Registration No. 2-39272
811-2162
================================================================================
Securities and Exchange Commission
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 46 [ X]
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 Offices) (Zip Code)
Depositor's Telephone Number, including Area Code: (314) 231-1700
Matthew P. McCauley, Esquire
General American Life Insurance Company
700 Market Street
St. Louis, MO 63101
(Name and address of Agent for Service)
Copy to:
Raymond A. O'Hara III
Blazzard, Grodd & Hasenauer, P.C.
P. O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ X] on May 1, 2000 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following:
_____ This post-effective amendment designates a new effective
date for a previously field post-effective amendment.
Title of Securities Being Registered:
Group and Individual Variable Annuity Contracts
CROSS REFERENCE SHEET
(required by Rule 495)
ITEM NO. Location
PART A
1. Cover Page Cover Page
2. Definitions Index of Special Terms
3. Synopsis Highlights
4. Condensed Financial Information Financial Statements
5. General Description of Registrant, The Company; Funds;
Depositor, and Portfolio Companies Other Information
6. Deductions and Expenses Expenses
7. General Description of the
Variable Annuity Contracts The Annuity Contracts
8. Annuity Period Annuity Payments
9. Death Benefit Death Benefit
10. Purchases and Contract Value Purchase
11. Redemptions Access to Your Money
12. Taxes Taxes
13. Legal Proceedings None
14. Table of Contents for the Table of Contents of
Statement of Additional the Statement of
Information Additional Information
ITEM NO. Location
PART B
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History Company
18. Services Not Applicable
19. Purchase of Securities Distribution
Being Offered
20. Underwriters Distribution
21. Calculation of Performance Data Performance Information
22. Annuity Payments Annuity Provisions
23. Financial Statements Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate
Item so numbered in Part C to this Registration Statement.
PART A
GENERAL AMERICAN LIFE INSURANCE COMPANY
GENERAL AMERICAN SEPARATE ACCOUNT TWO
PROSPECTUS
FOR THE
GROUP AND INDIVIDUAL VARIABLE ANNUITY CONTRACTS
This prospectus describes certain group and individual variable annuity
contracts (Contracts) offered by General American Life Insurance Company (we,
us, our). The Contracts are deferred variable annuities. The Contracts have been
offered as non-qualified annuities, individual retirement annuities (IRAs), tax
sheltered annuities (TSAs), or pursuant to other qualified plans. These
Contracts provide for accumulation of contract values and annuity payments on a
fixed and variable basis, or a combination fixed and variable basis. Sales of
the Contracts have been discontinued with certain exceptions. Please contact you
broker for further details.
The Contracts have a number of investment choices (1 General Account and 8
Funds). The General Account is part of our general assets and provides an
investment rate guaranteed by us. The eight Funds available are portfolios of
General American Capital Company and Variable Insurance Products Fund which are
listed below. You can put your money in any of these Funds which are offered
through our separate account, General American Separate Account Two.
<TABLE>
<CAPTION>
<S> <C>
GENERAL AMERICAN CAPITAL COMPANY VARIABLE INSURANCE PRODUCTS FUND
Advised by: Conning Asset Management Company Managed by: Fidelity Management & Research Company
S & P 500 Index Fund VIP: Equity-Income Portfolio
Money Market Fund VIP: Growth Portfolio
Bond Index Fund VIP: Overseas Portfolio
Managed Equity Fund
Asset Allocation Fund
</TABLE>
Please read this Prospectus before investing. You should keep it for future
reference. It contains important information. To learn more about the Contract,
you can obtain a copy of the Statement of Additional Information (SAI) (dated
May 1, 2000). The SAI has been filed with the Securities and Exchange Commission
(SEC) and is legally a part of the Prospectus. If you wish to receive, at no
charge, the SAI, call us at (800) 449-6447 (toll free) or write us at: 700
Market Street, St. Louis, Missouri 63101. The SEC has a website
(http://www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding companies that file electronically. The Table of
Contents of the SAI is on Page __ of this Prospectus.
The Contracts:
* are not bank deposits
* are not federally insured
* are not endorsed by any bank or government agency
* are not guaranteed and may be subject to loss of principal
The SEC has not approved these Contracts or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
MAY 1, 2000
TABLE OF CONTENTS
INDEX OF SPECIAL TERMS..........................................
SEPARATE ACCOUNT TABLE OF FEES AND EXPENSES....................
HIGHLIGHTS......................................................
THE COMPANY.....................................................
THE ANNUITY CONTRACTS...........................................
PURCHASE........................................................
Purchase Payments...............................................
Allocation Of Purchase Payments.................................
FUNDS...........................................................
General American Capital Company................................
Variable Insurance Products Fund................................
The General Account.............................................
Transfers.......................................................
Additions, Deletions and Substitutions..........................
EXPENSES........................................................
Surrender Charges (Contingent Deferred Sales Charge)......
Charge-Free Amounts...........................................
Administrative Charge ........................................
Transfer Charge................................................
Mortality and Expense Risk Charge..............................
Premium Taxes..................................................
Income Taxes..................................................
Fund Expenses..................................................
Exchange Program...............................................
ACCUMULATED VALUE..............................................
Accumulated Value..............................................
Net Investment Factor..........................................
ACCESS TO YOUR MONEY...........................................
Surrenders and Partial Withdrawals.............................
Termination Benefits...........................................
DEATH BENEFIT..................................................
Death of Contract Owner During the Accumulation Phase..........
Death of Annuitant During the Accumulation Phase...............
Death of Contract Owner or Annuitant During the Income Phase...
Special Tax Considerations.....................................
Avoiding Probate...............................................
ANNUITY PAYMENTS...............................................
Annuity Income Options.........................................
Value of Variable Annuity Payments.............................
TAXES..........................................................
Annuity Contracts in General...................................
Qualified and Non-Qualified Contracts..........................
Withdrawals - Non-Qualified Contracts..........................
Withdrawals - Qualified Contracts..............................
Withdrawals - Tax-Sheltered Annuities..........................
Diversification................................................
Section 403(b) Plans...........................................
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans...
Deferred Compensation Plans....................................
PERFORMANCE....................................................
OTHER INFORMATION..............................................
Separate Account Two...........................................
Distributor of the Contracts...................................
Voting Rights..................................................
Written Notice or Written Request..............................
Deferment of Payment...........................................
Ownership......................................................
The Beneficiary................................................
Assignments....................................................
Financial Statements...........................................
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION...
APPENDIX A.....................................................
Historical Table of Units and Unit Values for Qualified Plans..
Historical Table of Units and Unit Values For Non-Qualified
Plans......................................................
Table of Units and Unit Values.................................
INDEX OF SPECIAL TERMS
Because of the complex nature of the contract, we have used certain
words or terms in this prospectus which may need an explanation. 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. These words and terms are in
italics on the indicated page.
Page
Accumulation Phase......................................................
Annuitant...............................................................
Annuity Commencement Date...............................................
Annuity Income Options..................................................
Annuity Payments........................................................
Beneficiary.............................................................
Business Day............................................................
General Account.........................................................
Income Phase............................................................
Funds...................................................................
Non-Qualified...........................................................
Owner...................................................................
Purchase Payment........................................................
Qualified...............................................................
Tax Deferral............................................................
GENERAL AMERICAN SEPARATE ACCOUNT TWO TABLE OF FEES AND
EXPENSES
Owner Transaction Expenses
<TABLE>
<CAPTION>
Surrender Charges (Expressed as a percentage of amount withdrawn):
<S> <C>
First Contract Year 9.00%
Second Contract Year 8.00%
Third Contract Year 7.00%
Fourth Contract Year 6.00% The surrender charge is levied only when you withdraw
Fifth Contract Year 5.00% money from your Contract. The first 10% of the account
Sixth Contract Year 4.00% value you withdraw in any contract year will not have
Seventh Contract Yar 3.00% a surrender charge applied to it.
Eighth Contract Year 2.00%
Ninth Contract Year 1.00%
</TABLE>
Transfer Fee: None
<TABLE>
<CAPTION>
Separate Account Annual Fees (as a percentage of the accumulated value of your Contract)
<S> <C>
Mortality and Expense Risk Charge: 1.00%
-----
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES: 1.00%
</TABLE>
Fund Expenses
(expressed as a percentage of average net assets):
<TABLE>
<CAPTION>
Management Other Total Annual
Fee Expenses Expenses
------------- ---- ------------------
<S> <C> <C> <C> <C>
GENERAL AMERICAN CAPITAL COMPANY
Advised by Conning Asset
Managed Company
S & P 500 Index Fund .250% .050% .300%
Money Market Fund .125% .080% .205%
Bond Index Fund .250% .050% .300%
Managed Equity Fund(a) .290% .100% .390%
Asset Allocation Fund .500% .100% .600%
VARIABLE INSURANCE PRODUCTS FUND(b)
Managed by Fidelity Management &
Research Company
VIP: Equity-Income Portfolio .480% .080% .560%
VIP: Growth Portfolio .580% .070% .650%
VIP: Overseas Portfolio .730% .140% .870%
<FN>
(a) Investment advisory fees applicable to the Managed Equity Fund decline
ratably on the average daily net assets in excess of $10 million (see the
General American Capital Company Prospectus).
(b) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain funds,
or FMR on behalf of certain funds', custodian credits realized as a result
of uninvested cash balances were used to reduce a portion of each fund's
expenses. Without these reductions, the Total Annual Expenses presented in
the table for the year ended December 31, 1999 would have been .57% for the
VIP: Equity-Income Portfolio; .66% for the VIP: Growth Portfolio; and .91%
for the VIP: Overseas Portfolio.
</FN>
</TABLE>
EXAMPLES:
The examples are not a representation of actual, past or future expenses, and
actual expenses may be higher or lower than those shown. The purpose of the
tables is to help you understand the costs and expenses that you will bear
directly or indirectly. The expense amounts in the examples are aggregate
amounts for the total number of years indicated. Neither the table nor the
examples reflect any premium taxes that may be applicable to your contract. Such
taxes currently range from 0% to 3.5%.
There can be no assurance that the investment experience of the Funds in the
future will be comparable to past experience.
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
(a) if you surrendered your contract after the end of the specified time
period;
(b) if you do not surrender your contract after the end of the specified
time period;
(c) If you annuitize after the end of the specified time period.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Time Periods
1 year 3 years 5 years 10 years
------ ------- ------- --------
GENERAL AMERICAN CAPITAL COMPANY
Advised by Conning Asset Management Company
S & P 500 Index Fund (a) $ 97.19 (a) $111.31 (a) $124.99 (a) $156.30
(b) $ 13.23 (b) $ 41.17 (b) $ 71.18 (b) $156.30
(c) $ 97.19 (c) $111.31 (c) $ 71.18 (c) $156.30
Money Market Fund (a) $ 96.30 (a) $108.56 (a) $120.21 (a) $145.61
(b) $ 12.27 (b) $ 38.22 (b) $ 66.14 (b) $145.61
(c) $ 96.30 (c) $108.56 (c) $ 66.14 (c) $145.61
Bond Index Fund (a) $ 97.19 (a) $111.31 (a) $124.99 (a) $156.30
(b) $ 13.23 (b) $ 41.17 (b) $ 71.18 (b) $156.30
(c) $ 97.19 (c) $111.31 (c) $ 71.18 (c) $156.30
Managed Equity Fund (a) $ 98.02 (a) $113.91 (a) $129.50 (a) $166.33
(b) $ 14.14 (b) $ 43.96 (b) $ 75.93 (b) $166.33
(c) $ 99.02 (c) $113.09 (c) $ 75.93 (c) $166.33
Asset Allocation Fund (a) $ 99.96 (a) $119.95 (a) $139.95 (a) $189.34
(b) $ 16.26 (b) $ 50.44 (b) $ 86.93 (b) $189.34
(c) $ 99.96 (c) $119.95 (c) $ 86.93 (c) $189.34
VARIABLE INSURANCE PRODUCTS FUND
Managed by Fidelity Management &
Research Company
VIP: Equity-Income Portfolio (a) $ 99.59 (a) $118.80 (a) $137.97 (a) $185.00
(b) $ 15.86 (b) $ 49.21 (b) $ 84.84 (b) $185.00
(c) $ 99.59 (c) $118.80 (c) $ 84.84 (c) $185.00
VIP: Growth Portfolio (a) $100.43 (a) $121.38 (a) $142.41 (a) $194.75
(b) $ 16.77 (b) $ 51.97 (b) $ 89.53 (b) $194.75
(c) $100.43 (c) $121.38 (c) $ 89.53 (c) $194.75
VIP: Overseas Portfolio (a) $102.46 (a) $127.66 (a) $153.20 (a) $218.18
(b) $ 18.98 (b) $ 58.71 (b) $100.90 (b) $218.18
(c) $102.46 (c) $127.66 (c) $100.90 (c) $218.18
</TABLE>
HIGHLIGHTS
The variable annuity Contract that we are offering is a contract between you,
the owner, and us, the insurance company. The Contract provides a means for
investing on a tax-deferred basis in our General Account and 8 Funds. The
Contract is intended for retirement savings or other long-term investment
purposes and provides for a death benefit as well as other insurance related
benefits. If you choose to have your money invested in the Funds you will bear
the entire investment risk.
The Contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
accumulate on a tax-deferred basis and are taxed as income when you make a
withdrawal. The income phase occurs when you begin receiving regular payments
from your Contract.
You can choose to receive annuity payments on a variable basis, a fixed basis,
or a combination of both. If you choose variable payments, the amount of the
variable annuity payments will depend upon the investment performance of the
Funds you select for the income phase. If you choose fixed payments, the amount
of the fixed annuity payments are level for the payout period.
Free Look. If you cancel your Contract within 20 days after receiving it (or
whatever period is required in your state), we will give you back your purchase
payments. In some states we are required to give you back the value of your
Contract that is invested in the Funds plus any purchase payments you allocated
to the General Account.
Tax Penalty. The earnings in your Contract are not taxed until you take money
out of your Contract. If you take money out during the accumulation phase,
earnings come out first and are taxed as income. If you are younger than 59 1/2
when you take money out, you may be charged a 10% federal tax penalty on these
earnings. Payments during the income phase are considered partly a return of
your original investment.
Inquiries. If you need more information or require assistance after you purchase
a Contract, please contact us at:
General American's Variable Annuity Administration Department
P.0. Box 14490
St. Louis, Missouri 63178-4490
(800) 449-6447.
All inquiries should include the Contract number and the name of the Contract
owner and/or the annuitant.
THE COMPANY
We are an insurance company that is wholly-owned by GenAmerica Corporation.
GenAmerica Corporation is wholly-owned by Metropolitan Life Insurance
Company, A New York insurance company ("MetLife"). 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.
MetLife is developing a plan under which it would convert from a mutual
company to a publicly-held stock company. MetLife's conversion to a stock
company, or "demutualization", is subject to policyholder and regulatory
approval, as well as the satisfaction of certain other conditions.
MetLife's contemplated demutualization will not affect our contractual
obligations.
THE ANNUITY CONTRACTS
This Prospectus describes the variable annuity Contracts that we are offering.
An annuity is a contract between you, the owner, and us, the insurance company,
where we promise to pay you an income, in the form of annuity payments,
beginning on a designated date in the future. Until you decide to begin
receiving annuity payments, your annuity is in the accumulation phase. Once you
begin receiving annuity payments, your Contract enters the income phase.
The Contract benefits from tax deferral. Tax deferral means that you are not
taxed on earnings or appreciation on the assets in your Contract until you take
money out of your Contract.
The Contract is called a variable annuity because you can choose among the
Funds, and depending upon market conditions, you can make or lose money in any
of these Funds. If you select the variable annuity portion of the Contract, the
amount of money you are able to accumulate in your Contract during the
accumulation phase depends upon the investment performance of the Fund(s) you
select. If you select the fixed annuity portion of the Contract, the value will
depend upon the interest we credit to the General Account.
The Contracts consist of a group variable annuity contract for use in Tax
Sheltered Annuity (Section 403(b) annuity) Plans (TSA), and individual variable
annuity contracts for use in HR-10 (Keogh) Plans, Individual Retirement
Annuity (IRA) Plans, Simplified Employee Pension Plans, and
non-qualified retirement plans. When you buy a TSA under the group variable
annuity contract, we issue you a certificate which sets out all of your rights
and benefits.
PURCHASE
You can purchase this Contract by completing an application and providing us
with an initial purchase payment. We will not issue a Contract or certificate if
the annuitant is older than 79 1/2.
Purchase Payments
The minimum initial purchase payment permitted is $25. Afterwards, the purchase
payments must be at least $25 and cannot exceed the annual equivalent of twice
the initial purchase payment. For example, if you established a planned purchase
payment of $50.00 per month, the total of all purchase payments in any Contract
year could not exceed $1200. Any purchase payments in excess of this amount will
be accepted only after our prior approval.
Additional purchase payments on qualified Contracts are limited to proceeds from
certain qualified plans. Purchase payments for other types of Contracts can be
made at anytime during the accumulation phase so long as the annuitant is
living.
You may elect to make purchase payments by means of a pre-authorized check
("PAC") procedure. Under a PAC procedure, amounts will be deducted each month
from your checking account and applied as a purchase payment under a Contract.
You can also ask us to bill you for planned purchase payments.
Allocation of Purchase Payments
You specify how you want your purchase payments allocated. You may allocate each
purchase payment to one or more of the Funds and/or the General Account.
However, the requested allocations must be in whole number percentages, total
100%, and involve amounts of at least $25. You can change the allocation
instructions for future purchase payments by sending a written notice.
If the application is in good order, the initial purchase payment will be
credited within two business days after receipt of the application. However, if
an application is not in good order (missing information, etc.), we may retain
the initial purchase payment for up to five business days while attempting to
complete the application. If the application cannot be made in good order within
five business days, the initial purchase payment will be returned immediately
unless you consent in writing to us retaining the initial purchase payment until
the application is in good order. Subsequent purchase payments are credited
within one business day.
Our business days are each day when both the New York Stock Exchange and us are
open for business. The following are not business days for us: New Year's Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Friday after
Thanksgiving Day and Christmas Day. Our business day ends when the New York
Stock Exchange closes, usually 4:00 PM Eastern Time.
FUNDS
The Contract gives you the choice of allocating purchase payments to our General
Account, or to one or more of the Funds listed below. The Funds are managed by
investment advisors. Additional Funds may be made available in the future.
Each of these Funds has a separate prospectus that is provided with this
prospectus. You should read the Fund prospectus before you decide to allocate
your assets to the Fund.
General American Capital Company
General American Capital Company ("Capital Company") is advised by Conning Asset
Management Company. Capital Company currently operates eight separate investment
Funds, five of which are available under the Contract. The assets of each Fund
are separate from the others and each Fund has separate investment objectives
and policies. As a result, each Fund operates as a separate investment portfolio
and the investment performance of one Fund has no effect on the investment
performance of any other Fund. The following Funds are available under the
Contracts.
* S & P 500 Index Fund
* Money Market Fund
* Bond Index Fund
* Managed Equity Fund
* Asset Allocation Fund
Variable Insurance Products Fund
Variable Insurance Products Fund ("VIP") is managed by Fidelity Management &
Research Company ("FMR") of Boston, Massachusetts. VIP currently has five
separate investment portfolios, but only the three listed below are currently
available under the Contracts. The following Funds are available under the
Contracts.
* VIP: Equity-Income Portfolio
* VIP: Growth Portfolio
* VIP: Overseas Portfolio
The investment objectives and policies of certain of the Funds are similar
to the investment objectives and policies of other mutual funds that
certain of the investment advisers manage. Although the objectives and
policies may be similar, the investment results of the Funds may be higher
or lower than the results of such other mutual funds. The investment
advisers cannot guarantee, and make no representation, that the investment
results of similar funds will be comparable even though the funds have the
same investment advisers.
A Fund's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-
investment grade debt securities, initial public offerings (IPOs) or
companies with relatively small market capitalizations. IPOs and other
investment techniques may have a magnified performance impact on a Fund
with a small asset base. A Fund may not experience similar performance as
its assets grow.
Shares of the Fund's may be offered in connection with certain variable
annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
Funds may also be sold directly to qualified plans. The Funds believe
that offering their shares in this manner will not be disadvantageous
to you.
The General Account
If you elect the General Account we will credit interest at an effective annual
rate of at least 4% to purchase payments or portions of purchase payments
allocated or transferred to the General Account under the Contracts. We may, at
our sole discretion, credit a higher rate of interest to the General Account, or
to amounts allocated or transferred to the General Account.
Transfers
You may transfer amounts as follows:
1. Between the General Account and one or more of the Funds; or
2 Among the Funds.
These transfers will be subject to the following rules:
1. Transfers must be made by written request or by telephone,
provided we have a Telephone Authorization Form in good order
completed by you.
2. Transfers from or among the Funds may be made at any time and
must be at least $100 or the entire amount of a Fund, if
smaller.
3. Transfers from the General Account to the Funds may be made
once each year on the Contract's anniversary date and must be
at least $100 but no more than 25% of the amount in the
General Account prior to the transfer.
We may revoke or modify the transfer privilege at any time, including the
minimum amount for a transfer and the transfer charge, if any.
Additions, Deletions and Substitutions
We may be required to substitute another Fund for one of the Funds you have
selected. We would not do this without the prior approval of the Securities and
Exchange Commission. We may also limit further investment in a Fund. We will
give you notice of our intent to take either of these actions.
EXPENSES
There are charges and other expenses associated with the Contracts that reduce
the return on your investment in the Contract. These charges and expenses are:
Surrender Charges (Contingent Deferred Sales Charge)
For Contracts sold prior to May of 1982, a sales charge equal to 4.75% is
imposed on all purchase payments to cover sales and distribution expenses.
Contracts sold afterwards impose surrender charges (sometimes referred to as a
contingent deferred sales charge) to recover these costs. The surrender charge
percentage is based on the age of the Contract as shown in the following
schedule:
SURRENDER CHARGE
Number of Complete Years Percentage Charge
Since Purchasing the Contract On Amount Withdrawn
- - ----------------------------- -------------------
0-1 9%
2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
Upon full surrender, the surrender charge is calculated by multiplying the
surrender charge percentage by the Contract's accumulated value. The surrender
charge is deducted from amounts remaining in your Contract, if sufficient. If
not, the surrender charge is taken from the amount you requested to the extent
necessary and the withdrawal is considered a full surrender. In addition,
surrender charges are not applied in the event of the death or disability of the
Contract owner or Annuitant, or in the event of annuitization after five
Contract years.
The surrender charge will never exceed 9% of total net purchase payments.
