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SURVIVORSHIP ADVANTAGE VARIABLE UNIVERSAL LIFE
ISSUED BY AMERICAN NATIONAL INSURANCE COMPANY
HOME OFFICE ONE MOODY PLAZA GALVESTON, TEXAS 77550
PROSPECTUS OCTOBER 29, 1999 1-800-306-2959
This prospectus describes a variable universal life insurance policy offered by
American National Insurance Company. The policy provides survivorship life
insurance protection on two insureds with flexibility to vary the amount and
timing of premium payments and the level of death benefit. The death benefit is
payable after the second insured's death. The death benefits available under
your policy can increase if the value of the policy increases.
The value of your policy will vary with the investment performance of investment
options you choose. You can choose to have your net premium payments (premium
payments less applicable charges) allocated to subaccounts of the American
National Variable Life Separate Account and to our general account. Each
subaccount invests in a corresponding portfolio of American National Investment
Accounts, Inc., Variable Insurance Products Fund, Variable Insurance Products
Fund II, Variable Insurance Products Fund III, T. Rowe Price International
Series, Inc., or T. Rowe Price Equity Series, Inc.
The portfolios currently available for purchase by the subaccounts are:
AMERICAN NATIONAL FUND
. AN Money Market
. AN Growth
. AN Balanced
. AN Managed
T. ROWE PRICE FUNDS
. T. Rowe Price Equity Income
. T. Rowe Price Mid-Cap Growth
. T. Rowe Price International Stock
FIDELITY FUNDS
. VIP Money Market
. VIP Equity-Income
. VIP High Income
. VIP Growth
. VIP Overseas
. VIP Contrafund
. VIP Asset Manager: Growth
. VIP Investment Grade Bond
. VIP Asset Manager
. VIP Index 500
. VIP Balanced
. VIP Growth and Income
. VIP Mid Cap
. VIP Growth Opportunities
The Securities and Exchange Commission has not approved or disapproved the
policy or passed upon the adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
THE POLICY IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK, NOR IS IT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THE POLICY INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Please read this prospectus and keep it for future reference.
Form 4716
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TABLE OF CONTENTS
PAGE
Definitions......................................... 5
Summary............................................. 7
The Policy........................................ 7
Issuance of a Policy.............................. 7
Allocation of Premiums............................ 7
Policy Benefits and Rights........................ 8
Charges........................................... 8
Taxes............................................. 11
Policy Benefits..................................... 12
Purposes of the Policy............................ 12
Death Benefit Proceeds............................ 12
Death Benefit Options............................. 12
Guaranteed Coverage Benefit....................... 16
Duration of the Policy............................ 16
Accumulation Value................................ 16
Payment of Policy Benefits........................ 16
Policy Rights....................................... 20
Loan Benefits..................................... 20
Surrenders........................................ 21
Transfers......................................... 22
Refund Privilege.................................. 23
Dollar Cost Averaging............................. 23
Rebalancing....................................... 23
Payment and Allocation of Premiums.................. 25
Issuance of a Policy.............................. 25
Premiums.......................................... 25
Premium Flexibility............................... 25
Allocation of Premiums and Accumulation Value..... 26
Grace Period and Reinstatement.................... 26
Charges and Deductions.............................. 27
Premium Charges................................... 27
Charges from Accumulation Value................... 27
Monthly Deduction............................... 27
Cost of Insurance............................... 27
Surrender Charge................................ 28
Transfer Charge................................. 28
Partial Surrender Charge........................ 28
Daily Charges Against the Separate Account...... 28
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Fees and Expenses Incurred by
Eligible Portfolios............................ 28
Taxes........................................... 28
Exceptions to Charges............................. 29
American National Insurance Company, the Separate
Account, the Funds, and the Fixed Account........ 30
American National Insurance Company............... 30
The Separate Account.............................. 30
The Funds......................................... 32
Fixed Account..................................... 35
Federal Income Tax Considerations................... 36
Introduction...................................... 36
Tax Status of the Policy.......................... 36
Tax Treatment of Policy Proceeds.................. 37
American National's Income Taxes.................. 40
Other Information................................... 41
Sale of the Policy................................ 41
Year 2000......................................... 41
The Contract...................................... 41
Policy Split Option.............................. 43
Dividends......................................... 43
Legal Matters..................................... 44
Legal Proceedings................................. 44
Registration Statement............................ 44
Experts........................................... 44
Senior Executive Officers and Directors of
American National Insurance Company................ 45
Financial Statements................................ 51
Appendix............................................ 79
Illustrations of Death Benefits,
Accumulation Values, and Surrender Values....... 79
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DEFINITIONS
ACCUMULATION VALUE. The total amount that a Policy provides for investment at
any time.
