<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1999
Registration Nos. 2-30771
811-01764
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 45*
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[X] Amendment No. 45*
AMERICAN FIDELITY SEPARATE ACCOUNT A
(FORMERLY AMERICAN FIDELITY VARIABLE ANNUITY FUND A)
(Exact Name of Registrant)
AMERICAN FIDELITY ASSURANCE COMPANY
(Name of Depositor)
2000 N. CLASSEN BOULEVARD, OKLAHOMA CITY, OKLAHOMA 73106
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, Including Area Code (405) 523-2000
Stephen P. Garrett Copies to:
Senior Vice President
Law and Government Affairs Connie S. Stamets, Esq.
American Fidelity Assurance Company Winstead Sechrest & Minick P.C.
2000 N. Classen Boulevard 5400 Renaissance Tower
Oklahoma City, Oklahoma 73106 1201 Elm Street
(Name and Address of Agent for Service) Dallas, Texas 75270
Approximate Date of Proposed Public Offering: As soon as practicable after
effectiveness of the
Registration Statement
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1999 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 box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Group variable annuity contracts
================================================================================
<PAGE> 2
AMERICAN FIDELITY SEPARATE ACCOUNT A
Cross Reference Sheet
Pursuant to Rule 495
<TABLE>
<CAPTION>
Item
No. Item Location in Prospectus
- ------- ---- ----------------------
<S> <C> <C>
PART A
1 Cover Page........................................... Cover Page
2 Definitions ......................................... Glossary of Terms
3 Synopsis ............................................ Summary
4 Condensed Financial Information...................... Condensed Financial Information
5 General Description of Registrant,
Depositor, and
Portfolio Companies................................ American Fidelity, Separate
Account A and Dual Strategy Fund
6 Deductions and Expenses.............................. Expenses
7 General Description of Variable Annuity
Contracts......................................... The Contract
8 Annuity Period ...................................... Annuity Provisions
9 Death Benefit ....................................... Death Benefit
10 Purchases and Contract Value ........................ Purchasing Accumulation Units
11 Redemptions ......................................... Withdrawals
12 Taxes ............................................... Federal Tax Matters
13 Legal Proceedings ................................... Legal Proceedings
14 Table of Contents of the Statement of
Additional Information .............................. Table of Contents of Statement of
Additional Information
PART B
15 Cover page........................................... Cover Page
16 Table of Contents.................................... Table of Contents
17 General Information and History ..................... General Information and History
18 Services............................................. Not Applicable
19 Purchase of Securities Being Offered................. Not Applicable
20 Underwriters......................................... Underwriter
21 Calculation of Performance Data...................... Performance Information
22 Annuity Payments..................................... Annuity Payments
23 Financial Statements................................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item as numbered in Part C of this Registration Statement.
<PAGE> 3
AFPR1ME
GROWTH
Variable Annuity(TM)
FROM
[AMERICAN FIDELITY LOGO]
A MEMBER OF THE AMERICAN FIDELITY GROUP
May 1, 1999
<PAGE> 4
- --------------------------------------------------------------------------------
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AFPR1ME
GROWTH
Variable Annuity(TM)
ISSUED BY
AMERICAN FIDELITY SEPARATE ACCOUNT A
AND
AMERICAN FIDELITY ASSURANCE COMPANY
PROSPECTUS
MAY 1, 1999
American Fidelity Separate Account A ("Separate Account A") is offering the
AFPR1ME GROWTH Variable Annuity(TM) to employers and self-employed individuals
for use in qualified retirement plans. The AFPR1ME GROWTH Variable Annuity(TM)
is issued by American Fidelity Assurance Company (we or "American Fidelity") in
the form of group contracts ("Contracts").
The assets of Separate Account A will be invested solely in American
Fidelity Dual Strategy Fund ("Dual Strategy Fund"). Dual Strategy Fund has as
its primary investment objective long-term growth of capital which it endeavors
to achieve through a diversified investment portfolio consisting primarily of
common stock. A secondary investment objective of Dual Strategy Fund is the
production of income. Any income and realized capital gains will be reinvested
in shares of Dual Strategy Fund. The value of a Contract will vary with the
investment performance of Dual Strategy Fund. There is no assurance that the
investment objectives of Dual Strategy Fund will be met. The Participants in
each Contract bear the entire investment risk for amounts invested under the
Contracts.
This Prospectus sets forth information about the Contracts and Separate
Account A that a prospective investor ought to know before investing. To learn
more about the Contracts and Separate Account A, you may obtain a copy of the
Statement of Additional Information ("SAI") dated May 1, 1999. The SAI has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated by
reference into this Prospectus and therefore is legally a part of the
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference and other material regarding companies
that file electronically with the SEC. The table of contents of the SAI appears
on the last page of this Prospectus. For a free copy of the SAI, call us at
(800) 662-1106 or write to us at P.O. Box 25523, Oklahoma City, Oklahoma
73125-0523 or e-mail us at [email protected].
Investment in a variable annuity contract is subject to risks, including
the possible loss of principal amount invested. Interests in the Contracts are
not deposits or obligations of, or guaranteed by, any financial institution and
are not insured by the Federal Deposit Insurance Corporation or any other
agency.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE
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<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary of Terms........................................... 3
Summary..................................................... 4
Fee Table................................................... 5
Condensed Financial Information............................. 6
Performance................................................. 6
American Fidelity, Separate Account A and Dual Strategy
Fund...................................................... 7
American Fidelity......................................... 7
Separate Account A........................................ 7
Dual Strategy Fund........................................ 7
Voting Rights............................................. 8
Substitution.............................................. 8
The Contract................................................ 8
Annuity Provisions.......................................... 9
Annuity Date.............................................. 9
Selection of an Annuity Option............................ 9
Annuity Payments.......................................... 9
Annuity Options........................................... 10
Purchasing Accumulation Units............................... 10
Premium Deposits.......................................... 10
Accumulation Units........................................ 11
Expenses.................................................... 11
Sales Charge.............................................. 11
Insurance Charges......................................... 12
Premium Taxes............................................. 12
Income Taxes.............................................. 12
Dual Strategy Fund Expenses............................... 12
Withdrawals................................................. 12
Death Benefit............................................... 13
Federal Tax Matters......................................... 13
General................................................... 13
Taxes Payable by Participants and Annuitants.............. 14
Section 403(b) Annuities for Employees of Certain
Tax-Exempt Organizations or Public Educational
Institutions........................................... 14
Sections 401(a), 401(k) and 403(a) Qualified Pension,
Profit-Sharing or Annuity Plans........................ 15
Individual Retirement Annuities (IRAs).................... 16
Diversification........................................... 17
Other Information........................................... 18
Distribution.............................................. 18
Legal Proceedings......................................... 18
Financial Statements...................................... 18
Table of Contents of Statement of Additional Information.... 18
</TABLE>
2
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GLOSSARY OF TERMS
Some of the terms used in this Prospectus are technical. To help you
understand these terms, we have defined them below and have capitalized them
throughout the Prospectus.
Accumulation Period: The period of time between becoming a Participant and
the commencement of Annuity Payments.
Accumulation Unit: A standard of measurement used to measure the value of
each Participant Account.
Annuitant: The Participant on whose life Annuity Payments will be based and
who will receive Annuity Payments pursuant to a Contract.
Annuity: A series of installment payments for the life of the Annuitant, or
for the joint lifetime of the Annuitant and another person and thereafter during
the lifetime of their survivor, with either a minimum number of payments or a
specific sum.
Annuity Date: The date Annuity Payments begin.
Annuity Options: The four alternative methods to receive Annuity Payments
available under the Contract.
Annuity Payments: Payments made after retirement to Annuitants pursuant to
the Contract.
Annuity Period: The period of time between commencement of Annuity Payments
and the payment of the last Annuity Payment due under the Contract.
Annuity Unit: A measure used to calculate the amount of Annuity Payments.
Contract: The master group contract between American Fidelity and a
Contract Owner.
Contract Owner: The entity to which a Contract is issued, which is normally
the employer of Participants or an organization representing such employer.
Participant: A person having an interest in a Contract through Premium
Deposits, but who has not begun to receive Annuity Payments.
Participant Account: The account we maintain for each Participant
reflecting the Accumulation Units credited to the Participant.
Premium Deposit: Money invested by or on behalf of Participants in a
Contract.
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SUMMARY
The following information is a summary of some of the more important
features of your Contract. More detailed information is contained in the
corresponding sections of this Prospectus.
The Contract. The Contract is a group deferred variable annuity policy
issued by American Fidelity. It is a contract between the Contract Owner and
American Fidelity, which is an insurance company. The Contract provides a means
for investing on a tax deferred basis in Dual Strategy Fund. The Contract is
designed for people seeking long-term tax deferred accumulation of assets,
generally for retirement or other long-term purposes. The tax deferred feature
is most attractive to people in high federal and state tax brackets. You should
not become a Participant if you are looking for a short-term investment or if
you cannot accept the risk of getting back less money than you put in.
Like all deferred annuities, the Contract has two phases: the Accumulation
Period and the Annuity Period. During the Accumulation Period, you invest money
in your annuity on a pre-tax basis (subject to limitations explained under
"Federal Tax Matters"), and your earnings accumulate on a tax deferred basis.
Your earnings are based on the investment performance of Dual Strategy Fund. You
can withdraw money from your Participant Account during the Accumulation Period;
federal income tax and penalties may apply if you make withdrawals before age
59 1/2. The Annuity Period occurs when you begin receiving regular payments from
your Participant Account. Among other factors, the amount of the payments you
may receive during the Annuity Period will depend upon the amount of money you
are able to accumulate in your Participant Account during the Accumulation
Period.
Dual Strategy Fund. Premium Deposits are used to purchase, at net asset
value, shares of Dual Strategy Fund. Dual Strategy Fund has investment
objectives and policies that are described in the accompanying prospectus for
Dual Strategy Fund. You can make or lose money on your investment, depending
upon market conditions.
Annuity Provisions. You may receive monthly Annuity Payments from your
Contract under an Annuity Option.
Purchasing Accumulation Units. You may make Premium Deposits at any time
during the Accumulation Period to increase the number of Accumulation Units in
your Participant Account. The minimum initial Premium Deposit is $20 and the
minimum Premium Deposit thereafter is $10. You must complete an application and
make your first Premium Deposit to become a Participant. Accumulation Units are
valued each business day based on the investment performance of Dual Strategy
Fund after deduction of the mortality and expense risk charge.
Expenses. There is a one-time fee of $15 deducted from the initial Premium
Deposit of each Participant, and $.50 is deducted from each Premium Deposit. In
addition, American Fidelity deducts sales, administrative expense and minimum
death benefit expense charges from each Premium Deposit at the time of payment.
These charges, as a percentage of Premium Deposits, are as follows: 3% sales
charge, .25% administrative expense, and .75% minimum death benefit expense. The
annual mortality and expense risk charge deducted from the average daily value
of your Participant Account every year is .96025%.
Some states require the payment of premium taxes on Premium Deposits or
Annuity Payments. Presently, premium taxes range from 0 to 4.0%.
Because Separate Account A purchases shares of Dual Strategy Fund, the net
assets of Separate Account A will reflect the investment advisory fee and
portfolio expenses incurred by Dual Strategy Fund. Dual Strategy Fund pays its
investment adviser, American Fidelity, an annual management and investment
advisory fee of .50% of the value of the average daily net assets of Dual
Strategy Fund.
Withdrawals. You may make a withdrawal at any time during the Accumulation
Period. There are no fees charged upon withdrawals. Under federal tax laws,
there are restrictions on when you can withdraw from a qualified plan, and you
may have to pay income tax and a tax penalty on any money you take out. If a
withdrawal causes a Participant Account to have a remaining value of less than
$1,000, we may redeem all
4
<PAGE> 8
your Accumulation Units and cancel your Participant Account. After a complete
withdrawal, you may not establish a new Participant Account without our consent.
Although the Contract has no "free-look" provision, you do have the right
to withdraw all or part of the value of your Participant Account at any time
without paying a withdrawal fee.
Death Benefit. If you die during the Accumulation Period, the person you
have selected as your beneficiary will receive a death benefit. In most cases,
when you die, your beneficiary will receive the death benefit without going
through probate.
Federal Tax Matters. Generally, the Premium Deposits you make are
excludable from your gross income, and earnings are not taxed until you make
withdrawals. In most cases, if you take money out, 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 federal tax penalty on the taxable amounts withdrawn, which in
most cases is 10% on the taxable amounts. All payments during the Annuity Period
are taxable.
Inquiries. If you have any questions about your Contract or need more
information, please contact us at:
American Fidelity Assurance Company
Annuity Services Department
P.O. Box 25523
Oklahoma City, OK 73125-0523
Telephone: (800) 662-1106
E-mail: [email protected]
FEE TABLE
<TABLE>
<S> <C>
Contract Owner Transaction Expenses (as a percentage of
purchase payments)
Sales Charges............................................. 3.00%
Administrative Expense.................................... 0.25%
Minimum Death Benefit Expense............................. 0.75%
Deferred Sales Load....................................... None
Surrender Fees............................................ None
Exchange Fee.............................................. None
Per Payment Charge.......................................... $ 0.50
One-time Contract Certificate Fee........................... $15.00
Separate Account A Annual Expenses (as a percentage of
average account value)
Mortality and Expense Risk Fees........................... .96025%
Dual Strategy Fund Annual Expenses (as a percentage of its
average net assets)
Management Fee............................................ .50000%
</TABLE>
The purpose of the fee table is to show you the various costs and expenses
that you will bear directly or indirectly. The table reflects the expenses of
both Separate Account A and Dual Strategy Fund. For a more complete explanation
of each of the expense components, see "Expenses" in this Prospectus as well as
the description of expenses of Dual Strategy Fund in the accompanying
prospectus. Premium taxes are not shown in the fee table, but may be charged by
some states on purchase payments or amounts annuitized. Presently, premium taxes
range from 0 to 4.0%.
EXAMPLE
If you surrender your Contract or if you annuitize at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$69 $99 $131 $221
</TABLE>
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<PAGE> 9
This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown above.
Similarly, the 5% annual rate of return assumed in the example is not an
estimate or guarantee of future performance. Under federal income tax laws, a
penalty tax may be assessed upon withdrawal of amounts accumulated under a
Contract prior to commencement of Annuity Payments.
CONDENSED FINANCIAL INFORMATION
The following table shows Accumulation Unit values and the number of
Accumulation Units outstanding for Separate Account A's predecessor, American
Fidelity Variable Annuity Fund A, as of the dates indicated. The information is
derived from the financial statements of American Fidelity Variable Annuity Fund
A. Beginning January 1, 1999, Accumulation Unit information for Separate Account
A will reflect its operations as a unit investment trust investing in Dual
Strategy Fund.
<TABLE>
<CAPTION>
1998 1997 1996 1995(A) 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit value:
Beginning of year....... $19.463 $15.339 $12.199 $ 9.094 $9.709 $9.108 $8.866 $6.924 $6.514 $5.110
End of year............. $24.333 $19.463 $15.339 $12.199 $9.094 $9.709 $9.108 $8.866 $6.924 $6.514
Number of Accumulation
Units outstanding at end
of year (in 000's)...... 7,584 7,044 6,443 5,997 5,616 5,114 4,644 4,268 4,041 3,806
</TABLE>
- ---------------
(a) Investment management by the present sub-advisers commenced October 2, 1995.
PERFORMANCE
Separate Account A may from time to time advertise performance in sales
literature, advertisements and reports to Contract Owners. Performance will be
calculated on the basis of total return and average annual total return for one,
five and ten year periods, assuming an initial investment of $1,000, the
deduction of all sales charges and other expenses from investment results and
the reinvestment of dividends and distributions during the period. Total return
is calculated by subtracting the initial investment from the ending value for a
specified period, dividing the difference by the initial investment and
converting the quotient to a percentage. Average annual total return is
calculated pursuant to a standardized formula and is expressed as a percentage
rate which, if applied on a compounded annual basis to the original investment,
would result in the value of the investment at the end of the period.
Performance calculations do not reflect the deduction of any premium taxes.
Any past performance results are not an indication of future results.
Further information regarding Separate Account A's performance is contained in
the SAI.
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AMERICAN FIDELITY, SEPARATE ACCOUNT A AND DUAL STRATEGY FUND
AMERICAN FIDELITY
American Fidelity Assurance Company is an Oklahoma stock life insurance
company incorporated under the laws of the State of Oklahoma in 1960. Its
principal executive offices are located at 2000 N. Classen Boulevard, Oklahoma
City, Oklahoma 73106, telephone number (405) 523-2000. American Fidelity is
licensed to conduct life, annuity and accident and health insurance business in
49 states and the District of Columbia.
American Fidelity has been a wholly owned subsidiary of American Fidelity
Corporation since 1974. The stock of American Fidelity Corporation is controlled
by a family investment partnership, Cameron Enterprises, A Limited Partnership,
whose managing general partners are William M. Cameron, William E. Durrett,
Edward C. Joullian, III, John W. Rex and Theodore M. Elam. The address of both
American Fidelity Corporation and Cameron Enterprises, A Limited Partnership is
2000 N. Classen Boulevard, Oklahoma City, Oklahoma 73106. American Fidelity
served as the investment adviser to Separate Account A's predecessor, American
Fidelity Variable Annuity Fund A, and is presently the investment adviser to
Dual Strategy Fund.
Like other separate accounts, financial and business organizations and
individuals around the world, Separate Account A and Dual Strategy Fund could be
adversely affected if the computer systems used by American Fidelity and its
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." We have had a formal project team (including 22 information
systems professionals) working to correct the problem since 1996. In the
briefest terms, the correction is to change all date-related fields in our
computer systems to four digits instead of two digits. At the same time, all
relationships with systems outside American Fidelity must be checked for the
same change and all must be tested to determine that relationships continue to
be compatible. Those systems tested on December 31, 1997 and went through
year-end processing without incident. The final test of all systems will be run
in 1999. Even though management of American Fidelity is expending considerable
resources in a concerted effort to meet this technology-related threat, there is
no guarantee that there will be no adverse impact on Separate Account A or Dual
Strategy Fund of some sort as January 1, 2000 passes.