Charge-Free Amounts
If a Contract is within the nine year surrender charge period (the first nine
Contract years), an amount may be withdrawn up to 10% of your accumulated
account value (determined as of the date we receive the withdrawal request) each
Contract year without incurring a surrender charge. Any percentages of your
accumulated value previously withdrawn during a Contract year are subtracted
from 10% in calculating the remaining percentage of account value that is
available for withdrawal during the same Contract year.
Administrative Charge
For Contracts sold prior to May of 1982, an administrative charge of $10 per
year is also imposed during the accumulation phase.
Transfer Charge
For Contracts sold prior to May of 1982, a $5 charge is imposed whenever funds
are transferred between the General Account and Separate Account.
Mortality and Expense Risk Charge
During both the accumulation phase and the income phase, charges to cover
mortality and expense risk are made each business day as a percentage of the
accumulated value of the Contract. The charge for mortality and expense risk is
1% annually.
The mortality risk assumed by us 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 the annuity
tables and other provisions contained in the Contract, and in accordance with
the option selected (see "Annuity Income Options"), to each annuitant regardless
of how long he lives and regardless of how long all annuitants as a group live.
The expense risk assumed by us 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.
We can modify a group Contract prospectively, with respect to future
participants, after the Contract has been in force for at least three years. No
modifications can affect the annuitants in any manner without an annuitant's
written consent, unless such modification is deemed necessary to give you or the
annuitants the benefit of federal or state statutes or Treasury Department rules
or regulations.
Premium Taxes
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for the payment of these
taxes and will make a deduction from the value of the Contract for them. Some of
these taxes are due when the Contract is issued, and others are due when annuity
payments begin. When a premium tax is due at the time the purchase payment is
made, we will deduct from the payment such tax. Premium taxes generally range
from 0% to 3.5%, depending on the state.
Income Taxes
We will deduct from the Contract for any income taxes which we incur because of
the Contract. At the present time, we are not making any such deductions.
Fund Expenses
There are deductions from and expenses paid out of the assets of the various
Funds, which are described in the attached Fund prospectuses.
Exchange Program
You may exchange your Contract, provided it is no longer subject to any
surrender charge, for a variable annuity contract issued by our affiliate, Cova
Financial Services Life Insurance Company or its affiliate, Cova Financial Life
Insurance Company (together, "Cova Life"). If you choose to so exchange your
Contract, Cova Life will waive any otherwise applicable withdrawal charges and
contract maintenance charges.
ACCUMULATED VALUE
The accumulated value is the value of your Contract. It is the sum of your
interest in the various Funds and our General Account.
Accumulated Value
During the accumulation phase, the value of the variable portion of your
contract will go up or down depending upon the investment performance of the
Fund(s) you choose. We calculate your accumulated value after the New York Stock
Exchange closes each business day.
Your accumulated value will be determined on a daily basis. On the date your
initial net purchase payment is applied to the General Account and/or the Funds,
your accumulated value in a Fund will equal the portion of any purchase payment
allocated to the Fund.
Thereafter, on each business day, the accumulated value in a Fund will equal:
1. The accumulated value in the Fund on the preceding business day,
multiplied by the Fund's Net Investment Factor (defined below) for the
business day; plus
2. Any purchase payments received during the current business day which
are allocated to the Fund; plus
3. Any amounts transferred to the Fund from the General Account or from
another Fund during the current business day; minus
4. That portion transferred from the Fund to the General Account, or
another Fund during the current business day (including any transfer
charges); minus
5. Any partial withdrawals from the Fund during the current business day;
minus
6. Any withdrawal or surrender charges incurred during the business day
in connection with a partial withdrawal.
Net Investment Factor
The Net Investment Factor measures the investment performance of a Fund from
business day to business day. The Net Investment Factor for each Fund for a
business day is calculated as follows:
1. The value of the assets at the end of the preceding business day; plus
2. The investment income and capital gains-realized or
unrealized-credited to the assets for the business day for which the
Net Investment Factor is being determined.
3. The capital losses, realized or unrealized, charged against those
assets during the business day; minus
4. Any amount charged against each Fund for taxes, or any amount set
aside during the business day as a reserve for taxes attributable to
the operation or maintenance or each Fund; minus
5. A charge not to exceed 0.002740% of the assets for each calendar day.
This corresponds to 1% per year for mortality and expense risk;
divided by
6. The value of the assets at the end of the preceding business day.
The accumulated value is expected to change from business day to business day,
reflecting the investment experience of the selected Funds as well as the daily
deduction of charges.
For Contracts issued prior to the reorganization of the Separate Account into a
unit investment trust, a daily adjustment to values held in the Fund of the
Separate Account that invests in the Managed Equity Fund will be made to offset
fully the effect of any and all additional expenses (other than advisory
expenses for the Managed Equity Fund) of a type or in an amount which would not
have been borne by the Separate Account prior to the reorganization.
ACCESS TO YOUR MONEY
You can have access to the money in your Contract:
* by making a withdrawal (either a partial or a complete withdrawal);
* when a death benefit is paid; or
* by electing to receive annuity payments.
Surrenders and Partial Withdrawals
You may surrender the Contract or make a partial withdrawal to receive all or
part of your accumulated value, at any time before you begin receiving annuity
payments and while the annuitant is living, by sending us a written request.
The amount available for surrender or partial withdrawal is your accumulated
value, 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 to you upon surrender or withdrawal may be paid in a lump sum or, if
elected, all or any part may be paid out under an Annuity Income Option. (See
"Annuity Income Options.")
The minimum amount that can be withdrawn is $100. If you do not tell us
otherwise, the amounts will be withdrawn from the Funds and the General Account
on a pro rata basis. The amount paid on the surrender or withdrawal will
ordinarily be paid within seven days after we receive a written request in good
order.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL
YOU MAKE.
Termination Benefits
If you own a Tax Sheltered Variable Annuity Contract, you have certain rights if
you terminate your participation prior to the Annuity Commencement Date. Upon
termination of participation prior to the Annuity Commencement Date, you may
elect:
* to have the accumulated value applied to provide annuity payments
under one of the annuity income options described below, or
* to leave the accumulated value in the Contract, in which case the
number of accumulation units in your individual account will remain
fixed, but the value thereof will vary as described in the Section
"Accumulated Value", or
* to receive the accumulated value on the basis of the accumulation unit
value next determined after the written request for surrender is
received by us; or
* to convert to an Individual Variable Annuity Contract, if appropriate
individual Contracts are issued by us on the effective date of
termination, on the basis set forth by us at the time of such
conversion.
DEATH BENEFIT
Death of Contract Owner During the Accumulation Phase
If the you die during the accumulation phase, and your spouse is the
beneficiary, we will treat your spouse as the new Contract owner. Otherwise, if
the you die during the accumulation phase, this Contract will no longer be in
force. We will pay your interest in the Contract to your beneficiary in a lump
sum upon receiving proof of your death. If there is no beneficiary, the proceeds
will be paid to your estate. If there are joint owners, the death benefit will
be paid out on the first death to occur.
This payment will be made within five years after the date of your death unless
you or your beneficiary choose, by providing us with written notice, one of the
options described below:
* Leave the proceeds of the Contract with us as provided under
Annuity Income Option 6 of this Contract (or Option 7 in the
case of a non-qualified Contract) . Any amount remaining
unpaid under Annuity Income Option 6 will be paid in a lump
sum to the beneficiary before the end of the fifth year after
your death.
* Buy an immediate annuity for the beneficiary, who will be the
owner and annuitant. Payments under the annuity, or under any
other method of payment we make available, must be for the
life of the beneficiary, or for a number of years that is not
more than the life expectancy of the beneficiary at the time
of your death (as determined for Federal tax purposes), and
must begin within one year after your death.
Death of Annuitant During the Accumulation Phase
When we receive due proof of the death of the annuitant during the accumulation
phase, we will pay the beneficiary the accumulated value of the Contract. The
accumulated value will be the value next determined following our receipt of due
proof of death of the annuitant as well as proof that the annuitant died during
the accumulation phase. The beneficiary must receive the amount payable under a
payout method available for the Death of Owner explained above.
If a beneficiary has not been designated by the annuitant or if a beneficiary
designated by the annuitant is not living on the date a lump sum death benefit
is payable, or on the date any payments are to be continued, we will pay the
lump sum death benefit for the commuted value of the payments to the deceased
annuitant's spouse. If the spouse is not living, then payments will be made
equally to the annuitant's surviving children. If the children are not
surviving, then payments will be made to either the surviving father or mother
or to both equally if both survive. If none of the above survive the annuitant,
then payments will be made to his or her executors or administrators.
Death of Contract Owner or Annuitant During the Income Phase
If the you or the annuitant dies during the income phase, the Annuity Income
Option then in effect will govern as to whether or not we will continue to make
any payments. Any remaining payments will be made at least as rapidly as at the
time of death.
Special Tax Considerations
There are special tax rules that apply to IRA and other qualified Contracts
during both the accumulation phase and income phase governing distributions upon
the death of the owner. These rules are contained in provisions in the
endorsements to the Contracts and supersede any other distribution rules
contained in the Contracts.
The preceding provisions regarding the death of the owner are intended to
satisfy the distribution at death requirements of section 72(s) of the Internal
Revenue Code of 1986, as amended. We reserve the right to amend this Contract by
subsequent endorsement as necessary to comply with applicable tax requirements,
if any, which are subject to change from time to time. Such additional
endorsements, if necessary to comply with amended tax requirements, will be
mailed to you and become effective within 30 days of mailing, unless you notify
us in writing, within that time frame, that you reject the endorsement.
Avoiding Probate
In most cases, when you die, the person you choose as your beneficiary will
receive the death benefit without going through probate. However, the avoidance
of probate does not mean that the beneficiary will not have tax liability as a
result of receiving the death benefit.
ANNUITY PAYMENTS
Under the Contracts you can receive regular income payments. You can choose the
month and year in which those payments begin. We call that date the Annuity
Commencement Date. We ask you to choose your Annuity Commencement Date and
Annuity Income Option when you purchase the Contract. You can change either at
any time before the Annuity Commencement Date with 30 days notice to us.
The annuitant is the person whose life we look to when make annuity payments.
Annuity Income Options
The Annuity Income Options, with the exception of Option 7, may be selected on
either a variable annuity or a fixed payment basis, or a combination of both. In
the absence of an election to the contrary, the variable accumulated value will
be applied to provide variable annuity payments and the guaranteed accumulated
value will be applied to provide guaranteed annuity payments.
The minimum amount which may be applied under an option is $5,000 and the
minimum annuity payment is $50 (or any lower amount required by state law). If
the accumulated value is less than $5,000 when the Annuity Commencement Date
arrives, we will make a lump sum payment of such amount to you. If at any time
payments are, or become less than $50, we have the right to change the
frequency of payments to intervals that will result in installments of at least
$50.
The following options are available:
Option 1 - Life Annuity -Under this option we make monthly income
payments during the lifetime of the annuitant and terminating with the
last payment preceding his/her death.
Option 2 - Life Annuity with 60, 120, l80, or 240 Monthly Payments
Guaranteed Under this option we make monthly income payments during the
lifetime of the annuitant. We guarantee that if, at the death of the
annuitant, payments have been made for less than a stated certain
period, which may be five, ten, fifteen or twenty years, as elected,
the monthly income will continue during the remainder of the stated
period to the beneficiary. However, the beneficiary may elect to
receive a single sum payment. A single sum payment will be equal to the
present value of remaining payments as of the date of receipt of due
proof of death commuted at the assumed investment rate.
Option 3 - Unit Refund Life Annuity - Under this option, we make
monthly income payments during the lifetime of the annuitant,
terminating with the last payment preceding his/her death. If the
annuitant dies, the beneficiary will receive an additional payment of
the then dollar value of the number of annuity units. This is equal to
the excess, if any, of (a) over (b) where (a) is the total amount
applied under the option divided by the annuity unit value at the
Annuity Commencement Date and (b) is the number of annuity units
represented by each payment multiplied by the number of payments made.
For example, if $19,952.07 were applied under this option for a male at
age 65 on the Annuity Commencement Date, the annuity unit value in the
appropriate Fund on such date was $12.071, the number of annuity units
represented by each payment was ten, thirteen Annuity payments were
paid prior to the date of death, and the value of an annuity unit on
the date of death was $12.818, the amount paid to the beneficiary would
be $19,520.44.
Option 4 - Joint and Survivor Income for Life - Under this option we
make monthly income payments during the joint lifetime of the annuitant
and another named individual and thereafter during the lifetime of the
survivor. Payments cease with the last income payment due prior to the
death of the survivor.
Option 5 - Income for a Fixed Period - Under this option, we make
annual, semiannual, quarterly, or monthly payments over a specified
number of years, not less than three and not more than thirty. When
payments are made on a variable basis, a mortality and expense risk
charge continues to be assessed, even though we do not incur a
mortality risk under this option. The person considering this option
should consult his tax adviser about the possibility that this
selection might be held to be "constructive receipt" of the entire
accumulated value and result in adverse tax treatment.
Option 6 - Income of a Fixed Amount - Under this option, we make fixed
equal payments annually, semiannually, quarterly, or monthly (not less
than $75 per annum per $1,000 of the original amount due) until the
proceeds applied under this option, with interest credited at the
current annual rate, are exhausted. The final installment will be for
the remaining balance. When payments are made on a variable basis, a
mortality and expense risk charge continues to be assessed, even though
we incur no mortality risk under this option. The person considering
this option should consult his tax adviser about the possibility that
such selection might be held to be "constructive receipt" of the entire
accumulated value and result in adverse tax treatment.
Option 7 - Interest Income (may be available to Non-qualified Annuities
only) Under this option, you can place your Accumulated Value on
deposit with us in our General Account and we will make annual,
semiannual, quarterly, or monthly payments, as selected. Your remaining
balance will earn interest at a rate not less than 4% per annum.
With respect to any Option not involving a life contingency (e.g., Option 5 -
Income for a Fixed Period), you may elect to have the present value of the
guaranteed monthly annuity payments remaining, as of the date we receive proof
of the claim, commuted and paid in a lump sum as set forth in the Contract.
Value of Variable Annuity Payments
The dollar amount of your payment from the Fund(s) will depend upon four things:
* the value of your Contract in the Fund(s) on the Annuity Commencement
Date;
* the 4% assumed investment rate used in the annuity table for the
Contract; and
* the performance of the Funds you selected; and
* if permitted in your state and under the type of Contract you have
purchased, the age and sex of the annuitant(s).
If the actual performance exceeds the 4% assumed rate plus the deductions for
expenses, your annuity payments will increase. Similarly, if the actual
performance is less than 4% plus the amount of the deductions, your annuity
payments will decrease.
The value of all payments (both guaranteed and variable) will be greater for
shorter guaranteed periods than for longer guaranteed periods, and greater for
life annuities than for joint and survivor annuities, because they are expected
to be made for a shorter period.
The method of computation of variable annuity payments is described in more
detail in the Statement of Additional Information.
TAXES
NOTE: We have prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any individual.
You should consult your own tax adviser about your own circumstances. We have
included in the Statement of Additional Information an additional discussion
regarding taxes.
Annuity Contracts in General
Annuity contracts are a means of setting aside money for future needs - usually
retirement. Congress recognized how important saving for retirement was and
provided special rules in the Internal Revenue Code (Code) for annuities.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your annuity contract until you take the money out. This is
referred to as tax deferral. There are different rules as to how you are taxed
depending on how you take the money out and the type of contract - qualified or
non-qualified (see following sections).
Under non-qualified Contracts, you, as the owner, are not taxed on increases in
the value of your Contract until a distribution occurs - either as a withdrawal
or as annuity payments. When you make a withdrawal, you are taxed on the amount
of the withdrawal that is earnings. For annuity payments, different rules apply.
A portion of each annuity payment is treated as a partial return of your
purchase payments and is not taxed. The remaining portion of the annuity payment
is treated as ordinary income. How the annuity payment is divided between
taxable and non-taxable portions depends upon the period over which the annuity
payments are expected to be made. Annuity payments received after you have
received all of your purchase payments are fully includible in income.
When a non-qualified Contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than a trust holding the Contract as
an agent for a natural person), the Contract will generally not be treated as an
annuity for tax purposes.
Qualified and Non-Qualified Contracts
If you purchase the Contract as an individual and not under any pension plan,
specially sponsored program or an individual retirement annuity, your Contract
is referred to as a non-qualified Contract.
If you purchase the Contract under a pension plan, specially sponsored program,
or an individual retirement annuity, your Contract is referred to as a qualified
Contract. Examples of qualified plans are: Individual Retirement Annuities
(IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b) contracts), and
pension and profit-sharing plans, which include 401(k) plans and H.R. 10 Plans.
A qualified Contract will not provide any necessary or additional tax deferral
if it is used to fund a qualified plan that is tax deferred. However, the
Contract has features and benefits other than tax deferral that may make it an
appropriate investment for a qualified plan. You should consult your tax adviser
regarding these features and benefits prior to purchasing a qualified Contract.
Withdrawals - Non-Qualified Contracts
If you make a withdrawal from your Contract, the Code treats such a withdrawal
as first coming from earnings and then from your purchase payments. Such
withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. Some withdrawals will
be exempt from the penalty. They include any amounts:
(1) paid on or after the taxpayer reaches age 59 1/2;
(2) paid after you die;
(3) paid if the taxpayer becomes totally disabled (as that term is defined
in the Code);
(4) paid in a series of substantially equal payments made annually (or
more frequently) for life or a period not exceeding life expectancy;
(5) paid under an immediate annuity; or
(6) which come from purchase payments made prior to August 14, 1982.
The Contract provides that upon the death of the Annuitant during the
Accumulation Phase, the death proceeds will be paid to the beneficiary. Such
payments made when the Annuitant, who is not the Contract owner, dies do not
qualify for the death of the Contract owner exception (described in (2) above)
and will be subject to the 10% distribution penalty unless the beneficiary is 59
1/2 years old or one of the other exceptions to the penalty applies.
Withdrawals - Qualified Contracts
If you make a withdrawal from your qualified Contract, a portion of the
withdrawal is treated as taxable income. This portion depends on the ratio of
pre-tax purchase payments to the after-tax purchase payments in your contract.
If all of your purchase payments were made with pre-tax money then the full
amount of any withdrawal is includible in taxable income. Special rules may
apply to withdrawals from certain types of qualified Contracts.
The Code also provides that any amount received under a qualified Contract
which is included in income may be subject to a penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
withdrawals will be exempt from the penalty. They include any amounts:
(1) paid on or after you reach age 59 1/2;
(2) paid after you die;
(3) paid if you become totally disabled (as that term is defined in the
Code);
(4) paid to you after leaving your employment in a series of substantially
equal periodic payments made annually (or more frequently) under a
lifetime annuity;
(5) paid to you after you have attained age 55 and you have left your
employment;
(6) paid for certain allowable medical expenses (as defined in the Code);
(7) paid pursuant to a qualified domestic relations order;
(8) paid on account of an IRS levy upon the qualified Contract;
(9) paid from an IRA for medical insurance (as defined in the Code);
(10) paid from an IRA for qualified higher education expenses; or
(11) paid from an IRA for up to $10,000 for qualified first-time homebuyer
expenses (as defined in the Code).
The exceptions in (5) and (7) above do not apply to IRAs. The exception in
(4) above applies to IRAs but without the requirement of leaving employment.
We have provided a more complete discussion in the Statement of Additional
Information.
Withdrawals - Tax-Sheltered Annuities
The Code limits the withdrawal of amounts attributable to purchase payments
made under a salary reduction agreement by owners from Tax-Sheltered Annuities.
Withdrawals can only be made when an owner:
(1) reaches age 59 1/2;
(2) leaves his/her job;
(3) dies;
(4) becomes disabled (as that term is defined in the Code); or
(5) in the case of hardship.
However, in the case of hardship, the owner can only withdraw the purchase
payments and not any earnings.
Diversification
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. We believe that the Funds are managed so as to comply with the
requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the degree
of control you exercise over the underlying investments, are considered the
owner of the shares of the Funds. If you are considered the owner of the shares,
it will result in the loss of the favorable tax treatment for the Contract. It
is unknown to what extent owners are permitted to select Funds, to make
transfers among the Funds or the number and type of Funds owners may select from
without being considered the owner of the shares. If any guidance is provided
which is considered a new position, then the guidance is generally applied
prospectively. However, if such guidance is considered not to be a new position,
it may be applied retroactively. This would mean that you, as the owner of the
Contract, could be treated as the owner of the Funds.
Types of Qualified Contracts
Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's taxable income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. Sales of Contracts for use with IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish an IRA.
Section 408A of the Code provides that beginning in 1998, eligible individuals
may purchase a new type of non-deductible IRA, known as a Roth IRA. Purchase
payments are limited to $2,000 per year and are not deductible from taxable
income. Qualified distributions are free from federal income tax. Roth IRAs
are also subject to specific limitations as to eligibility, contributions,
transferability and distributions.
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. Furthermore there are additional restrictions regarding transferability,
distributions, nondiscrimination and withdrawals.
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 permits 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
Under Code provisions, employees and independent contractors performing services
for state and local governments and other tax-exempt organizations may
participate in Deferred Compensation Plans under Section 457 of the Code. The
amounts deferred under a Plan which meets the requirements of Section 457 of the
Code are not taxable as income to the participant until paid or otherwise made
available to the participant or beneficiary. In general, distributions from a
Plan are prohibited under section 457 of the Code unless made after the
participating employee:
attains age 70 1/2,
separates from service,
dies, or
suffers an unforeseeable financial emergency as defined in the Code.
Furthermore, the Code provides additional requirements and restrictions
regarding eligibility, contributions and distributions.
PERFORMANCE
We periodically advertise performance of the various Funds. We will calculate
performance by determining the percentage change in the accumulated value for
selected periods. This performance number reflects the deduction of the
insurance charges. It does not reflect the deduction of any surrender charge.
The deduction of any surrender charges would reduce the percentage increase or
make greater any percentage decrease. Any advertisement will also include total
return figures which reflect the deduction of the mortality and expense charges,
and surrender charges.
We may, from time to time, include in our advertising and sales materials, tax
deferred compounding charts and other hypothetical illustrations, which may
include comparisons of currently taxable and tax deferred investment programs,
based on selected tax brackets.
OTHER INFORMATION
Separate Account Two
We established Separate Account Two to hold the assets that underlie the
Contracts. The Separate Account was established on October 22, 1970 under
Missouri law, pursuant to authorization by our Board of Directors. We have
registered the Separate Account as a unit investment trust with the Securities
and Exchange Commission under the Investment Company Act of 1940.
Payments are received into the Separate Account from individual and group
variable annuity contracts entitled to tax benefits under Sections 401, 403(b),
and 408 of the Code and also from individual variable annuity contracts not
entitled to any special tax benefits. Such payments are pooled together and
invested separately from the General Account of General American (the general
assets of the insurance company other than separate account assets). The persons
participating in the variable portion of these Contracts look to the investment
experience of the assets in the Separate Account.