AGE AT ISSUE. For each insured, the age at the Insured's last birthday before
the Date of Issue.
AMERICAN NATIONAL FUND. American National Investment Accounts, Inc.
ATTAINED AGE. For each insured, Age at Issue plus the number of complete Policy
Years.
BENEFICIARY. The Beneficiary designated in the application or the latest change,
if filed and recorded with us.
DAILY ASSET CHARGE. A charge equal to an annual rate of 0.90% of the average
daily Accumulation Value of each subaccount.
DATE OF ISSUE. The Date of Issue in the Policy and any riders to the Policy.
DEATH BENEFIT. The amount of insurance coverage provided under the selected
Death Benefit option.
DEATH BENEFIT PROCEEDS. The proceeds payable upon death of the last Insured to
die.
DECLARED RATE. The rate at which interest is credited in the Fixed Account.
EFFECTIVE DATE. The later of the Date of Issue or the date on which:
. the first premium, as shown on the Policy Data Page, has been paid; and
. the Policy has been delivered while both Insureds are alive and in good
health.
Any increase in Specified Amount, addition of a benefit rider, or
reinstatement of coverage will take effect on the Monthly Deduction Date
which coincides with or next follows the date we approve an application for
such change or for reinstatement of the Policy.
ELIGIBLE PORTFOLIO. A Portfolio of American National Investment Accounts, Inc.,
Variable Insurance Products Fund, Variable Insurance Products Fund II, Variable
Insurance Products Fund III, T. Rowe Price International Series, Inc., and T.
Rowe Price Equity Series, Inc., in which a subaccount can be invested.
FIDELITY FUNDS. Variable Insurance Products Fund, Variable Insurance Products
Fund II and Variable Insurance Products Fund III.
FIXED ACCOUNT. A part of our General Account which accumulates interest at a
fixed rate.
GENERAL ACCOUNT. Includes all of our assets except assets segregated into
separate accounts.
GUARANTEED COVERAGE BENEFIT. Our agreement to keep the Policy in force if the
Guaranteed Coverage Premium is paid and other Policy provisions are met.
GUARANTEED COVERAGE PREMIUM. Specified premiums which, if paid in advance as
required, will keep the Policy in force so long as other Policy provisions are
met.
INSUREDS. The persons upon whose lives the Policy is issued.
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MONTHLY DEDUCTION. The sum of (1) cost of insurance charge, (2) charge for any
riders, and (3) monthly expense charge and monthly expense fee shown on the
Policy Data Page.
MONTHLY DEDUCTION DATE. The same date in each succeeding month as the Date of
Issue, except that whenever the Monthly Deduction Date falls on a date other
than a Valuation Date, the Monthly Deduction Date will be deemed to be the next
Valuation Date. The Date of Issue is the first Monthly Deduction Date.
NET AMOUNT AT RISK. Your Death Benefit minus your Accumulation Value.
PLANNED PERIODIC PREMIUMS. Scheduled premiums selected by you.
POLICY. The variable universal life insurance policy described in this
prospectus.
POLICY DATA PAGE. The pages of the Policy so titled.
POLICY DEBT. The sum of all unpaid Policy loans and accrued interest thereon.
POLICYOWNER ("YOU"). The owner of the Policy, as designated in the application
or as subsequently changed. If a Policy has been absolutely assigned, the
assignee is the Policyowner. A collateral assignee is not the Policyowner.
POLICY YEAR. The period from one Policy anniversary date until the next Policy
anniversary date.
SATISFACTORY PROOF OF DEATH. Submission of the following:
. certified copy of the death certificate;
. a claimant statement;
. the Policy; and
. any other information that we may reasonably require to establish the
validity of the claim.
SECOND INSURED. The last Insured to die.