SEPARATE ACCOUNT A
American Fidelity's Board of Directors adopted a resolution on May 7, 1968
to establish Separate Account A as a separate account under Oklahoma insurance
law. Separate Account A operated under the name American Fidelity Variable
Annuity Fund A and was organized as an open-end diversified management
investment company with its own portfolio of securities. On January 1, 1999,
Separate Account A was reorganized to its present form as a unit investment
trust. As part of the reorganization, the assets of the managed account were
transferred intact to Dual Strategy Fund in exchange for shares of Dual Strategy
Fund. Separate Account A is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940. Separate Account A has no
sub-accounts.
The assets of Separate Account A are held in American Fidelity's name on
behalf of Separate Account A and legally belong to American Fidelity. Under
Oklahoma law, however, those assets may not be charged with liabilities arising
out of other business activities of American Fidelity. All income, gains and
losses, realized or unrealized, are credited to or charged against Separate
Account A Contracts without regard to income, gains and losses of American
Fidelity. American Fidelity is obligated to pay all benefits and make all
payments under the Contracts.
DUAL STRATEGY FUND
Separate Account A invests exclusively in American Fidelity Dual Strategy
Fund. As part of the reorganization of Separate Account A into a unit investment
trust, effective January 1, 1999, its securities
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<PAGE> 11
portfolio was transferred to Dual Strategy Fund, which is a newly established
open-end diversified management investment company.
Pursuant to a management and investment advisory agreement and subject to
the authority of Dual Strategy Fund's Board of Directors, American Fidelity
serves as Dual Strategy Fund's investment adviser and conducts the business and
affairs of Dual Strategy Fund. American Fidelity has engaged Lawrence W. Kelly &
Associates, Inc. and Todd Investment Advisors, Inc. as sub-advisers to provide
day-to-day portfolio management for Dual Strategy Fund.
Dual Strategy Fund offers its shares to Separate Account A as a funding
vehicle for the Contracts. Dual Strategy Fund shares are also offered to other
separate accounts supporting other variable annuity contracts. Dual Strategy
Fund does not offer its shares directly to the general public.
Dual Strategy Fund's investment objectives are, first, long-term growth of
capital and, second, the production of income. Dual Strategy Fund invests in a
diversified portfolio consisting primarily of common stock. Meeting investment
objectives depends on various factors, including how well the portfolio managers
anticipate changing economic and market conditions. There is no assurance that
Dual Strategy Fund will achieve its objectives.
Additional information concerning Dual Strategy Fund can be found in the
current prospectus for Dual Strategy Fund which accompanies this Prospectus. You
should read Dual Strategy Fund's prospectus carefully before investing.
VOTING RIGHTS
American Fidelity is the legal owner of the Dual Strategy Fund shares
allocated to Separate Account A. However, we believe that when Dual Strategy
Fund solicits proxies in conjunction with a shareholder vote, we are required to
obtain from Contract Owners (based on instructions they receive from their
respective Participants and Annuitants) instructions as to how to vote those
shares. When we receive the instructions, we will vote all of the shares we own
for the benefit of Separate Account A in proportion to those instructions.
Should we determine that we are no longer required to comply with the above, we
will vote the shares in our own right.
SUBSTITUTION
We cannot guarantee that Dual Strategy Fund will always be available for
our variable annuity products. If it should not be available, we will try to
replace it with a comparable fund. A substitution of shares attributable to the
Contracts will not be made without prior notice to Contract Owners, Participants
and Annuitants and the prior approval of the SEC in conformity with the
Investment Company Act of 1940.
THE CONTRACT
A group annuity is a contract between the Contract Owner, on behalf of its
Participants, and an insurance company (in this case American Fidelity), where
the insurance company promises to pay you (or someone else you choose) an income
in the form of Annuity Payments beginning on a date chosen by you. Until you
decide to begin receiving Annuity Payments, your annuity is in the Accumulation
Period. Once you begin receiving Annuity Payments, your annuity is in the
Annuity Period. If you or the Annuitant dies during the Accumulation Period,
American Fidelity will pay a death benefit to your beneficiary.
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, depending upon market
conditions, you can make or lose money invested in Dual Strategy Fund. The
amount of money you are able to accumulate in your Participant Account during
the Accumulation Period and the Annuity Payments you will be entitled to receive
depend in large part upon the investment performance of Dual Strategy Fund.
8
<PAGE> 12
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time you become a Participant in the
Contract unless changed at a later date. If the beneficiary and the Participant
or Annuitant, as applicable, die at the same time, we will assume that the
beneficiary died first for purposes of payment of the death benefit. You can
name any beneficiary to be an irrevocable beneficiary. The interest of an
irrevocable beneficiary cannot be changed without his or her consent.
You can change the beneficiary at any time during the Annuitant's life. To
do so, you need to send a request to our home office. The request must be on a
form we accept. The change will go into effect when signed, subject to any
payments we make or actions we take before we record the change. A change
cancels all prior beneficiaries, except a change will not cancel any irrevocable
beneficiary without his or her consent. The interest of the beneficiary will be
subject to any Annuity Option in effect at the Annuitant's death.
American Fidelity may change the Contract at any time if required by state
or federal laws. After a Contract has been in force for three years, we may
change any term of the Contract except that benefits already earned by
Participants cannot be decreased and guaranteed monthly life incomes cannot be
decreased. We will notify Contract Owners of any change at least 90 days before
a change will take effect.
ANNUITY PROVISIONS
ANNUITY DATE
You may receive regular monthly income payments (Annuity Payments) under
your Contract. You may choose the month and year in which those payments begin.
We call that date the Annuity Date. You may select an Annuity Date at any time
during the Accumulation Period. You must notify us of this date at least 30 days
prior to the date you want your Annuity Payments to begin. Prior to the Annuity
Date, you may change the Annuity Date by written request. Any change must be
requested at least 30 days prior to the new Annuity Date. Your Annuity Date must
be the first day of a calendar month. The Annuity Date may not be later than the
earliest to occur of the distribution date required by federal law, the Contract
Owner's tax-qualified plan or, if applicable, state law.
SELECTION OF AN ANNUITY OPTION
If the value of your Participant Account is at least $1,000, you may choose
among income plans. We call those Annuity Options. If your Account is less than
$1,000, we reserve the right to pay you the amount of your Participant Account
in one lump sum. An election to receive Annuity Payments under an Annuity Option
must be made at least 30 days prior to the Annuity Date. If no option is
selected, Option 2 with 120 monthly payments guaranteed will automatically be
applied. Once an Annuity Option has been selected, you may not change to another
Annuity Option. Prior to the Annuity Date, you may change the Annuity Option
selected by written request. Any change must be requested at least 30 days prior
to the Annuity Date. If an option is based on life expectancy, we will require
proof of the payee's date of birth.
ANNUITY PAYMENTS
Annuity Payments are paid in monthly installments, although we have the
right to change the frequency of payments. Should Annuity Payments become less
than $20, we may change the payment interval to result in payments of at least
$20. Annuity Payments may be made on a variable basis (which means they will be
based on the investment performance of Dual Strategy Fund) and/or on a fixed
basis (which means Annuity Payments are fixed as of the Annuity Date applying an
annual rate of interest of 4%). Depending on your election, the value of your
Participant Account (adjusted for any taxes) will be applied to provide the
Annuity Payment. If you choose to have any portion of your Annuity Payments
based on a variable Annuity Option, the dollar amount of your payment will
depend upon three things: (1) the value of your Participant Account on the
Annuity Date, (2) the assumed investment rate used in the annuity table for the
Contract, and (3) the performance of Dual Strategy Fund. The assumed investment
rate will be 4.5%. If the actual performance exceeds the 4.5% assumed rate, your
Annuity Payments will increase. Similarly, if the actual rate is less than
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4.5%, your Annuity Payments will decrease. The amount of the first Annuity
Payment will depend on the Annuity Option elected and the age of the Annuitant
at the time the first payment is due.
ANNUITY OPTIONS
You may choose one of the following Annuity Options. After Annuity Payments
begin, you cannot change the Annuity Option.
OPTION 1. Life Variable Annuity: We will make monthly payments during the
life of the Annuitant. If this option is elected, payments will stop when the
Annuitant dies.
OPTION 2. Life Variable Annuity with Payments Certain: We will make monthly
payments for the guaranteed period selected during the life of the Annuitant.
When the Annuitant dies, any amounts remaining under the guaranteed period
selected will be distributed to the beneficiary at least as rapidly as they were
being paid as of the date of the Annuitant's death. If the beneficiary dies
before the end of the guaranteed period, the present value of the remaining
payments will be paid to the estate of the beneficiary based on an annual
compound interest rate of 3 1/2%. The guaranteed period may be 10 years, 15
years or 20 years.
OPTION 3. Unit Refund Life Variable Annuity: We will make monthly payments
during the lifetime of the Annuitant. Upon the Annuitant's death, we will make
an additional payment equal to the value at the date of death of the number of
Variable Annuity Units equal to the excess, if any, of (a) the total amount
applied under this option divided by the Variable Annuity Unit value on the
Annuity Date over (b) the Variable Annuity Units represented by each Annuity
Payment multiplied by the number of Annuity Payments paid prior to death.
OPTION 4. Joint and Survivor Annuity: We will make monthly payments during
the joint lifetime of the Annuitant and a joint Annuitant. Payments will
continue during the lifetime of the surviving Annuitant based on 66 2/3% of the
Annuity Payment in effect during the joint lifetime. If the joint Annuitant is
not the Annuitant's spouse, this Annuity Option may not be selected if, as of
the Annuity Date, the present value of the Annuity Payments which would be
payable to the joint Annuitant exceeds 49% of the present value of all payments
payable to the Annuitant and the joint Annuitant.
OTHER OPTIONS. A Participant has the further option to elect forms of fixed
annuities having essentially the same characteristics as Annuity Options 1
through 4 above.
PURCHASING ACCUMULATION UNITS
PREMIUM DEPOSITS
A Premium Deposit is the money you give us to increase the number of
Accumulation Units in your Participant Account. You may make Premium Deposits at
any time during the Accumulation Period. You may increase, decrease or change
the frequency of such payments. The first Premium Deposit must be at least $20,
and after that each Premium Deposit must be at least $10. If in any year a
Participant makes no Premium Deposits, the Contract will not lapse with respect
to the Participant. We reserve the right to reject any application or Premium
Deposit. We may deduct amounts from Premium Deposits for premium taxes, if any.
Once we receive your Premium Deposit and application, we will issue you a
certificate evidencing your participation in the Contract and invest your first
Premium Deposit within two business days. If you do not give us all of the
information we need, we will contact you to get it. If for some reason we are
unable to complete this process within five business days, we will either send
back your money or get your permission to keep it until we get all of the
necessary information. We will credit your subsequent Premium Deposits to your
Participant Account using the Accumulation Unit value next determined after
receipt. If we receive a Premium Deposit by 3:00 p.m., Central Time, we will
apply same-day pricing to determine the number of Accumulation Units to credit
to your account.
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ACCUMULATION UNITS
The value of your Participant Account will go up or down depending upon the
investment performance of Dual Strategy Fund. The value of your Participant
Account will also depend on the expenses of Separate Account A. In order to keep
track of the value of your Participant Account, we use a measurement called an
Accumulation Unit. During the Annuity Period, we call the unit an Annuity Unit.
Every business day we determine the value of an Accumulation Unit by
multiplying the Accumulation Unit value for the previous period by a factor for
the current period. The factor, which we call the net investment factor, is
determined by:
1. dividing the value of a Dual Strategy Fund share at the end of the
current period, including the value of any dividends or gains per share
for the current period, by the value of a Dual Strategy Fund share for
the previous period, and
2. subtracting from that amount the mortality and expense risk charge.
The value of an Accumulation Unit may go up or down from day to day.
When you make a Premium Deposit, we credit your Participant Account with
Accumulation Units. The number of Accumulation Units credited is determined by
dividing the amount of the net Premium Deposit (after deduction of 4% to cover
sales, administrative and maximum death benefit charges and $.50 per Premium
Deposit) by the value of the Accumulation Unit. A $15 Contract certificate
issuance fee will also be deducted from the first Premium Deposit.
We calculate the value of an Accumulation Unit after the New York Stock
Exchange closes, currently 4:00 p.m., Eastern Time, on each day American
Fidelity is open for business and then credit your Participant Account
accordingly.
EXAMPLE:
On Thursday we receive an additional Premium Deposit of $100 from you. At
3:00 p.m., Central Time, on that Thursday, we determine that the value of
an Accumulation Unit is $20.25. We then divide $95.50 by $20.25 and credit
your Participant Account on Thursday night with 4.72. Accumulation Units.
The value of a Participant's individual account at any time prior to
commencement of Annuity Payments is determined by multiplying the total number
of Accumulation Units credited to his or her account by the current Accumulation
Unit value. Each Participant is advised semiannually of the number of
Accumulation Units credited to his or her account, the current Accumulation Unit
value, and the total value of the account.
EXPENSES
There are charges and other expenses associated with the Contract that will
reduce your investment return. These charges and expenses are explained below.
SALES CHARGE
We deduct 3% from each Premium Deposit received as a sales charge. The
sales charge is intended to recover all distribution expenses associated with
marketing Contracts. In the event the sales charge is not adequate to recover
all distribution expenses, the resulting "shortfall" is borne by American
Fidelity. Any such shortfall amounts paid by us may consist, among other things,
of proceeds derived from mortality and expense risk charges discussed below. The
sales charge for lump sum or periodic payments of $2,000 or greater may be less
than 3%, depending on the actual commission paid.
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INSURANCE CHARGES
Administrative Expenses. We deduct 1/4% of each Premium Deposit received
to reimburse us for administrative expenses we incur in administering Contracts,
including salaries, rent, postage, telephone, office equipment, printing,
travel, and legal, actuarial and accounting fees.
There is an additional administrative charge against each Premium Deposit
of $.50 and a one-time certificate issuance fee of $15. The $.50 per payment
deduction will not be increased until Premium Deposits on behalf of a
Participant equal twice the amount of Premium Deposits made during the first
year of participation. The deduction may be increased on Premium Deposits in
excess of such amount.
Minimum Death Benefit. A deduction of 3/4% of each Premium Deposit is made
for the minimum death payment. This deduction is not applicable after a
Participant attains age 65.
Mortality and Expense Risk. American Fidelity assumes the risk that the
actuarial estimate of mortality rates among variable annuitants may be erroneous
and the reserves based on such estimate will not be sufficient to meet annuity
payment obligations. For mortality and expense risks assumed, American Fidelity
receives .96025% on an annual basis (.0026308% for each one-day valuation
period) of average account value. Of this amount, .85% is for mortality risks
and .11025% is for expense risks.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. American Fidelity is responsible for the payment
of these taxes and will make a deduction from the value of your Participant
Account for them. Some of these taxes are due when Premium Deposits are made;
others are due when Annuity Payments begin. It is our current practice to pay
any premium taxes when they become payable to the states. Premium taxes
presently range from 0% to 4%, depending on the state.
INCOME TAXES
American Fidelity will deduct from each Contract any income taxes which it
may incur because of the Contract. Currently, American Fidelity is not making
any such deductions.
DUAL STRATEGY FUND EXPENSES
There are deductions from and expenses paid out of the assets of Dual
Strategy Fund which are described in the attached prospectus for Dual Strategy
Fund.
WITHDRAWALS
Prior to commencement of Annuity Payments, you may withdraw cash by
redeeming all or a portion of the Accumulation Units in your Participant
Account. The redemption value of a Participant's Account is equal to the
Accumulation Unit value under the account next computed after the request for
redemption is received by American Fidelity. There is no assurance that the
redemption value of your Participant Account will equal or exceed the aggregate
amount of Premium Deposits at any time. There are no administrative fees for
withdrawals.
A partial redemption will result in a reduction of the Accumulation Units
in your Participant Account. The reduction in the number of Accumulation Units
will equal the amount withdrawn divided by the applicable Accumulation Unit
value next computed after receipt of the redemption request. If a partial
redemption reduces the value of your Participant Account to less than $1,000, we
may pay you cash equal to the value of all Accumulation Units in the account and
cancel your account. After full redemption and cancellation of a Participant's
Account, no further Premium Deposits may be made on behalf of the Participant
without our consent.
A Participant's request for redemption should be submitted to us in
writing. A redemption request requires the signature of the person in whose name
the Participant Account is registered, signed exactly as the
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name appears on American Fidelity's register. In certain instances, we may
require additional documents such as trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. All proper redemption requests received before 3:00 p.m., Central
Time, will receive same-day pricing.
Payment for Accumulation Units redeemed are made within three business days
after our receipt of a properly tendered request. Redemption rights may be
suspended or payment postponed at times when the New York Stock Exchange is
closed (other than customary weekend and holiday closings) or trading on the New
York Stock Exchange is restricted; when an emergency exists as a result of which
disposal by Dual Strategy Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for Dual Strategy Fund to
determine the value of its net assets; or for such other periods as the SEC may
by order permit for the protection of Participants. We may delay the mailing of
a redemption check for recently purchased Accumulation Units until such time as
the payment check has cleared.
There are restrictions under federal income tax law on when you can
withdraw from a qualified plan. In addition, certain adverse tax consequences
may result from withdrawals, as explained below under "Federal Tax Matters."
DEATH BENEFIT
In the event of a Participant's death prior to commencement of Annuity
Payments, death proceeds are payable to a named beneficiary in an amount equal
to (1) the value of the Participant's Account as of the valuation date (the date
on which we have received both written notice of death and the beneficiary's
written instructions) or (2) if greater and if the Participant's death occurs
prior to age 65, 100% of the total Premium Deposits made by the Participant,
less any redemptions. Payments normally are made within seven days of receipt of
such notice.
If the Participant dies during the Annuity Period, we will pay any
remaining guaranteed payments to (1) the Participant's beneficiary or (2) the
Participant's estate, if no beneficiary survives. Any payments made to a
beneficiary must be on a payment schedule at least as rapid as that made to the
Participant.
A beneficiary who is the spouse of a deceased Participant may choose to
receive the death benefit in any form that the Participant could have chosen to
receive Annuity Payments. Federal tax law requires that annuity contracts issued
after January 18, 1985 restrict the length of time over which non-spouse
beneficiaries may elect to receive death benefit proceeds. Contracts issued
after this date provide that non-spouse beneficiaries must either take a total
distribution within five years of the death of the Participant or, within one
year of the Participant's death, begin Annuity Payments under an Annuity Option
for a period not to exceed the expected lifetime of the beneficiary.
FEDERAL TAX MATTERS
The following description of federal income tax consequences under the
Contracts is not exhaustive, and special rules may apply to situations not
discussed here. For further information, consult a qualified tax adviser before
establishing any retirement program. This description is not intended as tax
advice. We have included additional information regarding taxes in the Statement
of Additional Information.