The assets of the Separate Account are held in our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the Contracts, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains, and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
Contracts and not against any other contracts we may issue.
Distributor of the Contracts
Walnut Street Securities, Inc. ("Walnut Street"), 400 South Fourth Street, Suite
1000, St. Louis, Missouri 63102 is the principal underwriter and the distributor
of the Contracts. Walnut Street is a wholly owned subsidiary of General
American. Walnut Street has entered into contracts with various broker-dealers
and registered representatives affiliated with Walnut Street to aid in the
distribution of the Contracts. Commissions paid to dealer(s) in varying amounts
are not expected to exceed 3.75% of Purchase Payments for such Contracts, under
normal circumstances.
Voting Rights
We are the legal owner of the Fund shares. However, we believe that when a Fund
solicits proxies in conjunction with a vote of shareholders, it is required to
obtain from you and other owners instructions as to how to vote those shares.
When we receive those instructions, we will vote all of the shares we own in
proportion to those instructions. This will also include any shares that we own
on our own behalf. Should we determine that we are no longer required to comply
with the above, we will vote the shares in our own right.
Written Notice or Written Request
A written notice or written request is any notice or request that you send to us
requesting any changes or making any request affecting your Contract. Such a
request or notice must be in a format and content acceptable to us.
Deferment of Payment
We may be required to suspend or postpone payments for surrenders or transfers
for any period when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
Funds is not reasonably practicable or we cannot reasonably value the
shares of the Funds;
4. during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We may also delay the payment of a surrender or partial withdrawal from the
General Account for up to six months from receipt of Written Request. If payment
is delayed, the amount due will continue to be credited with the rate of
interest then credited to the General Account until the payment is made.
Ownership
Owner. You, as the owner of the Contract, have all the rights under the
Contract. Prior to the Annuity Commencement Date, the owner is as designated at
the time the Contract is issued, unless changed.
The Beneficiary
The beneficiary is the person(s) or entity you or the annuitant name to receive
any death benefit. The beneficiary is named at the time the Contract is issued
unless changed at a later date. Subject to any assignment of a Contract, the
beneficiary may be changed during the lifetime of the annuitant by providing us
with the proper forms in good order. If the joint and survivor option is
selected, the annuitant may not change the designation of a joint annuitant
after payments begin.
A change of beneficiary designation will not become effective unless we accept
the written request, at which time it will be effective as of the date of the
request. A beneficiary who becomes entitled to receive benefits under this
Contract may also designate, in the same manner, a beneficiary to receive any
benefits which may become payable under this Contract by reason of death.
Assignments
With respect to individual non-qualified Contracts, an assignment or transfer of
the Contract or of any interest in it will not bind us unless (1) it is made as
a written instrument, (2) the original instrument or a certified copy is filed
at our Home Office, and (3) we send the Contract owner a receipt. We are not
responsible for the validity of the assignment. If a claim is based on an
assignment or transfer, proof of interest of the claimant may be required. A
valid assignment will take precedence over any claim of a beneficiary.
With respect to all other Contracts, you may not transfer, sell, assign,
discount or pledge a Contract for a loan or a security for the performance of an
obligation or any other purpose, to any person other than to us.
AN ASSIGNMENT MAY BE A TAXABLE EVENT.
Financial Statements
The consolidated financial statements for General American (as well as the
auditors' report thereon) are in the Statement of Additional Information.
Financial statements for the Separate Account are also in the Statement of
Additional Information.
Table of Contents of the Statement of Additional Information
Company..................................
Experts..................................
Distribution.............................
Performance Information..................
Federal Tax Status.......................
Annuity Provisions.......................
General Matters..........................
Safekeeping of Account Assets............
State Regulation.........................
Records and Reports......................
Legal Proceedings........................
Other Information........................
Financial Statements.....................
<TABLE>
<CAPTION>
APPENDIX A
HISTORICAL TABLE OF UNITS AND UNIT VALUES FOR QUALIFIED PLANS FOR SEPARATE ACCOUNT TWO
1980 1981 1982 1983 1984 1985 1986 1987 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $8.23 $9.94 $ 9.92 $12.09 $13.25 $13.15 $16.68 $19.73 $20.03
End of period $9.94 $9.92 $12.09 $13.25 $13.15 $16.68 $19.73 $20.03 $21.30*
Number of units outstanding at end of period (in thousands)
175 169 138 162 162 148 170 255 263*
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL TABLE OF UNITS AND UNIT VALUES FOR NON-QUALIFIED PLANS FOR SEPARATE ACCOUNT TWO
1980 1981 1982 1983 1984 1985 1986 1987 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
Accumulation unit value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $ 9.30 $10.73 $10.91 $12.63 $13.77 $14.30 $18.16 $21.47 $21.80
End of period $10.73 $10.91 $12.63 $13.77 $14.30 $18.16 $21.47 $21.80 $23.18*
Number of units outstanding at end of period (in thousands)
27 49 50 52 50 48 49 49 28*
</TABLE>
*Unit values and units outstanding represent the values and number of units at
the date of reorganization, February 23, 1988.
TABLE OF UNITS AND UNIT VALUES FOR SEPARATE ACCOUNT TWO
This Table shows unit values and the number of units of the Separate Account
invested in the Funds of General American Capital Company and Variable Insurance
Products Fund. There can be no assurance that the investment experience of these
Funds in the future will be comparable to past experience.
<TABLE>
<CAPTION>
Accumulation Qualified Plan Nonqualified Plan
Unit Value Accumulation Units Outstanding Units Outstanding
Beginning Unit Value End of Period End of Period
of Period* End of Period (in thousands) (in thousands)
---------- ------------- -------------- --------------
S & P 500 Index Fund Division**
<S> <C> <C> <C> <C>
1999 55.35 66.06 968 340
1998 43.62 55.35 987 342
1997 33.17 43.62 935 366
1996 27.27 33.17 808 325
1995 20.12 27.27 657 297
1994 20.09 20.12 636 265
1993 18.48 20.09 599 241
1992 17.37 18.48 366 152
1991 13.47 17.37 236 109
1990 14.15 13.47 133 67
1989 11.01 14.15 97 23
1988 10.00 11.01 36 7
Money Market Fund Division
1999 16.57 17.26 228 69
1998 15.85 16.57 124 79
1997 15.14 15.85 102 74
1996 14.50 15.14 117 62
1995 13.82 14.50 106 57
1994 13.39 13.82 93 58
1993 13.12 13.39 115 73
1992 12.78 13.12 181 85
1991 12.16 12.78 179 101
1990 11.33 12.16 188 79
1989 10.44 11.33 28 15
1988 10.00 10.44 6 5
Bond Index Fund Division***
1999 20.97 20.16 148 60
1998 19.50 20.97 200 75
1997 18.01 19.50 163 80
1996 17.66 18.01 163 70
1995 14.99 17.66 146 85
1994 15.78 14.99 146 58
1993 14.43 15.78 161 61
1992 13.68 14.43 116 48
1991 12.12 13.68 50 67
1990 11.22 12.12 33 58
1989 10.27 11.22 22 17
1988 10.00 10.27 5 2
Managed Equity Fund Division Qualified
1999 82.60 84.35 106 N/A
1998 72.99 82.60 126 N/A
1997 59.73 72.99 136 N/A
1996 49.83 59.73 153 N/A
1995 37.68 49.83 164 N/A
1994 39.42 37.68 188 N/A
1993 36.54 39.42 210 N/A
1992 34.56 36.54 217 N/A
1991 27.62 34.56 216 N/A
1990 28.73 27.62 192 N/A
1989 22.11 28.73 194 N/A
1988 21.30 22.11 207 N/A
Managed Equity Fund Division Nonqualified
1999 89.89 91.79 N/A 1
1998 79.43 89.89 N/A 1
1997 64.99 79.43 N/A 2
1996 54.22 64.99 N/A 2
1995 41.00 54.22 N/A 17
1994 42.90 41.00 N/A 20
1993 39.76 42.90 N/A 24
1992 37.61 39.76 N/A 25
1991 30.05 37.61 N/A 25
1990 31.27 30.05 N/A 25
1989 24.06 31.27 N/A 25
1988 23.18 24.06 N/A 26
Managed Equity Fund Division 88 Series
1999 42.70 43.56 246 49
1998 37.77 42.70 266 54
1997 30.94 37.77 280 67
1996 25.84 30.94 240 58
1995 19.56 25.84 215 75
1994 20.48 19.56 204 68
1993 19.00 20.48 197 56
1992 17.99 19.00 158 40
1991 14.39 17.99 101 27
1990 14.99 14.39 56 20
1989 11.54 14.99 21 7
1988 10.83 11.54 6 0
Asset Allocation Fund Division
1999 33.12 40.46 463 163
1998 28.38 33.12 487 187
1997 24.14 28.38 496 187
1996 21.08 24.14 375 178
1995 16.52 21.08 317 168
1994 17.37 16.52 320 180
1993 16.01 17.37 332 166
1992 15.16 16.01 223 119
1991 12.78 15.16 140 66
1990 12.60 12.78 94 35
1989 10.61 12.60 33 16
1988 10.00 10.61 9 4
VIP: Equity-Income Portfolio Division
1999 22.41 23.60 736 299
1998 20.27 22.41 868 352
1997 15.98 20.27 838 351
1996 14.12 15.98 767 317
1995 10.55 14.12 552 207
1994 10.00 10.55 315 82
VIP: Growth Portfolio Division
1999 25.45 34.64 1,141 341
1998 18.42 25.45 1,127 342
1997 15.07 18.42 1,064 343
1996 13.27 15.07 974 362
1995 9.90 13.27 646 261
1994 10.00 9.90 356 116
VIP: Overseas Portfolio Division
1999 14.93 21.09 348 105
1998 13.37 14.93 355 98
1997 12.11 13.37 363 124
1996 10.80 12.11 346 107
1995 9.95 10.80 266 77
1994 10.00 9.95 240 52
</TABLE>
* At the date of first deposits into the Separate Account on May 16, 1988,
except for the Managed Equity Fund Division, which began on February 24, 1988;
the VIP: Equity-Income Portfolio Division and the VIP: Growth Portfolio Division
which began on January 6, 1994; and the VIP: Overseas Portfolio Division which
began on January 11, 1994.
**The name of the S & P 500 Index Fund was changed from "Equity Index Fund"
effective May 1, 1994.
***The name of the Bond Index Fund was changed from "Intermediate Bond Fund"
effective October 1, 1992. The name change reflects a change in investment
policies and objectives of the Fund.
Notes on Appendix A
The initial value of an accumulation unit in the Separate Account was set at
$10.00 as of May 28, 1971.
The Historical Tables of Units and Unit Values for Non-qualified Plans for
Separate Account 2 above show accumulation unit values and the numbers of units
outstanding for the period from January 1, 1980 through February 23, 1988.
During that time, the Separate Account invested solely and directly in common
stocks. On February 23, 1988, the net assets of the Separate Account were
exchanged for shares in the Managed Equity Fund of General American Capital
Company, and the investment advisory fee for these assets was increased from
.25% to a sliding scale with a maximum of .50%, as an annual percentage of net
assets (see the General American Capital Company Prospectus).
PART B
STATEMENT OF ADDITIONAL INFORMATION
GROUP AND INDIVIDUAL VARIABLE ANNUITY CONTRACT
ISSUED BY
GENERAL AMERICAN SEPARATE ACCOUNT TWO
AND
GENERAL AMERICAN LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 2000, FOR THE INDIVIDUAL
AND GROUP VARIABLE ANNUITY CONTRACT WHICH IS DESCRIBED HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: 700 MARKET STREET, ST. LOUIS, MISSOURI 63101, (800) 449-6447.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 2000.
TABLE OF CONTENTS
Page
COMPANY .....................................................................
EXPERTS .....................................................................
DISTRIBUTION..................................................................
PERFORMANCE INFORMATION.......................................................
FEDERAL TAX STATUS............................................................
ANNUITY PROVISIONS...........................................................
GENERAL MATTERS..............................................................
SAFEKEEPING OF ACCOUNT ASSETS................................................
STATE REGULATION.............................................................
RECORDS AND REPORTS..........................................................
LEGAL PROCEEDINGS............................................................
OTHER INFORMATION............................................................
FINANCIAL STATEMENTS.........................................................
COMPANY
We are an insurance company that is wholly-owned by GenAmerica Corporation.
GenAmerica Corporation is wholly-owned by Metropolitan Life Insurance
Company, A New York insurance company ("MetLife"). 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.
MetLife is developing a plan under which it would convert from a mutual
company to a publicly-held stock company. MetLife's conversion to a stock
company, or "demutualization", is subject to policyholder and regulatory
approval, as well as the satisfaction of certain other conditions.
MetLife's contemplated demutualization will not affect our contractual
obligations.
EXPERTS
Audited financial statements of General American Life Insurance Company and the
Separate Account have been included in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
DISTRIBUTION
Walnut Street Securities, Inc. ("Walnut Street"), the principal underwriter of
the Contracts, is registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc.
The Contracts are offered to the public through individuals licensed under the
federal securities laws and state insurance laws who have entered into
agreements with Walnut Street. The offering of the Contracts is continuous and
Walnut Street does not anticipate discontinuing the offering of the Contracts.
However, Walnut Street does reserve the right to discontinue the offering of the
Contracts.
REDUCTION OF THE SURRENDER CHARGE
The amount of the surrender charge on the Contracts may be reduced or eliminated
when sales of the Contracts are made to individuals or to a group of individuals
in a manner that results in savings of sales expenses. The entitlement to
reduction of the surrender charge will be determined by the Company after
examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made. Generally, the
sales expenses for a larger group are less than for a smaller group because
of the ability to implement large numbers of Contracts with fewer sales
contacts.
2. The total amount of purchase payments to be received. Per Contract sales
expenses are likely to be less on larger purchase payments than on smaller
ones.
3. Any prior or existing relationship with the Company. Per Contract sales
expenses are likely to be less when there is a prior existing relationship
because of the likelihood of implementing the Contract with fewer sales
contacts.
4. Other circumstances, of which the Company is not presently aware, which
could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction of the surrender charge.
The surrender charge may be eliminated when the Contracts are issued to an
officer, director or employee of the Company or any of its affiliates. In no
event will any reduction of the surrender charge be permitted where the
reduction or elimination will be unfairly discriminatory to any person.
PERFORMANCE INFORMATION
TOTAL RETURN
From time to time, the Company may advertise performance data. Such data will
show the percentage change in the value of an accumulation unit based on the
performance of a Fund over a period of time, usually a calendar year, determined
by dividing the increase (decrease) in value for that unit by the accumulation
unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of the expenses for the underlying Fund being advertised and any
applicable surrender charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the actual accumulation unit
values for an initial $1,000 purchase payment, and deducting any applicable
surrender charge to arrive at the ending hypothetical value. The average annual
total return is then determined by computing the fixed interest rate that a
$1,000 purchase payment would have to earn annually, compounded annually, to
grow to the hypothetical value at the end of the time periods described. The
formula used in these calculations is:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment made at the
beginning of the time periods used.
The Company may also advertise performance data which will be calculated in the
same manner as described above but which will not reflect the deduction of any
surrender charge. The deduction of any surrender charge would reduce any
percentage increase or make greater any percentage decrease.
Owners should note that the investment results of each Fund will fluctuate over
time, and any presentation of the Fund's total return for any period should not
be considered as a representation of what an investment may earn or what an
owner's total return may be in any future period.
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 Fund 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 Securities and Exchange Commission also permits General American to disclose
the effective yield of the Money Market Division for the same seven-day period,
determined on a compounded basis. The effective yield is calculated by
compounding the unannualized base period return by adding one to the base period
return, raising the sum to a power equal to 365 divided by seven, and
subtracting one from the result.
The yield on amounts held in the Money Market Division normally will fluctuate
on a daily basis. Therefore, the disclosed yield for any given past period is
not an indication or representation of future yields or rates of return. The
Money Market Division's actual yield is affected by changes in interest rates on
money market securities, average portfolio maturity of the Money Market Fund the
types and quality of portfolio securities held by the Money Market Fund, and its
operating expenses.
HISTORICAL UNIT VALUES
The Company may also show historical accumulation unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual accumulation unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in accumulation unit values for any of the Funds against
established market indices such as the Standard & Poor's 500 Composite Stock
Price Index, the Dow Jones Industrial Average or other management investment
companies which have investment objectives similar to the Fund being compared.
The Standard & Poor's 500 Composite Stock Price Index is an unmanaged,
unweighted average of 500 stocks, the majority of which are listed on the New
York Stock Exchange. The Dow Jones Industrial Average is an unmanaged, weighted
average of thirty blue chip industrial corporations listed on the New York Stock
exchange. Both the Standard & Poor's 500 Composite Stock Price Index and the Dow
Jones Industrial Average assume quarterly reinvestment of dividends.
FEDERAL TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is not
taxed on increases in the value of a Contract until distribution occurs, either
in the form of a lump sum payment or as annuity payments under the Annuity
Option selected. For a lump sum payment received as a total withdrawal (total
surrender), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the purchase payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered (i.e. when the total of the
excludable amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in the imposition of federal income
tax to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the Funds
underlying variable contracts such as the Contract. The Regulations amplify the
diversification requirements for variable contracts set forth in the Code and
provide an alternative to the safe harbor provision described above. Under the
Regulations, an Fund will be deemed adequately diversified if: (1) no more than
55% of the value of the total assets of the option is represented by any one
investment; (2) no more than 70% of the value of the total assets of the option
is represented by any two investments; (3) no more than 80% of the value of the
total assets of the option is represented by any three investments; and (4) no
more than 90% of the value of the total assets of the option is represented by
any four investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Funds underlying the Contracts will be managed in
such a manner as to comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. For purposes of this rule, contracts received in a
Section 1035 exchange will be considered issued in the year of the exchange
Owners should consult a tax adviser prior to purchasing more than one
non-qualified annuity contract in any calendar year.
Partial 1035 Exchanges
Section 1035 of the Code provides that an annuity contract may be exchanged in
a tax-free transaction for another annuity contract. Historically, it was
presumed that only the exchange of an entire contract, as opposed to a
partial exchange, would be accorded tax-free status. In 1998 in CONWAY VS.
COMMISSIONER, the Tax Court held that the direct transfer of a portion of
an annuity contract into another annuity contract qualified as a non-taxable
exchange. On November 22, 1999, the Internal Revenue Service filed an Action
on Decision which indicated that it acquiesced in the Tax Court decision in
CONWAY. However, in its acquiescence with the decision of the Tax Court, the
Internal Revenue Service stated that it will challenge transactions where
taxpayers enter into a series of partial exchanges and annuitizations as part
of a design to avoid application of the 10% premature distribution penalty or
other limitations imposed on annuity contracts under the Code. In the absence
of further guidance from the Internal Revenue Service it is unclear what
specific types of partial exchange designs and transactions will be challenged
by the Internal Revenue Service. Due to the uncertainty in this area owners
should consult their own tax advisers prior to entering into a partial exchange
of an annuity contract.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to a Contract held by a trust or other entity as an
agent for a natural person nor to Contracts held by Qualified Plans. Purchasers
should consult their own tax counsel or other tax adviser before purchasing a
Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
DEATH BENEFITS
Any death benefits paid under the Contract are taxable to the beneficiary.
The rules governing the taxation of payments from an annuity contract, as
discussed above, generally apply to the payment of death benefits and depend
on whether the death benefits are paid as a lump sum or as annuity payments.
Estate taxes may also apply.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. However, the Owner, in most cases, may elect not
to have taxes withheld or to have withholding done at a different rate.
Certain distributions from retirement plans qualified under Section 401 or
Section 403(b) of the Code, which are not directly rolled over to another
eligible retirement plan or individual retirement account or individual
retirement annuity, are subject to a mandatory 20% withholding for federal
income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; c)
the portion of the distributions not includible in gross income (i.e. returns of
after-tax contributions) or d) hardship distributions. Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any premature distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of the
Owner; (c) if the taxpayer is totally disabled (for this purpose disability is
as defined in Section 72(m)(7) of the Code); (d) in a series of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the taxpayer or for the joint lives (or joint life
expectancies) of the taxpayer and his or her Beneficiary; (e) under an immediate
annuity; or (f) which are allocable to purchase payments made prior to August
14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
Furthermore, the Contract provides that upon the death of the Annuitant during
the Accumulation Phase, the death proceeds will be paid to the beneficiary. Such
payments made when the Annuitant, who is not the Contract Owner, dies do not
qualify for the death of the Contract Owner exception (described in (2) above)
and will be subject to the 10% distribution penalty unless the beneficiary is 59
1/2 years old or one of the other exceptions to the penalty applies.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Contracts.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein are designed to be suitable for use under various
types of Qualified Plans. Taxation of participants in each Qualified Plan varies
with the type of plan and terms and conditions of each specific plan. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified Plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Contracts issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. The Company is not
bound by the terms and conditions of such plans to the extent such terms
conflict with the terms of a Contract, unless the Company specifically consents
to be bound. Owners, Annuitants and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law.
A qualified Contract will not provide any necessary or additional tax deferral
if it is used to fund a qualified plan that is tax deferred. However, the
Contract has features and benefits other than tax deferral that may make it an
appropriate investment for a qualified plan. Following are general descriptions
of the types of Qualified Plans with which the Contracts may be used. Such
descriptions are not exhaustive and are for general informational purposes only.
The tax rules regarding Qualified Plans are very complex and will have differing
applications depending on individual facts and circumstances. Each purchaser
should obtain competent tax advice prior to purchasing a Contract issued under a
Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
a. Section 403(b) Plans
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Contracts for the benefit of their employees. Such
contributions are not includible in the gross income of the employees until the
employees receive distributions from the Contracts. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals - Qualified Contracts" and "Tax-Sheltered Annuities -
Withdrawal Limitations" below.) Employee loans are not allowable under the
Contracts. Any employee should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
b. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's taxable income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
Roth IRAs
Section 408A of the Code provides that beginning in 1998, individuals may
purchase a new type of non-deductible IRA, known as a Roth IRA. Purchase
payments for a Roth IRA are limited to a maximum of $2,000 per year and are not
deductible from taxable income. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of single
taxpayers, between $150,000 and $160,000 in the case of married taxpayers filing
joint returns, and between $0 and $10,000 in the case of married taxpayers
filing separately. An overall $2,000 annual limitation continues to apply to all
of a taxpayer's IRA contributions, including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA for at
least five years and, in addition, that the distribution is made either after
the individual reaches age 59 1/2, on the individual's death or disability, or
as a qualified first-time home purchase, subject to a $10,000 lifetime maximum,
for the individual, a spouse, child, grandchild, or ancestor. Any distribution
which is not a qualified distribution is taxable to the extent of earnings in
the distribution. Distributions are treated as made from contributions first and
therefore no distributions are taxable until distributions exceed the amount of
contributions to the Roth IRA. The 10% penalty tax and the regular IRA
exceptions to the 10% penalty tax apply to taxable distributions from a Roth
IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or a
previously deductible IRA contribution.