SPECIFIED AMOUNT. The minimum Death Benefit under the Policy until the younger
Insured reaches Attained Age of 100. The Specified Amount is an amount you
select in accordance with Policy requirements.
SURRENDER VALUE. The Accumulation Value less Policy Debt and surrender charges.
T. ROWE PRICE FUNDS. T. Rowe Price International Series, Inc. and T. Rowe Price
Equity Series, Inc.
VALUATION DATE. Each day the New York Stock Exchange ("NYSE") is open for
regular trading. A redemption can be made on any Valuation Date; however, a
transfer can be made only on days that American National is open. American
National will be open on each day the NYSE is open except for the day after
Thanksgiving and the day before Christmas Eve.
VALUATION PERIOD. American National's close of business on one Valuation Date to
the close of business on another.
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SUMMARY
The Policy is not available in some states. You should rely only on the
information contained or incorporated by reference in this prospectus. We have
not authorized anyone to provide you with information that is different.
You should read the following summary in conjunction with the detailed
information appearing elsewhere in this prospectus. Unless otherwise indicated,
the description of the Policy assumes that the Policy is in effect and that
there is no Policy Debt.
THE POLICY
The Policy is a flexible premium variable universal life insurance policy.
You do not have a fixed schedule for premium payments. You can establish a
schedule of Planned Periodic Premiums, but you are not required to follow such
schedule. (See "Premium Flexibility," page 25.)
The Death Benefit under the Policy may, and the Accumulation Value will, reflect
the investment performance of the investments you choose. (See "Death Benefits,"
page 8 and "Accumulation Value," page 16.) You benefit from any increase in
value and bear the risk that your chosen investment options may decrease in
value. The amount and duration of the life insurance coverage provided by the
Policy is not guaranteed, except under the Guaranteed Coverage Benefit
provision. Further, the Accumulation Value is not guaranteed, except in the
Fixed Account.
ISSUANCE OF A POLICY
In order to purchase a Policy, you must submit an application to us. We review
the application to determine whether the Policy can be issued in accordance with
our underwriting standards. Once the underwriting process is completed, the Date
of Issue is designated. You, however, must submit your initial premium for the
Policy to have an Effective Date. Accordingly, the Date of Issue may be before
the Effective Date. If the underwriting process is not completed within 45 days
after you submit your application and initial premium, we will refund your
premium. Your initial premium can be re-submitted if the underwriting review of
the application is later completed.
ALLOCATION OF PREMIUMS
You can allocate premiums to one or more of the subaccounts and to the Fixed
Account. (See "The Separate Account," page 30 and "Fixed Account," page 35.) The
assets of the various subaccounts are invested in Eligible Portfolios. The
prospectuses or prospectus profiles for the Eligible Portfolios accompany this
prospectus.
Premium payments received before the Date of Issue are held in our General
Account without interest. On the Date of Issue, premiums received on or before
that date are allocated to the subaccount for the AN Money Market Portfolio.
Premium payments received within 15 days after the Date of Issue are also
allocated to the AN Money Market Portfolio. After the 15-day period, premium
payments and Accumulation Value are allocated among the Eligible Portfolios in
accordance with your
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instructions as contained in the application. The minimum percentage that you
may allocate to any one subaccount or to the Fixed Account is 10% of the
premium, and fractional percentages may not be used.
POLICY BENEFITS AND RIGHTS
Death Benefit. The Death Benefit is available in two options. (See "Death
Benefit Options," page 12.) The Death Benefit Proceeds may be paid in a lump
sum or in accordance with an optional payment plan. (See "Payment of Policy
Benefits," page 17.)
Adjustments to Death Benefit. You can adjust the Death Benefit by changing the
Death Benefit option and by increasing or decreasing the Specified Amount.
Changes in the Specified Amount or the Death Benefit option are subject to
certain limitations. (See "Death Benefit Options," page 12 and "Change in
Specified Amount," page 14.)
Accumulation Value and Surrender Value. The Accumulation Value reflects the
investment performance of the chosen subaccounts, the rate of interest paid on
the Fixed Account, premiums paid, partial surrenders, and charges deducted from
the Policy. There is no guaranteed minimum Accumulation Value. You can withdraw
the entire Surrender Value. Subject to certain limitations, you can also
withdraw a portion of the Surrender Value. Partial surrenders reduce both the
Accumulation Value and the Death Benefit payable under the Policy. A surrender
charge will be deducted from the amount paid upon a partial withdrawal. (See
"Partial Surrender Charge," page 28. See "Surrenders," page 21.) Surrenders may
have tax consequences. (See "Federal Income Tax Considerations," page 36.)