GENERAL
Annuity contracts are a means of setting aside money for future
needs -- usually retirement. Congress has recognized how important saving for
retirement is and provided special rules in the Internal Revenue Code of 1986,
as amended (the "Code"), for annuities. Basically, these rules provide that you
will not be taxed on the money you contribute under your Contract and/or the
earnings on your contributions until you receive a distribution from your
Contract. There are different rules regarding how you will be taxed depending
upon how you take money out of your Contract.
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TAXES PAYABLE BY PARTICIPANTS AND ANNUITANTS
The Contracts offered by this Prospectus are used with retirement programs
which receive favorable tax deferred treatment under federal income tax law.
Increases in the value of a Participant's account are not subject to income tax
until annuity payments commence, at which time the amount of each payment is
considered as ordinary income.
Annuity Payments and other amounts received under all Contracts generally
are subject to some form of federal income tax withholding. The withholding
requirement will vary among recipients depending on the type of program, the tax
status of the individual and the type of payments from which taxes are withheld.
Additionally, Annuity Payments and other amounts received under all Contracts
may be subject to state income tax withholding requirements.
SECTION 403(B) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS OR
PUBLIC EDUCATIONAL INSTITUTIONS
Premium Deposits. Under Section 403(b) of the Code, payments made by
tax-exempt organizations meeting the requirements of Section 501(c)(3) of the
Code and public educational institutions to purchase annuity Contracts for their
employees are excludable from the gross income of employees to the extent that
the aggregate Premium Deposits do not exceed the limitations prescribed by
Section 402(g), Section 403(b)(2) and Section 415 of the Code. This gross income
exclusion applies to employer contributions and voluntary salary reduction
contributions.
An individual's voluntary salary reduction contributions under Section
403(b) are generally limited to $10,000 per year (as adjusted from time to time
by the Internal Revenue Service). Additional catch-up contributions are
permitted under certain circumstances. Combined employer and salary reduction
contributions are generally limited to the individual's "exclusion allowance."
An employee's exclusion allowance for a taxable year is equal to 20% of
includible compensation times years of service, minus amounts previously
excludable from the employee's gross income. In addition, employer contributions
must comply with various nondiscrimination rules; these rules may have the
effect of further limiting the rate of employer contributions for highly
compensated employees.
Taxation of Distributions. Distributions of voluntary salary reduction
amounts are restricted. The restrictions apply to amounts accumulated after
December 31, 1988 (including voluntary contributions after that date and
earnings on prior and current voluntary contributions). These restrictions
require that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3) death,
(4) disability, or (5) hardship (hardship distributions are limited to the
amount of salary reduction contributions, not including any earnings).
Distributions from a Section 403(b) annuity Contract are taxed as ordinary
income to the recipient in accordance with Section 72 of the Code. Distributions
received before the recipient attains age 59 1/2 generally are subject to a 10%
penalty tax in addition to regular income tax. Certain distributions are
excepted from this penalty tax, including distributions following (1) death, (2)
disability, (3) separation from service during or after the year the Participant
reaches age 55, (4) separation from service at any age if the distribution is in
the form of substantially equal periodic payments over the life (or life
expectancy) of the Participant (or the joint lives (or joint life expectancy) of
the Participant and beneficiary), and (5) distributions in excess of tax
deductible medical expenses.
Required Distributions. Generally, distributions from Section 403(b)
annuities must commence no later than April 1 of the calendar year following the
later of the calendar year in which the Participant attains age 70 1/2 or the
calendar year in which the Participant retires. Such distributions must be made
over a period that does not exceed the life expectancy of the Participant (or
the joint life expectancy of the Participant and beneficiary). If a Participant
dies prior to the commencement of Annuity Payments, the amount accumulated under
the account must be distributed within five years or, if distributions to a
beneficiary designated under the account start within one year of the
Participant's death, distributions are permitted over the life of the
beneficiary or over a period not extending beyond the beneficiary's life
expectancy. If the designated
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beneficiary is the Participant's surviving spouse, the beneficiary must commence
receiving benefits on or before the later of the end of the calendar year in
which the deceased spouse would have attained age 70 1/2 or the end of the
calendar year following the year in which the Participant died. If the
Participant has started receiving annuity distributions prior to his or her
death, distributions must continue at least as rapidly as under the method in
effect at the date of death. A penalty tax of 50% will be imposed on the amount
by which the minimum required distribution in any year exceeds the amount
actually distributed in that year.
Tax-Free Transfers and Rollovers. The Internal Revenue Service has ruled
(Revenue Ruling 90-24) that total or partial amounts may be transferred tax free
between Section 403(b) annuity contracts and/or Section 403(b)(7) custodial
accounts under certain circumstances. In addition, Section 403(b)(8) of the Code
permits tax-free rollovers from Section 403(b) programs to IRAs or other Section
403(b) programs under certain circumstances. Such a rollover must be completed
within 60 days of receipt of the distribution. The portion of any distribution
which is eligible to be rolled over to an IRA or another Section 403(b) program
is subject to 20% federal income tax withholding unless the Participant elects a
direct rollover of such distribution to an IRA or other Section 403(b) program.
SECTIONS 401(A), 401(K) AND 403(A) QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY
PLANS
Premium Deposits. Premium Deposits made by an employer (or a self-employed
individual) under a pension, profit-sharing or annuity plan qualified under
Section 401(a) or Section 403(a) of the Code are excluded from the gross income
of the employee for federal income tax purposes. Payments made by an employee
generally are made on an after-tax basis, unless they are made on a pre-tax
basis by reason of Sections 401(k) or 414(h) of the Code.
Taxation of Distributions. Distributions from Contracts purchased under
qualified plans are taxable as ordinary income, except to the extent allocable
to an employee's after-tax contributions (which constitute "investment in the
Contract"). If a distribution is made in the form of an annuity, a fixed portion
of each payment is generally excludable from income for federal income tax
purposes to the extent it is allocable to the taxpayer's after-tax contributions
to the plan. In general, the excludable amount is determined by dividing the
after-tax contributions (basis) by the anticipated number of payments to be made
under the Contract. If prior to January 1, 2000 an employee or the beneficiary
receives a lump sum distribution, as defined in the Code, from an exempt
employees' trust, the taxable portion of the distribution may be subject to
special tax treatment. For most individuals receiving lump sum distributions
after attainment of age 59 1/2, the rate of tax may be determined under a
special 5-year income averaging provision. Those who attained age 50 by January
1, 1986 may instead elect to use a 10-year income averaging provision based on
the income tax rates in effect for 1986. In addition, individuals who attained
age 50 by January 1, 1986 may elect capital gains treatment for the taxable
portion of a lump sum distribution attributable to years of service before 1974;
such capital gains treatment has otherwise been repealed. Taxable distributions
received from an account under a qualified plan prior to attainment of age
59 1/2 are subject to the same 10% penalty tax (and the same exceptions) as
described with respect to Section 403(b) annuities.
Required Distributions. The minimum distribution requirements for qualified
plans are generally the same as described with respect to Section 403(b)
annuities.
Tax-Free Rollovers. The taxable portion of certain distributions from a
plan qualified under Sections 401(a) or 403(a) may be transferred in a tax-free
rollover to an individual retirement account or annuity or to another such plan.
Such a rollover must be completed within 60 days of receipt of the qualifying
distribution. The portion of any distribution which is eligible to be rolled
over to an IRA or another Section 401(a) or 403(a) plan is subject to 20%
federal income tax withholding unless the Participant elects direct rollover of
such distribution to an IRA or other Section 401(a) or 403(a) plan.
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INDIVIDUAL RETIREMENT ANNUITIES (IRAS)
Traditional IRAs
Premium Deposits. Federal tax laws limit the extent to which individuals
may make tax-deductible contributions for traditional IRA Contracts. Deductible
contributions equal to the lesser of $2,000 or 100% of compensation are
permitted only for an individual who (i) is not (and whose spouse is not) an
active participant in another retirement plan; (ii) is an active participant in
another retirement plan, but is unmarried and has adjusted gross income in 1999
of $31,000 or less; (iii) is an active participant in another retirement plan,
but is married and has adjusted gross income in 1999 of $51,000 or less; or (iv)
is not an active participant in another retirement plan, but his or her spouse
is an active participant in another retirement plan and has adjusted gross
income of $150,000 or less. Such individuals may also establish an IRA for a
spouse during the tax year if the combined compensation of both spouses is at
least equal to the contributed amount. An individual who is an active
participant in another retirement plan and whose adjusted gross income exceeds
the cut-off point (for 1999, $31,000 if unmarried and $51,000 if married) by
less than $10,000 is entitled to make deductible IRA contributions in
proportionately reduced amounts.
An individual may make nondeductible IRA contributions to the extent of the
excess of (i) the lesser of $2,000 or 100% of compensation over (ii) the IRA
deduction limit with respect to the individual.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient except to the extent allocable to the
recipient's after-tax contributions (which constitute "investment in the
Contract"). If a distribution is made in the form of an annuity, the rules for
determining the taxable portion of a distribution are similar to the rules
described with respect to pension, profit-sharing, and annuity plans. In
addition, a 10% penalty tax will be imposed on taxable distributions received
before the year in which the recipient attains age 59 1/2, except that
distributions made on account of death, disability or in the form of
substantially equal periodic payments over the life (or life expectancy) of the
Participant (or the joint lives (or joint life expectancies) of the Participant
and beneficiary) are not subject to the penalty tax. In addition, early
withdrawals for the purchase of a home by a first-time home buyer (subject to a
$10,000 lifetime limit) or for the payment of qualified higher education
expenses or medical insurance (in limited circumstances) are not subject to the
penalty tax.
Required Distributions. The minimum distribution requirements for IRA
Contracts are generally the same as described with respect to Section 403(b)
annuities, except that no amounts are exempted from the minimum distribution
requirements and in all events such distributions must commence no later than
April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2.
Tax-Free Rollovers. Federal law permits funds to be transferred in a
tax-free rollover from a qualified employer pension, profit-sharing or annuity
plan, or a Section 403(b) annuity Contract to an IRA Contract under certain
conditions. Amounts accumulated under such a rollover IRA may subsequently be
rolled over on a tax-free basis to another such plan or Section 403(b) annuity
Contract. In addition, a tax-free rollover may be made from one IRA to another,
provided that not more than one such rollover may be made during any
twelve-month period. In order to qualify for tax-free treatment, all rollovers
must be completed within 60 days after the distribution is received.
Roth IRAs
Premium Deposits. The "Roth IRA" permits individuals to make nondeductible
contributions and, if specific requirements are met, receive distributions that
are tax free. The Roth IRA is an individual retirement account and is treated in
the same manner as a regular IRA with certain exceptions. An individual can make
an annual nondeductible contribution to a Roth IRA up to the lesser of $2,000 or
100% of the individual's annual compensation minus the aggregate amount of
contributions for the tax year to all other IRAs maintained for the benefit of
that individual. Unlike a traditional IRA, active participation in an employer's
qualified plan does not reduce the amount that an individual can contribute to a
Roth IRA. The contribution that can be made to a Roth IRA is phased out for
individuals with adjusted gross income of between $95,000 and $110,000, and for
joint filers with combined adjusted gross income of between $150,000 and
$160,000.
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American Fidelity Assurance Company
P.O. Box 25523
Oklahoma City, OK 73125-0523
Attention: Annuity Services Department
<PAGE> 21
Please send me the Statement of Additional Information for the following:
[ ] AFPrime Growth Variable Annuity
[ ] American Fidelity Dual Strategy Fund, Inc.
<TABLE>
<S> <C>
Name
------------------------------------------------------------
(please print)
Address
------------------------------------------------------------
(please print)
------------------------------------------------------------
(please print)
------------------------------------------------------------
(please print)
</TABLE>
<PAGE> 22
Taxation of Distributions. Distributions from a Roth IRA are not includible
in income if the contribution to which the distribution relates is a "qualified
distribution." A "qualified distribution" is a distribution which is made on or
after the recipient becomes age 59 1/2, on account of death or disability or for
a qualified first-time home buyer expense. A distribution is not considered to
be a "qualified distribution" if it is made within the five-year period
beginning with the first tax year for which the individual made a contribution
to a Roth IRA. A distribution is also not a "qualified distribution" for
payments properly allocable to a "qualified rollover contribution" from a
regular IRA if it is made within the five-year period beginning with the first
tax year in which the rollover contribution was made. Nonqualifying
distributions from a Roth IRA are includible in income to the extent of earnings
on contributions. Distributions that are attributable to contributions to a Roth
IRA are received tax free, since these contributions were nondeductible.
Required Distributions. Roth IRAs are not subject to minimum distribution
rules before death.
Tax-Free Rollovers. A tax-free rollover may be made to a Roth IRA from (a)
another Roth IRA or (b) a regular IRA that meets the requirements for the
exclusion of a rollover under Code Section 408(d)(3) if the taxpayer has
adjusted gross income of not more than $100,000 and, if married, does not file a
separate return.
Simplified Employee Pension Plans
Premium Deposits. Under Section 408(k) of the Code, employers may establish
a type of IRA plan referred to as a simplified employee pension plan ("SEP").
Employer contributions under a SEP, which generally must be made at a rate
representing a uniform percent of the compensation of participating employees,
are excluded from the gross income of employees for federal income tax purposes.
Employer contributions to a SEP cannot exceed the lesser of $30,000 or 15% of an
employee's compensation.
Salary Reduction SEPs. Federal tax law allows employees of certain small
employers to have contributions made to the SEP on their behalf on a salary
reduction basis. These salary reduction contributions may not exceed $7,000
indexed for inflation. Employees of tax-exempt organizations are not eligible
for this type of SEP. Additionally, only certain small employers who have SEPs
that permitted salary reduction contributions on December 31, 1996 may continue
to allow salary reduction contributions.
Taxation of Distributions. SEP distributions are subject to taxation in the
same manner as regular IRA distributions.
Required Distributions. SEP distributions are subject to the same minimum
required distribution rules applicable to traditional IRAs.
Tax-Free Rollovers. Funds may be rolled over tax free from one SEP to
another as long as the rollover is completed within 60 days after the
distribution is received and is done no more frequently than once every twelve
months.
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. American Fidelity believes that Dual Strategy Fund is being
managed so as to comply with the requirements.
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OTHER INFORMATION
DISTRIBUTION
American Fidelity Securities, Inc., a wholly owned subsidiary of American
Fidelity, acts as the distributor of the Contracts.
LEGAL PROCEEDINGS
There are no material pending legal proceedings affecting Separate Account
A, Dual Strategy Fund, American Fidelity or American Fidelity Securities, Inc.
FINANCIAL STATEMENTS
The financial statements of Separate Account A and of American Fidelity
have been included in the SAI.
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History............................. 2
Performance Information..................................... 2
Annuity Payments............................................ 2
Federal Income Tax Considerations........................... 4
Underwriter................................................. 8
Independent Accountants..................................... 8
Legal Matters............................................... 8
Financial Statements........................................ 8
</TABLE>
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AFPR1ME
GROWTH
Variable Annuity(TM)
ISSUED BY
AMERICAN FIDELITY SEPARATE ACCOUNT A
AND
AMERICAN FIDELITY ASSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus dated May 1, 1999 relating to the AFPR1ME
GROWTH Variable Annuity(TM).
The Prospectus concisely sets forth information that a prospective investor
should know before investing. For a copy of the Prospectus,
<TABLE>
<CAPTION>
<S> <C> <C>
write to us at: call us at: e-mail us at:
P.O. Box 25523 (800) 662-1106 [email protected]
Oklahoma City, OK 73125-0523
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TABLE OF CONTENTS
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PAGE
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General Information and History............................. 2
Performance Information..................................... 2
Annuity Payments............................................ 2
Federal Income Tax Considerations........................... 4
Underwriter................................................. 8
Independent Accountants..................................... 8
Legal Matters............................................... 8
Financial Statements........................................ 8
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<PAGE> 25
GENERAL INFORMATION AND HISTORY
American Fidelity Assurance Company ("Company") was organized in the State
of Oklahoma in 1960 and during its existence has never changed its name. Neither
the sales of variable annuity contracts nor the sales of any other insurance
product by the Company have ever been suspended by any state where the Company
has done or is presently doing business.
The Company is a wholly owned subsidiary of American Fidelity Corporation,
an insurance holding company. The stock of American Fidelity Corporation is
controlled by a family investment partnership, Cameron Enterprises, A Limited
Partnership, an Oklahoma limited partnership ("CELP"). In accordance with the
partnership agreement, management of the affairs of CELP is vested in five
managing general partners: William M. Cameron, William E. Durrett, Edward C.
Joullian, III, John W. Rex and Theodore M. Elam.
PERFORMANCE INFORMATION
American Fidelity Variable Annuity Fund A's average annual total returns
for the one, five and ten year periods ended December 31, 1998 were 18.09%,
18.81% and 16.22%, respectively. The average annual total return (T) is computed
by equating the value at the end of the period (ERV) with a hypothetical initial
investment of $1,000 (P) over a period of years (n) according to the following
formula as required by the Securities and Exchange Commission: P(1 + T)(n) =
ERV. Average annual total returns are calculated after deduction of all
applicable fees and expenses.
American Fidelity Variable Annuity Fund A's total returns for the one, five
and ten year time periods ended December 31, 1998 were 18.09%, 136.71% and
349.72%, respectively. Total return is measured by comparing the investment
return at the end of a specified period to the initial investment. To calculate
total return, an initial investment is multiplied by 96% (which gives effect to
the 3.00% sales charge, 0.25% administrative fee and 0.75% minimum death benefit
expense). The product is then reduced by the $0.50 per payment expense and the
one-time contract certificate fee of $15. The resulting amount is divided by the
Accumulation Unit value at the beginning of the period in order to determine the
initial number of Accumulation Units purchased. The number of Accumulation Units
purchased is multiplied by the Accumulation Unit value as of the end of the
period in order to determine the ending value. The difference between the ending
value and the initial investment divided by the initial investment converted to
a percentage equals total return. Total return may be calculated for one, five
and ten year periods and for other time periods.
Returns for periods prior to Separate Account A's reorganization on January
1, 1999 reflect the investment performance of American Fidelity Variable Annuity
Fund A. For periods subsequent to 1998, Separate Account A will report its
performance as a unit investment trust investing in Dual Strategy Fund.