Purchasers of Contracts to be qualified as a Roth IRA should obtain competent
tax advice as to the tax treatment and suitability of such an investment.
c. Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit employers, including self-employed
individuals, to establish various types of retirement plans for employees. These
retirement plans may permit the purchase of the Contracts to provide benefits
under the Plan. Contributions to the Plan for the benefit of employees will not
be includible in the gross income of the employees until distributed from the
Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals Qualified Contracts" below.)
Purchasers of Contracts for use with Pension or Profit Sharing Plans should
obtain competent tax advice as to the tax treatment and suitability of such an
investment.
d. Deferred Compensation Plans
Under Code provisions, employees and independent contractors performing services
for state and local governments and other tax-exempt organizations may
participate in Deferred Compensation Plans under Section 457 of the Code. The
amounts deferred under a Plan which meets the requirements of Section 457 of the
Code are not taxable as income to the participant until paid or otherwise made
available to the participant or beneficiary. As a general rule, the maximum
amount which can be deferred in any one year is the lesser of $8,000 or 33 1/3
percent of the participant's includible compensation. However, in limited
circumstances, the plan may provide for additional catch-up contributions in
each of the last three years before normal retirement age. Furthermore, the Code
provides additional requirements and restrictions regarding eligibility and
distributions.
All of the assets and income of a Plan established by a governmental employer
after August 20, 1996, must be held in trust for the exclusive benefit of
participants and their beneficiaries. For this purpose, custodial accounts and
certain annuity contracts are treated as trusts. Plans that were in existence on
August 20, 1996 may be amended to satisfy the trust and exclusive benefit
requirements any time prior to January 1, 1999, and must be amended not later
than that date to continue to receive favorable tax treatment. The requirement
of a trust does not apply to amounts under a Plan of a tax exempt
(non-governmental) employer. In addition, the requirement of a trust does not
apply to amounts under a Plan of a governmental employer if the Plan is not an
eligible plan within the meaning of section 457(b) of the Code. In the absence
of such a trust, amounts under the plan will be subject to the claims of the
employer's general creditors.
In general, distributions from a Plan are prohibited under section 457 of the
Code unless made after the participating employee:
attains age 70 1/2,
separates from service,
dies, or
suffers an unforeseeable financial emergency as defined in the Code.
Under present federal tax law, amounts accumulated in a Plan under section 457
of the Code cannot be transferred or rolled over on a tax-deferred basis except
for certain transfers to other Plans under section 457.
Due to the uncertainty in this area, we reserve the right to modify the contract
in an attempt to maintain favorable tax treatment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the individual's
cost basis to the individual's total accrued benefit under the retirement plan.
Special tax rules may be available for certain distributions from a Qualified
Contract. Section 72(t) of the Code imposes a 10% penalty tax on the taxable
portion of any distribution from qualified retirement plans, including Contracts
issued and qualified under Code Sections 401 (Pension and Profit-Sharing Plans),
403(b)(Tax-Sheltered Annuities) and 408 and 408A (Individual Retirement
Annuities). To the extent amounts are not includible in gross income because
they have been rolled over to an IRA or to another eligible Qualified Plan, no
tax penalty will be imposed. The tax penalty will not apply to the following
distributions: (a) if distribution is made on or after the date on which the
Owner or Annuitant (as applicable) reaches age 59 1/2; (b) distributions
following the death or disability of the Owner or Annuitant (as applicable) (for
this purpose disability is as defined in Section 72(m) (7) of the Code); (c)
after separation from service, distributions that are part of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the Owner or Annuitant (as applicable) or the joint lives
(or joint life expectancies) of such Owner or Annuitant (as applicable) and his
or her designated Beneficiary; (d) distributions to an Owner or Annuitant (as
applicable) who has separated from service after he has attained age 55; (e)
distributions made to the Owner or Annuitant (as applicable) to the extent such
distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Owner or Annuitant (as applicable) for amounts paid during
the taxable year for medical care; (f) distributions made to an alternate payee
pursuant to a qualified domestic relations order; (g) distributions made on
account of an IRS levy on the Qualified Contract; (h) distributions from an
Individual Retirement Annuity for the purchase of medical insurance (as
described in Section 213(d)(1)(D) of the Code) for the Owner or Annuitant (as
applicable) and his or her spouse and dependents if the Owner or Annuitant (as
applicable) has received unemployment compensation for at least 12 weeks (this
exception will no longer apply after the Owner or Annuitant (as applicable) has
been re-employed for at least 60 days); (i) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) to the extent
such distributions do not exceed the qualified higher education expenses (as
defined in Section 72(t)(7) of the Code) of the Owner or Annuitant (as
applicable) for the taxable year; and (j) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) which are
qualified first-time home buyer distributions (as defined in Section 72(t)(8)of
the Code.) The exceptions stated in (d) and (f) above do not apply in the case
of an Individual Retirement Annuity. The exception stated in (c) above applies
to an Individual Retirement Annuity without the requirement that there be a
separation from service.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years on which the exception was used.
Generally, distributions from a qualified plan must begin no later than April
1st of the calendar year following the later of (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value which represents contributions made by the Owner and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989 and apply only to salary reduction contributions made after December 31,
1988, to income attributable to such contributions and to income attributable to
amounts held as of December 31, 1988. The limitations on withdrawals do not
affect transfers between Tax-Sheltered Annuity Plans. Owners should consult
their own tax counsel or other tax adviser regarding any distributions.
ANNUITY PROVISIONS
COMPUTATION OF THE VALUE OF AN ANNUITY UNIT
The table of contractual guaranteed annuity rates is based on an assumed
interest rate. The assumed interest rate is 4% for all contracts issued on or
after May 1, 1982; 3.5% for tax-qualified contracts issued prior to May 1, 1982;
and 3% for non-tax-qualified Contracts issued prior to May 1, 1982.
As a starting point, the value of a separate account Two annuity unit was
established at $10.00 as of the end of the business day on January 4, 1971. For
Contracts issued prior to May 1, 1982, the value of the annuity unit at the end
of any subsequent business day is determined by multiplying such value for the
preceding business day by the product of (a) the daily reduction factor
(described below) once for each calendar day expiring between the end of the
sixth preceding business day and the end of the fifth preceding business day and
(b) the net investment factor for the fifth business day preceding such business
day.
The daily reduction factors referred to above are .99989256 for all contracts
issued on or after May 1, 1982; .99990575 for tax-qualified contracts issued
prior to May 1, 1982; and .99991902 for non-tax-qualified contracts issued
before May 1, 1982.
These daily reduction factors are necessary to neutralize the assumed net
investment rate built into the annuity tables. Calculations are performed as of
the fifth preceding business day to permit calculation of amounts and the
mailing of checks in advance of their due date.
This may be illustrated by the following hypothetical example. Assuming that the
net investment factor for the fifth preceding business day was 1.00176027, and
assuming that the annuity unit value for the preceding business day was $10.20,
then the annuity unit for the current business day is $10.22, determined as
follows:
1.00176027 $10.200000
X .99989256 X 1.00165264
----------- ------------
1.00165264 $10.216857
DETERMINATION OF THE AMOUNT OF THE FIRST ANNUITY INSTALLMENT
When annuity installments begin, the accumulated value of the Contract is
established. This is the sum of the products of the values of an accumulation
unit in each Fund on the fifth business day preceding the annuity commencement
date and the number of accumulation units credited to the Contract as of the
annuity commencement date.
The Contract contains tables indicating the dollar amount of the first annuity
installment under each form of variable annuity for each $1,000 of value of the
Contract. The amount of the first annuity installment depends on the option
chosen and the sex (if applicable) and age of the annuitant.
The first annuity installment is determined by multiplying the benefit per
$1,000 of value shown in the tables in the contract by the number of thousands
of dollars of accumulated value of the contract (individual account).
If a greater first installment would result, General American will compute the
first installment on the same mortality basis as is used in determining such
installments under individual variable annuity contracts then being issued for a
similar class of annuitants.
DETERMINATION OF THE FLUCTUATING VALUES OF THE ANNUITY INSTALLMENTS
The dollar amount of the first annuity installment, determined as described
above, is translated into annuity units by dividing that dollar amount by the
value of an annuity unit on the due date of the first annuity installment. The
number of annuity units remains fixed and the amount of each subsequent annuity
installment is determined by multiplying this fixed number of annuity units by
the value of an annuity unit on the date the installment is due.
If in any month after the first the application of the above net investment
factors produces a net investment increment exactly equivalent to the assumed
annualized rate of 4%, then the payment in that month will not change. Since it
is unlikely that it will be exactly equivalent, installments will vary up or
down depending upon whether such investment increment is greater or less than
the assumed annualized rate of 4%. A higher assumption would mean a higher
initial annuity payment but a more slowly rising series of subsequent annuity
payments (or a more rapidly falling series of subsequent annuity payments if the
value of an annuity unit is decreasing). A lower assumption would have the
opposite effect.
FIXED ANNUITY
A fixed annuity is a series of payments made during the annuity period which are
guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Separate Account. The general account value as of
the annuity calculation date will be used to determine the fixed annuity monthly
payment. The first monthly annuity payment will be based upon the annuity option
elected and the appropriate annuity option table. Fixed annuity payments will
remain level.
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, reduce the stipulated payment, or leave
the distribution with General American to accumulate with interest.
JOINT ANNUITANT
The contract owner may, by written request at least 30 days prior to the annuity
commencement date, name a joint annuitant. An annuitant or joint annuitant may
not be replaced. The annuity commencement date shall be specified in the
application. If the annuitant or joint annuitant dies after the annuity
commencement date, the survivor shall be the sole annuitant. Another joint
annuitant may not be designated. Payment to a beneficiary shall not be made
until the death of the surviving annuitant.
INCORRECT AGE OR SEX
If the age at issue or sex of the annuitant as shown in the Contract is
incorrect, any benefit payable under a supplemental agreement will be such as
the premiums paid would have purchased at the correct age at issue and sex.
After General American begins paying monthly income installments, appropriate
adjustment will be made in any remaining installments.
ANNUITY DATA
General American will not be liable for obligations which depend on receiving
information from a payee until such information is received in a form
satisfactory to General American.
QUARTERLY REPORTS
Quarterly, General American will give the contract owner a report of the current
accumulated value allocated to each Fund; the current accumulated value
allocated to the General Account; and any purchase payments, charges, transfers,
or surrenders during that period. This report will also give the contract owner
any other information required by law or regulation. The contract owner may ask
for a report like this at any time. The quarterly reports will be distributed
without charge. General American reserves the right to charge a fee for
additional reports.
INCONTESTABILITY
General American cannot contest this Contract, except for nonpayment of
stipulated payments or premiums, after it has been in force during the lifetime
of the Annuitant for a period of two years from the date of issue. This
provision will not apply to any supplemental agreement relating to total and
permanent disability benefits.
OWNERSHIP
The owner of the Contract on the contract date is the annuitant, unless
otherwise specified in the application. The owner may specify a new owner by
written notice at any time thereafter. During the annuitant's lifetime all
rights and privileges under this Contract may be exercised solely by the owner.
REINSTATEMENT
A Contract may be reinstated if a stipulated payment is in default and if the
accumulated value has not been applied under the surrender provision.
Reinstatement may be made during the lifetime of the annuitant but before the
annuity date by the payment of one stipulated payment. Benefits provided by any
supplemental agreement attached to this Contract may be reinstated by providing
evidence of insurability satisfactory to General American. The reinstatement
provisions incorporated in such supplemental agreement must be complied with.
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 shares held by each of the Funds 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.
LEGAL PROCEEDINGS
There are no legal proceedings to which the separate account is a party or to
which the assets of the separate account are subject. General American is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the separate account.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments, and exhibits
thereto has been included in this Statement of Additional Information.
Statements contained in this Statement of Additional Information concerning the
content of the Contracts and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange
Commission.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
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, 1999,
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, 1999, 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, 1999,
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.
/s/ KPMG LLP
St. Louis, Missouri
February 25, 2000
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<CAPTION>
S & P 500 MONEY BOND MANAGED ASSET
INDEX MARKET INDEX EQUITY ALLOCATION
FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in General American Capital Company,
at market value (see Schedule of Investments) $86,520,558 $5,135,191 $4,211,687 $21,896,770 $25,370,323
----------- ---------- ---------- ----------- -----------
Liabilities:
Payable to General American Life
Insurance Company 76,334 3,880 3,408 17,736 21,386
----------- ---------- ---------- ----------- -----------
Total net assets $86,444,224 $5,131,311 $4,208,279 $21,879,034 $25,348,937
=========== ========== ========== =========== ===========
Net assets represented by:
Tax sheltered annuities in accumulation period 63,962,626 3,936,297 2,993,964 21,778,339 18,749,489
Individually purchased annuities in accumulation
period 22,481,598 1,195,014 1,214,315 77,569 6,599,448
Variable annuities in payment period 0 0 0 23,126 0
----------- ---------- ---------- ----------- -----------
Total net assets $86,444,224 $5,131,311 $4,208,279 $21,879,034 $25,348,937
=========== ========== ========== =========== ===========
Tax sheltered units held - 88 Series 968,190 228,055 148,491 246,016 463,392
Individually purchased units held - 88 Series 340,300 69,235 60,226 49,141 163,105
Tax sheltered units held - 82 Series -- -- -- 106,051 --
Individually purchased units held - 82 Series -- -- -- 845 --
Tax sheltered accumulation unit value - 88 Series $ 66.06 $ 17.26 $ 20.16 $ 43.56 $ 40.46
Individually purchased accumulation unit value
- 88 Series 66.06 17.26 20.16 43.56 40.46
Tax sheltered accumulation unit value - 82 Series -- -- -- 84.35 --
Individually purchased accumulation unit value
- 82 Series -- -- -- 91.79 --
Cost of investments $58,185,837 $5,268,130 $4,520,620 $20,016,667 $18,343,703
=========== ========== ========== =========== ===========
See accompanying notes to financial statements.
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<CAPTION>
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
------------- ------------- -------------
<S> <C> <C> <C>
Assets:
Investments in Fidelity Variable Insurance Products
Fund, at market value (see Schedule of Investments) $24,417,201 $51,387,245 $9,558,915
----------- ----------- ----------
Liabilities:
Payable to General American Life
Insurance Company 19,720 41,217 7,057
----------- ----------- ----------
Total net assets $24,397,481 $51,346,028 $9,551,858
=========== =========== ==========
Net assets represented by:
Tax sheltered annuities in accumulation period 17,355,459 39,526,617 7,337,884
Individually purchased annuities in accumulation period 7,042,022 11,819,411 2,213,974
Variable annuities in payment period 0 0 0
----------- ----------- ----------
Total net assets $24,397,481 $51,346,028 $9,551,858
=========== =========== ==========
Tax sheltered units held - 88 Series 735,818 1,140,987 347,945
Individually purchased units held - 88 Series 298,560 341,183 104,981
Tax sheltered units held - 82 Series -- -- --
Individually purchased units held - 82 Series -- -- --
Tax sheltered accumulation unit value - 88 Series $ 23.60 $ 34.64 $ 21.09
Individually purchased accumulation unit value - 88 Series 23.60 34.64 21.09
Tax sheltered accumulation unit value - 82 Series -- -- --
Individually purchased accumulation unit value - 82 Series -- -- --
Cost of investments $20,415,691 $32,447,833 $6,610,887
=========== =========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
S & P 500 MONEY BOND MANAGED ASSET
INDEX MARKET INDEX EQUITY ALLOCATION
FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Investment income
Dividend income<F*> $ -- $ -- $ -- $ -- $ --
Expenses:
Mortality and expense charge (792,852) (45,647) (49,500) (225,660) (235,101)
----------- --------- --------- ----------- ----------
Net investment expense (792,852) (45,647) (49,500) (225,660) (235,101)
----------- --------- --------- ----------- ----------
Net realized gain on investments:
Realized gain from distributions 5,435,587 241,447 246,102 1,054,269 398,861
Realized gain on sales 6,846,825 47,250 30,028 744,248 1,164,781
----------- --------- --------- ----------- ----------
Net realized gain on investments 12,282,412 288,697 276,130 1,798,517 1,563,642
----------- --------- --------- ----------- ----------
Net unrealized gain (loss) on investments:
Unrealized gain (loss) on investments,
beginning of year 25,704,555 (76,053) 120,643 2,935,033 3,602,884
----------- --------- --------- ----------- ----------
Unrealized gain (loss) on investments, end of year 28,334,721 (132,939) (308,933) 1,880,103 7,026,620
----------- --------- --------- ----------- ----------
Net unrealized gain (loss) on investments 2,630,166 (56,886) (429,576) (1,054,930) 3,423,736
----------- --------- --------- ----------- ----------
Net gain (loss) on investments 14,912,578 231,811 (153,446) 743,587 4,987,378
----------- --------- --------- ----------- ----------
Net increase (decrease) in net assets resulting
from operations $14,119,726 $ 186,164 $(202,946) $ 517,927 $4,752,277
=========== ========= ========= =========== ==========
<FN>
<F*>See Note 2C
</FN>
See accompanying notes to financial statements.
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<CAPTION>
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
------------- ------------- -------------
<S> <C> <C> <C>
Investment income:
Dividend income<F*> $ 396,861 $ 67,689 $ 104,514
Expenses:
Mortality and expense charge (260,823) (422,316) (73,429)
----------- ----------- ----------
Net investment income (expense) 136,038 (354,627) 31,085
----------- ----------- ----------
Net realized gain on investments:
Realized gain from distributions 877,273 4,255,947 168,572
Realized gain on sales 1,948,854 1,987,793 244,928
----------- ----------- ----------
Net realized gain on investments 2,826,127 6,243,740 413,500
----------- ----------- ----------
Net unrealized gain (loss) on investments:
Unrealized gain on investments,
beginning of year 5,605,100 11,237,914 639,503
----------- ----------- ----------
Unrealized gain on investments, end of year 4,001,510 18,939,412 2,948,028
----------- ----------- ----------
Net unrealized gain (loss) on investments (1,603,590) 7,701,498 2,308,525
----------- ----------- ----------
Net gain on investments 1,222,537 13,945,238 2,722,025
----------- ----------- ----------
Net increase in net assets resulting
from operations $ 1,358,575 $13,590,611 $2,753,110
=========== =========== ==========
<FN>
<F*>See Note 2C
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
S & P 500 MONEY BOND
INDEX MARKET INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
-------------------------- ------------------------- -------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment expense $ (792,852) $ (650,414) $ (45,647) $ (30,761) $ (49,500) $ (54,543)
Net realized gain on investments 12,282,412 9,348,569 288,697 225,619 276,130 362,092
Net unrealized gain (loss) on investments 2,630,166 6,849,805 (56,886) (57,732) (429,576) 89,036
----------- ----------- ---------- ---------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations 14,119,726 15,547,960 186,164 137,126 (202,946) 396,585
Net deposits into (withdrawals from)
Separate Account (1,253,635) 1,283,048 1,589,240 436,791 (1,345,223) 596,366
----------- ----------- ---------- ---------- ----------- ----------
Increase in net assets 12,866,091 16,831,008 1,775,404 573,917 (1,548,169) 992,951
Net assets, beginning of year 73,578,133 56,747,125 3,355,907 2,781,990 5,756,448 4,763,497
----------- ----------- ---------- ---------- ----------- ----------
Net assets, end of year $86,444,224 $73,578,133 $5,131,311 $3,355,907 $ 4,208,279 $5,756,448
=========== =========== ========== ========== =========== ==========
<CAPTION>
MANAGED ASSET
EQUITY ALLOCATION
FUND DIVISION FUND DIVISION
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment expense $ (225,660) $ (223,158) $ (235,101) $ (203,860)
Net realized gain on investments 1,798,517 3,634,874 1,563,642 2,515,734
Net unrealized gain (loss) on investments (1,054,930) (563,625) 3,423,736 912,972
----------- ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations 517,927 2,848,091 4,752,277 3,224,846
Net deposits into (withdrawals from)
Separate Account (2,773,878) (1,909,564) (1,748,016) (266,538)
----------- ----------- ----------- -----------
Increase in net assets (2,255,951) 938,527 3,004,261 2,958,308
Net assets, beginning of year 24,134,985 23,196,458 22,344,676 19,386,368
----------- ----------- ----------- -----------
Net assets, end of year $21,879,034 $24,134,985 $25,348,937 $22,344,676
=========== =========== =========== ===========
See accompanying notes to financial statements.
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
-------------------------- -------------------------- ------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (expense) $ 136,038 $ 81,625 $ (354,627) $ (170,916) $ 31,085 $ 60,266
Net realized gain on investments 2,826,127 2,156,183 6,243,740 4,532,258 413,500 618,085
Net unrealized gain (loss) on investments (1,603,590) 312,751 7,701,498 5,806,145 2,308,525 49,088
----------- ----------- ----------- ----------- ---------- ----------
Increase in net assets resulting
from operations 1,358,575 2,550,559 13,590,611 10,167,487 2,753,110 727,439
Net deposits (withdrawals) into Separate
Account (4,305,771) 695,101 365,758 1,296,367 32,879 (469,743)
----------- ----------- ----------- ----------- ---------- ----------
Increase in net assets (2,947,196) 3,245,660 13,956,369 11,463,854 2,785,989 257,696
Net assets, beginning of year 27,344,677 24,099,017 37,389,659 25,925,805 6,765,869 6,508,173
----------- ----------- ----------- ----------- ---------- ----------
Net assets, end of year $24,397,481 $27,344,677 $51,346,028 $37,389,659 $9,551,858 $6,765,869
=========== =========== =========== =========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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.
On January 6, 2000, Metropolitan Life Insurance Company (MetLife),
headquartered in New York City, purchased 100% of GenAmerica Corporation
(the Company) for $1.2 billion in cash. The acquisition was a result of
liquidity problems encountered by the Company's wholly-owned subsidiary
General American Life Insurance Company (General American) during 1999.
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>
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>
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 - Contract 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 1999 and 1998 are disclosed in Note 6.