Policy Loans. You can borrow money from us using the Policy as security for the
loan. (See "Loan Benefits," page 20.) Policy Loans may have tax consequences.
(See "Federal Income Tax Considerations," page 36.)
Free Look Period. You have a free look period in which to examine a Policy and
return it for a refund. The length of the free look period varies among
different states, but generally runs for 10 days after you receive your Policy.
The date you receive your Policy will not necessarily be the date you submit
your premium. (See "Refund Privilege," page 23.)
Policy Lapse and Guaranteed Coverage Benefit. We will provide a Guaranteed
Coverage Benefit so long as the Guaranteed Coverage Premium is paid and other
Policy provisions are met. After the Guaranteed Coverage Benefit period, the
Policy will lapse at any time the Surrender Value is insufficient to pay the
Monthly Deductions and the grace period expires without sufficient additional
premium payment. The grace period starts when written notice of lapse is mailed
to your last known address and expires 61 days later. Unless the Guaranteed
Coverage Benefit requirements have been met, lapse can occur even if Planned
Periodic Premiums are paid. (See "Payment and Allocation of Premiums," page 25.)
CHARGES
Premium Charge. A premium charge at a maximum of 3.0% will be deducted from
each premium payment.
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Charges from Accumulation Value. The Accumulation Value of the Policy will be
reduced by certain Monthly Deductions and Daily Asset Charges as follows:
. On each Monthly Deduction Date by:
. Cost of Insurance Charge. Because the cost of insurance depends upon several
variables, the cost can vary from month to month. We will determine the
monthly cost of insurance charges by multiplying the applicable cost of
insurance rate by the Net Amount at Risk, as of the Monthly Deduction Date,
for each Policy month.
The monthly cost of insurance rate is based on the Specified Amount, the
Policy Year and each Insured's Age at Issue, sex, and underwriting risk
class. The rate may vary if either Insured is a tobacco user or tobacco non-
user or if either Insured is in a substandard risk classification and rated
with a tabular extra rating.
. Charge for the Cost of any Riders.
. Monthly Expense Charge and Monthly Expense Fee. The monthly expense fee will
be a maximum of $5.00. The monthly expense charge, which will vary by Age at
Issue, risk class, and Policy Year, will be a maximum of $0.125 per $1,000
of Specified Amount. The monthly expense charge and monthly expense fee are
determined when the policy is issued, but may increase in subsequent years.
. On each Valuation Date, by a Daily Asset Charge not to exceed 0.90% annually
of the average daily Accumulation Value in each subaccount. (See "Charges and
Deductions," page 27.)
Eligible Portfolio Expenses. The values of the units in each subaccount will
reflect the net asset value of shares in the corresponding Eligible Portfolios.
The Eligible Portfolios' expenses reduce the net asset value of those shares.
ELIGIBLE PORTFOLIO ANNUAL EXPENSES
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(as a percentage of average net assets)
<TABLE>
<CAPTION>
PORTFOLIO MANAGEMENT OTHER EXP. TOTAL EXP. MANAGEMENT OTHER EXP. TOTAL EXP.