Performance will fluctuate over time, and any past performance results are not
an indication of future results.
The following assumptions are reflected in computations of average annual
total returns and in calculating total return: (1) reinvestment of dividends and
other distributions, (2) a complete redemption at the end of any period
illustrated and (3) no deduction for premium taxes.
ANNUITY PAYMENTS
VARIABLE ANNUITY PAYMENTS
A Participant may elect a variable annuity payout. Variable Annuity
Payments reflect the investment performance of Dual Strategy Fund during the
Annuity Period. Variable Annuity Payments are not guaranteed as to dollar
amounts.
The Company will determine the first Annuity Payment by using the 4.5%
annuity table in the Contract. It shows the dollar amount of the first monthly
payment which can be purchased with each $1,000 of value in a Participant
Account after deducting any applicable premium taxes.
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<PAGE> 26
The value of a Participant Account is determined by multiplying the
Participant's Accumulation Units by the Accumulation Unit value on the
fourteenth day before the first Annuity Payment. The first Annuity Payment
varies according to the Annuity Option selected and the Participant's age.
The Company will determine the number of Annuity Units payable for each
payment by dividing the dollar amount of the first Annuity Payment by the
Annuity Unit value on the Annuity Date. This sets the number of Annuity Units.
The number of Annuity Units payable remains the same unless a Participant
transfers a portion of the annuity benefit to a fixed annuity. The dollar amount
is not fixed and will change from month to month.
The dollar amount of Annuity Payments after the first payment is determined
by multiplying the fixed number of Annuity Units per payment by the Annuity Unit
value on the fourteenth calendar day preceding the payment date. The result is
the dollar amount of the payment.
ANNUITY UNIT
The value of an Annuity Unit is determined by multiplying the value of an
Annuity Unit for the immediately preceding period by the product of
1. the net investment factor for the fourteenth calendar day prior to the
valuation date for which the value is being determined, and
2. .9998794.
VARIABLE ANNUITY FORMULAS
The following formulas summarize the Annuity Payment calculations described
above:
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Dollar Amount of First Monthly Payment
Number of Variable Annuity Units = -----------------------------------------------------
Variable Annuity Unit Value on Date of First Payment
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<S> <C> <C> <C> <C> <C> <C>
Value of Annuity Net Investment Factor
Annuity = Unit on Preceding X .9998794 X for 14th Day Preceding
Unit Value Valuation Date Current Valuation Date
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Dollar Amount
of Second and Number of Annuity Unit Value
Subsequent Annuity = Annuity Units X for Period in Which
Payments Per Payment Payment is Due
</TABLE>
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed Annuity Payment will be at least as great
as that determined in accordance with the 4% annuity table in the Contract. The
fixed annuity provides a 4% annual guaranteed interest rate on all Annuity
Options. The Company may pay or credit excess interest on a fixed annuity at its
discretion.
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FEDERAL INCOME TAX CONSIDERATIONS
Note: The following description is based upon the Company's understanding of
current federal income tax law applicable to tax-qualified 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 policies. Purchasers bear the complete risk that the policies 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.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code"),
governs taxation of annuities in general. A Participant is not taxed on
increases in the value of his or her Participant Account until distribution
occurs, either in the form of a lump sum payment or as Annuity Payments under
the Annuity Option elected. For a lump sum payment received as a total surrender
(total redemption) or death benefit, the recipient is taxed on the portion of
the payment that exceeds the Participant's cost basis, which may be zero. The
taxable portion of a 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. For traditional IRA Contracts and SEP
and salary reduction SEP Contracts, the exclusion amount for payments based on a
fixed Annuity Option is determined by multiplying the payment by the ratio that
the Participant's cost basis (adjusted for any period certain or refund feature)
bears to the expected return under the Contract. For traditional IRA Contracts
and SEP and salary reduction SEP Contracts, the exclusion amount for payments
based on a variable annuity option is determined by dividing the Participant's
cost basis (adjusted for any period certain or refund feature) by the number of
years over which the annuity is expected to be paid. Payments received after the
Participant's investment has been recovered (i.e., when the total of the
excludable amounts equal the Participant's investment) are fully taxable. The
taxable portion is taxed at ordinary income rates. For Section 401(a), 401(k),
and 403(a) qualified pension, profit-sharing or annuity plans and 403(b)
tax-deferred annuities ("Qualified Plans"), the exclusion amount is generally
determined by dividing the cost-basis of the Contract by the anticipated number
of payments to be made under the Contract. Participants, 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, Separate Account A 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 adequately
diversified in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Contract as
an annuity contract would result in imposition of federal income tax to the
Participant 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 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 investment
portfolios 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 investment
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portfolio will be deemed adequately diversified if: (1) no more than 55% of the
value of the total assets of the portfolio is represented by any one investment;
(2) no more than 70% of the value of the total assets of the portfolio is
represented by any two investments; (3) no more than 80% of the value of the
total assets of the portfolio is represented by any three investments; and (4)
no more than 90% of the value of the total assets of the portfolio 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 Dual Strategy Fund will be managed in such a
manner as to comply with these diversification requirements.
MULTIPLE IRA CONTRACTS
For purposes of applying Section 72 of the Code to Contracts issued
pursuant to IRAs, SEPs and salary reduction SEPs ("IRA Contracts"), all IRA
Contracts are treated as one Contract and all distributions during a taxable
year are treated as one distribution.
TAX TREATMENT OF ASSIGNMENTS
Contracts issued pursuant to Qualified Plans generally may not be assigned.
The assignment or pledge of an IRA Contract may be a taxable event. The Owner of
a Contract should consult competent tax advisers before assigning or pledging
the Contract.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Participant 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 Participant, in
most cases, may elect not to have taxes withheld or to have withholding done at
a different rate.
Effective January 1, 1993, certain distributions from Qualified Plans 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; or (c) the portion of the distributions not
includible in gross income (i.e., returns of after-tax contributions).
Participants should consult their own tax counsel or other tax adviser regarding
withholding requirements.
QUALIFIED PLANS
The Contracts offered by the Prospectus are designed to be suitable for use
under various types of Qualified Plans and IRAs. Because of the minimum Premium
Deposit requirements, the Contracts may not be appropriate for some periodic
payment retirement plans. Taxation of participants in each Qualified Plan or IRA
varies with the type of plan and terms and conditions of each specific plan.
Participants, Annuitants and beneficiaries are cautioned that benefits under a
Qualified Plan or IRA 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.
Participants, Annuitants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. The Prospectus, under "Federal Tax
Matters," describes the types of qualified plans with which the Contract 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,
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<PAGE> 29
depending on individual facts and circumstances. Each purchaser should obtain
competent tax advice prior to participating in a Contract issued under a
qualified plan.
Contracts issued pursuant to qualified plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Statement of Additional Information. 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 policies.
TAX TREATMENT OF WITHDRAWALS
Special Tax Treatment for Lump Sum Distributions from Qualified Plans. If
the taxpayer receives an amount from a Contract issued pursuant to a Qualified
Plan and the distribution qualifies as a lump sum distribution under the Code,
the portion of the distribution that is included in income may be eligible for
special tax treatment. The plan administrator should provide the taxpayer with
information about the tax treatment of a lump sum distribution at the time the
distribution is made.
Special Rules for Distributions that are Rolled Over. Special rules apply
to a distribution from a Contract that relates to a Qualified Plan Contract or a
rollover IRA Contract if the distribution is properly rolled over in accordance
with the provisions of the Code. These provisions contain various requirements,
including the requirement that the rollover be made directly from the
distributing plan or within 60 days of receipt:
- To a traditional IRA under Section 408 of the Code.
- To another, similar Qualified Plan.
These special rules only apply to distributions that qualify as "eligible
rollover distributions" under the Code. In general, a distribution from a
Qualified Plan Contract will be an eligible rollover distribution except to the
extent:
- It represents the return of "after-tax" contributions or is not otherwise
includable in income.
- It is part of a series of payments made for the taxpayer's life (or life
expectancy) or the joint lives (or joint life expectancies) of the
taxpayer and his beneficiary under the plan or for a period of more than
ten years.
- It is a required minimum distribution under Section 401(a)(9) of the Code
as described below.
- It is made from a Qualified Plan by reason of a hardship.
The administrator of the applicable Qualified Plan should provide
additional information about these rollover tax rules when a distribution is
made.
Distributions in the Form of Annuity Payments. If any distribution from a
Qualified Plan Contract or IRA Contract is made in the form of annuity payments
(and is not eligible for rollover or is not in any event rolled over), a fixed
portion of each payment is generally excludable from income for federal income
tax purposes to the extent it is treated as allocable to the taxpayer's
"after-tax" contributions to the Contract (and any other cost basis in the
Contract). To the extent the payment exceeds such portion, it is includable in
income. The portion of the annuity payment that is excludable from income is
determined under detailed rules provided in the Code. If the annuity payments
continue after all excludable amounts have been paid, such additional payments
will generally be included in full in income.
Penalty Tax on Withdrawals. Generally, there is a penalty tax equal to 10%
of the portion of any payment from a Qualified Plan Contract or IRA Contract
that is included in income. This 10% penalty will
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not apply if the distribution meets certain conditions. Some of the
distributions that are excepted from the 10% penalty are listed below:
- A distribution that is made on or after the date the taxpayer reaches age
59 1/2.
- A distribution that is properly rolled over to a traditional IRA or to
another eligible employer plan or account.
- A distribution that is made on or after the death of the taxpayer.
- A distribution that is made when the taxpayer is totally disabled (as
defined in Section 72(m)(7) of the Code).
- A distribution that is made as part of a series of substantially equal
periodic payments which are made at least annually for the taxpayer's
life (or life expectancy) or the joint lives (or joint life expectancies)
of the taxpayer and his joint beneficiary under the Qualified Contract
(and, with respect to Qualified Plan Contracts, which begin after the
taxpayer separates from service with the employer maintaining the plan).
- A distribution that is made to by reason of separation from service with
the employer of the applicable plan during or after the calendar year in
which the taxpayer reaches age 55.
- A distribution that is made to the taxpayer to the extent it does not
exceed the amount allowable as a deduction for medical care under Section
213 of the Code (determined without regard to whether the taxpayer
itemizes deductions).
- A distribution that is made to an alternate payee pursuant to a qualified
domestic relations order (that meets the conditions of Section 414(p) of
the Code) (not applicable to IRA Contracts).
- Distributions from an IRA Contract for the purchase of medical insurance
(as described in Section 213(d)(1)(D) of the Code) for the taxpayer and
his or her spouse and dependents if the taxpayer has received
unemployment compensation for at least 12 weeks (this exception will no
longer apply after the taxpayer has been reemployed for at least 60
days).
- Distributions from an IRA Contract made to the taxpayer 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 taxpayer for the
taxable year.
- Distributions from an IRA Contract made to the taxpayer which are
qualified first-time home buyer distributions (as defined in Section
72(t)(8) of the Code).
Required Distributions. Distributions from a Contract issued pursuant to a
Qualified Plan or IRA Contract (other than a Roth IRA) must meet certain rules
concerning required distributions that are set forth in the Code. Such rules are
summarized below:
- Required distributions generally must start by April 1 of the calendar
year following the calendar year in which the taxpayer reaches age
70 1/2.
- If the Contract is issued pursuant to a Qualified Plan and the taxpayer
does not own more than 5% of the employer maintaining the plan, the
required distributions generally do not have to start until April 1 of
the calendar year following the later of the calendar year in which the
taxpayer reaches age 70 1/2 or the calendar year in which the taxpayer
terminates employment with the employer.
- When distributions are required under the Code, a certain minimum amount,
determined under the Code, must be distributed each year.
In addition, other rules apply under the Code to determine when and how
required minimum distributions must be made in the event of the taxpayer's
death. The applicable plan documents will contain such rules.
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WITHDRAWAL LIMITATIONS
Contracts issued pursuant to 401(k) Qualified Plans and 403(b) tax-deferred
annuities are subject to limitations on when amounts may be distributed. The
Prospectus, under "Federal Tax Matters," describes the applicable limitations.
UNDERWRITER
The Contracts are offered on a continuous basis by the Company's wholly
owned subsidiary, American Fidelity Securities, Inc. ("AFS"), 2000 N. Classen
Boulevard, Oklahoma City, Oklahoma 73106. AFS may also serve as an underwriter
and distributor of other separate accounts of the Company. The aggregate
underwriting commissions paid to and retained by AFS for 1996, 1997 and 1998
were $312,800, $449,200 and $600,700, respectively.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company included in this Statement of
Additional Information have been audited by KPMG LLP, independent auditors, as
set forth in its report appearing below. KPMG LLP's address is 700 Oklahoma
Tower, Oklahoma City, Oklahoma 73102.
LEGAL MATTERS
Winstead Sechrest & Minick P.C., Dallas, Texas, has provided advice on
certain matters relating to the federal securities and income tax laws
applicable to the Contracts.
FINANCIAL STATEMENTS
Following are the financial statements of Separate Account A and the
Company. The consolidated financial statements of the Company should be
considered only as bearing on the ability of the Company to meet its obligations
under the Contracts. They should not be considered as bearing on the investment
performance of the assets held in Separate Account A.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Fidelity Assurance Company:
We have audited the accompanying statement of assets and liabilities of American
Fidelity Separate Account A (Account A) (formerly known as American Fidelity
Variable Annuity Fund A), as of January 1, 1999. This financial statement is the
responsibility of Account A's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. Our procedures included confirmation of securities owned as of
December 31, 1998, by examination of the underlying portfolio. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of American Fidelity Separate
Account A as of January 1, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
January 12, 1999
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AMERICAN FIDELITY SEPARATE ACCOUNT A
(formerly known as American Fidelity Variable Annuity Fund A)
Statement of Assets and Liabilities
January 1, 1999
<TABLE>
<CAPTION>
Investments, at fair value:
<S> <C>
American Fidelity Dual Strategy Fund shares (cost $184,548,449) $ 184,548,449
-------------
Total assets 184,548,449
Total liabilities --
-------------
Net assets $ 184,548,449
=============
Accumulation units outstanding 7,584,332
=============
Net asset value per unit $ 24.3329
=============
</TABLE>
See accompanying notes to statement of assets and liabilities.
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AMERICAN FIDELITY SEPARATE ACCOUNT A
(formerly known as American Fidelity Variable Annuity Fund A)
Notes to Statement of Assets and Liabilities
January 1, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
American Fidelity Separate Account A (Account A) is a separate
account of American Fidelity Assurance Company (AFA). Account A
was formerly known as American Fidelity Variable Annuity Fund A,
and operated as an open-end diversified management investment
company from 1968 to December 31, 1998. Effective January 1,
1999, it was converted to a unit investment trust separate
account, and it transferred its investment portfolio to the
American Fidelity Dual Strategy Fund, Inc. (the Fund) in exchange
for shares of the Fund.
(b) INVESTMENTS
Account A's investment objectives are primarily long-term growth
of capital and secondarily the production of income. Investments
are made in the portfolio of the Fund and are valued at the
reported net asset values of such portfolio, which values its
investment securities at fair value. At January 1, 1999, the
reported net asset value of the Fund was equal to its net asset
value at December 31, 1998, because January 1, 1999 was a holiday
and the markets were not open. The cost of Account A's shares of
the Fund is equal to the fair value of those shares at January 1,
1999. Transactions are recorded on a trade date basis.
(c) INCOME TAXES
Account A is not taxed separately because the operations of
Account A are part of the total operations of AFA. AFA files its
federal income tax returns under sections of the Internal Revenue
Code applicable to life insurance companies. Account A will not
be taxed as a "Regulated Investment Company" under Subchapter "M"
of the Internal Revenue Code.
(d) ANNUITY RESERVES
Annuity reserves are computed for currently payable contracts to
the Progressive Annuity Mortality Table. The assumed interest is
3.5 percent the annuitant elects otherwise, in which case the
rate may vary from zero to 5 percent as regulated by the laws of
the respective states. Charges to annuity reserves for mortality
and expense risks experience are reimbursed to AFA if the
reserves required are less than originally estimated. If
additional
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AMERICAN FIDELITY SEPARATE ACCOUNT A
(formerly known as American Fidelity Variable Annuity Fund A)
Notes to Statement of Assets and Liabilities
January 1, 1999
reserves are required, AFA reimburses Account A. At January 1,
1999, there were no contract owners who had elected the variable
annuity method of payout. Accordingly, Account A held no annuity
reserves at January 1, 1999.
(e) 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.
(2) VARIABLE ANNUITY CONTRACTS AND TRANSACTIONS WITH AFFILIATES
During the accumulation period, contract owners may partially or totally
withdraw from Account A by surrendering a portion or all of their
accumulation units. The Internal Revenue Code may limit certain
withdrawals based upon age, disability, and other factors. When contract
owners withdraw, they receive the current value of their accumulation
units.
(3) YEAR 2000 RISKS
Like other separate accounts, financial and business organizations and
individuals around the world, Account A could be adversely affected if
the computer systems used by AFA and Account A's other service providers
do not properly process and calculate date-related information and data
from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." AFA has had a formal project team (including 22 information
systems professionals) working to correct the problem since 1996. In the
briefest terms, the correction is to change all date related fields in
AFA's computer systems to four digits instead of two digits. At the same
time, all relationships with systems outside AFA must be checked for the
same change and all must be tested to determine that relationships
continue to be compatible. Those systems were tested on December 31,
1997 and went through year-end processing without incident. The final
test of all systems will be run in 1999. Even though management of AFA
is expending considerable resources in a concerted effort to meet this
technology-related threat, there is no guarantee that there will be no
adverse impact on Account A of some sort as January 1, 2000 passes.