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENT
Note 4 - Purchases and Sales of Shares
During the year ended December 31, 1999, 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 $15,570,691 $7,563,741 $1,086,737 $1,944,587 $2,215,470
----------- ---------- ---------- ---------- ----------
Sales $12,464,659 $5,877,750 $2,254,518 $3,886,310 $3,846,096
----------- ---------- ---------- ---------- ----------
</TABLE>
During the year ended December 31, 1999, 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 $2,646,564 $9,444,729 $1,379,262
---------- ---------- ----------
Sales $6,032,125 $5,156,148 $1,227,215
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 5 - ACCUMULATION UNIT ACTIVITY
The following is a summary of the accumulation unit activity for the year ended December 31, 1999 and 1998 (in thousands):
<CAPTION>
S & P 500 INDEX MONEY MARKET BOND INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
--------------- --------------- -------------
Tax sheltered annuities: 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net deposits 229 236 327 123 26 61
Net withdrawals (248) (184) (223) (101) (78) (24)
Outstanding units, beginning of year 987 935 124 102 200 163
---- ---- ---- ---- --- ---
Outstanding units, end of year 968 987 228 124 148 200
==== ==== ==== ==== === ===
Individually purchased annuities:
Net deposits 51 53 149 54 11 19
Net withdrawals (53) (77) (159) (49) (26) (25)
Outstanding units, beginning of year 342 366 79 74 75 81
---- ---- ---- ---- --- ---
Outstanding units, end of year 340 342 69 79 60 75
==== ==== ==== ==== === ===
<CAPTION>
MANAGED EQUITY ASSET ALLOCATION
FUND DIVISION FUND DIVISION
-------------------------------------- -----------------
88 Series Other
Tax sheltered annuities: 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net deposits 29 33 2 7 62 63
Net withdrawals (49) (47) (22) (17) (86) (72)
Outstanding units, beginning of year 266 280 126 136 487 496
--- --- --- --- --- ---
Outstanding units, end of year 246 266 106 126 463 487
=== === === === === ===
Individually purchased annuities:
Net deposits 3 10 0 0 9 17
Net withdrawals (8) (23) 0 (1) (33) (17)
Outstanding units, beginning of year 54 67 1 2 187 187
--- --- --- --- --- ---
Outstanding units, end of year 49 54 1 1 163 187
=== === === === === ===
(continued)
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 5 - ACCUMULATION UNIT ACTIVITY (CONTINUED)
The following is a summary of the accumulation unit activity for the year
ended December 31, 1999 and 1998 (in thousands):
<CAPTION>
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
--------------- ----------------- ---------------
Tax sheltered annuities: 1999 1998 1999 1998 1999 1998
---- ---- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net deposits 82 161 204 205 59 60
Net withdrawals (214) (131) (190) (142) (66) (68)
Outstanding units, beginning of year 868 838 1,127 1,064 355 363
---- ---- ----- ----- --- ---
Outstanding units, end of year 736 868 1,141 1,127 348 355
==== ==== ===== ===== === ===
Individually purchased annuities:
Net deposits 21 51 70 50 23 11
Net withdrawals (74) (50) (71) (51) (16) (37)
Outstanding units, beginning of year 352 351 342 343 98 124
---- ---- ----- ----- --- ---
Outstanding units, end of year 299 352 341 342 105 98
==== ==== ===== ===== === ===
</TABLE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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.
<CAPTION>
S & P 500 INDEX MONEY MARKET BOND INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
--------------------------- ------------------------ -------------------------
Tax sheltered annuities: 1999 1998 1999 1998 1999 1998
----------- ------------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 4,780,975 $ 6,468,331 $ 237,270 $ 551,562 $ 364,130 $ 429,226
Transfers between fund divisions
and General American 1,752,189 1,266,937 2,396,429 309,709 (254,095) 574,600
Surrenders and withdrawals (7,641,939) (5,208,621) (863,973) (514,215) (1,141,258) (277,854)
----------- ----------- ---------- --------- ----------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions (1,108,775) 2,526,647 1,769,726 347,056 (1,031,223) 725,972
Deductions:
Sales charges and premium taxes 673 541 0 33 0 3
Transfer charges 0 0 0 0 0 0
Surrender charges 73,320 39,730 5,148 2,941 4,266 3,061
----------- ----------- ---------- --------- ----------- ---------
73,993 40,271 5,148 2,974 4,266 3,064
Total deposits into (withdrawals from)
Separate Account $(1,182,768) $ 2,486,376 $1,764,578 $ 344,082 $(1,035,489) $ 722,908
=========== =========== ========== ========= =========== =========
<CAPTION>
MANAGED EQUITY ASSET ALLOCATION
FUND DIVISION FUND DIVISION
--------------------------------------------------------- ---------------------------
88 Series Other
Tax sheltered annuities: 1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 1,017,574 $ 1,031,883 $ 98,087 $ 128,121 $ 1,099,914 $ 1,377,673
Transfers between fund divisions
and General American (664,792) (215,453) (244,132) 257,403 (21,014) (79,296)
Surrenders and withdrawals (1,195,279) (1,211,325) (1,533,674) (1,191,151) (1,926,140) (1,579,937)
----------- ----------- ----------- ----------- ----------- -----------
Total gross deposits, transfers, and
surrenders between fund divisions (842,497) (394,895) (1,679,719) (805,627) (847,240) (281,560)
Deductions:
Sales charges and premium taxes 64 62 262 244 0 3
Transfer charges 0 0 0 0 0 0
Surrender charges 13,761 17,119 0 0 20,846 12,490
----------- ----------- ----------- ----------- ----------- -----------
13,825 17,181 262 244 20,846 12,493
Total deposits into (withdrawals from)
Separate Account $ (856,322) $ (412,076) $(1,679,981) $ (805,871) $ (868,086) $ (294,053)
=========== =========== =========== =========== =========== ===========
<CAPTION>
S & P 500 INDEX MONEY MARKET BOND INDEX
FUND DIVISION FUND DIVISION FUND DIVISION
--------------------------- ----------------------- -----------------------
Individually purchased annuities: 1999 1998 1999 1998 1999 1998
------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 753,899 $ 1,765,647 $ 36,328 $ 120,214 $ 17,091 $ 55,283
Transfers between fund divisions
and General American 702,384 (209,771) 44,784 (22,244) (185,048) 67,237
Surrenders and withdrawals (1,504,179) (2,726,185) (256,255) (5,242) (139,177) (244,863)
----------- ----------- --------- --------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions (47,896) (1,170,309) (175,143) 92,728 (307,134) (122,343)
Deductions:
Sales charges and premium taxes 0 0 0 0 0 0
Transfer charges 0 0 0 0 0 0
Surrender charges 22,971 33,019 195 19 2,600 4,199
----------- ----------- --------- --------- --------- ---------
22,971 33,019 195 19 2,600 4,199
Total deposits into (withdrawals from)
Separate Account $ (70,867) $(1,203,328) $(175,338) $ 92,709 $(309,734) $(126,542)
=========== =========== ========= ========= ========= =========
<CAPTION>
MANAGED EQUITY ASSET ALLOCATION
FUND DIVISION FUND DIVISION
------------------------------------------------------ -------------------------
88 Series Other
Individually purchased annuities: 1999 1998 1999 1998 1999 1998
---------- ----------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 56,049 $ 164,355 $ 0 $ 1,589 $ 78,617 $ 265,936
Transfers between fund divisions
and General American (59,910) (24,136) 0 0 (255,371) (71,336)
Surrenders and withdrawals (216,312) (739,966) (15,347) (72,481) (679,108) (164,660)
--------- --------- -------- -------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions (220,173) (599,747) (15,347) (70,892) (855,862) 29,940
Deductions:
Sales charges and premium taxes 0 0 0 0 0 0
Transfer charges 0 0 0 0 0 0
Surrender charges 2,055 20,978 0 0 24,068 2,425
--------- --------- -------- -------- --------- ---------
2,055 20,978 0 0 24,068 2,425
Total deposits into (withdrawals from)
Separate Account $(222,228) $(620,725) $(15,347) $(70,892) $(879,930) $ 27,515
========= ========= ======== ======== ========= =========
(continued)
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 6 - SUMMARY OF GROSS AND NET DEPOSITS INTO SEPARATE ACCOUNT,
(CONTINUED)
<CAPTION>
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
--------------------------- --------------------------- -----------------------
Tax sheltered annuities: 1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 1,407,920 $ 2,099,844 $ 2,689,326 $ 2,854,340 $ 473,024 $ 599,682
Transfers between fund divisions
and General American (2,034,265) 281,676 1,072,738 665,837 137,849 (134,703)
Surrenders and withdrawals (2,408,056) (1,685,785) (3,327,807) (2,126,620) (673,787) (564,009)
----------- ----------- ----------- ----------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions (3,034,401) 695,735 434,257 1,393,557 (62,914) (99,030)
Deductions:
Sales charges and premium taxes 18 199 149 229 34 12
Transfer charges 0 0 0 0 0 0
Surrender charges 21,503 22,250 41,171 38,955 7,968 7,586
----------- ----------- ----------- ----------- --------- ---------
21,521 22,449 41,320 39,184 8,002 7,598
Total deposits (withdrawals) into
Separate Account $(3,055,922) $ 673,286 $ 392,937 $ 1,354,373 $ (70,916) $(106,628)
=========== =========== =========== =========== ========= =========
<CAPTION>
EQUITY-INCOME GROWTH OVERSEAS
FUND DIVISION FUND DIVISION FUND DIVISION
--------------------------- --------------------------- -----------------------
Individually purchased annuities: 1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits $ 136,056 $ 626,962 $ 327,467 $ 674,480 $ 44,310 $ 136,339
Transfers between fund divisions
and General American (1,026,467) 12,989 33,246 (55,684) 135,078 (180,306)
Surrenders and withdrawals (346,195) (604,051) (371,595) (657,597) (73,053) (308,720)
----------- --------- --------- --------- -------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions (1,236,606) 35,900 (10,882) (38,801) 106,335 (352,687)
Deductions:
Sales charges and premium taxes 6 5 22 23 0 0
Transfer charges 0 0 0 0 0 0
Surrender charges 13,237 14,080 16,275 19,182 2,540 10,428
----------- --------- --------- --------- -------- ---------
13,243 14,085 16,297 19,205 2,540 10,428
Total deposits (withdrawals) into
Separate Account $(1,249,849) $ 21,815 $ (27,179) $ (58,006) $103,795 $(363,115)
=========== ========= ========= ========= ======== =========
</TABLE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
<CAPTION>
No. of Shares Market Value
-------------- -------------
<S> <C> <C>
S&P 500 Index Fund
General American Capital Company <F*> 1,421,309 $86,520,558
Money Market Fund
General American Capital Company <F*> 253,561 $ 5,135,191
Bond Index Fund
General American Capital Company <F*> 172,157 $ 4,211,687
Managed Equity Fund
General American Capital Company <F*> 596,491 $21,896,770
Asset Allocation Fund
General American Capital Company <F*> 547,671 $25,370,323
Equity-Income Fund
Variable Insurance Products Fund 949,716 $24,417,201
Growth Fund
Variable Insurance Products Fund 935,504 $51,387,245
Overseas Fund
Variable Insurance Products Fund 348,357 $ 9,558,915
<FN>
<F*> These funds use consent dividending. See Note 2C.
</FN>
See accompanying independent auditors' report.
</TABLE>
<PAGE>
<TABLE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
FINANCIAL HIGHLIGHTS INFORMATION
DECEMBER 31, 1999
<CAPTION>
Tax Qualified Plan Non-Tax Qualified Plan
Units outstanding, Units outstanding,
Accumulation unit value: Accumulation unit value: end of period end of period
Beginning of period<F*> End of period (in thousands) (in thousands)
------------------------ ------------------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
S & P 500 Index Fund Division <F**>
1999 55.35 66.06 968 340
1998 43.62 55.35 987 342
1997 33.17 43.62 935 366
1996 27.27 33.17 808 325
1995 20.12 27.27 657 297
1994 20.09 20.12 636 265
1993 18.48 20.09 599 241
1992 17.37 18.48 366 152
1991 13.47 17.37 236 109
1990 14.15 13.47 133 67
1989 11.01 14.15 97 23
Money Market Fund Division
1999 16.57 17.26 228 69
1998 15.85 16.57 124 79
1997 15.14 15.85 102 74
1996 14.50 15.14 117 62
1995 13.82 14.50 106 57
1994 13.39 13.82 93 58
1993 13.12 13.39 115 73
1992 12.78 13.12 181 85
1991 12.16 12.78 179 101
1990 11.33 12.16 188 79
1989 10.44 11.33 28 15
Bond Index Fund Division <F***>
1999 20.97 20.16 148 60
1998 19.50 20.97 200 75
1997 18.01 19.50 163 80
1996 17.66 18.01 163 70
1995 14.99 17.66 146 85
1994 15.78 14.99 146 58
1993 14.43 15.78 161 61
1992 13.68 14.43 116 48
1991 12.12 13.68 50 67
1990 11.22 12.12 33 58
1989 10.27 11.22 22 17
Managed Equity Fund Division
82 Series Tax Qualified
1999 82.60 84.35 106 N/A
1998 72.99 82.60 126 N/A
1997 59.73 72.99 136 N/A
1996 49.83 59.73 153 N/A
1995 37.68 49.83 164 N/A
1994 39.42 37.68 188 N/A
1993 36.54 39.42 210 N/A
1992 34.56 36.54 217 N/A
1991 27.62 34.56 216 N/A
1990 28.73 27.62 192 N/A
1989 22.11 28.73 194 N/A
Non-Tax Qualified
1999 89.89 91.79 N/A 1
1998 79.43 89.89 N/A 1
1997 64.99 79.43 N/A 2
1996 54.22 64.99 N/A 2
1995 41.00 54.22 N/A 17
1994 42.90 41.00 N/A 20
1993 39.76 42.90 N/A 24
1992 37.61 39.76 N/A 25
1991 30.05 37.61 N/A 25
1990 31.27 30.05 N/A 25
1989 24.06 31.27 N/A 25
<FN>
<F*> At the date of first deposits into Separate Account on May 16, 1988, (continued)
except for the Managed Equity Fund, which began on February 24, 1988;
the Equity Fund and the Growth Fund which began on January 6, 1994; and
the Overseas Fund which began on January 11, 1994.
<F**> The name of the S&P 500 Index Fund was changed from the Equity Fund
effective May 1, 1994.
<F***>The name of the Bond Index Fund was changed from the Intermediate Bond
Fund effective October 1, 1992. The name change reflects a change in
investment policies and objectives of the Fund.
</FN>
See accompanying independent auditors' report.
<PAGE>
GENERAL AMERICAN SEPARATE ACCOUNT TWO
FINANCIAL HIGHLIGHTS INFORMATION
DECEMBER 31, 1999
<CAPTION>
Tax Qualified Plan Non-Tax Qualified Plan
Units outstanding, Units outstanding,
Accumulation unit value: Accumulation unit value: end of period end of period
Beginning of period<F*> End of period (in thousands) (in thousands)
------------------------ ------------------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
Managed Equity Fund Division (continued)
88 Series
1999 42.70 43.56 246 49
1998 37.77 42.70 266 54
1997 30.94 37.77 280 67
1996 25.84 30.94 240 58
1995 19.56 25.84 215 75
1994 20.48 19.56 204 68
1993 19.00 20.48 197 56
1992 17.99 19.00 158 40
1991 14.39 17.99 101 27
1990 14.99 14.39 56 20
1989 11.54 14.99 21 7
Asset Allocation Fund Division
1999 33.12 40.46 463 163
1998 28.38 33.12 487 187
1997 24.14 28.38 496 187
1996 21.08 24.14 375 178
1995 16.52 21.08 317 168
1994 17.37 16.52 320 180
1993 16.01 17.37 332 166
1992 15.16 16.01 223 119
1991 12.78 15.16 140 66
1990 12.60 12.78 94 35
1989 10.61 12.60 33 16
Equity-Income Fund Division
1999 22.41 23.60 736 299
1998 20.27 22.41 868 352
1997 15.98 20.27 838 351
1996 14.12 15.98 767 317
1995 10.55 14.12 552 207
1994 10.00 10.55 315 82
Growth Fund Division
1999 25.45 34.64 1,141 341
1998 18.42 25.45 1,127 342
1997 15.07 18.42 1,064 343
1996 13.27 15.07 974 362
1995 9.90 13.27 646 261
1994 10.00 9.90 356 116
Overseas Fund Division
1999 14.93 21.09 348 105
1998 13.37 14.93 355 98
1997 12.11 13.37 363 124
1996 10.80 12.11 346 107
1995 9.95 10.80 266 77
1994 10.00 9.95 240 52
<FN>
<F*> At the date of first deposits into Separate Account on May 16, 1988,
except for the Managed Equity Fund, which began on February 24, 1988; the
Equity Fund and the Growth Fund which began on January 6, 1994; and the
Overseas Fund which began on January 11, 1994.
<F**> The name of the S&P 500 Index Fund was changed from the Equity Fund
effective May 1, 1994.
<F***>The name of the Bond Index Fund was changed from the Intermediate Bond
Fund effective October 1, 1992. The name change reflects a change in
investment policies and objectives of the Fund.
</FN>
See accompanying independent auditors' report.
</TABLE>
<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.
GENERAL AMERICAN LIFE INSURANCE
COMPANY AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
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, 1999
and 1998, 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, 1999. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
General American Life Insurance Company and subsidiaries as of December
31, 1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
St. Louis, Missouri
February 4, 2000
<PAGE>>
<TABLE>
General American Life Insurance Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
<CAPTION>
As of December 31
-----------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
- - ----------------------------------------------------------------
Fixed maturities:
Available-for-sale, at fair value $ 6,826.1 11,068.3
Mortgage loans, net 1,678.9 2,337.5
Real estate, net 127.2 129.9
Equity securities, at fair value 49.3 48.6
Policy loans 2,243.9 2,151.0
Short-term investments 292.4 195.3
Other invested assets 898.8 457.6
--------- --------
Total investments 12,116.6 16,388.2
Cash and cash equivalents 790.0 591.1
Accrued investment income 153.9 205.6
Reinsurance recoverables 863.3 905.0
Other contract deposits 325.5 4,094.8
Deferred tax asset, net 197.6 -
Deferred policy acquisition costs 1,286.1 773.8
Other assets 781.1 675.7
Separate account assets 6,915.6 5,214.8
--------- --------
Total assets $23,429.7 28,849.0
========= ========
LIABILITIES AND STOCKHOLDER EQUITY
- - ----------------------------------------------------------------
Policy and contract liabilities:
Future policy benefits $ 5,995.6 5,589.5
Policyholder account balances:
Universal life 3,032.1 2,960.9
Annuities 3,709.8 3,714.5
Pension funds and interest sensitive contract liabilities 556.8 7,581.3
Policy and contract claims 702.1 591.1
Dividends payable to policyholders 120.6 121.7
--------- --------
Total policy and contract liabilities 14,117.0 20,559.0
Amounts payable to reinsurers 79.2 201.4
Long-term debt and notes payable 216.6 221.9
Other liabilities and accrued expenses 825.0 912.4
Deferred tax liability, net - 75.4
Separate account liabilities 6,892.0 5,194.9
--------- --------
Total liabilities 22,129.8 27,165.0
Minority interests 420.0 383.1
Stockholder equity:
Common stock, $1 par value, 5,000,000 shares authorized,
3,000,000 shares issued and outstanding 3.0 3.0
Additional paid in capital 71.1 3.0
Retained earnings 1,074.1 1,242.0
Accumulated other comprehensive (loss) income (268.3) 52.9
--------- --------
Total stockholder equity 879.9 1,300.9
--------- --------
Total liabilities and stockholder equity $23,429.7 28,849.0
========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
General American Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions)
<CAPTION>
Years ended December 31
-----------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
REVENUES
- - -------------------------------------------------------
Insurance premiums $2,207.6 2,028.0 1,671.3
Other considerations 183.2 173.6 135.8
Net investment income 1,157.2 1,135.8 945.5
Ceded commissions 21.7 39.9 44.9
Other income 386.0 323.0 362.3
Net realized investment (losses) gains (200.6) 13.7 28.5
-------- ------- -------
Total revenues 3,755.1 3,714.0 3,188.3
-------- ------- -------
BENEFITS AND EXPENSES
- - -------------------------------------------------------
Policy benefits 1,978.4 1,832.9 1,517.7
Interest credited to policyholder account balances 533.9 516.8 399.4
-------- ------- -------
Total policyholder benefits 2,512.3 2,349.7 1,917.1
Dividends to policyholders 191.6 192.1 182.1
Policy acquisition costs 154.0 240.7 171.1
Other insurance and operating expenses 917.5 713.7 712.8
Interest expense 17.7 17.9 20.2
Demutualization expense 13.3 - -
Fees to exit funding agreement business 141.4 - -
-------- ------- -------
Total benefits and expenses 3,947.8 3,514.1 3,003.3
-------- ------- -------
(Loss) income before provision for income taxes (192.7) 199.9 185.0
-------- ------- -------
Income tax (benefit) provision:
Current (23.6) 35.2 65.8
Deferred (40.7) 18.4 (0.1)
-------- ------- -------
Total income tax (benefit) provision (64.3) 53.6 65.7
-------- ------- -------
(Loss) income before minority interest (128.4) 146.3 119.3
Minority interest in earnings of consolidated subsidiaries (24.8) (29.2) (22.1)
-------- ------- -------
Net (loss) income $ (153.2) 117.1 97.2
======== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
General American Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
<CAPTION>
Years ended December 31
-----------------------
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Net (loss) income $(153.2) 117.1 97.2
Other comprehensive (loss) income (321.2) (54.0) 75.6
------- ----- -----
Comprehensive (loss) income $(474.4) 63.1 172.8
======= ===== =====
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
General American Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY
(dollars in millions)
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED (LOSS) STOCKHOLDER
STOCK CAPITAL EARNINGS INCOME EQUITY
------ ---------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ - - 966.5 31.3 997.8
Net income 97.2 97.2
Other comprehensive income 75.6 75.6
Issuance of common stock 3.0 3.0 (6.0) -
Dividend to parent (4.5) (4.5)
Other, net 4.4 4.4
---- ---- ------- ------ -------
Balance at December 31, 1997 3.0 3.0 1,057.6 106.9 1,170.5
Net income 117.1 117.1
Other comprehensive loss (54.0) (54.0)
Parent's share of subsidiary's
issuance of non-voting stock 68.6 68.6
Other, net (1.3) (1.3)
---- ---- ------- ------ -------
Balance at December 31, 1998 3.0 3.0 1,242.0 52.9 1,300.9
Net loss (153.2) (153.2)
Other comprehensive loss (321.2) (321.2)
Parent's share of subsidiaries'
capital stock transactions 25.3 25.3
Capital contribution from parent 68.1 68.1
Dividends (40.0) (40.0)
---- ---- ------- ------ -------
Balance at December 31, 1999 $3.0 71.1 1,074.1 (268.3) 879.9
==== ==== ======= ====== =======
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
General American Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<CAPTION>
Years ended December 31
-----------------------
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- - ----------------------------------------------------------------
Net (loss) income $ (153.2) 117.1 97.2
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Change in:
Accrued investment income 50.9 (37.4) (20.6)
Reinsurance recoverables and
other contract deposits 463.9 496.1 203.7
Deferred policy acquisition costs (165.9) (102.1) (113.0)
Other assets (39.5) (172.1) (61.8)
Future policy benefits 406.2 655.5 693.1
Policy and contract claims 111.0 132.5 105.5
Other liabilities and accrued expenses (78.1) 48.2 319.8
Deferred income tax provision (40.7) 18.4 (0.1)
Policyholder considerations (183.2) (173.6) (135.8)
Interest credited to policyholder account balances 533.9 516.8 399.4
Amortization and depreciation (32.5) 34.6 32.7
Net realized investment losses (gains) 200.6 (13.7) (28.5)
Other, net 12.0 7.4 0.4
--------- ------- -------
Net cash provided by operating activities 1,085.4 1,527.7 1,492.0
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
- - ----------------------------------------------------------------
Proceeds from investments sold or redeemed:
Fixed maturities available-for-sale 10,891.4 2,027.4 2,070.7
Mortgage loans 1,442.8 370.4 594.2
Equity securities 10.3 2.1 31.6
Cost of investments purchased:
Fixed maturities available-for-sale (8,110.5) (4,251.1) (4,463.1)
Mortgage loan originations (800.2) (594.5) (439.0)
Equity securities (19.2) (17.4) (47.3)
Maturity of fixed maturities available-for-sale 310.6 145.3 281.7
Increase in policy loans, net (92.9) (77.9) (153.4)
Increase in short-term and other invested assets, net (521.8) (215.2) (130.4)
Investments in subsidiaries 81.3 (24.5) (6.0)
--------- ------- -------
Net cash provided by (used in) investing activities 3,191.8 (2,635.4) (2,261.0)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
- - ----------------------------------------------------------------
Net policyholder account and contract (withdrawals) deposits (4,186.7) 1,108.8 1,024.5
Proceeds from subsidiary stock offering 124.9 221.8 -
Issuance of debt - 2.3 1.9
Repayment of debt (0.7) (0.4) (80.6)
Dividends (45.8) (3.8) (2.1)
Other, net 28.9 27.5 46.8
--------- ------- -------
Net cash (used in) provided by financing activities (4,079.4) 1,356.2 990.5
--------- ------- -------
Effect of exchange rate changes 1.1 (16.3) (5.3)
--------- ------- -------
Net increase in cash and cash equivalents 198.9 232.2 216.2
Cash and cash equivalents at beginning of year 591.1 358.9 142.7
--------- ------- -------
Cash and cash equivalents at end of year $ 790.0 591.1 358.9
========= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
General American Life Insurance Company and Subsidiaries
(1) BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ACQUISITION BY METLIFE
On January 6, 2000, Metropolitan Life Insurance Company (MetLife),
headquartered in New York City, purchased 100% of GenAmerica Corporation
(GenAmerica), General American Life Insurance Company's (General American
or the Company) parent, for $1.2 billion in cash. The acquisition was a
result of liquidity problems encountered by General American.