FEES WITH WITH WITH FEES WITHOUT WITHOUT WITHOUT
REDUCTION REDUCTION REDUCTION REDUCTION REDUCTION REDUCTION
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<S> <C> <C> <C> <C> <C> <C>
AN Money Market/1/ 0.00% 0.87% 0.87% 0.50% 0.87% 1.37%
AN Growth1 0.36% 0.51% 0.87% 0.50% 0.51% 1.01%
AN Balanced/1/ 0.44% 0.74% 1.18% 0.50% 0.74% 1.24%
AN Managed/1/ 0.16% 0.49% 0.65% 0.50% 0.49% 0.99%
VIP High Income/2/ 0.58% 0.24% 0.82% 0.58% 0.24% 0.82%
VIP Money Market 0.20% 0.10% 0.30% 0.20% 0.10% 0.30%
VIP Equity-Income/2/ 0.49% 0.19% 0.68% 0.49% 0.19% 0.68%
VIP Growth/2/ 0.59% 0.21% 0.80% 0.59% 0.21% 0.80%
VIP Overseas/2/ 0.74% 0.27% 1.01% 0.74% 0.27% 1.01%
VIP Investment Grade Bond 0.43% 0.14% 0.57% 0.43% 0.14% 0.57%
VIP Asset Manager/2/ 0.54% 0.24% 0.78% 0.54% 0.24% 0.78%
VIP Index 500/2/ 0.24% 0.11% 0.35% 0.24% 0.11% 0.35%
VIP Contrafund/2/ 0.59% 0.21% 0.80% 0.59% 0.21% 0.80%
VIP Asset Manager Growth/2/ 0.59% 0.30% 0.89% 0.59% 0.30% 0.89%
VIP Balanced/2/ 0.44% 0.26% 0.70% 0.44% 0.26% 0.70%
VIP Growth and Income/2/ 0.49% 0.22% 0.71% 0.49% 0.22% 0.71%
VIP Mid Cap/2/ 0.56% 0.40% 0.96% 0.56% 0.40% 0.96%
VIP Growth Opportunities/2/ 0.59% 0.21% 0.80% 0.59% 0.21% 0.80%
T. Rowe Price Equity Income/3/ 0.85% 0.00% 0.85% 0.85% 0.00% 0.85%
T. Rowe Price Mid-Cap Growth/3/ 0.85% 0.00% 0.85% 0.85% 0.00% 0.85%
T. Rowe Price International Stock/3/ 1.05% 0.00% 1.05% 1.05% 0.00% 1.05%
</TABLE>
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/1/ Under its Administrative Service Agreement with the American National Fund,
Securities Management and Research, Inc. ("SM&R"), the American National Fund's
investment advisor and manager, has agreed to pay (or to reimburse each
Portfolio for ) each Portfolio's expenses (including the advisory fee and
administrative services fee paid to SM&R, but exclusive of interest,
commissions, and other expenses incidental to Portfolio transactions) in excess
of 1.50% per year of such Portfolio's average daily net assets. In addition,
SM&R has entered into a separate undertaking with the American National Fund
effective May 1, 1994 until April 30, 2000, pursuant to which SM&R has agreed to
reimburse the AN Money Market Portfolio and the AN Growth Portfolio for expenses
in excess of 0.87%; the AN Balanced Portfolio for expenses in excess of 1.18%;
and the AN Managed Portfolio for expenses in excess or 0.65%, of each of such
portfolio's average daily net assets during such period. SM&R is under no
obligation to renew this undertaking for any Portfolio at the end of such period
/2/ A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses. If these
offsets and reductions were taken into account, the Other Expenses and Total
Expenses would have been 0.12% and 0.70%, respectively, for the VIP High Income
Portfolio, 0.09% and 0.58%, respectively, for the VIP Equity-Income Portfolio,
0.09% and 0.68%, respectively, for the VIP Growth Portfolio, 0.17% and 0.91%,
respectively, for the VIP Overseas Portfolio, 0.10% and 0.64%, respectively, for
the VIP Asset Manager Portfolio, 0.04% and 0.28%, respectively, for the VIP
Index 500 Portfolio, 0.11% and 0.70%, respectively, for the VIP Contrafund
Portfolio, 0.14% and 0.73%, respectively, for the VIP Asset Manager Growth
Portfolio, 0.15% and 0.59%, respectively, for the VIP Balanced Portfolio, 0.12%
and 0.61%, respectively, for the VIP Growth and Income Portfolio, 0.30% and
0.86%, respectively, for the VIP Mid Cap Portfolio, and 0.12% and 0.71% for the
VIP Growth Opportunities Portfolio.
/3/ T. Rowe Price Equity Income and Mid-Cap Growth Portfolios pay T. Rowe Price
an annual all-inclusive fee of 0.85% based on such Portfolios' average daily net
assets. T. Rowe Price International Stock Portfolio pays Rowe Price-Fleming
International, Inc. an annual all-inclusive fee of 1.05% based on such
Portfolio's average daily net assets. These fees pay for investment management
services and other operating costs of the Portfolios.