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[LOGO] [KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
American Fidelity Assurance Company:
We have audited the accompanying consolidated balance sheets of American
Fidelity Assurance Company and subsidiaries (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 American Fidelity
Assurance Company and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
March 15, 1999
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AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------- ----------
<S> <C> <C>
Investments:
Fixed maturities held-to-maturity, at amortized cost
(fair value $222,215 and $241,863 in 1998 and
1997, respectively) $ 211,622 234,799
Fixed maturities available-for-sale, at fair value
(amortized cost of $691,835 and $622,712
in 1998 and 1997, respectively) 720,221 642,577
Equity securities, at fair value:
Common stocks (cost $11,272 and $11,023 in
1998 and 1997, respectively) 13,317 11,736
Mortgage loans on real estate, net 133,440 135,122
Investment real estate, at cost (less accumulated
depreciation of $815 and $1,350 in 1998
and 1997, respectively) 10,160 9,070
Policy loans 11,147 8,668
Short-term and other investments 19,181 20,770
---------- ----------
1,119,088 1,062,742
---------- ----------
Cash 17,245 8,427
Accrued investment income 15,523 14,357
Accounts receivable:
Uncollected premiums 22,560 20,571
Reinsurance receivable 61,201 57,503
Other 8,372 15,248
---------- ----------
92,133 93,322
---------- ----------
Deferred policy acquisition costs 193,741 177,737
Other assets 8,497 5,761
Separate account assets 188,721 137,090
---------- ----------
Total assets $1,634,948 1,499,436
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 38
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
---------- ----------
<S> <C> <C>
Policy liabilities:
Reserves for future policy benefits:
Life and annuity $ 131,494 105,663
Accident and health 164,067 140,530
Unearned premiums 3,363 2,686
Benefits payable 36,830 35,347
Funds held under deposit administration contracts 577,301 580,499
Other policy liabilities 96,666 92,144
---------- ----------
1,009,721 956,869
---------- ----------
Other liabilities:
Net deferred income tax liability 63,155 59,198
General expenses, taxes, licenses and fees payable
and other liabilities 39,868 36,099
---------- ----------
103,023 95,297
---------- ----------
Notes payable 57,858 50,719
Separate account liabilities 188,721 137,090
---------- ----------
Total liabilities 1,359,323 1,239,975
---------- ----------
Stockholder's equity:
Common stock, par value $10 per share. 250,000
shares authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 23,244 23,244
Accumulated other comprehensive income 19,775 13,371
Retained earnings 230,106 220,346
---------- ----------
Total stockholder's equity 275,625 259,461
Commitments and contingencies (notes 9, 11 and 14)
---------- ----------
Total liabilities and stockholder's equity $1,634,948 1,499,436
========== ==========
</TABLE>
15
<PAGE> 39
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity $ 26,901 25,282 24,187
Accident and health 206,821 181,944 166,057
---------- ---------- ----------
233,722 207,226 190,244
Net investment income 70,479 69,175 67,502
Other 14,757 13,190 11,250
---------- ---------- ----------
Total revenues 318,958 289,591 268,996
Benefits:
Benefits paid or provided:
Life and annuity 18,790 18,045 18,539
Accident and health 116,908 105,594 93,858
Interest credited to funded contracts 29,208 30,207 28,386
Increase in reserves for future policy benefits:
Life and annuity (net of increase (decrease) in
reinsurance reserves ceded of $1,362, $55,
and $(3) in 1998, 1997, and 1996, respectively) 1,179 2,788 4,336
Accident and health (net of increase) in
reinsurance reserves ceded $9,316, $9,838, and
$6,704, in 1998, 1997, and 1996, respectively) 13,588 10,250 13,259
---------- ---------- ----------
179,673 166,884 158,378
---------- ---------- ----------
Expenses:
Selling costs 64,931 56,835 47,105
Other operating, administrative and general expenses 49,258 43,241 44,942
Taxes, other than federal income taxes, and licenses
and fees 7,644 7,251 6,535
Increase in deferred policy acquisition costs (16,004) (15,240) (10,082)
---------- ---------- ----------
105,829 92,087 88,500
---------- ---------- ----------
Total benefits and expenses 285,502 258,971 246,878
---------- ---------- ----------
Income before income taxes 33,456 30,620 22,118
Income taxes:
Current 10,482 2,680 4,421
Deferred 508 5,802 4,650
---------- ---------- ----------
10,990 8,482 9,071
---------- ---------- ----------
Net income $ 22,466 22,138 13,047
========== ========== ==========
Basic net income per share $ 89.86 88.55 52.19
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 40
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 2,500 17,718 223,195 16,028 259,441
Comprehensive income:
Net income -- -- 13,047 -- 13,047
Net change in unrealized holding
gain on investments available-
for-sale, net of deferred taxes -- -- -- (9,776) (9,776)
------------
Comprehensive income 3,271
Dividends -- -- (4,200) -- (4,200)
Capital contribution -- 2,198 -- -- 2,198
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 2,500 19,916 232,042 6,252 260,710
Comprehensive income:
Net income -- -- 22,138 -- 22,138
Net change in unrealized holding
gain on investments available-
for-sale, net of deferred taxes -- -- -- 7,119 7,119
------------
Comprehensive income 29,257
Dividends -- -- (33,834) -- (33,834)
Capital contribution -- 3,328 -- -- 3,328
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 2,500 23,244 220,346 13,371 259,461
Comprehensive income:
Net income -- -- 22,466 -- 22,466
Net change in unrealized holding
gain on investments available-
for-sale, net of deferred taxes -- -- -- 6,404 6,404
------------
Comprehensive income 28,870
Dividends -- -- (12,706) -- (12,706)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 $ 2,500 23,244 230,106 19,775 275,625
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 41
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,466 22,138 13,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation on investment real estate 212 653 935
Accretion of discount on investments (793) (546) (469)
Realized gains on investments (2,053) (1,823) (1,793)
Increase in deferred policy acquisition costs (16,004) (15,240) (10,082)
Increase in accrued investment income (1,166) (218) (478)
(Increase) decrease in accounts receivable 1,189 (23,254) (15,006)
Increase in policy liabilities 32,450 27,694 18,017
Increase in interest credited on deposit and
other investment-type contracts 29,208 30,207 28,386
Charges on deposit and other investment-type contracts (3,255) (2,878) (2,812)
Increase in general expenses, taxes, licenses and
fees payable and other liabilities 3,769 2,656 4,257
Deferred income taxes 508 5,802 4,650
Other (2,737) 949 840
---------- ---------- ----------
Total adjustments 41,328 24,002 26,445
---------- ---------- ----------
Net cash provided by operating activities 63,794 46,140 39,492
---------- ---------- ----------
Cash flows from investing activities:
Sale, maturity or repayment of investments:
Fixed maturities held-to-maturity 24,305 20,940 26,867
Fixed maturities available-for-sale 122,675 133,727 166,678
Equity securities 160 11,673 5,708
Mortgage loans on real estate 29,244 20,200 15,736
Real estate 3,244 9,221 9,101
Net decrease (increase) in short-term and
other investments 1,589 (11,013) (3,416)
Purchase of investments:
Fixed maturities held-to-maturity (492) (4,349) (45,961)
Fixed maturities available-for-sale (191,017) (211,464) (171,753)
Equity securities (409) (19,489) (4,580)
Mortgage loans on real estate (27,415) (24,793) (24,671)
Real estate (3,263) (1,403) (907)
Policy loans, net (2,479) (309) (194)
Cash received upon assumption of reserves (note 12) 18,747 -- --
---------- ---------- ----------
Net cash used in investing activities (25,111) (77,059) (27,392)
---------- ---------- ----------
</TABLE>
(Continued)
18
<PAGE> 42
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends paid to parent $ (12,706) (14,156) (4,200)
Capital contribution from parent -- 3,328 --
Proceeds from notes payable 25,000 109,775 9,075
Repayment of notes payable (17,861) (76,583) (8,278)
Deposits from deposit and other investment-type
contracts 60,269 87,709 67,478
Withdrawals from deposit and other investment-type
contracts (84,567) (86,689) (74,939)
---------- ---------- ----------
Net cash (used in) provided by financing activities (29,865) 23,384 (10,864)
---------- ---------- ----------
Net increase (decrease) in cash 8,818 (7,535) 1,236
Cash at beginning of year 8,427 15,962 14,726
---------- ---------- ----------
Cash at end of year $ 17,245 8,427 15,962
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on notes payable $ 3,073 2,076 1,340
========== ========== ==========
Federal income taxes $ 6,600 4,800 7,100
========== ========== ==========
Supplemental disclosure of noncash investing activities:
Change in unrealized holding gain on investments
available-for-sale, net of deferred tax expense (benefit)
of $3,449, $3,840, and $(6,289), in 1998, 1997, and
1996, respectively $ 6,404 7,119 (9,776)
========== ========== ==========
</TABLE>
(Continued)
19
<PAGE> 43
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosure of noncash financing activities:
Capital contribution from parent through
forgiveness of deferred tax liability $ -- -- 2,198
=========== =========== ===========
Amounts transferred to Parent through dividend of
common stock of affiliated companies:
Fixed maturities $ -- 8,567 --
=========== =========== ===========
Real estate, net $ -- 2,632 --
=========== =========== ===========
Short-term and other investments $ -- 3,006 --
=========== =========== ===========
Accounts receivable $ -- 732 --
=========== =========== ===========
Accrued investment income $ -- 109 --
=========== =========== ===========
Other assets $ -- 241 --
=========== =========== ===========
Policy liabilities $ -- 378 --
=========== =========== ===========
Notes payable $ -- 2,312 --
=========== =========== ===========
Deferred tax liability $ -- 683 --
=========== =========== ===========
Other liabilities $ -- 682 --
=========== =========== ===========
Amounts transferred to Parent through dividend of
common stock of non-affiliated companies:
Common stock $ -- 6,485 --
=========== =========== ===========
Deferred tax liability assumed by the Company $ -- (1,961) --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 44
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
American Fidelity Assurance Company (AFA or the Company) and
subsidiaries provide a variety of financial services. AFA is a wholly
owned subsidiary of American Fidelity Corporation (AFC), a Nevada
insurance holding company. The principal subsidiary of AFA for the
year ended December 31, 1996, was Security General Life Insurance
Company (SGLI), a life insurance company. The Company and its
insurance subsidiaries are subject to state insurance regulations and
periodic examinations by state insurance departments.
AFA is licensed in 49 states and the District of Columbia with
approximately 38% of direct premiums written in Oklahoma, Texas, and
California. AFA is represented by approximately 240 salaried managers
and agents, and over 8,300 brokers. Activities of AFA are largely
concentrated in the group disability income, group and individual
annuity, and individual medical markets. In addition, individual and
group life business is also conducted. The main thrust of AFA's sales
is worksite marketing of voluntary products through the use of payroll
deduction. The Company sells these voluntary products through a
salaried sales force that is broken down into two divisions: the
Association Group Division (AGD) and American Fidelity Educational
Services (AFES). AGD specializes in voluntary disability income
insurance programs aimed at selected groups and associations whose
premiums are funded by employees through payroll deductions. AFES
focuses on marketing to public school employees with ancillary
insurance products such as disability income, tax sheltered annuities,
life insurance, dread disease, and accidental death and dismemberment.
These premiums are also funded by employees through payroll
deductions. The expertise gained by the Company in worksite marketing
of voluntary products is used by the Strategic Alliance Division in
developing products to meet special situations and focusing on
marketing to a broad range of employers through independent broker
agencies and agents interested in getting into or enhancing their
payroll deduction capability.
A significant portion of the Company's business consists of group and
individual annuities. The Company's earnings related to these products
are impacted by conditions in the overall interest rate environment.
(b) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, which vary in some
respects from statutory accounting practices prescribed or permitted
by state insurance departments (see note 2). The consolidated
financial statements include the accounts and operations of AFA and
its wholly owned subsidiaries, except where control is expected to be
temporary. All significant
(Continued)
21
<PAGE> 45
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
(c) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates. Principal estimates that could change in the future are the
actuarial assumptions used in establishing deferred policy acquisition
costs and policy liabilities.
(d) INVESTMENTS
Management determines the appropriate classification of investments at
the time of purchase. If management has the intent and the Company has
the ability at the time of purchase to hold the investments until
maturity, they are classified as held-to-maturity and carried at
amortized cost. Investments to be held for indefinite periods of time
and not intended to be held-to-maturity are classified as
available-for-sale and carried at fair value. Fair values of
investments available-for-sale are based on quoted market prices.
The effects of any unrealized holding gains or losses on securities
available-for-sale are reported as accumulated other comprehensive
income, a separate component of stockholder's equity, net of deferred
taxes. Transfers of securities between categories are recorded at fair
value at the date of transfer.
Fixed maturities held-to-maturity and short-term investments (bonds,
notes, and redeemable preferred stocks) are reported at cost, adjusted
for amortization of premium or accretion of discount because it is
management's intent to hold these investments to maturity. Equity
securities (common and nonredeemable preferred stocks) are reported
at current fair value. Mortgage loans on real estate are reported at
the unpaid balance less an allowance for possible losses. Investment
in real estate is carried at cost less accumulated depreciation.
Investment in real estate, excluding land, is depreciated on a
straight-line basis using the estimated life of 39 years. Policy loans
are reported at the unpaid balance.
Realized gains or losses on disposal of investments are determined on
a specific-identification basis and are included in the accompanying
consolidated statements of income.
Because the Company's primary business is in the insurance industry,
the Company holds a significant amount of assets that are matched with
its liabilities in relation to maturity and interest margin. In order
to maximize earnings and minimize risk, the Company invests in a
diverse portfolio of investments. The portfolio is diversified by
geographic region, investment
(Continued)
22
<PAGE> 46
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
type, underlying collateral, maturity, and industry. Management does
not believe the Company has any significant concentrations of credit
risk in its investments.
The investment portfolio includes fixed maturities, equity securities,
mortgage loans, real estate, policy loans, and short-term investments.
The Company's portfolio does not include any fixed maturities that are
low investment-grade and have a high-yield ("junk bonds"). The Company
limits its risks by investing in fixed maturities and equity
securities of rated companies; mortgage loans adequately
collateralized by real estate; selective real estate supported by
appraisals; and policy loans collateralized by policy cash values. In
addition, the Company performs due diligence procedures prior to
making mortgage loans. These procedures include evaluations of the
creditworthiness of the mortgagees and/or tenants and independent
appraisals. Certain fixed maturities are guaranteed by the United
States government.
The Company periodically reviews its investment portfolio to determine
if allowances for possible losses are necessary. In connection with
this determination, management reviews published market values, credit
ratings, independent appraisals, and other valuation information.
While management believes that the allowances are adequate,
adjustments may be necessary in the future due to changes in economic
conditions. In addition, regulatory agencies periodically review
investment valuation as an integral part of their examination process.
Such agencies may require the Company to recognize adjustments to the
losses based upon available information and judgments of the
regulatory examiners at the time of their examination.
(e) RECOGNITION OF PREMIUM REVENUE AND COSTS
Revenues from life, payout annuity (with life contingencies), and
accident and health policies represent premiums recognized over the
premium-paying period and are included in life, annuity, and accident
and health premiums. Expenses are associated with earned premiums to
result in recognition of profits over the life of the policies.
Expenses include benefits paid to policyholders and the change in the
reserves for future policy benefits.
Revenues from accumulation policies, which are included in other
revenues, represent amounts assessed against policyholders. Such
assessments are principally surrender charges. Policyholder account
balances for accumulation annuities consist of premiums received, plus
credited interest, less accumulated policyholder assessments.
Policyholder account balances are reported in the consolidated balance
sheets as funds held under deposit administration contracts. Expenses
for accumulation annuities represent interest credited to policyholder
account balances.
Revenues from most universal life policies, which are included in
other revenues, represent amounts assessed against policyholders. Such
assessments are principally mortality charges,
(Continued)
23
<PAGE> 47
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
surrender charges, and policy service fees. Policyholder account
balances consist of premiums received plus credited interest, less
accumulated policyholder assessments. Policyholder account balances
are reported in the consolidated balance sheets as other policy
liabilities. Expenses include interest credited to policyholder
account balances and benefits in excess of account balances returned
to policyholders.
(f) POLICY ACQUISITION COSTS
The Company defers costs which vary with and are primarily related to
the production of new business. Deferred costs associated with life,
annuity, universal life, and accident and health insurance policies
consist principally of field sales compensation, direct response
costs, underwriting and issue costs, and related expenses. Deferred
costs associated with life policies are amortized (with interest) over
the anticipated premium paying period of the policies using
assumptions that are consistent with the assumptions used to calculate
policy reserves. Deferred costs associated with annuities and
universal life policies are amortized over the life of the policies at
a constant rate based on the present value of the estimated gross
profit to be realized. Deferred costs related to accident and health
insurance policies are amortized over the anticipated premium paying
period of the policies based on the Company's experience. Deferred
policy acquisition costs are subject to recoverability testing at the
time of policy issue and at the end of each accounting period, and are
written off if determined to be unrecoverable.
(g) POLICY LIABILITIES
Life and annuity and accident and health policy benefit reserves are
primarily calculated using the net level reserve method. The net level
reserve method includes assumptions as to future investment yields,
withdrawal rates, mortality rates, and other assumptions based on the
Company's experience. These assumptions are modified as necessary to
reflect anticipated trends and include provisions for possible
unfavorable deviation.
Reserves for benefits payable are determined using case-basis
evaluations and statistical analyses. These reserves represent the
estimate of all benefits incurred but unpaid. The estimates are
periodically reviewed and, as adjustments become necessary, they are
reflected in current operations. Although such estimates are the
Company's best estimate of the ultimate value, the actual results may
vary from these values in either direction.
(h) REINSURANCE
The Company accounts for reinsurance transactions as prescribed by
Statement of Financial Accounting Standards No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" (Statement 113). Statement 113 requires the reporting of
reinsurance transactions relating to the balance sheet on a gross
basis and precludes immediate gain recognition on reinsurance
contracts.
(Continued)
24
<PAGE> 48
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income 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 and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
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 effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) EQUIPMENT
Equipment, which is included in other assets, is stated at cost and is
depreciated on a straight-line basis using estimated lives of 3 to 10
years. Additions, renewals, and betterments are capitalized.
Expenditures for purchased software, maintenance, and repairs
generally are expensed. The costs associated with internally developed
software are generally capitalized. Upon retirement or disposal of an
asset, the asset and related accumulated depreciation are eliminated
and any related gain or loss is included in income.
(k) SEPARATE ACCOUNTS
The Company maintains a separate account under Oklahoma insurance law
designated as American Fidelity Separate Account A (Account A).
Account A was formerly known as American Fidelity Variable Annuity
Fund A, and operated as an open-end diversified management investment
company from 1968 to December 31, 1998. Effective January 1, 1999, it
was converted to a unit investment trust separate account, and it
transferred its investment portfolio to the American Fidelity Dual
Strategy Fund (the Fund) in exchange for shares of the Fund. Under
Oklahoma law, the assets of Account A are segregated from the
Company's assets, are held for the exclusive benefit of the variable
annuity contract owners and are not chargeable with liabilities
arising out of the business conducted by any other account or by the
Company.
The Company also maintains a separate account under Oklahoma insurance
law designated as American Fidelity Separate Account B (Account B).