On August 10, 1999, at management's request, the Missouri Department of
Insurance placed the Company under an order of administrative supervision
(the order). The immediate cause of the order was the Company's inability
to immediately satisfy approximately $4 billion in institutional funding
agreement contract surrenders. The funding agreements guaranteed the
holder a return on principal at a stated interest rate for a specified
period of time. The contracts also allowed the holder to "put" the
contract to the Company for a payout of principal and interest within
designated time periods of 7, 30 or 90 days. The Company had reinsured 50%
of the funding agreement contracts with ARM Financial Group, Inc. (ARM).
In July 1999, Moody's Investors Services, Inc. downgraded the claims paying
ability rating of ARM due to the relative illiquidity of certain of its
invested assets, which resulted in the Company recapturing the obligations
and assets related to the funding agreements reinsured by ARM. As a result
of the recapture, Moody's downgraded the Company's claims paying ability
rating. Upon announcement of the downgrade, a large number of funding
agreement holders surrendered their contracts. The Company was unable to
liquidate sufficient assets in an orderly fashion without incurring
significant losses and therefore management requested the order.
In connection with the acquisition, MetLife offered each holder of a
General American funding agreement the option to exchange its funding
agreement for a MetLife funding agreement with substantially identical
terms and conditions or receive cash equal to the principal amount plus
accrued interest. In consideration of this exchange offer, the Company
transferred to MetLife assets having a market value equal to the market
value of the funding agreement liabilities, approximately $5.7 billion.
As a result of its efforts to raise liquidity to meet the funding agreement
requests and the transfer of assets to MetLife, the Company incurred
approximately $214.7 million in pretax capital losses. In addition to the
capital losses, the Company incurred $141.4 million in fees associated with
the recapture and transfer of the funding agreement business. With the
transfer, the Company fully exited the funding agreement business.
GenAmerica will operate as a wholly-owned stock subsidiary of MetLife.
The $1.2 billion purchase price was paid to GenAmerica's parent General
American Mutual Holding Company (GAMHC) and deposited in an account for the
benefit of the Company's policyholders. Ultimately, these funds, minus
adjustments, will be distributed to participating General American
policyholders, with accumulated interest and GAMHC will be dissolved.
7
<PAGE>
General American Life Insurance Company and Subsidiaries
REORGANIZATION
In September 1996, the Board of Directors of General American adopted the
Plan which authorized the reorganization (Reorganization) of the Company
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 the
Company approved the Plan on January 28, 1997 and the Reorganization became
effective on April 24, 1997 (effective date). The Company 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, the Company (i) formed GAMHC as a mutual
insurance holding company under the insurance laws of the State of
Missouri, (ii) formed 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 became 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) became a member of GAMHC and had 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 or annuity policy or 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 owned the Company, and GAMHC
indirectly owned 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 the following wholly owned
insurance subsidiaries: Cova Corporation (COVA), an insurance holding
company, Paragon Life Insurance Company, Security Equity Life Insurance
Company, General Life Insurance Company of America, General Life Insurance
Company (GLIC), GenAm Benefits Insurance Company, and its 48.3 percent
owned subsidiary, Reinsurance Group of America, Incorporated (RGA), an
insurance holding company. In addition, the financial statements include
the assets, liabilities, and results of operations of the following wholly
owned non-insurance subsidiaries: Red Oak Realty Company, White Oak
Royalty Company, GenMark, Inc., and its 60.4 percent owned subsidiary,
Conning Corporation (Conning).
The Company's principal lines of business, conducted through General
American or one of its subsidiaries, are: Individual Life Insurance,
Annuities, Group Life and Health Insurance, Asset Management, and
Reinsurance. The Company distributes its products and services primarily
through a nationwide network of general agencies, independent brokers, and
group sales and claims offices. The Company 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, Conning successfully completed an Initial Public Offering
of 2.875 million shares of its common stock. Conning received net proceeds
of approximately $34.5 million from the offering. The
8
<PAGE>
General American Life Insurance Company and Subsidiaries
Company owned 60.4 and 62.7 percent of the total shares outstanding of
Conning's common stock at December 31, 1999 and 1998 respectively. The
publicly held stock of Conning is listed on the NASDAQ National Market
System.
OTHER OFFERINGS
At 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 7,417,500 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% to 53.3%.
On September 14, 1999 RGA held a special shareholder's meeting at which an
amendment to its restated articles of incorporation, as amended, was
approved which converted 7,417,496 shares of non-voting common stock into
7,194,971 shares of voting common stock, with cash paid in lieu of any
fractional shares. After the non-voting stock conversion, the Company's
ownership percentage was 53.5%.
On November 23, 1999, RGA completed a private placement of securities in
which it sold 4,784,689 shares of its common stock, $0.01 par value per
share to MetLife. The price per share was $26.125, and the aggregate value
of the transaction was approximately $125 million. Proceeds from the
private placement will be used for general corporate purposes, including
the immediate capital needs associated with the Company's primary
businesses. After the private offering, the Company's ownership percentage
was 48.3%.
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. The Company continues to
consolidate the financial statements of RGA even though its ownership
percentage has declined to below 50 percent since the Company has retained
control of RGA through a majority representation on RGA's Board of
Directors at December 31, 1999 and through January 6, 2000. 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 insurance policies, including participating
businesses, premiums are recognized when due, less allowances for estimated
uncollectible balances. For limited payment contracts, net premiums are
recorded as revenue, and the difference between the gross premium and the
net premium is deferred and recognized in income in a constant relationship
to insurance in force over the estimated policy life.
For universal life and annuity products, contract charges for mortality,
surrender, and expense, other than front-end expense charges, are reported
as income when charged to policyholders' accounts.
Other income represents the fees generated from the Company's non-insurance
operations, primarily service and contract fees relating to concessions,
asset management, system development, and third-party administration.
Amounts are recognized when earned.
9
<PAGE>
General American Life Insurance Company and Subsidiaries
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 as well as related adjustments
to deferred acquisition costs, in accumulated other comprehensive income, a
separate component of stockholder equity.
The Company recognizes its proportionate share of the resultant gains or
losses on the issuance or repurchase of its subsidiaries' stock as a direct
credit or charge to retained earnings.
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 of the underlying contracts. Investment real estate
which the Company intends 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 $44.0 million and $52.4 million at
December 31, 1999 and 1998, respectively. Direct valuation allowances
amounted to $4.7 million and $7.3 million at December 31, 1999 and 1998,
respectively. Other invested assets are principally recorded at fair
value.
SHORT-TERM INVESTMENTS: Short-term investments, consisting primarily of
money market instruments and other debt issues purchased with an original
maturity of less than a year, are carried at amortized cost, which
approximates fair value.
INVESTED ASSET IMPAIRMENT AND VALUATION ALLOWANCES: Invested assets are
considered impaired when the Company determines that collection of all
amounts due under the contractual terms is doubtful. The Company adjusts
invested assets to their estimated net realizable value at the point at
which it determines an impairment is other than temporary. In addition,
the Company has established valuation allowances for mortgage loans and
other invested assets. Valuation allowances for other than temporary
impairments in value are netted against the asset categories to which they
apply. Additions to valuation allowances are included in realized gains
and losses.
10
<PAGE>
General American Life Insurance Company and Subsidiaries
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 those prepayments 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 taking into account 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, mortality
charges, and withdrawals. These expense charges are recognized in income
as earned.
The range of weighted average interest crediting rates used by the
Company's life insurance subsidiaries were as follows:
1999 1998 1997
Universal life 4.00-8.00% 5.25-7.10% 6.00-7.10%
Annuities 3.00-9.10% 4.00-9.20% 5.70-9.30%
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.
11
<PAGE>
General American Life Insurance Company and Subsidiaries
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, 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.
The range of average rates of assumed interest used by the Company's
insurance subsidiaries in estimated gross margins were as follows:
1999 1998 1997
Participating life 7.76% 8.25% 8.17%
Universal life 6.00-9.20% 6.25-7.50% 6.25-7.79%
Annuities 3.00-7.00% 7.00-7.83% 7.00-7.84%
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.
12
<PAGE>
General American Life Insurance Company and Subsidiaries
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
consolidated 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. 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. The Company has not recognized a
deferred tax liability for the excess of financial statement carrying
amount over the tax basis of its less-than-80 percent owned domestic
subsidiaries as the tax law provides a means by which the reported amount
of that investment can be recovered tax-free and the Company expects that
it will ultimately use that means.
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 $27.2 million and $19.9 million at December 31,
1999 and 1998, 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.
13
<PAGE>
General American Life Insurance Company and Subsidiaries
DERIVATIVES: Derivatives are valued using quoted market prices, if
available. For derivatives not actively traded, fair values are estimated
using values obtained from independent pricing services.
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 cash surrender values. For contracts with no defined maturity date,
the carrying value approximates fair value.
PENSION FUNDS AND INTEREST SENSITIVE CONTRACT LIABILITIES: Fair values for
the Company's interest sensitive contract liabilities are estimated using
cash surrender values. For contracts with no defined maturity date, the
carrying value approximates fair value.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The separate account assets and
liabilities are carried at fair value as determined by the market value of
the underlying segregated investments.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: The carrying amount
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 & Note 4 for additional information on fair value of
financial instruments.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning
after June 15, 2000, and is effective for interim periods in the initial
year of adoption. SFAS No. 133 requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. It
also requires that gains or losses resulting from changes in the values of
those derivatives be reported depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company has not yet
determined the effect of the implementation of SFAS No. 133 on the results
of operation, financial position, or liquidity. The Company plans to adopt
the provisions of SFAS No. 133 in 2001.
RECLASSIFICATION
The Company has reclassified the presentation of certain prior period
information to conform to the 1999 presentation.
(2) ACQUISITIONS AND DIVESTITURES
On September 30, 1999, the Company sold its 100 percent ownership in
Consultec, LLC to ACS Enterprise Solutions, Inc. Proceeds received net of
expenses were $65.7 million and the realized gain, net of tax, on the sale
was $28.4 million.
14
<PAGE>
General American Life Insurance Company and Subsidiaries
(3) INVESTMENTS
Fixed Maturities and Equity Securities
The amortized cost and estimated fair value of fixed maturities and equity
securities at December 31, 1999 and 1998 are as follows (in millions):
<TABLE>
<CAPTION>
1999
- - ---------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. Treasury securities $ 88.6 0.2 (4.8) 84.0
Government agency
obligations 686.8 55.3 (54.8) 687.3
Corporate securities 4,298.6 104.6 (318.2) 4,085.0
Mortgage-backed securities 970.3 1.2 (106.7) 864.8
Asset-backed securities 1,441.5 1.0 (337.5) 1,105.0
-------- ----- ------ -------
Total fixed maturities
available-for-sale $7,485.8 162.3 (822.0) 6,826.1
======== ===== ====== =======
Equity securities $ 42.7 9.5 (2.9) 49.3
======== ===== ====== =======
<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 $ 20.7 0.4 -- 21.1
Government agency
obligations 1,151.5 122.5 (11.2) 1,262.8
Corporate securities 6,889.9 380.1 (164.1) 7,105.9
Mortgage-backed securities 1,812.4 34.0 (38.5) 1,807.9
Asset-backed securities 861.7 13.1 (4.2) 870.6
--------- ----- ------ --------
Total fixed maturities
available-for-sale $10,736.2 550.1 (218.0) 11,068.3
========= ===== ====== ========
Equity securities $ 39.1 9.5 -- 48.6
========= ===== ====== ========
</TABLE>
The Company manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1999, 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
stockholder equity.
15
<PAGE>
General American Life Insurance Company and Subsidiaries
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 1999 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 millions). 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.
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
Due in one year or less $ 147.8 149.0
Due after one year through five years 1,122.9 1,086.1
Due after five years through ten years 1,641.7 1,482.9
Due after ten years through twenty years 3,603.1 3,243.3
Mortgage-backed securities 970.3 864.8
-------- -------
Total $7,485.8 6,826.1
======== =======
The sources of net investment income follow (in millions):
1999 1998 1997
-------- ------- -----
Fixed maturities $ 749.6 744.3 561.7
Mortgage loans 175.4 188.8 194.5
Real estate 25.0 25.7 34.1
Equity securities 2.0 1.2 1.3
Policy loans 144.9 152.2 148.3
Short-term investments 46.5 22.4 16.6
Other 33.0 18.9 14.0
-------- ------- -----
Investment revenue 1,176.4 1,153.5 970.5
Investment expenses (19.2) (17.7) (25.0)
-------- ------- -----
Net investment income $1,157.2 1,135.8 945.5
======== ======= =====
16
<PAGE>
General American Life Insurance Company and Subsidiaries
Net realized gains (losses) from sales of investments consist of the
following (in millions):
1999 1998 1997
------- ----- -----
Fixed maturities:
Realized gains $ 70.4 19.0 24.0
Realized losses (330.8) (14.0) (16.8)
Equity securities:
Realized gains 48.2 2.0 1.8
Realized losses (0.4) (0.2) (1.5)
Other investments, net 12.0 6.9 21.0
------- ----- -----
Net realized investment gains $(200.6) 13.7 28.5
======= ===== =====
Included in net realized losses are permanent write-downs of
approximately $67.6 million and $5.5 million during 1999 and 1998,
respectively.
A summary of the components of the net unrealized appreciation
(depreciation) on invested assets carried at fair value is as follows
(in millions):
1999 1998
------- ------
Unrealized (depreciation) appreciation:
Fixed maturities available-for-sale $(659.7) 332.1
Equity securities 6.6 9.5
Derivatives (33.8) (5.3)
Effect of unrealized appreciation (depreciation) on:
Deferred policy acquisition costs 186.0 (155.7)
Present value of future profits 14.6 (0.5)
Deferred income taxes 169.7 (69.1)
Other 1.5 (2.9)
Minority interest, net of taxes 69.4 (19.6)
------- ------
Net unrealized (depreciation) appreciation $(245.7) 88.5
======= ======
The Company has securities on deposit with various state insurance
departments and regulatory authorities with an amortized cost of
approximately $881.8 million and $545.7 million at December 31, 1999 and
1998, respectively.
The Company's credit review procedures are designed to promote timely
identification of investments that require a higher-than-normal degree
of scrutiny. Each quarter a review is performed of impaired assets.
Factors considered in the evaluation include the collateral values,
credit quality of the issuer, amount of the exposure, our ability to
reduce exposure in situations of deteriorating credit worthiness, and
loss probabilities. Once a charge-off is taken, income is no longer
accrued, all cash is applied to principal. The Company's total impaired
assets amount to $31.8 million and $35.6 million at December 31, 1999
and 1998, respectively.
17
<PAGE>
General American Life Insurance Company and Subsidiaries
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.
During 1999, the Company entered into an agreement whereby approximately
$625.6 million of mortgage loans were sold by the Company for
securitization and resale by a financial institution as mortgage pass-
through certificates. The sale of these mortgage loans resulted in a
net gain of approximately $0.6 million. These amounts are reflected
within net investment income in the consolidated statement of
operations.
The Company's mortgage loans were distributed as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
PERCENT PERCENT
CARRYING OF CARRYING OF
VALUE TOTAL VALUE TOTAL
-------------------- --------------------
<S> <C> <C> <C> <C>
Arizona $ 125.6 7.4% $ 167.6 7.1%
California 298.0 17.4 395.3 16.6
Colorado 150.5 8.8 228.1 9.6
Florida 134.0 7.9 171.6 7.2
Georgia 137.6 8.1 176.1 7.4
Illinois 91.9 5.4 162.2 6.8
Maryland 78.2 4.6 102.9 4.3
Missouri 98.1 5.7 93.5 3.9
Texas 157.8 9.2 197.4 8.3
Washington 69.1 4.0 99.6 4.2
Other 367.2 21.5 581.7 24.6
-------------------- --------------------
Subtotal 1,708.0 100.0% 2,376.0 100.0%
===== =====
Valuation reserve (29.1) (38.5)
-------- --------
Total $1,678.9 $2,337.5
======== ========
<CAPTION>
1999 1998
-------------------- --------------------
PERCENT PERCENT
CARRYING OF CARRYING OF
VALUE TOTAL VALUE TOTAL
-------------------- --------------------
<S> <C> <C> <C> <C>
Property type:
Apartment $ 143.0 8.4% $ 77.1 3.2%
Retail 490.8 28.7 872.2 36.7
Office building 604.6 35.4 747.8 31.5
Industrial 391.6 22.9 422.6 17.8
Other commercial 78.0 4.6 256.3 10.8
-------------------- --------------------
Subtotal 1,708.0 100.0% 2,376.0 100.0%
===== =====
Valuation reserve (29.1) (38.5)
-------- --------
Total $1,678.9 $2,337.5
======== ========
</TABLE>
18
<PAGE>
General American Life Insurance Company and Subsidiaries
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 $6.5 million and $20.1 million at December 31, 1999
and 1998, respectively. At December 31, 1999 and 1998, the recorded
investment in mortgage loans that were considered impaired was $48.8
million and $100.7 million, respectively, with related allowances for
credit losses of $4.0 million and $12.6 million, respectively. The
average recorded investment in impaired loans during 1999 and 1998 was
$74.8 million and $110.2 million, respectively.
For the years ended December 31, 1999, 1998, and 1997, the Company
recognized $3.6 million, $6.8 million, and $9.7 million, respectively,
of interest income on those impaired loans, which included $3.6 million,
$7.0 million, and $9.9 million, respectively, of interest income
recognized using the cash basis method of income recognition.
As of December 31, 1999, the Company has outstanding fixed rate
Commercial mortgage loan commitments totaling $68.9 million with a
market value of $67.0 million at rates ranging from 7.125% to 8.50%, and
total variable rate commitments totaling $143.3 million with a market
value of $140.9 million.
SECURITIES LENDING
The Company participates in a securities lending program. In the
Company's agreements, collateral is held on certain fixed maturity
securities loaned to other institutions through a lending agreement.
The minimum collateral on securities loaned is 102% of the market value
of the loaned securities, marked to market daily. The Company retains
full ownership of the loaned securities and is indemnified by the
lending agent in the event a borrower becomes insolvent or fails to
return the securities. The amount on loan at December 31, 1999 and 1998
was $60.3 million and $122.5 million, respectively, and was
appropriately collateralized.
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, 1999, the Company had 19 outstanding interest rate swap
agreements which expire at various dates through 2024. Under 18 of the
agreements, the Company receives a fixed rate ranging from 6.065 percent
to 6.842 percent on a notional amount of $1.5 billion and pays a
floating rate based on London Interbank Offered Rate (LIBOR). Under the
remaining outstanding interest rate swap agreement, the Company receives
a floating rate based on LIBOR on a notional amount of $2 million and
pays a fixed rate of 6.495 percent. The estimated fair value of the
agreements at December 31, 1999 was a net loss of approximately $33.8
million, which is recognized in accumulated other comprehensive income.
19
<PAGE>
General American Life Insurance Company and Subsidiaries
At December 31, 1998, the Company had 35 outstanding interest rate swap
agreements which expire at various dates through 2025. 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. 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 LIBOR. 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.
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.
At December 31, 1999, the Company held no currency or cross currency
swaps. At December 31, 1998 the Company had one outstanding currency
swap agreement and five outstanding cross currency swaps which expire at
various dates through 2016. The notional amount was $34.2 million. The
1998 estimated fair value of the agreements was a net loss of $5.5
million and is 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 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, 1999, the Company held no total return swap agreements.
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.
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.