See the prospectuses for American National Investment Accounts, Inc., Variable
Insurance Products Fund, Variable Insurance Products Fund II, Variable Insurance
Products Fund III, T. Rowe Price International Series, Inc., and T. Rowe Price
Equity Series, Inc. for more detailed information about the Eligible Portfolios'
fees and expenses.
Surrender Charges. If you surrender all or a portion of your Policy, a surrender
charge will be assessed. The surrender charge for a full surrender is assessed
based on a rate per $1,000 of Specified Amount, with the charges being
calculated separately for the original Specified Amount and each increase, if
any, in Specified Amount. The surrender charge for the initial Specified Amount
is applicable until the 19th Policy anniversary. For an increase in Specified
Amount, the surrender charge is applicable for 19 years after the Effective Date
of such increase. Thereafter, there is no surrender charge.
The surrender charge varies by each Insured's sex, Age at Issue, risk class, and
by Policy Year. In the first Policy Year, the surrender charge shall not be
greater than $60.00 per $1,000 of Specified Amount. The rate reduces to zero
after nineteen years. (See "Surrender Charge," page 28.)
We will charge an additional $25 fee for partial surrenders. (See "Partial
Surrender Charge," page 28.) A surrender charge will also be assessed on
decreases in the Specified
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Amount of the Policy or on Death Benefit option changes that result in decreases
in Specified Amount.
Transfer Charge. The first 12 transfers of Accumulation Value in a Policy Year
are free. Thereafter, a transfer charge of $10 will be deducted from the amount
transferred. (See "Transfer Charge," page 28.)
TAXES
We intend for the Policy to satisfy the definition of life insurance under the
Internal Revenue Code. Therefore, the Death Benefit Proceeds generally should be
excludible from the gross income of the recipient. Similarly, you should not be
taxed on increases in the Accumulation Value until there is a distribution from
the Policy.
Under certain circumstances, a Policy could be a Modified Endowment Contract. If
so, all pre-death distributions, including Policy loans, will be treated first
as distributions of taxable gain and then as a return of basis or investment in
the policy. In addition, prior to age 59 1/2 any such distributions generally
will be subject to a 10% penalty tax.
If the Policy is not a Modified Endowment Contract, distributions generally will
be treated first as a return of basis or investment in the policy and then as
distributing taxable gain. Moreover, loans will not be treated as distributions
and neither distributions nor loans are subject to the 10% penalty tax.
See "Federal Income Tax Considerations," page 36, for a discussion of when
distributions, such as surrenders and loans, could be subject to federal income
tax.
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POLICY BENEFITS
PURPOSES OF THE POLICY
The Policy is designed to provide you:
. survivorship life insurance protection,
. Death Benefits that may, and Accumulation Value which will, vary with
performance of your chosen investment options,
. flexibility in the amount and frequency of premium payments,
. flexibility in the level of life insurance protection, subject to certain
limitations, and
. a Guaranteed Coverage Benefit, if you pay the Guaranteed Coverage Premium and
meet the other Policy requirements.
DEATH BENEFIT PROCEEDS
We will, upon Satisfactory Proof of Death of both Insureds, pay the Death
Benefit Proceeds in accordance with the Death Benefit option in effect when the
Second Insured dies. The amount of the Death Benefit will be determined at the
end of the Valuation Period in which the Second Insured dies. Death Benefit
Proceeds equal:
. the Death Benefit; plus
. additional life insurance proceeds provided by riders; minus
. Policy Debt; minus
. unpaid Monthly Deduction.
Subject to the rights of any assignee, we will pay the Death Benefit Proceeds
to:
. the Beneficiary or Beneficiaries, or
. if no Beneficiary survives the Insureds, the Second Insured's estate will
receive the proceeds.
The Death Benefit Proceeds may be paid to the Beneficiary in a lump sum or under
one or more of the payment options in the Policy. (See "Payment of Policy
Benefits," page 17.)
DEATH BENEFIT OPTIONS
You choose one of two Death Benefit options in the application. Until the
younger Insured's age 100, the Death Benefit under either option will equal or
exceed the current Specified Amount of the Policy.