Account B is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. Under Oklahoma law, the
assets of each of the nine segregated sub-accounts are held for the
exclusive benefit of the variable annuity contract owners and are not
chargeable with liabilities arising out of the business conducted by
any other account or by the Company.
(Continued)
25
<PAGE> 49
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(l) BASIC NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of
shares outstanding. During the years ended December 31, 1998, 1997,
and 1996, the weighted average number of shares was 250,000. There are
no dilutive securities outstanding.
(m) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent
with the current year presentation.
(n) NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," in 1998. SFAS No. 130
establishes standards for reporting and presentation of comprehensive
income and its components in a full set of financial statements.
Comprehensive income (loss) consists of net income (loss) and net
unrealized gains (losses) on securities available-for-sale and is
presented in the consolidated statements of stockholders' equity. SFAS
No. 130 requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
On January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits." SFAS No.
132 revises employers' disclosures about pension and other
postretirement benefits plans. SFAS No. 132 does not change the method
of accounting for such plans. Prior year disclosures in the notes to
the financial statements have been revised to conform to the
requirements of SFAS No. 132.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires that a company recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. This statement is required to be adopted by
the Company in 2000. Management does not anticipate this statement to
have a material adverse impact on the consolidated financial position
or the future results of operations of the Company.
In December 1997, the AICPA issued Statement of Position No. 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). This statement provides: (1) guidance for
determining when an entity should recognize a liability for
guaranty-fund and other insurance-related assessments, (2) guidance on
how to measure the
(Continued)
26
<PAGE> 50
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
liability, (3) guidance on when an asset may be recognized for a
portion of all of the assessment liability or paid assessment that can
be recovered through premium tax offsets or policy surcharges, and (4)
requirements for disclosures of certain information. SOP 97-3 is
effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not anticipate this statement to
have a material impact on the consolidated financial position or the
future results of the operations of the Company.
In March 1998, the AICPA issued Statement of Position No. 98-1 (SOP
98-1), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement provides guidance for
determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. The
guidance provided by SOP 98-1 applies only to such costs incurred
prospectively and is no retroactive to prior periods. In the past, the
Company has capitalized certain costs related to internally-developed
software, in a manner consistent with the guidance provided by SOP
98-1. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The Company does not anticipate this statement to have a
material impact on the consolidated financial position or the future
results of the operations of the Company.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts that do
not Transfer Insurance Risk" (SOP 98-7). This statement provides that
insurance and reinsurance contracts for which the deposit method is
appropriate should be classified and accounted for as one of the
following, those that (1) transfer only significant timing risk, (2)
transfer only significant underwriting risk, (3) transfer neither
significant timing nor underwriting risk, or (4) have an indeterminate
risk. SOP 98-7 does not address when deposit accounting should be
applied. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The Company is currently completing its evaluation of the
financial impact of this statement, as well as the changes to its
related disclosures.
(2) STATUTORY FINANCIAL INFORMATION
The Company is required to file statutory financial statements with
state insurance regulatory authorities. Accounting principles used to
prepare these statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting
principles. The Company reported statutory net income for the years
ended December 31, 1998, 1997, and 1996, of approximately $12,577,000,
$16,276,000, and $13,227,000, respectively. The Company reported
statutory capital and surplus at December 31, 1998 and 1997, of
approximately $126,277,000 and $119,523,000, respectively.
(Continued)
27
<PAGE> 51
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
Retained earnings of the Company and its insurance subsidiaries are
restricted as to payment of dividends by statutory limitations
applicable to insurance companies. Without prior approval of the state
insurance department, dividends that can be paid by the Company or an
insurance subsidiary are generally limited to the greater of (a) 10%
of statutory capital and surplus, or (b) the statutory net gain from
operations. These limitations are based on the amounts reported for
the previous calendar year.
The Oklahoma Insurance Department has adopted risk based capital (RBC)
requirements for life insurance companies. These requirements are
applicable to the Company. The RBC calculation serves as a benchmark
for the regulation of life insurance companies by state insurance
regulators. RBC provides for surplus formulas similar to target
surplus formulas used by commercial rating agencies. The formulas
specify various weighting factors that are applied to statutory
financial balances or various levels of activity based on the
perceived degree of risk, and are set forth in the RBC requirements.
The amount determined under such formulas is called the authorized
control level RBC (ACLC).
The RBC guidelines define specific capital levels based on a company's
ACLC that are determined by the ratio of the company's total adjusted
capital (TAC) to its ACLC. TAC is equal to statutory capital, plus the
Asset Valuation Reserve and any voluntary investment reserves, 50% of
dividend liability, and certain other specified adjustments. Companies
where TAC is less than or equal to 2.0 times ACLC are subject to
certain corrective actions, as set forth in the RBC requirements.
At December 31, 1998 and 1997, the statutory TAC of the Company
significantly exceeds the level requiring corrective action.
On March 16, 1998, the NAIC approved the codification of statutory
accounting practices. The codification will constitute the only source
of "prescribed" statutory accounting practices and is subject to
adoption by the Oklahoma Insurance Department. The Statements of
Statutory Accounting Principles established under the codification are
generally effective January 1, 2001. The Company has not determined
the impact the adoption of the codification will have on statutory
surplus.
(Continued)
28
<PAGE> 52
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(3) INVESTMENTS
Investment income for the years ended December 31 is summarized below
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest on fixed maturities $ 64,207 61,556 58,271
Dividends on equity securities 7 25 44
Interest on mortgage loans 11,890 12,091 11,747
Investment real estate income 1,208 2,285 3,295
Interest on policy loans 1,468 1,411 1,281
Interest on short-term investments 267 244 120
Net realized gains on investments 2,053 1,823 1,793
Other 647 787 1,186
-------- -------- --------
81,747 80,222 77,737
Less investment expenses (11,268) (11,047) (10,235)
-------- -------- --------
Net investment income $ 70,479 69,175 67,502
======== ======== ========
</TABLE>
Net realized gains (losses) and the changes in unrealized gains
(losses) on investments for the years ended December 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
REALIZED UNREALIZED REALIZED UNREALIZED REALIZED UNREALIZED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities
held-to-maturity $ 90 -- 173 -- (1,127) --
Fixed maturities
available-for-sale 534 8,521 449 12,600 573 (19,051)
Equity securities -- 1,332 -- (1,641) 27 2,986
Real estate 1,283 -- 1,219 -- 2,398 --
Mortgage loans 147 -- (15) -- (68) --
Other (1) -- (3) -- (10) --
---------- ---------- ---------- ---------- ---------- ----------
$ 2,053 9,853 1,823 10,959 1,793 (16,065)
========== ========== ========== ========== ========== ==========
</TABLE>
Included in the above realized gains (losses) is the increase
(decrease) in the allowance for possible losses on mortgage loans of
$(147,000), $16,000, and $(790,000), in 1998, 1997, and 1996,
respectively, and the increase in the allowance for losses on
investment real estate of $117,000 in 1996. In addition, the Company
realized net gains of approximately $554,000 and $1,000 during 1998,
and 1996, respectively, on investments in fixed maturities that were
called or prepaid.
(Continued)
29
<PAGE> 53
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(a) HELD-TO-MATURITY
The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 9,011 992 -- 10,003
Corporate securities 118,417 7,445 -- 125,862
Mortgage-backed securities 84,194 2,181 (25) 86,350
-------- -------- -------- --------
Totals $211,622 10,618 (25) 222,215
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 9,001 659 -- 9,660
Corporate securities 131,251 4,826 (354) 135,723
Mortgage-backed securities 94,547 2,037 (104) 96,480
-------- -------- -------- --------
Totals $234,799 7,522 (458) 241,863
======== ======== ======== ========
</TABLE>
The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity at December 31, 1998 are shown below (in
thousands) by contractual maturity. Expected maturities will differ
from contractual maturities because the issuers of such securities may
have the right to call or prepay obligations with or without call or
prepayment penalties.
(Continued)
30
<PAGE> 54
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less $ 2,999 3,031
Due after one year through five years 18,530 19,141
Due after five years through ten years 48,716 52,084
Due after ten years 57,183 61,609
---------- ----------
127,428 135,865
Mortgage-backed securities 84,194 86,350
---------- ----------
$ 211,622 222,215
========== ==========
</TABLE>
Proceeds from sales of investments in fixed maturities
held-to-maturity during 1998, 1997, and 1996 were approximately
$5,887,000, $9,006,000, and $7,948,000, respectively. Gross gains of
approximately $173,000, and $33,000, in 1997 and 1996, respectively,
were realized on those sales. In 1998 and 1996 gross losses of
approximately $124,000 and $1,161,000, respectively were realized on
those sales. In 1998, 1997, and 1996, significant deterioration in the
issuers' creditworthiness caused the Company to change its intent to
hold these securities to maturity.
(b) AVAILABLE-FOR-SALE
The gross unrealized holding gains on equity securities
available-for-sale were approximately $2,108,000 and $779,000 in 1998
and 1997, respectively. Gross unrealized holding losses on equity
securities available-for-sale were approximately $63,000 and $66,000
in 1998 and 1997, respectively.
(Continued)
31
<PAGE> 55
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 89,249 3,230 (25) 92,454
Corporate securities 439,030 21,958 (290) 460,698
Mortgage-backed securities 163,556 3,652 (139) 167,069
-------- ------- ----- --------
Totals $691,835 28,840 (454) 720,221
======== ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 89,182 2,249 (65) 91,366
Corporate securities 382,599 14,128 (195) 396,532
Mortgage-backed securities 150,931 3,909 (161) 154,679
-------- ------- ----- --------
Totals $622,712 20,286 (421) 642,577
======== ======= ===== ========
</TABLE>
The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale at December 31, 1998 are shown below (in
thousands) by contractual maturity. Expected maturities will differ from
contractual maturities because the issuers of such securities may have the
right to call or prepay obligations with or without call or prepayment
penalties.
(Continued)
32
<PAGE> 56
AMERICAN FlDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------- ---------
<S> <C> <C>
Due in one year or less $ 46,395 46,830
Due after one year through five years 199,552 207,039
Due after five years through ten years 182,320 191,083
Due after ten years 100,012 108,200
-------- --------
528,279 553,152
Mortgage-backed securities 163,556 167,069
-------- --------
$691,835 720,221
======== ========
</TABLE>
Proceeds from sales of investments in fixed maturities available-for-sale
were approximately $37,058,000, $102,958,000, and $136,577,000, in 1998,
1997, and 1996, respectively. Gross gains of approximately $206,000,
$1,152,000, and $1,257,000 and gross losses of approximately $12,000,
$703,000, and $684,000 were realized on those sales in 1998, 1997, and
1996, respectively.
At December 31, 1998 and 1997, investments with carrying values of
approximately $2,662,000 and $2,497,000, respectively, were on deposit with
state insurance departments as required by statute.
(Continued)
33
<PAGE> 57
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments (in thousands) and the
fair value estimates, methods, and assumptions are set forth below:
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------- ----------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 17,245 17,245 8,427 8,427
Short-term and other investments 19,181 19,181 20,770 20,770
Accounts receivable 30,932 30,932 35,819 35,819
Accrued investment income 15,523 15,523 14,357 14,357
Reinsurance receivables on paid
and unpaid benefits 61,201 61,201 57,503 57,503
Policy loans 11,147 11,147 8,668 8,668
Fixed maturities held-to-maturity 211,622 222,215 234,799 241,863
Fixed maturities available-for-sale 720,221 720,221 642,577 642,577
Equity securities 13,317 13,317 11,736 11,736
Mortgage loans 133,440 142,600 135,122 145,763
Financial liabilities:
Certain policy liabilities 637,618 620,611 639,272 620,976
Other liabilities 39,868 39,868 36,099 36,099
Notes payable 57,858 58,250 50,719 51,247
</TABLE>
CASH, SHORT-TERM AND OTHER INVESTMENTS, ACCOUNTS RECEIVABLE, ACCRUED
INVESTMENT INCOME, REINSURANCE RECEIVABLES ON PAID AND UNPAID BENEFITS, AND
OTHER LIABILITIES
The carrying amount of these financial instruments approximates fair value
because they mature within a relatively short period of time and do not
present unanticipated credit concerns.
POLICY LOANS
Policy loans have average interest rates of 6.75% and 6.95% as of December
31, 1998 and 1997, respectively, and have no specified maturity dates. The
aggregate fair value of policy loans approximates the carrying value
reflected on the consolidated balance sheets. These loans typically carry
an interest rate that is tied to the crediting rate applied to the related
policy and contract reserves. Policy loans are an integral part of the life
insurance policies which the Company has in force and cannot be valued
separately.
(Continued)
34
<PAGE> 58
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
FIXED MATURITY INVESTMENTS
The fair value of fixed maturity investments is estimated based on bid
prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of certain securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar instruments,
adjusted for the differences between the quoted instruments and the
instruments being valued.
EQUITY SECURITIES
The fair value of equity securities investments of the Company is based on
bid prices published in financial newspapers or bid quotations received
from securities dealers.
MORTGAGE LOANS
Fair values are estimated for portfolios of loans with similar
characteristics. Mortgage loans are segregated into either commercial or
residential categories, and have average net yield rates of 8.27% and 8.70%
for December 31, 1998 and 1997, respectively. The fair value of mortgage
loans was calculated by discounting scheduled cash flows to maturity using
estimated market discount rates of 7.15% and 7.29% for December 31, 1998
and 1997, respectively. These rates reflect the credit and interest rate
risk inherent in the loans. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market
information and specific borrower information. The fair value of certain
residential loans is based on the approximate fair value of the underlying
real estate securing the mortgages.
CERTAIN POLICY LIABILITIES
Certain policies sold by the Company are investment-type contracts. These
liabilities are segregated into two categories: deposit administration
funds and immediate annuities which do not have life contingencies. The
fair value of the deposit administration funds is estimated as the cash
surrender value of each policy less applicable surrender charges. The fair
value of the immediate annuities without life contingencies is estimated as
the discounted cash flows of expected future benefits less the discounted
cash flows of expected future premiums, using the current pricing
assumptions. The carrying amount of all other policy liabilities
approximates fair value.
(Continued)
35
<PAGE> 59
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Funds held under deposit
administration contracts $577,301 560,650 580,499 562,961
Annuities 60,317 59,961 58,773 58,015
</TABLE>
NOTES PAYABLE
The fair value of the Company's notes payable is estimated by discounting
the scheduled cash flows of each instrument through the scheduled maturity.
The discount rates used are similar to those used for the valuation of the
Company's commercial mortgage loan portfolio, except for the Company's
notes payable to the Federal Home Loan Bank of Topeka, which are valued
using discount rates at or near the carried rates because the notes have
relatively short lives or carry the option of conversion to an adjustable
rate.
LIMITATIONS
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, nor do they reflect income taxes on
differences between fair value and tax basis of the assets. Because no
established exchange exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
(Continued)
36
<PAGE> 60
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(5) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs principally represent field sales
compensation, direct response costs, underwriting and issue costs, and
related expenses. Information relating to the increase in deferred policy
acquisition costs, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
LIFE ACCIDENT
AND ANNUITY AND HEALTH TOTAL
----------- ---------- -----
<S> <C> <C> <C>
Year ended December 31, 1998:
Deferred costs $ 7,260 33,371 40,631
Amortization (4,669) (19,958) (24,627)
------- ------- -------
Net increase $ 2,591 13,413 16,004
======= ======= =======
Year ended December 31, 1997:
Deferred costs $ 8,600 28,734 37,334
Amortization (5,581) (16,513) (22,094)
------- ------- -------
Net increase $ 3,019 12,221 15,240
======= ======= =======
Year ended December 31, 1996:
Deferred costs $ 7,088 22,145 29,233
Amortization (6,437) (12,714) (19,151)
------- ------- -------
Net increase $ 651 9,431 10,082
======= ======= =======
</TABLE>
(Continued)
37
<PAGE> 61
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(6) RESERVES FOR FUTURE POLICY BENEFITS
Reserves for life and annuity future policy benefits as of December 31 are
principally based on the interest assumptions set forth below (in
thousands):
<TABLE>
<CAPTION>
INTEREST
1998 1997 ASSUMPTIONS
-------- ------- ---------------
<S> <C> <C> <C>
Life and annuity reserves:
Issued prior to 1970 $ 3,218 3,308 4.75%
Issued 1970 through 1980 28,458 28,796 6.75% to 5.25%
Issued after 1982 (indeterminate
premium products) 593 559 10.00% to 8.50%
Issued through 1987 (SGLI acquisition) 1,336 1,360 11.00%
Issued 1981 - 1994 (all other) 28,875 28,018 8.50% to 7.00%
Issued after 1994 (all other) 4,195 2,892 7.00%
Life contingent annuities 32,825 30,894 Various*
Group term life waiver of premium
disabled lives 5,287 5,311 6.00%
Reserves acquired through assumption
reinsurance agreement (see note 12) 21,971 -- 5.50% to 2.25%
All other life reserves 4,736 4,525 Various
-------- -------
$131,494 105,663
======== =======
</TABLE>
* These reserves are revalued as limited-pay contracts. As a result, the
reserve is somewhat greater than the present value of future benefits
and expenses at the assumed interest rates, i.e., the actual interest
rates required to support the reserves are somewhat lower than the
rates assumed.
Assumptions as to mortality are based on the Company's prior experience.
This experience approximates the 1955-60 Select and Ultimate Table
(individual life issued prior to 1981), the 1965-70 Select and Ultimate
Table (individual life issued in 1981 and after) and the 1960 Basic Group
Table (all group issues). Assumptions for withdrawals are based on the
Company's prior experience. All assumptions used are adjusted to provide
for possible adverse deviations.
(7) LIABILITY FOR BENEFITS PAYABLE
The provision for benefits pertaining to prior years did not change
significantly in 1998 or 1997.