At December 31, 1999, the Company held no futures contracts. At
December 31, 1998, futures contracts outstanding were as follows (in
millions):
Net Sold Notional Fair Unrealized
Position Amount Value Gain
-------- -------- ----- -----------
(0.3) $33.1 $32.9 $0.2
The 1998 unrealized gain was recognized in accumulated other
comprehensive income.
20
<PAGE>
General American Life Insurance Company and Subsidiaries
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, 1999 and 1998, there were not
any significant concentrations with counterparties.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The following table presents the carrying amounts and estimated
fair values of the Company's financial instruments at December 31, 1999
and 1998 (in millions). Refer to Note 3 for the estimated fair values
of the Company's derivative instruments.
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------- --------------------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $6,826.1 6,826.1 11,068.3 11,068.3
Mortgage loans 1,678.9 1,691.7 2,337.5 2,472.5
Policy loans 2,243.9 2,243.9 2,151.0 2,151.0
Short-term investments 292.4 292.4 195.3 195.3
Other invested assets 898.8 898.8 457.6 457.6
Separate account assets 6,915.6 6,915.6 5,214.8 5,214.8
Liabilities:
Policyholder account balances
relating to investment
Contracts $5,179.4 5,279.8 5,044.8 4,929.7
Pension funds and other
interest sensitive liabilities 556.8 551.2 7,581.3 7,592.0
Long-term debt and
notes payable 216.6 209.8 221.9 216.6
Separate account liabilities 6,892.0 6,892.0 5,194.9 5,194.9
======== ======= ======== ========
</TABLE>
(5) 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 millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Direct $1,139.5 1,210.8 1,159.1
Assumed 1,667.7 1,422.3 996.9
Ceded (416.4) (431.5) (348.9)
-------- ------- -------
Net insurance premiums and other
considerations $2,390.8 2,201.6 1,807.1
======== ======= =======
</TABLE>
21
<PAGE>
General American Life Insurance Company and Subsidiaries
(6) FEDERAL INCOME TAXES
Income tax (benefit) expense attributable to income from operations
consists of the following (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ---- ----
<S> <C> <C> <C>
Current income tax (benefit) expense $(23.6) 35.2 65.8
Deferred income tax (benefit) expense (40.7) 18.4 (0.1)
------ ---- ----
Provision for income taxes $(64.3) 53.6 65.7
====== ==== ====
</TABLE>
Income tax (benefit) 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 millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- ----
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense $(67.4) 70.0 64.8
Increase (decrease) in income tax resulting
from:
Surplus (benefit) tax on mutual life
insurance companies - (7.5) 5.3
Foreign tax rate in excess of U.S. tax
rate 1.0 0.8 0.6
Tax preferred investment income (11.4) (10.9) (6.6)
State tax net of federal benefit 1.7 1.6 0.8
Corporate owned life insurance (3.3) (3.6) -
Foreign tax credit - (1.3) (0.6)
Goodwill amortization 1.9 1.5 1.0
Difference in book vs. tax basis in
domestic subsidiaries 1.6 2.8 2.2
Valuation allowance for loss
carryforwards 5.7 - -
Capitalized acquisition costs 2.4 - -
Other, net 3.5 0.2 (1.8)
------ ---- ----
Provision for income taxes $(64.3) 53.6 65.7
====== ==== ====
</TABLE>
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Provision for income taxes $ (64.3) 53.6 65.7
Income tax from stockholder equity:
Unrealized investment (loss) gain
recognized for financial reporting
purposes (237.0) (22.6) 55.9
Foreign currency translation 7.8 (9.4) (12.1)
Other (2.4) (1.4) (0.5)
------- ----- -----
Provision for income taxes $(295.9) 20.2 109.0
======= ===== =====
</TABLE>
22
<PAGE>
General American Life Insurance Company and Subsidiaries
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1999
and 1998 are presented below (in millions):
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Deferred tax assets:
Reserve for future policy benefits $158.9 90.9
Deferred acquisition costs capitalized for tax 147.4 128.8
Employee benefits 41.5 28.2
Investments 46.2 -
Net operating and capital loss 57.2 46.8
Unrealized loss on investments 163.9 -
Other, net 95.5 98.5
------ -----
Gross deferred tax assets 710.6 393.2
Less valuation allowance 7.2 1.5
------ -----
Total deferred tax assets after valuation allowance $703.4 391.7
====== =====
<CAPTION>
1999 1998
------- -----
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on investments $ - 79.1
Deferred acquisition costs capitalized for financial
reporting 385.0 274.5
Investments - 3.7
Other, net 120.8 109.8
------- -----
Total deferred tax liabilities 505.8 467.1
------- -----
Total deferred tax (asset) liability $(197.6) 75.4
======= =====
</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. In addition, the Company has not recognized a deferred tax
liability of approximately $106 million for the excess of financial
statement carrying amount over the tax basis of its less-than-80-percent
owned domestic subsidiaries. This is because the unremitted earnings of
foreign subsidiaries will not be repatriated in the foreseeable future,
or because the excess of the financial statement carrying amount over
the tax basis of its less-that-80 percent owned domestic subsidiaries
will not become taxable as the tax law provides a means by which the
reported amount of that investment can be recovered tax-free and the
Company expects that it will ultimately use that means.
The Company believes that it is more likely than not that the deferred
tax assets established will be realized except for the amount of the
valuation allowance. As of December 31, 1999 and 1998, the Company has
provided for a 100 percent valuation allowance against the deferred tax
asset related to the net operating losses of the Company's foreign
subsidiaries including RGA's Australian, Argentine, South African and UK
subsidiaries and NaviSys' Mexican subsidiary. At December 31, 1999, the
Company's subsidiaries had capital loss carryforwards of $89.4 million,
and net operating loss carryforwards of $146.7 million. The capital and
net operating losses are expected to be utilized during the period
allowed for carryforwards.
23
<PAGE>
General American Life Insurance Company and Subsidiaries
The Company has been audited by the Internal Revenue Service for the
years through and including 1994. The Company is currently being
audited for the years 1995 and 1996. The Company believes that any
adjustments that might be required for open years will not have a
material effect on the Company's consolidated financial statements.
During 1999, 1998, and 1997 the Company paid income taxes totaling
approximately $77.0 million, $59.6 million, and $70.8 million,
respectively.
(7) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized is as
follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year $ 773.8 695.3 652.3
Transfer of present value of future profits -- -- 19.3
Prior year adjustment due to change in
reserving methods -- (0.2) --
Policy acquisition costs deferred 324.6 332.9 267.0
Policy acquisition cost amortized (214.4) (280.0) (211.9)
Interest credited 60.4 39.3 40.8
Deferred policy acquisition costs relating to
change in unrealized (gain) loss on
investments available-for-sale 341.7 (13.5) (72.2)
-------- ------ ------
Balance at end of year $1,286.1 773.8 695.3
======== ====== ======
</TABLE>
(8) ASSOCIATE BENEFIT PLANS AND POSTRETIREMENT BENEFITS
The Company has a defined benefit plan covering substantially all
associates. The benefits are based on years of service and each
associate's compensation level. The Company's funding policy is to
contribute annually the maximum amount deductible for federal income tax
purposes. Contributions provide for benefits attributed to service to
date and for those expected to be earned in the future.
Associates of the Company also are offered 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. Effective April
30, 1999, the liabilities that relate to these plans are managed at
GenAmerica Management Corporation, a subsidiary of GenAmerica. The
Company recognized expense of $12.9 million, $8.2 million, and $7.7
million for the years ended December 31, 1999, 1998, and 1997,
respectively, related to these plans.
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 $13.4 million and $14.4 million at December
31, 1999 and 1998, respectively.
24
<PAGE>
General American Life Insurance Company and Subsidiaries
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 $4.3 million, $10.4 million, and $10.4
million for 1999, 1998, and 1997 respectively.
At December 31, 1999, plan assets were invested 79.2% in the S&P Stock
Fund, 6.9% in the Small-Cap Stock Fund, 9.1% in the Separately Managed
Account Fund, and 4.8% in the Long-Term Bond Fund. At December 31, 1998
plan assets were invested 70.1% in the S&P 500 Stock Fund, 7.4% in the
Small-Cap Stock Fund, 17.3% in the Separately Managed Account Fund, and
5.2% in the Long-Term Bond Fund. These assets are invested in General
American separate accounts and held in a trust by an unrelated third
party administrator.
The following tables summarize the Company's associate benefit plans and
postretirement benefits (in millions):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ -----------------
1999 1998 1999 1998
------ ----- ----- ----
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $149.1 129.8 $45.7 37.7
Service cost 6.5 5.8 1.7 1.7
Interest cost 10.3 9.2 2.8 2.9
Participant contributions -- -- 0.2 0.2
Plan amendments 0.3 (0.4) -- (1.3)
Curtailments 2.4 -- -- --
Special termination benefits 1.2 -- -- --
Benefits paid (8.0) (6.6) (1.9) (1.4)
Actuarial (gain) loss (1.9) 11.3 (7.8) 5.9
------ ----- ----- ----
Benefit obligation at end of year 159.9 149.1 40.7 45.7
------ ----- ----- ----
Change in plan assets:
Fair value of plan assets at
beginning of year 174.8 150.5 -- --
Actual return on plan assets 10.5 29.2 -- --
Employer contributions 2.1 1.7 1.7 1.2
Associates contributions -- -- 0.2 0.2
Benefits paid (8.0) (6.6) (1.9) (1.4)
------ ----- ----- ----
Fair value of plan assets at end of year $179.4 174.8 $-- --
====== ===== ===== ====
</TABLE>
25
<PAGE>
General American Life Insurance Company and Subsidiaries
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of funded status:
Funded status $ 19.4 25.7 20.7 $(40.7) (45.7) (37.7)
Unrecognized actuarial gain (12.3) (14.5) (8.2) (9.6) (1.9) (7.8)
Unrecognized transition
obligation 0.2 0.3 1.1 13.4 14.4 16.8
Unrecognized prior service
cost (0.3) (0.8) (2.2) -- -- --
------ ----- ----- ------ ----- -----
Net amount recognized at end
of year 7.0 10.7 11.4 (36.9) (33.2) (28.7)
------ ----- ----- ------ ----- -----
Amounts recognized in the
statement of financial
position consist of:
Prepaid benefit cost 40.6 37.9 35.9 -- -- --
Accrued benefit liability (38.2) (32.2) (28.2) (36.9) (33.2) (28.7)
Intangible asset 0.1 0.9 0.9 -- -- --
Accumulated other
comprehensive loss 4.5 4.1 2.8 -- -- --
------ ----- ----- ------ ----- -----
Net amount recognized at end
of year $ 7.0 10.7 11.4 $(36.9) (33.2) (28.7)
====== ===== ===== ====== ===== =====
Other comprehensive loss
(income) attributable to
change in additional
minimum liability
recognition $ 0.3 1.3 (0.5) $ -- -- --
====== ===== ===== ====== ===== =====
</TABLE>
26
<PAGE>
General American Life Insurance Company and Subsidiaries
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
------ ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Additional year-end
information for plans with
benefit obligations in
excess of plan assets:
Benefit obligation 47.6 36.6 32.2 40.7 45.7 37.7
Additional year-end
information for pension
plans with accumulated
benefit obligations in
excess of plan assets:
Projected benefit
obligation 40.5 36.6 32.2 -- -- --
Accumulated benefit
obligation 37.8 32.1 28.0 -- -- --
Fair value of plan assets 0.1 0.1 -- -- -- --
====== ===== ===== ==== ==== ====
Components of net periodic
benefit cost:
Service cost 6.5 5.8 5.9 1.7 1.7 1.7
Interest cost 10.3 9.2 8.6 2.8 2.9 2.5
Expected return on plan
assets (15.3) (13.2) (11.1) -- -- --
Amortization of prior
service cost (0.1) (0.1) 0.1 -- -- --
Amortization of
transitional
obligation 0.1 0.1 0.3 1.0 1.0 1.1
Recognized actuarial
loss (gain) 0.6 0.4 0.4 (0.1) -- (0.2)
------ ----- ----- ---- ---- ----
Net periodic benefit cost $ 2.1 2.2 4.2 5.4 5.6 5.1
====== ===== ===== ==== ==== ====
Additional loss recognized due to:
Curtailment $ 2.3 0.1 -- -- -- --
Special Termination Benefit 1.4 -- -- -- -- --
====== ===== ===== ==== ==== ====
Weighted-average assumptions as
of December 31:
Discount rate 7.50% 6.75% 7.25% 7.50% 6.75% 7.25%
Expected long-term rate of
return on plan assets 9.00% 9.00% 9.00% -- -- --
Rate of compensation
increase (qualified plan) 4.95% 4.20% 4.20% -- -- --
====== ===== ===== ==== ==== ====
</TABLE>
27
<PAGE>
General American Life Insurance Company and Subsidiaries
ASSUMED HEALTH CARE COST TREND: For measurement purposes, a 7.0% annual
rate of increase in the per capita cost of covered health care benefits
was assumed for 1999. The rate assumed to decrease gradually to 5% for
2003 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
(in thousands):
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total service and interest cost
components for 1999 $0.9 (0.7)
Effect on end of year 1999
postretirement benefit obligation $5.8 (4.7)
(9) DEBT
The Company's long-term debt and notes payable consists of the
following (in millions):
<TABLE>
<CAPTION>
Face Value at December 31,
Description Rate Maturity 1999 1998
- - ----------- ---- -------- ---- ----
<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 2000 9.5 8.9
------ -----
Total long-term debt and notes payable $216.5 215.9
====== =====
</TABLE>
The difference between the face value of debt and the carrying value per
the consolidated balance sheets is unamortized discount.
General American's surplus note pays interest on January 15 and July 15
of each year. The note is not subject to redemption prior to maturity.
Payment of principal and interest on the note may be made only with the
approval of the Missouri Director of Insurance.
The RGA senior note pays interest semiannually on April 1 and October 1.
The ability of RGA to make debt principal and interest payments as well
as make dividend payments to shareholders is ultimately dependent on the
earnings and surplus of its subsidiaries and the investment earnings on
the undeployed debt proceeds. The transfer of funds from the insurance
subsidiaries to RGA is subject to applicable insurance laws and
regulations. Principal repayments are due in April 2000 and are
expected to be renewed under the terms of the line of credit. This
agreement contained 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 1999, 1998, and 1997 amounted to $17.8
million, $17.0 million, and $20.0 million, respectively.
As of December 31, 1999, the Company was in compliance with all
covenants under its debt agreements.
28
<PAGE>
General American Life Insurance Company and Subsidiaries
(10) 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 No. 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 No. 130.
The components of comprehensive income, other than net income, are as
follows (in millions):
<TABLE>
<CAPTION>
1999
---------------------------------------------
TAX NET-
BEFORE-TAX (EXPENSE) OF-TAX
AMOUNT BENEFIT AMOUNT
---------------------------------------------
<S> <C> <C> <C>
Foreign currency translation adjustments $ 19.5 (6.8) 12.7
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period (753.1) 266.9 (486.2)
Less: Reclassification adjustment for gains
(losses) realized in net income (233.5) 81.5 (152.0)
---------------------------------------------
Net unrealized gains (losses) on securities (519.6) 185.4 (334.2)
Minimum benefit liability (1.0) 1.3 0.3
---------------------------------------------
Total other comprehensive (loss) income $(501.1) 179.9 (321.2)
=============================================
<CAPTION>
1998
---------------------------------------------
TAX NET-
BEFORE-TAX (EXPENSE) OF-TAX
AMOUNT BENEFIT AMOUNT
---------------------------------------------
<S> <C> <C> <C>
Foreign currency translation adjustments $(20.6) 7.2 (13.4)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period (56.6) 19.3 (37.3)
Less: Reclassification adjustment for gains
(losses) realized in net income 4.7 (1.7) 3.0
--------------------------------------------
Net unrealized gains (losses) on securities (61.3) 21.0 (40.3)
Minimum benefit liability (0.3) -- (0.3)
--------------------------------------------
Total other comprehensive (loss) income $(82.2) 28.2 (54.0)
============================================
</TABLE>
29
<PAGE>
General American Life Insurance Company and Subsidiaries
<TABLE>
<CAPTION>
1997
---------------------------------------------
TAX NET-
BEFORE-TAX (EXPENSE) OF-TAX
AMOUNT BENEFIT AMOUNT
---------------------------------------------
<S> <C> <C> <C>
Foreign currency translation adjustments $(14.3) 10.6 (3.7)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period 132.3 (49.1) 83.2
Less: Reclassification adjustment for gains
(losses) realized in net income 7.4 (2.6) 4.8
---------------------------------------------
Net unrealized gains (losses) on securities 124.9 (46.5) 78.4
Minimum benefit liability 0.9 -- 0.9
---------------------------------------------
Total other comprehensive (loss) income $111.5 (35.9) 75.6
=============================================
</TABLE>
The following schedule reflects the change in net accumulated other
comprehensive (loss) income for the periods ending December 31, 1999
and 1998 (in millions):
<TABLE>
<CAPTION>
CURRENT
BALANCE AS PERIOD BALANCE AS
OF 12/31/98 CHANGE OF 12/31/99
----------- ------- -----------
<S> <C> <C> <C>
Foreign currency adjustments $(32.9) 12.7 (20.2)
Unrealized gains (losses) on securities 88.5 (334.2) (245.7)
Minimum benefit liability (2.7) 0.3 (2.4)
----------- ------- -----------
Total accumulated other comprehensive
(loss) income $ 52.9 (321.2) (268.3)
----------- ------- -----------
<CAPTION>
CURRENT
BALANCE AS PERIOD BALANCE AS
OF 12/31/97 CHANGE OF 12/31/98
----------- ------- -----------
<S> <C> <C> <C>
Foreign currency adjustments $(19.5) (13.4) (32.9)
Unrealized gains (losses) on securities 128.8 (40.3) 88.5
Minimum benefit liability (2.4) (0.3) (2.7)
----------- ------- -----------
Total accumulated other comprehensive
(loss) income $106.9 (54.0) 52.9
=========== ======= ===========
</TABLE>
30
<PAGE>
General American Life Insurance Company and Subsidiaries
(11) REGULATORY MATTERS
The Company and its insurance subsidiaries are subject to financial
statement filing requirements in their respective state of domicile, as
well as the states in which they transact business. Such financial
statements, generally referred to as statutory financial statements, are
prepared on a basis of accounting which varies in some respects from
GAAP. Statutory accounting practices include: (1) charging of policy
acquisition costs to income as incurred; (2) establishment of a
liability for future policy benefits computed using required valuation
standards; (3) nonprovision of deferred federal income taxes resulting
from temporary differences between financial reporting and tax bases of
assets and liabilities; (4) recognition of statutory liabilities for
asset impairments and yield stabilization on fixed maturity dispositions
prior to maturity with asset valuation reserves based on statutorily
determined formulas; and (5) valuation of investments in bonds at
amortized cost.
Combined net income and policyholders' surplus of the Company and its
consolidated insurance subsidiaries, for the years ended and at December
31, 1999, 1998, and 1997, as determined in accordance with statutory
accounting practices, are as follows (in millions):
1999 1998 1997
------- ------- -----
Net (loss) income $(190.8) 60.8 39.7
Policyholders' surplus 741.3 1,147.4 844.1
======= ======= =====
For the year ended December 31, 1999, General American has changed its
method for recording equity in earnings of subsidiaries on a statutory
basis to reflect such earnings as a direct charge or credit to surplus,
and not a component of investment income.
Under Risk-Based Capital (RBC) requirements, General American and its
insurance subsidiaries are required to measure their solvency against
certain parameters. As of December 31, 1999, the Company's insurance
subsidiaries exceeded the established RBC minimums. In addition, the
Company's insurance subsidiaries exceeded the minimum statutory capital
and surplus requirements of their respective states of domicile.
The Company's 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.
31
<PAGE>
General American Life Insurance Company and Subsidiaries
(12) PARTICIPATING POLICIES AND DIVIDENDS TO POLICYHOLDERS
Over 18.9 percent and 22.8 percent of the Company's business in force
relates to participating policies as of December 31, 1999 and 1998,
respectively. These participating policies allow the policyholders to
receive dividends based on actual interest, mortality, and expense
experience for the related policies. These dividends are distributed to
the policyholders through an annual dividend, using current dividend
scales which are approved by the Board of Directors.
(13) CONTINGENT LIABILITIES
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 Trial
Court reduced the punitive damage award to $18 million. The Company has
appealed the verdict and the award of the Court.
The Company was named as a defendant in a lawsuit filed in a federal
district court in Phoenix, Arizona along with Paul Revere Life Insurance
Company. The lawsuit claimed that Paul Revere denied benefits which was
a breach of the implied duty of good faith and that both companies were
liable due to being in a joint venture relationship. The jury found for
the plaintiff and assessed punitive damages against the company in the
sum of $10.2 million and against Paul Revere in the sum of $6.8 million.
Both companies have filed post-trial motions aimed at setting aside the
jury verdict and/or reducing the jury awards. The Company intends to
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, DAllesandro 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 has negotiated a settlement agreement with counsel
for plaintiffs which resolves all matters concerning the relief for the
class. There is, however, no agreement on the attorneys' fees or
expenses of class counsel. This settlement is in the process of being
finalized. It will then be submitted to the Court for review and
approval along with the issue of attorneys' fees and expenses. If the
settlement is not approved the Company intends to continue to oppose the
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.
32
<PAGE>
General American Life Insurance Company and Subsidiaries
(14) RELATED PARTY TRANSACTIONS
In 1999, GenAmerica made capital contributions to the Company of $38.0
million, $10.1 million of NaviSys Incorporated's (NaviSys) equity, and
$20.0 million of NaviSys' bonds. The $38.0 million contribution
consisted of a promissory note from ARM, and was expensed by the Company
after it became uncollectible.
The following related party transactions occurred in the connection with
MetLife's acquisition of GenAmerica.
The Company paid and expensed approximately $20 million to MetLife
as consideration for MetLife's willingness to accept the funding
agreement business of General American as described in Note 1.
The Company paid $40 million to MetLife during 1999 which
ultimately was returned to GAMHC at the closing on January 6,
2000. This transaction has been recorded as a dividend by the
Company to GAMHC in the accompanying financial statements.
Subsequent to December 31, 1999 an additional $40 million was paid
to MetLife on behalf of GAMHC.
During 1999, GenAmerica paid and expensed $12 million of
investment advisory fees for which GAMHC and GenAmerica were
jointly and severably liable.
RGA also has reinsurance transactions between MetLife and certain of its
subsidiaries. Under these agreements, RGA reflected earned premiums of
approximately $108 million and $113 million in 1999 and 1998,
respectively. The earned premiums reflect the net of business assumed
from and ceded to MetLife and its subsidiaries. Underwriting gain
(loss) on this business was approximately $12 million and $13 million in
1999 and 1998, respectively.
