*> 7/16/99
Robert L. Virgil, Jr. Director
<F*> 7/16/99
Virginia V. Weldon Director
<F*> 7/16/99
Ted C. Wetterau Director
<F*>By /s/MATTHEW P. MCCAULEY
-----------------------
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.
</FN>
</TABLE>
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<PAGE>
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.
/s/KPMG LLP
KPMG LLP
St. Louis, Missouri
Date: July 23, 1999