(Continued)
38
<PAGE> 62
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(8) NOTES PAYABLE
Notes payable as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
5.49% line of credit, due in 1999, interest due monthly $ 3,500 --
5.49% line of credit, due in 1999, interest due monthly 5,000 --
5.07% line of credit, due in 1999, interest due monthly 3,000 3,000
5.52% line of credit, due in 1999, interest due monthly 10,000 10,000
6.84% line of credit, due in 2000, interest due monthly 4,000 4,000
5.81% line of credit, due in 2002, interest due monthly 10,000 10,000
5.78% line of credit, due in 2002, interest due monthly 3,000 3,000
5.05% line of credit, due in 2005, interest due monthly 5,000 --
5.55% line of credit, due in 2008, interest due monthly 6,500 --
5.03% line of credit, due in 2008, interest due monthly 5,000 --
8.4% mortgage loan, due in monthly installments of
$22,000 (including interest) to 2027 2,858 2,881
Various notes payable, paid in 1998 -- 17,838
------- -------
$57,858 50,719
======= =======
</TABLE>
The promissory notes are guaranteed by AFC. The mortgage loan is secured by
a mortgage on other investment real estate. The mortgage loan is also
secured by an assignment of the leases on investment real estate.
AFA has a $55,000,000 line of credit with the Federal Home Loan Bank of
Topeka. The line of credit is secured by investment securities pledged as
collateral by AFA with a carrying value of approximately $71,230,000 at
December 31, 1998. The collateral required for this line of credit at
December 31, 1998, was $63,250,000. The pledged securities are held in the
Company's name in a custodial account at InvesTrust, N.A., to secure
current and future borrowings. To participate in this available credit, AFA
has purchased 126,202 shares of Federal Home Loan Bank of Topeka common
stock with a total carrying value of approximately $13,061,000 at December
31, 1998.
(Continued)
39
<PAGE> 63
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
Interest expense for the years ended December 31, 1998, 1997, and 1996,
totaled approximately $3,336,000, $2,076,000, and $1,319,000, respectively.
Scheduled maturities (excluding interest) of the above indebtedness at
December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 21,525
2000 4,027
2001 30
2002 13,032
2003 35
Thereafter 19,209
----------
$ 57,858
==========
</TABLE>
(9) INCOME TAXES
Total income tax expense in the accompanying consolidated statements of
income differs from the federal statutory rate of 35% of income before
income taxes principally due to the recapture of certain tax reserve
benefits on reinsurance recaptured by the ceding company in 1997, loss on
the disposition of a subsidiary in 1997, payments made to AFC in 1998 and
1997 treated as management fees for tax purposes, and the correction of
prior year estimates of deferred taxes in 1998 and 1997.
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, are presented below
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
Other investments 450 522
Life and health reserves 17,906 12,783
Other liabilities -- --
-------- -------
Total gross deferred tax assets 18,356 13,305
-------- -------
Deferred tax liabilities:
Fixed maturities (10,795) (7,602)
Equity securities (715) (250)
Deferred policy acquisition costs (62,378) (57,151)
Other assets (6,803) (6,902)
Other liabilities (820) (598)
-------- -------
Total gross deferred tax liabilities (81,511) (72,503)
-------- -------
Net deferred tax liability $(63,155) (59,198)
======== =======
</TABLE>
(Continued)
40
<PAGE> 64
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
Management believes that it is more likely than not that the results of
operations will generate sufficient taxable income to realize the deferred
tax assets reported on the consolidated balance sheets.
The Company and its subsidiaries are included in AFC's consolidated federal
income tax return. Income taxes are reflected in the accompanying
consolidated financial statements as if the Company and its subsidiaries
were separate tax paying entities. At December 31, 1998 and 1997, other
accounts receivable (payable) includes income taxes receivable (payable)
from (to) AFC and other members of the consolidated group of approximately
$(687,000) and $6,550,000, respectively.
Prior to 1984, life insurance companies were taxed under the 1959 Tax Act
on the lesser of taxable income or gain from operations plus one-half of
any excess of gain from operations over taxable investment income. The
one-half of the excess of the gain from operations was accumulated in a
special memorandum tax account known as the "policyholders surplus account"
(PSA). Accumulations at December 31, 1998 were approximately $8,161,000 for
AFA. Pursuant to the Tax Reform Act of 1984, the PSA was "frozen" at the
December 31, 1983 amount and, accordingly, no further additions to the PSA
will be made. These excess amounts in the PSA will become taxable at the
regular corporate tax rate, if distributions to stockholders exceed certain
stated amounts or if certain criteria are not met. No provision for
deferred federal income taxes applicable to the PSA has been made because
management is of the opinion that no distribution of the PSA will be made
in the foreseeable future.
(10) OTHER COMPREHENSIVE INCOME (LOSS)
The change in the components of other comprehensive income (loss) are
reported net of income taxes for the periods indicated, as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------- ------ ------
<S> <C> <C> <C>
Unrealized holding gain on investments:
Unrealized holding gain arising
during the period $ 10,387 (3,635) 6,752
Less: reclassification adjustment for
gains included in net income (534) 186 (348)
-------- ------ -----
Other comprehensive income $ 9,853 (3,449) 6,404
======== ====== =====
</TABLE>
(Continued)
41
<PAGE> 65
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------- ------ ------
<S> <C> <C> <C>
Unrealized holding gain on investments:
Unrealized holding gain arising
during the period $ 11,408 (3,993) 7,415
Less: reclassification adjustment for
gains included in net income (449) 153 (296)
-------- ------ -----
Other comprehensive income $ 10,959 (3,840) 7,119
======== ====== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------- ------ ------
<S> <C> <C> <C>
Unrealized holding loss on investments:
Unrealized holding loss arising
during the period $ (15,465) 5,413 (10,052)
Less: reclassification adjustment for
gains included in net income (600) 876 (276)
--------- ----- ------
Other comprehensive loss $ (16,065) 6,289 (9,776)
========= ===== ======
</TABLE>
(11) REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. Management believes that all reinsurers
presently used are financially sound and will be able to meet their
contractual obligations; therefore, no allowance for uncollectible amounts
has been included in the financial statements. At December 31, 1998 and
1997, reinsurance receivables with a carrying value of approximately
$13,597,000 and $22,844,000, respectively were associated with two
reinsurers.
Reinsurance agreements in effect for life insurance policies vary according
to the age of the insured and the type of risk. Retention amounts for life
insurance range from $500,000 on group life to $250,000 on individual life
coverages, with slightly lower limits on accidental death benefits. At
December 31, 1998 and 1997, the face amounts of life insurance in force
that are reinsured amounted
(Continued)
42
<PAGE> 66
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
to approximately $846,000,000 (approximately 12.6% of total life insurance
in force) and $307,000,000 (approximately 4.6% of total life insurance in
force), respectively.
Reinsurance agreements in effect for accident and health insurance policies
vary with the type of coverage. Retention limits range from $50,000 for
individual cancer coverage to $250,000 for major medical coverage.
The effects of reinsurance agreements on earned and written premiums, prior
to deductions for benefits and commission allowances, were approximately
$(114,225,000), $(92,731,000), and $(83,947,000) for life and accident and
health reinsurance ceded, and $14,220,000, $416,000, and $2,897,000, for
life and accident and health reinsurance assumed, for the years ended
December 31, 1998, 1997 and 1996, respectively.
Reinsurance agreements reduced benefits paid for life and accident and
health policies by approximately $88,999,000, $72,522,000, and $61,730,000,
for the years ended December 31, 1998, 1997, and 1996, respectively.
(12) ACQUIRED BUSINESS
Effective July 1, 1998, the Company entered into an assumption reinsurance
agreement with American Standard Life and Accident Insurance Company (ASL)
of Enid, Oklahoma, the National Organization of Life and Health Guaranty
Associations (NOLHGA) and the guaranty associations in the states where ASL
originally conducted its business. Under this agreement, the Company has
assumed the majority of ASL's policies inforce, with the exception of those
policies issued in states where a guaranty association does not exist.
Effective July 1, 1998, the Company assumed approximately $24 million in
life, annuity and health reserves under this agreement, of which
approximately $5 million were subsequently ceded to a third-party
reinsurer. ASL is an Oklahoma domiciled company in receivership under the
oversight of the Oklahoma Insurance Department and NOLHGA.
The Company recorded an asset for the value of the business acquired based
on the present value of the estimated future profits on the business (PVP),
at a 6.75% discount rate. The PVP was estimated to be $4,313,000 at July 1,
1998. Approximately $311,000 of amortization was recorded in 1998, and is
included in operating expenses in the accompanying consolidated statement
of income. The December 31, 1998 balance of the PVP asset approximates
$4,002,000 and is included in other assets in the accompanying consolidated
balance sheet.
(Continued)
43
<PAGE> 67
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
An estimate of the amortization of the PVP for the next five years is as
follows:
1999 $ 579,000
2000 504,000
2001 437,000
2002 379,000
2003 328,000
(13) EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries participate in a pension plan (the Plan)
covering all employees who have satisfied longevity and age requirements.
The Company's funding policy is to contribute annually the maximum amount
that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date but
also for those expected to be earned in the future.
The Plan's funded status as of December 31, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefits $ 16,182 14,455
Nonvested benefits 1,947 1,850
-------- ------
Total accumulated benefit obligation $ 18,129 16,305
======== ======
Change in benefit obligation:
Benefit obligation at beginning of period $ 19,466 15,278
Service cost 1,662 1,284
Interest cost 1,391 1,193
Actuarial loss 1,342 2,598
Benefits paid (1,604) (887)
-------- ------
Benefit obligation at end of period $ 22,257 19,466
======== ======
Change in plan assets:
Fair value of plan assets at beginning of period $ 21,839 17,587
Actual return on plan assets 3,970 4,340
Employer contributions -- 799
Benefits paid (1,604) (887)
-------- ------
Fair value of plan assets at end of period $ 24,205 21,839
======== ======
</TABLE>
(Continued)
44
<PAGE> 68
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Funded status at end of year (Plan assets in
excess of projected benefit obligation): $ 1,948 2,373
Unrecognized transition asset (161) (298)
Unrecognized net actuarial (gain) loss (461) 205
Unrecognized prior service cost due to plan
amendment 385 449
------- -----
Prepaid benefit cost $ 1,711 2,729
======= =====
</TABLE>
In determining the projected benefit obligation, the weighted average
assumed discount rates used were 6.75% and 7.0% in 1998 and 1997,
respectively. The rate of increase in future salary levels was 5.0% in 1998
and 1997. The expected long-term rate of return on assets used in
determining net periodic pension cost was 9.5% in 1998 and 1997. Plan
assets are invested in fixed maturities, equity securities and in
short-term investments.
Net periodic pension cost for the years ended December 31, included the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Service costs - benefits earned during period $ 1,662 1,284 1,237
Interest costs 1,391 1,193 1,054
Expected return on plan assets (1,962) (4,065) (3,711)
Net amortization and deferral (73) 2,332 2,421
------- ------ ------
Net periodic pension cost $ 1,018 744 1,001
======= ====== ======
</TABLE>
The Company participates in a defined contribution thrift and profit
sharing plan as provided under section 401(a) of the Internal Revenue Code,
which includes the tax deferral feature for employee contributions provided
by section 401(k) of the Internal Revenue Code. The Company contributed
approximately $1,023,000, $881,000, and $822,000, to this plan during the
years ended December 31, 1998, 1997, and 1996, respectively.
(14) COMMITMENTS AND CONTINGENCIES
Rent expense for office space and equipment for the years ended December
31, 1998, 1997, and 1996, was approximately $8,573,000, $6,163,000, and
$5,674,000, respectively. A portion of rent expense relates to leases that
expire or are cancelable within one year. The aggregate minimum annual
rental commitments as of December 31, 1998, under noncancellable long-term
leases for office space are as follows (in thousands):
(Continued)
45
<PAGE> 69
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<S> <C>
1999 $ 1,520
2000 1,320
2001 862
2002 690
2003 163
Thereafter 199
</TABLE>
The Company has pledged approximately $20,249,000 of its treasury notes as
collateral on lines of credit held by affiliated companies.
The Company has outstanding mortgage loan commitments of approximately
$10,595,000 and $8,165,000 at December 31, 1998 and 1997, respectively.
In the normal course of business, there are various legal actions and
proceedings pending against the Company and its subsidiaries. In
management's opinion, the ultimate liability, if any, resulting from these
legal actions will not have a material adverse effect on the Company's
financial position.
Like other financial and business organizations and individuals around the
world, the Company could be adversely affected if the computer systems used
by the Company and the Company's other service providers do not properly
process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Company has had a formal project team (including 22 information systems
professionals) working to correct the problem since 1996. In the briefest
terms, the correction is to change all date related fields in the Company's
computer systems to four digits instead of two digits. At the same time,
all relationships with systems outside the Company must be checked for the
same change and all must be tested to determine that relationships continue
to be compatible. Those systems were tested on December 31, 1997 and went
through year-end processing without incident. The final test of all systems
will be run in 1999. Management is expending considerable resources in a
concerted effort to meet this technology-related threat. Although there is
no guarantee that there will be no adverse impact on the Company of some
sort as January 1, 2000 passes, the Company is hopeful that any adverse
impact will be minimal.
(15) RELATED PARTY TRANSACTIONS
The Company and its subsidiaries lease automobiles, furniture, and
equipment from a partnership that owns a controlling interest in AFC. These
operating leases are cancelable upon one month's notice. During the years
ended December 31, 1998, 1997, and 1996, rentals paid under these leases
were approximately $3,989,000, $3,577,000, and $2,966,000, respectively.
(Continued)
46
<PAGE> 70
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
During the years ended December 31, 1998 and 1997, the Company paid
investment advisory fees to a partnership that owns a controlling interest
in AFC totaling approximately $3,190,000 and $3,232,000, respectively.
During the years ended December 31, 1998, 1997, and 1996, the Company and
its subsidiaries paid management fees and investment advisory fees to AFC
totaling approximately $4,523,000, $2,848,000, and $16,536,000,
respectively.
The Company and its subsidiaries lease office space from a subsidiary of
AFC. The rent payments associated with the lease will be approximately
$2,100,000 per year for the next 14 years.
During 1998, the Company paid a cash dividend of approximately $12,706,000
to AFC.
During 1997, the Company paid a dividend of approximately $33,834,000 to
AFC. This dividend was in the form of cash payments of approximately
$8,800,000, common stock in affiliated companies (including SGLI) of
approximately $16,588,000 (including deferred tax liabilities assumed by
AFC of $683,000), and common stock in non-affiliated companies of
approximately $8,446,000 (including a deferred tax liability retained by
the Company of $1,961,000). This transaction was approved by the Oklahoma
Insurance Department.
During 1998 and 1997, the Company entered into a three-year software lease
agreement with AFC. Lease expense related to this agreement was
approximately $1,344,000 and $616,000 for the years ended December 31, 1998
and 1997, respectively, and is included in selling costs and other
operating, administrative and general expenses.
Short-term and other investments at December 31, 1997 includes a note
receivable from AFC of approximately $3,328,000, which was repaid in 1998.
Short-term and other investments at December 31, 1995 include notes
receivable from AFC totaling approximately $6,485,000 which were repaid in
1996. During the year ended December 31, 1996, the Company recorded
investment income on the notes from AFC of approximately $481,000.
AFC and several of its subsidiaries rented office space in the home office
building from the Company until the home office building was sold in 1997.
During the years ended December 31, 1997, and 1996, the Company received
rental income from AFC and several of its subsidiaries of approximately
$299,000, and $1,280,000, respectively.
During 1996, AFC contributed capital of approximately $2,198,000 through
forgiveness of a deferred tax liability owed by AFA to AFC.
An officer of AFC serves on the board of directors of a financial
institution in which the Company maintains cash balances.
47
<PAGE> 71
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Schedule III - Business Segment Information
Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
The Company's reportable segments are its strategic business units. The
components of operations for the years ended December 31, 1998, 1997, and
1996 are included in the table below.
Assets and related investment income are allocated based upon related
insurance reserves which are backed by such assets. Other operating
expenses are allocated in relation to the mix of related revenues.
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
TOTAL REVENUES:
American Fidelity Education Services Division $ 158,707 152,021 142,493
Association Group Division 113,519 105,784 99,979
Strategic Alliance Division 45,987 32,290 24,558
Non insurance operations 745 (504) 1,966
---------- --------- ---------
$ 318,958 289,591 268,996
========== ========= =========
PRETAX EARNINGS:
American Fidelity Education Services Division $ 16,407 24,621 14,275
Association Group Division 6,242 10,683 9,349
Strategic Alliance Division 10,727 (2,344) (1,903)
Non insurance operations 80 (2,340) 397
---------- --------- ---------
$ 33,456 30,620 22,118
========== ========= =========
TOTAL ASSETS:
American Fidelity Education Services Division $1,156,565 1,029,976 922,671
Association Group Division 201,115 192,507 197,225
Strategic Alliance Division 274,732 274,818 239,986
Non insurance operations 2,536 2,135 3,170
---------- --------- ---------
$1,634,948 1,499,436 1,363,052
========== ========= =========
</TABLE>
48
<PAGE> 72
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Schedule IV - Reinsurance
Years ended December 31, 1998, 1997 and 1996
(In Thousands)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Life insurance in force $7,565,337 846,113 10 6,719,234 --
========== ======== ======== ==========
Premiums:
Life insurance $ 18,034 3,154 12,021 26,901 44.69 %
Accident and health insurance 315,693 111,071 2,199 206,821 1.06 %
---------- -------- -------- ----------
Total premiums 333,727 114,225 14,220 233,722 6.08 %
========== ======== ======== ==========
Year ended December 31, 1997
Life insurance in force $6,872,047 306,917 10 6,565,140 --
========== ======== ======== ==========
Premiums:
Life insurance $ 26,756 1,474 -- 25,282 --
Accident and health insurance 272,785 91,257 416 181,944 --
---------- -------- -------- ----------
Total premiums 299,541 92,731 416 207,226 --
========== ======== ======== ==========
Year ended December 31, 1996
Life insurance in force $6,276,241 403,148 125,101 5,998,194 2.09 %
========== ======== ======== ==========
Premiums:
Life insurance $ 23,240 1,907 2,854 24,187 11.80 %
Accident and health insurance 248,054 82,040 43 166,057 --
---------- -------- -------- ----------
Total premiums $ 271,294 83,947 2,897 190,244 1.52 %
========== ======== ======== ==========
</TABLE>
See accompanying independent auditors' report.
49
<PAGE> 73
PART C
OTHER INFORMATION
ITEM 24 -- FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements are included in Part B of this
registration statement:
AMERICAN FIDELITY SEPARATE ACCOUNT A
Independent Auditors' Report
Statement of Assets and Liabilities as of January 1, 1999
Notes to Statement of Assets and Liabilities
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Schedule III - Business Segment Information for the Years Ended
December 31, 1998, 1997 and 1996
Schedule IV - Reinsurance for the Years Ended December 31, 1998, 1997
and 1996
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
1.1 - Resolution adopted by the Board of Directors of American Fidelity on
May 7, 1968, authorizing establishment of the Registrant. Incorporated
herein by reference to Exhibit 1.1 to Post-Effective Amendment No. 43
to Registrant's registration statement on Form N-4 filed on November
25, 1998 (No. 2-30771).