Option A. Until the younger Insured's age 100, under Option A the Death Benefit
is the Specified Amount or, if greater, the corridor percentage of Accumulation
Value at the end of the Valuation Period that includes the date of death. The
Death Benefit at the younger Insured's age 100 and thereafter equals the
Accumulation Value. The applicable percentage declines as the age of the younger
Insured increases as shown in the following Corridor Percentage Table:
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CORRIDOR PERCENTAGE TABLE
<TABLE>
<CAPTION>
YOUNGER YOUNGER YOUNGER
INSURED'S INSURED'S INSURED'S
ATTAINED CORRIDOR ATTAINED CORRIDOR ATTAINED CORRIDOR
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
40 or younger 250 54 157 68 117
41 243 55 150 69 116
42 236 56 146 70 115
43 229 57 142 71 113
44 222 58 138 72 111
45 215 59 134 73 109
46 209 60 130 74 107
47 203 61 128 75 to 90 105
48 197 62 126 91 104
49 191 63 124 92 103
50 185 64 122 93 102
51 178 65 120 94 101
52 171 66 119 95 and thereafter 100
53 164 67 118
</TABLE>
OPTION A EXAMPLE. Assume that the younger Insured's Attained Age is between 0
and 40. A Policy with a $500,000 Specified Amount will generally pay $500,000 in
Death Benefits. However, the Death Benefit will be the greater of $500,000 or
250% of Accumulation Value. Anytime the Accumulation Value exceeds $200,000, the
Death Benefit will exceed the $500,000 Specified Amount. Each additional dollar
added to Accumulation Value above $200,000 will increase the Death Benefit by
$2.50. If the Accumulation Value exceeds $200,000 and increases by $100 because
of investment performance or premium payments, the Death Benefit will increase
by $250. A Policy with an Accumulation Value of $300,000 will provide a Death
Benefit of $750,000 ($300,000 x 250%); an Accumulation Value of $400,000 will
provide a Death Benefit of $1,000,000 ($400,000 x 250%); and, an Accumulation
Value of $500,000 will provide a Death Benefit of $1,250,000 ($500,000 x 250%).
Similarly, so long as Accumulation Value exceeds $200,000, each dollar decrease
in Accumulation Value will reduce the Death Benefit by $2.50. If, for example,
the Accumulation Value is reduced from $250,000 to $200,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $625,000 to $500,000.
Option B. Until the younger Insured's age 100, the Death Benefit is the
Specified Amount plus the Accumulation Value or, if greater, the applicable
corridor percentage of the Accumulation Value at the end of the Valuation Period
that includes the Second Insured's date of death. The corridor percentage is the
same as under Option A: 250% at younger Insured's Attained Age 40 or younger on
the Policy anniversary before the date of death, and for a younger Insured's
Attained Age over 40 on that Policy anniversary the percentage declines as shown
in the Corridor Percentage Table. Accordingly, before younger Insured's age 100,
the amount of the Death Benefit will always vary as the Accumulation Value
varies but will never be less than the Specified Amount. The Death Benefit at
younger Insured's age 100 and thereafter equals the Accumulation Value.
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OPTION B EXAMPLE. Assume that the younger Insured is age 40 or younger. A
policy with a Specified Amount of $500,000 will generally provide a Death
Benefit of $500,000 plus Accumulation Value. However, the Death Benefit will be
the greater of the Specified Amount plus the Accumulation Value, or 250% of the
Accumulation Value. Any time the Accumulation Value exceeds approximately
$333,334, the Death Benefit will be greater than the Specified Amount plus
Accumulation Value. Each additional dollar of Accumulation Value above $333,334
will increase the Death Benefit by $2.50. If the Accumulation Value exceeds
$333,334 and increases by $100 because of investment performance or premium
payments, the Death Benefit will increase by $250. For a Policy with
Accumulation value of $200,000, the Death Benefit will be $700,000 (Specified
amount of $500,000 plus $200,000 Accumulation Value). For an Accumulation Value
of $300,000, the Death Benefit will be $800,000 ($500,000 plus $300,000). For
an Accumulation Value of $400,000, the Death Benefit will be $1,000,000
($400,000 X 250% is greater than $500,000 plus $400,000). The Death Benefit,
therefore, will be at least 250% of Accumulation Value, because 250% is the
applicable corridor percentage for this age of Insured.