(15) SUBSEQUENT EVENTS
On January 1, 2000, the Company exited the Group Health business through
the Asset Purchase Agreement and related reinsurance arrangements with
Great-West Life & Annuity Insurance Company (Great-West). This
agreement also includes any life business that is directly associated to
the health business.
The Company is required to reimburse Great-West for up to $10 million in
net operating losses incurred during 2000. These amounts have been
fully accrued in the 1999 consolidated financial statements of the
Company. The Company must also compensate Great-West for certain
receivables related to this business should they be deemed uncollectible.
On January 18, 2000, MetLife proposed to acquire all of Conning's
outstanding shares of common stock not already controlled by MetLife for
$10.50 per share in cash. MetLife acquired a beneficial interest of
approximately 61% in Conning as a result of its January 6, 2000
acquisition of GenAmerica. Conning has received MetLife's proposal and
the Conning Board of Directors is evaluating the proposed transaction.
33
<PAGE>
General American Life Insurance Company and Subsidiaries
On January 24, 2000, Conning announced that it had learned of a
complaint purporting to be a shareholder class action suit that has been
filed in the Supreme Court of the State of New York, naming Conning and
MetLife as co-defendants. The complaint follows the January 18, 2000
announcement of MetLife's proposal to acquire all of the outstanding
shares of common stock not already controlled by MetLife for $10.50 per
share in cash. The complaint alleges that MetLife's proposal to acquire
the remaining equity interest in Conning fails to offer a fair price to
Conning's shareholders and lacks adequate procedural protections.
Additionally, the complaint alleges that as a result of MetLife's
proposal, the defendants have engaged in acts of self-dealing and
breeches of fiduciary duty in connection with the proposed transaction.
Conning was subsequently served with the complaint and believes the
plaintiff's claims are without merit.
34
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) Financial Statements
The financial statements of the Separate Account and the Company are
included in Part B hereof.
(b) Exhibits
(1) Resolutions of the Board of Directors of General American Life
Insurance Company ("General American") authorizing establishment of
the Separate Account <F1>
(2) Not Applicable
(3) (a) Form of Distribution Agreement <F4>
(b) Form of Selling Agreement <F2>
(4) (a) Form of tax sheltered group variable annuity contract (No.
V82-300)
<F12>
(b) Form of tax sheltered individual variable annuity certificate (No.
V82-301) <F12>
(c) Form of variable annuity (tax qualified)(No. V82-400) <F12>
(d) Form of individual variable annuity (non-tax qualified)(No. 10013)
<F12>
(e) Form of individual variable annuity (tax qualified)(No. 10014) <F12>
(f) Form of tax sheltered group variable annuity contract (No. 10015)
<F12>
(g) Form of tax sheltered group variable annuity certificate (No. 10016)
<F12>
(h) Endorsement related to the reorganization of Separate Account <F11>
(i) Form of endorsement relating to requirements of Section 408(b) (IRA's)
Internal Revenue Code IRC (No. 1096900) <F11>
(j) Form of endorsement allowing other Fund sponsors (No. 1098900) <F11>
(k) Form of endorsement relating tax sheltered annuities, Section 403(b)
IRC (No. 1098600) <F11>
(l) Form of endorsement relating to tax sheltered annuities with employer
contribution (No. 1098800) <F11>
(m) Form of endorsement relating to the Unemployment Compensation
Amendments (No. 1 E6) <F11>
(5) Form of application <F7>
(6) (a) Amended and Restated Charter and Articles of Incorporation of
General American Life Insurance Company <F12>
(b) By-laws of General American <F12>
(7) Not applicable
(8) Not applicable
(9) Opinion and Consent of Counsel <F6>
(10) Independent Auditors' Consent
(11) Not applicable
(12) Not applicable
(13) Not applicable
(14) Copies of manually signed powers of attorney for General American
Life Insurance Company directors August A. Busch, III, William E.
Cornelius, John C. Danforth <F10>, Bernard A. Edison, Richard A.
Liddy, William E. Maritz, Craig D. Schnuck <F9>, William P.
Stiritz, Andrew C. Taylor <F8>, H. Edwin Trusheim, Robert L.
Virgil, Jr., Virginia V. Weldon, and Ted C. Wetterau <F4>.
[FN]
- - ----------------
<F1> Incorporated by reference to initial registration statement, File No.
2-39272
<F2> Incorporated by reference to Pre-Effective Amendment No. 1 to registration
statement of General American Separate Account Eleven, File No. 33-10146
<F3> Incorporated by reference to initial registration statement of the Separate
Account and General American Capital Company, File No. 33-15347
<F4> Incorporated by reference to Post-Effective Amendments No. 29 and 34 to
this Registration Statement
<F5> Incorporated by reference to Pre-Effective Amendment No. 2 to this
Registration Statement
<F6> Incorporated by reference to Post-Effective Amendment No. 31 to this
Registration Statement
<F7> Incorporated by reference to Post-Effective Amendment No. 33 to this
Registration Statement
<F8> Incorporated by reference to Post-Effective Amendment No. 37 to this
Registration Statement
<F9> Incorporated by reference to Post-Effective Amendment No. 39 to this
Registration Statement
<F10>Incorporated by reference to Post-Effective Amendment No. 40 to this
Registration Statement
<F11>Incorporated by reference to Post-Effective Amendment No. 41 to this
Registration Statement
<F12>Incorporated by reference to Post-Effective Amendment No. 43 to this
Registration Statement
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Officer's Name and Principal Positions and Offices
Business Address* with Depositor
<S> <C>
Robert J. Banstetter, Sr. Vice President, General
700 Market Street Counsel & Secretary, Feb.
St. Louis, MO 63101 1991 to present. Vice President
and General Counsel, Jan. 1983 -
Feb. 1991.
Barry C. Cooper Vice President and Controller
Kevin C. Eichner President
E. Thomas Hughes Corporate Actuary and
700 Market Street Treasurer, Oct. 1994 to
St. Louis, MO 63101 present. Formerly Executive Vice
President - Group Pensions, March
1990 - Oct. 1994.
Richard A. Liddy Chairman and Chief
700 Market Street Executive Officer,
St. Louis, MO 63101 Jan. 1995 to present. Formerly,
President and Chief Executive
Officer, May 1992 - Jan.
1995. President and Chief
Operating Officer, May 1988 -
May 1992.
Warren J. Winer Executive Vice President-Group Life
& Health, Aug. 1995 to
present. Formerly Managing
Director for William M.
Mercer, Inc. July 1993 to
Aug. 1995 and President
and Chief Operating Officer,
W.F. Corroon, 1986 - July
1993.
Bernard H. Wolzenski Executive Vice President-
Individual, Oct. 1991 to present.
Formerly Vice President, Individual
Life Products, May 1986 - Oct. 1991.
A. Greig Woodring President and Chief
660 Mason Ridge Center Drive Executive Officer,
St. Louis, MO 63141 Reinsurance Group of America, Dec.
1992 to present. Also, Executive
Vice President Reinsurance.
</TABLE>
Richard A. Liddy, listed as a Principal Officer, is also a Director of the
Company.
******
* The principal business address of each person listed is General American
Life Insurance Company, 13045 Tesson Ferry Road, St. Louis, MO 63128,
unless otherwise indicated.
<TABLE>
<CAPTION>
Positions and Offices
Directors with Depositor
<S> <C>
August A. Busch III Director
Anheuser-Busch Companies, Inc.
One Busch Place
St. Louis, Missouri 63118
William E. Cornelius Director
Union Electric Company
1901 Chouteau Street
St. Louis, MO 63103
John C. Danforth Director
Bryan Cave
One Metropolitan Square, Suite 3600
St. Louis, Missouri 63102
Bernard A. Edison Director
Edison Brothers Stores, Inc.
P.O. Box 14020
St. Louis, Missouri 63178
William E. Maritz Director
Maritz, Inc.
1375 North Highway Drive
Fenton, Missouri 63099
Craig D. Schnuck Director
Schnuck Markets, Inc.
11420 Lackland Road
P.O. Box 46928
St. Louis, Missouri 63146
William P. Stiritz Director
Ralston Purina Company
Checkerboard Square
St. Louis, Missouri 63164
Andrew C. Taylor Director
Enterprise Rent-A-Car
600 Corporate Park Drive
St. Louis, Missouri 63105
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
<TABLE>
<CAPTION>
LIST OF SUBSIDIARIES AND AFFILIATES OF
GENAMERICA CORPORATION
As of January 27, 2000
<S> <C>
Metropolitan Life Insurance Company: Holds all of the stock in GenAmerica Corporation.
GenAmerica Corporation: formed to hold all of the stock of General American Life Insurance Company.
GenAmerica Management Corporation: central management corporation.
Walnut Street Securities, Inc.: wholly-owned subsidiary engaged in the process of selling variable life
insurance and variable annuities and other securities.
Walnut Street Advisers, Inc.: wholly-owned subsidiary of Walnut Street Securities engaged in
the business of giving investment advice.
WSS Insurance Agency of Alabama, Inc.: Formed to act as a resident insurance agency for Walnut
Street Securities, Inc. in Alabama.
WSS Insurance Agency of Massachusetts, Inc.: Formed to act as a resident insurance agency for
Walnut Street Securities, Inc. in Massachusetts.
WSS Insurance Agency of Ohio, Inc.: Formed to act as a resident insurance agency for Walnut
Street Securities, Inc. in Ohio.
WSS Insurance Agency of Texas, Inc.: Formed to act as a resident insurance agency for Walnut
Street Securities, Inc. in Texas.
Collaborative Strategies, Inc.: wholly-owned business management consulting company.
GenAmerica Capital I: Wholly-owned Delaware trust formed for the purpose of issuing securities as an
investment vehicle for GenAmerica Corporation.
Missouri Reinsurance (Barbados), Inc.: wholly-owned Barbados exempt life, accident and health
reinsurance company.
VirtualFinances.Com, Inc.: Wholly-owned company formed for the E-Commerce initiative of GeneraLife.
Benefit Resource Life Insurance Company (Bermuda) Ltd. (fka RGA Insurance Company (Bermuda) Limited):
subsidiary formed to engage in insurance business.
General American Life Insurance Company: an insurance company selling life and health insurance and
pensions.
GenAm Benefits Insurance Company (fka EBPLife Insurance Company): wholly-owned subsidiary
formed to hold all group business.
Cova Corporation: wholly-owned subsidiary formed to own the former Xerox Life companies.
Cova Financial Services Life Insurance Company: wholly-owned by Cova Corporation,
engaged in the business of selling annuities and life insurance.
First Cova Life Insurance Company: wholly-owned by Cova Financial Services
Life Insurance Company, engaged in the sale of life insurance in New York.
Cova Financial Life Insurance Company: wholly-owned by Cova Corporation,
engaged in the sale of life insurance and annuities in California.
Cova Life Management Company: wholly-owned by Cova Corporation. Employer of the
individuals operating the Cova companies.
Cova Investment Advisory Corporation: wholly-owned by Cova Life Management
Company. Intended to provide investment advice to Cova Life insureds and
annuity owners.
Cova Investment Allocation Corporation: wholly-owned by Cova Life Management
Company. Intended to provide advice on allocation of premiums to Cova Life
insureds and annuity owners.
Cova Life Sales Company: wholly-owned by Cova Life Management Company.
Broker-dealer established to supervise sales of Cova Life contracts.
Cova Life Administration Services Company: wholly-owned by Cova Life
Management Company. Provides administrative services for Cova annuities.
General Life Insurance Company: wholly-owned subsidiary, domiciled in Texas, engaged in the
business of selling life insurance and annuities.
General Life Insurance Company of America: wholly-owned subsidiary, domiciled in
Illinois, engaged in the business of selling life insurance and annuities.
Paragon Life Insurance Company: wholly-owned subsidiary engaged in employer sponsored sales of
life insurance.
Equity Intermediary Company: wholly-owned subsidiary holding company formed to own stock in
subsidiaries.
Reinsurance Group of America, Incorporated: subsidiary, of which approximately 53.5%
is owned by Equity Intermediary and the balance by the public.
RGA Sudamerica S.A.: Chilean subsidiary, of which all but one share is owned
by RGA and one share is owned by RGA Reinsurance Company, existing to hold
Chilean reinsurance operations.
BHIF America Sequros de Vida S.A.: Chilean subsidiary, of which 50%
is owned by RGA Sudamerica S.A. and 50% is owned by Chilean
interests, engaged in business as a life/annuity insurer.
RGA Reinsurance Company Chile S.A.: 100% owned by RGA, engaged in
business of reinsuring life and annuity business of BHIF America.
General American Argentina Sequros de Vida S.A.: Argentinean subsidiary 100%
owned by RGA, engaged in business as a life, annuity, disability and
survivorship insurer.
RGA Argentina S.A.: Argentinian subsidiary 100% owned by RGA.
Reinsurance Company of Missouri, Incorporated: wholly owned subsidiary formed
for the purpose of owning RGA Reinsurance Company.
RGA Reinsurance Company: subsidiary engaged in the reinsurance
business.
Fairfield Management Group, Inc.: 100% owned subsidiary.
Reinsurance Partners, Inc.: wholly-owned
subsidiary of Fairfield Management Group, Inc.,
engaged in business as a reinsurance brokerage
company.
Great Rivers Reinsurance Management, Inc.:
wholly-owned subsidiary of Fairfield Management
Group, Inc., acting as a reinsurance manager.
RGA (U.K.) Underwriting Agency Limited:
wholly-owned by Fairfield Management Group, Inc.
RGA Reinsurance Company (Barbados) Ltd.: subsidiary of Reinsurance Group of
America, Incorporated formed to engage in the exempt insurance business.
RGA/Swiss Financial Group, L.L.C.: 40% owned subsidiary formed to
market and manage financial reinsurance business to be assumed by RGA
Reinsurance Company.
Triad Re, Ltd.: Reinsurance Group of America, Incorporated owns 100% of all
outstanding and issued shares of the Company's preferred stock. Reinsurance
Group of America, Inc. owns 66.67% of all outstanding and issued shares of the
Company's common stock. Schmitt-Sussman Enterprises, Inc. owns 33.33% of all
outstanding and issued shares of the Company's common stock.
RGA Americas Reinsurance Company, Ltd.: Reinsurance Group of America,
Incorporated owns 100% of this company.
RGA International Ltd.: a New Brunswick corporation wholly-owned by
Reinsurance Group of America, existing to hold Canadian reinsurance operations.
RGA Financial Products Limited: 100% owned by RGA International Ltd.
(100 Class A shares).
RGA Canada Management Company, Ltd.: a New Brunswick corporation
wholly-owned by G.A. Canadian Holdings, existing to accommodate
Canadian investors.
RGA Life Reinsurance Company of Canada: wholly-owned by RGA
Canada Management Company, Ltd.
RGA Holdings Limited: holding company formed in the United Kingdom to own two
operating companies: RGA Managing Agency Limited and RGA Capital Limited.
RGA Capital Limited: company is a corporate member of a Lloyd's life
syndicate.
RGA Managing Agency Limited: inactive company.
RGA Australian Holdings Pty Limited: holding company formed to own RGA Reinsurance
Company of Australia Limited.
RGA Reinsurance Company of Australia Limited: formed to reinsure the life,
health and accident business of non-affiliated Australian insurance companies.
RGA South African Holdings (Pty) Ltd.: 100% owned by Reinsurance Group of America,
Incorporated formed for the purpose of holding RGA Reinsurance Company of South Africa
Limited.
RGA Reinsurance Company of South Africa Limited: 100% owned by RGA South
African Holdings (Pty) Ltd.
Security Equity Life Insurance Company: wholly-owned subsidiary, domiciled in New York,
engaged in the business of selling life insurance and annuities.
GenAm Holding Company: Formed to hold stock in various non-insurance subsidiaries.
NaviSys Incorporated: wholly-owned subsidiary engaged in the sale of computer
software and in providing third party administrative services.
NaviSys Enterprise Solutions, Inc.: 80% owned by NaviSys Incorporated. New
Jersey corporation providing enterprise life administration software.
NaviSys Illustration Solutions, Inc.: 100% owned by NaviSys Incorporated.
Pennsylvania corporation providing sales illustration software.
NaviSys Asia Pacific Limited: 100% owned by NaviSys Incorporated. Engaged in
licensing of software products in Hong Kong.
NaviSys de Mexico, S.A. de C.V.: 100% owned by NaviSys Incorporated, engaged
in licensing of NaviSys software products in Latin America.
Genelco Software, S.A.: 100% owned by NaviSys Incorporated, engaged in
licensing of NaviSys software products in Spain.
Conning Corporation: 61% owned subsidiary formed to own the Conning companies (with
the remainder owned by the public).
Conning, Inc.: a holding company organized under Delaware law.
Conning & Company: a Connecticut corporation engaged in providing asset
management and investment advisory services as well as insurance research
services.
Conning Asset Management Company: a Missouri corporation engaged in providing
investment advice.
Red Oak Realty Company: wholly-owned subsidiary formed for the purpose of investing
in and operating real estate.
GenMark Incorporated: wholly-owned subsidiary company acting as distribution company.
Stan Mintz Associates, Inc.: wholly-owned subsidiary purchased to maintain a
significant marketing presence in the Madison, Wisconsin area upon the
retirement of General Agent Stan Mintz.
GenMark Insurance Agency of Alabama, Inc.: formed to act as resident
insurance agency in Alabama.
GenMark Insurance Agency of Massachusetts, Inc.: formed to act as resident
insurance agency in Massachusetts.
GenMark Insurance Agency of Ohio, Inc.: formed to act as resident insurance
agency in Ohio.
GenMark Insurance Agency of Texas, Inc.: formed to act as resident insurance
agency in Texas.
White Oak Royalty Company: wholly-owned, second-tier subsidiary formed to own mineral
interests.
</TABLE>
Mutual funds associated with General American Life Insurance Company:
General American Capital Company
Item 27. Number of Contract Owners
As of March 31, 2000 there were 7,052 Contract Owners of qualified
contracts and 1,433 contract owners of non-qualified contracts.
Item 28. Indemnification
Section 351.355 of the Missouri General and Business Corporation Law, in brief,
allows a corporation to indemnify any person who is a party or is threatened to
be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative by reason
of the fact that he is or was a director, officer, employee, or agent of the
corporation, against expenses, including attorneys' fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action if he acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the corporation. Where any
person was or is a party or is threatened to be made a party in an action or
suit by or in the right of the corporation to procure a judgment in its favor,
indemnification may not be paid where such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation, unless a court determines that the person is fairly and reasonably
entitled to indemnity. A corporation has the power to give any further
indemnity, to any person who is or was a director, officer, employee or agent,
provided for in the articles of incorporation or as authorized by any by-law
which has been adopted by vote of the shareholders, provided that no such
indemnity shall indemnify any person's conduct which was finally adjudged to
have been knowingly fraudulent, deliberately dishonest, or willful misconduct.
In accordance with Missouri law, General American's Board of Directors, at its
meeting on 19 November 1987 and the policyholders of General American at the
annual meeting held on 26 January 1988 adopted the following resolutions:
"BE IT RESOLVED THAT
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.
(b) Directors and Officers
<TABLE>
<CAPTION>
Name and Principal Business Positions and Offices
Address* with Underwriter
Officers
<S> <C>
Richard J. Miller President, Chief
Executive Officer
Milton F. Svetanics, Jr. Vice President,
Secretary, and General
Counsel
Don P. Wuller Senior Vice President,
Administration and Chief
Financial Officer
Steven D. Anderson Vice President
Stephen E. Abbey Vice President,
Compliance and Assistant
Secretary
E. Thomas Hughes, Jr. Treasurer
Dona L. Barber Director
Kevin C. Eichner Director, Chairman
Nancy L. Gucwa Director
Matthew P. McCauley Director
Richard J. Miller Director
Steven C. Palmitier Director
Milton F. Svetanics, Jr. Director
Bernard H Wolzenski Director
<FN>
* Messrs. Hughes, McCauley, and Svetanics are at 700 Market Street, St.
Louis, Missouri 63101. Mr. Wolzenski is at 13045 Tesson Ferry Road, St.
Louis, Missouri 63128. Messrs. Abbey, Anderson, Miller, M.M. Nicholson,
Palmitier and Wuller are at 400 South Fourth Street, Suite 1000, St. Louis,
Missouri 63102.
</FN>
</TABLE>
(c) Principal Underwriter
Walnut Street Securities
1999 Brokerage 1999 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.
(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.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, as amended, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Registration Statement and
has caused this Registration Statement to be signed on its behalf in the City
of St. Louis and State of Missouri, on this 1st day of May, 2000.
GENERAL AMERICAN SEPARATE
ACCOUNT TWO (REGISTRANT)
By: GENERAL AMERICAN LIFE
INSURANCE COMPANY
(Depositor)
By:/s/ RICHARD A. LIDDY
----------------------------
Chairman and Chief Executive Officer
GENERAL AMERICAN LIFE
INSURANCE COMPANY
(Depositor)
By:/s/ RICHARD A. LIDDY
----------------------------
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ RICHARD A. LIDDY 5/1/00
- -----------------------
Richard A. Liddy Chairman and Chief
Executive Officer and
Director
(Principal Executive Officer)
- -----------------------
Kevin C. Eichner President
/s/ BARRY C. COOPER 5/1/00
- ----------------------- Vice President and Controller
Barry C. Cooper (Principal Financial Officer and
Principal Accounting Officer)
*
August A. Busch, III Director 5/1/00
*
William E. Cornelius Director 5/1/00
*
John C. Danforth Director 5/1/00
*
Bernard A. Edison Director 5/1/00
*
William E. Maritz Director 5/1/00
*
Craig D. Schnuck Director 5/1/00
*
William P. Stiritz Director 5/1/00
*
Andrew C. Taylor Director 5/1/00
*
Robert L. Virgil, Jr. Director 5/1/00
*
Virginia V. Weldon Director 5/1/00
*
Ted C. Wetterau Director 5/1/00
*By:/s/ MATTHEW P. MCCAULEY
-----------------------
Matthew P. McCauley
<FN>
* 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>
EXHIBITS TO
POST-EFFECTIVE AMENDMENT NO. 46 TO
FORM N-4
GENERAL AMERICAN SEPARATE ACCOUNT TWO
INDEX TO EXHIBITS
Exhibit Page
EX-99.B10 Independent Auditors' Consent
Independent Auditors' Consent
The Board of Directors
General American Life Insurance Company
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Registration Statement and
Prospectuses for General American Separate Account Two.
/s/KPMG LLP
------------
KPMG LLP
St. Louis, Missouri
April 28, 2000