1.2 - Resolution adopted by the Board of Directors of American Fidelity on
April 6, 1998, authorizing reorganization of the Registrant as a unit
investment trust. Incorporated herein by reference to Exhibit 1.2 to
Post-Effective Amendment No. 43 to Registrant's registration statement
on Form N-4 filed on November 25, 1998 (No. 2-30771).
1.3 - Resolution adopted by the Board of Managers of the Registrant on March
19, 1998, authorizing reorganization of the Registrant as a unit
investment trust. Incorporated herein by reference to Exhibit 1.3 to
Post-Effective Amendment No. 43 to Registrant's registration statement
on Form N-4 filed on November 25, 1998 (No. 2-30771).
</TABLE>
2 - Not applicable.
C-1
<PAGE> 74
<TABLE>
<S> <C>
3 - Underwriting Contract between the Registrant and American Fidelity
Securities, Inc. dated December 20, 1972. Incorporated herein by
reference to Exhibit 3 to Post-Effective Amendment No. 43 to
Registrant's registration statement on Form N-4 filed on November 25,
1998 (No. 2- 30771).
4.1 - Form of Variable Annuity Master Contract. Incorporated herein by
reference to Exhibit 4.1 to Post-Effective Amendment No. 43 to
Registrant's registration statement on Form N-4 filed on November 25,
1998 (No. 2-30771).
4.2 - Form of Variable Annuity Contract Certificate. Incorporated herein by
reference to Exhibit 4.2 to Post-Effective Amendment No. 43 to
Registrant's registration statement on Form N-4 filed on November 25,
1998 (No. 2-30771).
5 - Forms of Variable Annuity Application. Incorporated herein by reference
to Exhibit 5 to Post- Effective Amendment No. 43 to Registrant's
registration statement on Form N-4 filed on November 25, 1998 (No.
2-30771).
6.1 - Articles of Incorporation of American Fidelity and all amendments
through November 4, 1987. Incorporated herein by reference to Exhibit
6.1 to Post-Effective Amendment No. 43 to Registrant's registration
statement on Form N-4 filed on November 25, 1998 (No. 2-30771).
6.2 - Amended and Restated Bylaws of American Fidelity dated November 24,
1997. Incorporated herein by reference to Exhibit 8.2 to Post-Effective
Amendment No. 42 to Registrant's registration statement on Form N-3
filed on April 24, 1998 (No. 2-30771).
7 - Not applicable.
8 - Fund Participation Agreement dated December 22, 1998 between Registrant
and American Fidelity. Incorporated herein by reference to
Post-Effective Amendment No. 44 to Registrant's registration statement
on Form N-4 filed on January 11, 1999 (No. 2-30771).
9* - Opinion and Consent of Counsel.
10* - Independent Auditors' Consent.
11 - Not applicable.
12 - Not applicable.
13* - Schedule for computation of performance quotations.
14 - Not applicable.
</TABLE>
C-2
<PAGE> 75
<TABLE>
<S> <C>
15* - American Fidelity organization chart.
</TABLE>
- -----------------
* Filed herewith.
ITEM 25 -- DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with American Fidelity
------------------ ----------------------
<S> <C>
Lynda L. Cameron Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William M. Cameron Chairman and Chief
2000 N. Classen Boulevard Executive Officer, Director
Oklahoma City, OK 73106
David R. Carpenter Senior Vice President, Treasurer
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William E. Durrett Senior Chairman, Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
Stephen P. Garrett Senior Vice President, Secretary
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William A. Hagstrom Director
800 Research Parkway
Oklahoma City, OK 73104
Edward C. Joullian, III Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
Kenneth D. Klehm Senior Vice President
2000 N. Classen Boulevard
Oklahoma City, OK 73106
</TABLE>
C-3
<PAGE> 76
<TABLE>
<S> <C>
Alfred L. Litchenburg Senior Vice President
2000 N. Classen
Boulevard Oklahoma City, OK 73106
David R. Lopez Director
175 E. Houston
Room 4-A-60
San Antonio, TX 78205
Paula Marshall-Chapman Director
2745 East 11th Street
Tulsa, OK 74104
John W. Rex President, Chief Operating Officer,
2000 N. Classen Boulevard Director
Tulsa, OK 74104
Galen P. Robbins, M.D. Director
11901 Quail Creek Road
Oklahoma City, OK 73120
John D. Smith Director
3400 Peach Tree Road, Suite 831
Atlanta, GA 30326
</TABLE>
ITEM 26 -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
American Fidelity's organization chart is included as Exhibit 15. The
subsidiaries of American Fidelity reflected in the organization chart are
included in the consolidated financial statements of American Fidelity in
accordance with generally accepted accounting principles.
ITEM 27 -- NUMBER OF CONTRACT OWNERS
As of April 15, 1999, there were 2,237 Contract Owners of qualified
contracts offered by the Registrant.
ITEM 28 -- INDEMNIFICATION
The Bylaws of American Fidelity (Article VIII, Section 3) generally
provide that American Fidelity shall indemnify its directors, officers,
employees and agents, as well as any person serving at the request of American
Fidelity as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against liabilities
incurred in acting in any such capacity if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interest of
American Fidelity and, with respect to any criminal action, if they had no
reasonable cause to believe their conduct was unlawful. Indemnification of these
persons is also provided for derivative actions. See American Fidelity's Bylaws
filed as Exhibit 6.2 to this registration statement.
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
C-4
<PAGE> 77
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) American Fidelity Securities, Inc. is the sole underwriter for the
Registrant, American Fidelity Separate Account B and American Fidelity Dual
Strategy Fund, Inc.
(b) Director and officer information for American Fidelity Securities,
Inc. is as follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------
<S> <C>
David R. Carpenter Director, Chairman, President, Chief Executive
P. O. Box 25523 Officer, Treasurer, Chief Financial Officer and
Oklahoma City, OK 73125 Registered Limited Principal
Marvin R. Ewy Director, Vice President, Secretary, Chief
P. O. Box 25523 Compliance Officer and Registered
Oklahoma City, OK 73125 Limited Principal
Nancy K. Steeber Director, Vice President, Operations Officer and
P. O. Box 25523 Registered Limited Principal
Oklahoma City, OK 73125
</TABLE>
(c) The net underwriting discounts and commissions received by American
Fidelity Securities, Inc. in 1998 were $600,700, representing the 3% sales fee
deducted from premium deposits to the Registrant. It received no other
compensation from or on behalf of the Registrant during the year.
ITEM 30 -- LOCATION OF ACCOUNTS AND RECORDS
The name and address of the person who maintains physical possession of
the accounts, books and other documents of the Registrant required by Section
31(a) of the Investment Company Act of 1940 are:
David R. Carpenter
Senior Vice President and Treasurer
American Fidelity Assurance Company
2000 N. Classen Boulevard
Oklahoma City, Oklahoma 73106
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<PAGE> 78
ITEM 31 -- MANAGEMENT SERVICES
Not applicable.
ITEM 32 -- UNDERTAKINGS
UNDERTAKINGS
The Registrant hereby undertakes to:
(a) file a post-effective amendment to this registration statement
as frequently as is 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) include either (1) as part of any application to purchase a
contract offered by the Prospectus, a space that an applicant
can check to request a Statement of Additional Information, or
(2) a postcard or similar written communication affixed to or
included in the Prospectus that the applicant can remove to
send for a Statement of Additional Information; and
(c) deliver any Statement of Additional Information and any
financial statements required to be made available under this
Form promptly upon written or oral request.
REPRESENTATIONS
American Fidelity hereby represents that the fees and charges deducted
under the Variable Annuity Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by American Fidelity.
American Fidelity hereby represents that it is relying upon a No-Action
Letter issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption
restrictions imposed by Section 403(b)(11) in each registration statement,
including the prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption
restrictions imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the contract;
3. Instruct sales representatives who solicit participants to
purchase the contract specifically to bring the redemption restrictions imposed
by Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
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<PAGE> 79
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485 for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Oklahoma City
and State of Oklahoma on this 30th day of April, 1999.
AMERICAN FIDELITY SEPARATE ACCOUNT A
(Registrant)
By: American Fidelity Assurance Company
(Depositor)
By /s/ John W. Rex
---------------------------------------
John W. Rex, President
AMERICAN FIDELITY ASSURANCE COMPANY
(Depositor)
By /s/ John W. Rex
---------------------------------------
John W. Rex, President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on April 30, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ William M. Cameron* Chairman, Chief Executive Officer and
- ----------------------------------- Director (Principal Executive Officer)
William M. Cameron
/s/ William E. Durrett* Senior Chairman and Director
- -----------------------------------
William E. Durrett
/s/ Lynda L. Cameron* Director
- -----------------------------------
Lynda L. Cameron
/s/ John W. Rex Director, President and Chief Operating
- ----------------------------------- Officer
John W. Rex
/s/ Edward C. Joullian, III* Director
- -----------------------------------
Edward C. Joullian, III
/s/ Galen P. Robbins, M.D.* Director
- -----------------------------------
Galen P. Robbins, M.D.
/s/ John D. Smith* Director
- -----------------------------------
John D. Smith
/s/ William A. Hagstrom* Director
- -----------------------------------
William A. Hagstron
/s/ David R. Lopez* Director
- -----------------------------------
David R. Lopez
/s/ Paula Marshall-Chapman* Director
- -----------------------------------
Paula Marshall-Chapman
/s/ David R. Carpenter* Senior Vice President, Controller and
- ----------------------------------- Treasurer (Principal Financial and
David R. Carpenter Accounting Officer)
*By /s/ John W. Rex
-------------------------------
John W. Rex, Attorney in-Fact
</TABLE>
C-7
<PAGE> 80
INDEX TO EXHIBITS
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
9 - Opinion and Consent of Counsel
10 - Independent Auditors' Consent
13 - Schedule for computation of Performance Quotations
15 - American Fidelity organization Chart
</TABLE>
<PAGE> 1
EXHIBIT 9
[WINSTEAD SECHREST & MINICK P.C. LETTERHEAD]
April 30, 1999
American Fidelity Assurance Company
2000 N. Classen Boulevard
Oklahoma City, Oklahoma 73106
Re: American Fidelity Separate Account A - Post-Effective Amendment
No. 45 to Form N-4 Registration Statement (Nos. 2-30771 and
811-01764)
Ladies and Gentlemen:
You have requested our opinion in connection with the filing with the
Securities and Exchange Commission of Post-Effective Amendment No. 45 to the
above-referenced Registration Statement on Form N-4 for the AFPr1me Growth
Variable Annuity contract (the "Contract") to be issued by American Fidelity
Assurance Company ("AFA") and its separate account, American Fidelity Separate
Account A.
We have made such examination of the law and have examined such records
and documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
Based upon the foregoing, we are of the opinion that:
(1) American Fidelity Separate Account A is a separate account as the
term is defined in Section 2(a)(37) of the Investment Company Act of 1940 (the
"Act"), and is currently registered with the Securities and Exchange Commission
pursuant to Section 8(a) of the Act.
(2) The Contracts and the interests therein will be legally issued when
issued in accordance with the Prospectus contained in the Registration Statement
and in compliance with applicable state insurance law and will represent binding
obligations of AFA, provided that the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights generally.
You may use this opinion letter as an exhibit to the Registration
Statement. We consent to the reference to our firm under the caption "Legal
Matters" contained in the Statement of Additional Information which forms a part
of the Registration Statement.
Very truly yours,
/s/ WINSTEAD SECHREST & MINICK P.C.
CSS/jij
<PAGE> 1
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
American Fidelity Assurance Company:
We consent to the use of our reports included herein and the reference to our
name under the heading "Independent Accountants" in the Statement of Additional
Information.
KPMG LLP
Oklahoma City, Oklahoma
April 30, 1999
<PAGE> 1
EXHIBIT 13
AMERICAN FIDELITY
SEPARATE ACCOUNT A
SCHEDULE OF COMPUTATIONS FOR EACH PERFORMANCE QUOTATION PROVIDED IN THE
REGISTRATION STATEMENT
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR TEN YEAR
(1) TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN
------------ ------------ ------------
<S> <C> <C> <C>
(A) INITIAL INVESTMENT $ 1,000.00 $ 1,000.00 $ 1,000.00
multiplied by x x x
0.96 0.96 0.96 0.96
less $15.00 - - -
less $.50 $ 15.00 $ 15.00 $ 15.00
equals - - -
NET INITIAL INVESTMENT $ 0.50 $ 0.50 $ 0.50
= = =
$ 944.50 $ 944.50 $ 944.50
(B) NET INITIAL INVESTMENT $ 944.50 $ 944.50 $ 944.50
divided by / / /
ACCUMULATION UNIT VALUE ON PURCHASE DATE $ 19.4632 $ 9.7090 $ 5.1103
equals = = =
NUMBER OF ACCUMULATION UNITS PURCHASED 48.53 97.28 184.82
(C) ACCUMULATION UNIT VALUE AT THE END OF TIME PERIOD $ 24.3329 $ 24.3329 $ 24.3329
multiplied by x x x
NUMBER OF ACCUMULATION UNITS PURCHASED 48.53 97.28 184.82
equals = = =
ENDING VALUE $ 1,180.88 $ 2,367.10 $ 4,497.21
(D) ENDING VALUE $ 1,180.88 $ 2,367.10 $ 4,497.21
minus - - -
INITIAL INVESTMENT $ 1,000.00 $ 1,000.00 $ 1,000.00
equals = = =
TOTAL DOLLAR RETURN $ 180.88 $ 1,367.10 $ 3,497.21
(E) TOTAL DOLLAR RETURN $ 180.88 $ 1,367.10 $ 3,497.21
divided by / / /
INITIAL INVESTMENT $ 1,000.00 $ 1,000.00 $ 1,000.00
multiplied by 100 x x x
equals 100 100 100
TOTAL RETURN FOR THE PERIOD EXPRESSED AS A PERCENTAGE = = =
18.09% 136.71% 349.72%
</TABLE>
(2) AVERAGE ANNUAL TOTAL RETURN
Average annual total return quotations for the one, five and ten year periods
ending 31-Dec-98 are computed using the formula below:
(n)
P ( 1 + T ) = ERV
Where P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending value of a hypothetical $1,000 investment
as of the end of the one, five and ten year
periods computed in accordance with the formula
shown in (1) above.
Thus:
<TABLE>
<CAPTION>
ONE YEAR AVERAGE FIVE YEAR AVERAGE TEN YEAR AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
(1) (5) (10)
$1,000 (1 + T) $1,180.88 $1,000 (1 + T) $2,367.10 $1,000 (1 + T) = $4,497.21
T = 18.09% T = 18.81% T = 16.22%
</TABLE>
<PAGE> 1
EXHIBIT 15
CAMERON ENTERPRISES, A LIMITED PARTNERSHIP (CELP) - OK
73-1267299
<TABLE>
<S> <C> <C> <C>
CELP Ltd. Agency, Inc.
100% - OK
73-1369092
North American
Ins. Agency, Inc.
(NAIA)
91.5% - OK
73-0687265
Shade Works, LLC Agar Ins. Agency, Inc. North American Ins.
33.33% - OK 95.4% - OK Agency of
73-1475654 73-0675989 Colorado, Inc.
100% - CO
84-0599059
N.A.I.A. of North American North American
Louisiana, Inc. Insurance Agency of Ins. Agency of
100% - LA New Mexico, Inc. Tulsa, Inc.
72-0761691 100% - NM 100% - OK
85-0441542 73-0778755
North American N.A.I.A. Ins. Agency,
Ltd. Agency, Inc. Inc.
100% - OK 100% - OK
73-1356772 73-1527682
National Ins.
Marketers Agency,
Inc.
100% - OK
73-1437538
American Fidelity Corp.
(AFC)
94.0% - NV
73-0966202
Market Place Realty American Mortgage Security General Cimarron
Corp. (MPRC) & Investment Co. Life Ins. Co. Investment
100% - OK (AMICO) (SGL) Co., Inc.
73-1160212 98.7% - OK 100% - OK 100% - KS
73-1232134 73-0741925 48-0759023
NAIC #68691
Holliday Mortgage Corp.
100% - OK
73-1284635
Shade Works, LLC Concourse C, Inc.
16.67% - OK 100% - OK
73-1475634 73-1505641
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
American Fidelity
Property Co. (AFPC)
100% - OK
73-1290496
Home Rentals, Inc. Western Partners, L.L.C.
100% - OK 100% - OK
73-1364226 73-1544275
American Fidelity
Assurance Co.
(AFA)
100% - OK
73-0714500
NAIC #60410
AF Apartments, Inc. American Fidelity American Fidelity
100% - OK Securities, Inc. Ltd. Agency, Inc.
73-1512985 (AFS) (AFLA)
100% - OK 100% - OK
73-0783902 73-1352430
American
Fidelity
General
Agency, Inc.
(AFGA)
100% - OK
73-1352431
Balliet's, L.L.C. Apple Creek Senior Partners, LLC
75% - OK Apartments, Inc. 50% - OK
73-1529608 100% - OK 73-1559624
73-1408485
ASC Holding, L.L.C.
75% - OK
73-1528120
InvesTrust, N.A. Asset Services Co.,
100% - OK L.L.C.
73-1546867 100% - OK
73-1547246
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
American Fidelity
International
Holdings, Inc.
100% - OK
73-1421879
American Fidelity American Fidelity
Care, LLC Offshore
33% - OK Investments, Ltd.
73-1424864 100% - Bermuda
NAIC #20400
Reg. #EC20754
American Fidelity American Fidelity
(Cypress) Ltd. (China), Ltd.
99% - Republic of 93% - Bermuda
Cypress
Soyuznik Insurance Co.
34% - Russian Federation
Covenant
Mari El Development Pacific World Underwriters
Corporation Limited Holdings, Ltd. (Bermuda) Ltd.
51.3% - Republic of 55% - Labuan 33.33% - Bermuda
Cyprus
Reg. #7035
</TABLE>
- ----------------------
Insurance Company
A Limited Partnership
No tax or registration numbers
NOTE: All of the above organizations are corporations that have the word
Company, Inc., or Corp. The above organizations which have the
letters L.L.C. or L.C. are limited liability companies.