Similarly, any time Accumulation Value exceeds $333,334, each dollar taken out
of Accumulation Value will reduce the Death Benefit by $2.50. If, for example,
the Accumulation Value is reduced from $400,000 to $350,000 because of partial
surrenders, charges, or negative investment performance, the Death Benefit will
be reduced from $1,000,000 to $875,000. If at any time, however, the
Accumulation Value multiplied by the applicable corridor percentage is less than
the Specified Amount plus the Accumulation Value, the Death Benefit will be the
Specified Amount plus the Accumulation Value.
Change in Death Benefit Option. You may change the Death Benefit option at any
time by sending us a written request. The effective date of a change will be the
Monthly Deduction Date on or following the date we receive the written request.
A change may have federal tax consequences. (See "Federal Income Tax
Considerations," page 36.)
If you change from Option A to Option B, the Specified Amount will equal the
Specified Amount before the change minus the Accumulation Value on the effective
date of the change. If you change from Option B to Option A, the Specified
Amount after the change will equal the Death Benefit under Option B on the
effective date of change. You cannot change your Death Benefit option if the
Specified Amount remaining in force after the change would be less than
$100,000.
An increase in Specified Amount due to a Death Benefit option change will
increase the Monthly Deduction and the Guaranteed Coverage Premium. A surrender
charge may apply to a change in Death Benefit option. (See "Surrender Charge,"
page 28.)
A change in the Death Benefit option may affect subsequent cost of insurance
charges, which vary with our Net Amount at Risk. In addition, a change may
affect subsequent monthly expense fee and monthly expense charges. (See "Charges
and Deductions," page 27.)
Change in Specified Amount. Subject to certain limitations, you may increase the
Specified Amount of your Policy at any time and may decrease the Specified
Amount at any time after the first three Policy Years. A change in Specified
Amount may affect the
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cost of insurance rate and our Net Amount at Risk, both of which may affect your
cost of insurance charge and have federal tax consequences. (See "Cost of
Insurance," page 27 and "Federal Income Tax Considerations," page 36.)
The Specified Amount after a decrease may not be less than $100,000.
If following the decrease in Specified Amount, the Policy would not comply with
the maximum premium limitations required by federal tax law, the decrease may be
limited or a portion of Accumulation Value may be returned to you at your
election, to the extent necessary to meet these requirements. A decrease in the
Specified Amount will be applied first against increases in Specified Amount in
order of the more recent increase first, and finally against the initial
Specified Amount.
If your Specified Amount decreases, we will deduct a surrender charge from the
Accumulation Value. Such deduction will equal the sum of surrender charges
computed separately for each portion of Specified Amount reduced in the above
order. The surrender charges for each reduction is a pro rata portion of any
surrender charge applicable to a full surrender of the related increase or
initial Specified Amount. You cannot decrease the Specified Amount if the
younger Insured's Attained Age exceeds 99. A decrease in Specified Amount will
take effect on the Monthly Deduction Date which coincides with or next follows
the date we receive your written request.
If you want to increase the Specified Amount, you must submit a written
supplemental application and provide evidence of insurability for both Insureds.
You may have a different underwriting risk classification for the initial
Specified Amount and each increase in Specified Amount. (See "Charges from
Accumulation Value", page 27.) An additional premium may be required. (See
"Premiums Upon Increase in Specified Amount," page 26.) The minimum amount of
any increase is $5,000. You cannot increase the Specified Amount if either
Insured's Attained Age is over 80. An increase in the Specified Amount will
increase certain charges. Those charges will be deducted from the Accumulation
Value on each Monthly Deduction Date. An increase in the Specified Amount may
also increase surrender charges. An increase in the Specified Amount during the
time the Guaranteed Coverage Benefit provision is in effect will increase the
Guaranteed Coverage Premium requirement. (See "Charges and Deductions," page
27.)
You have a "free look period" for each increase in Specified Amount. The free
look period will apply only to the increase in Specified Amount. (See "Refund
Privilege," page 23.)
Methods of Affecting Insurance Protection. Your "pure insurance protection" will
be the difference between your Death Benefit and your Accumulation Value. You
may increase or decrease the pure insurance protection provided by a Policy as
your insurance needs change. You can change the pure insurance protection by
increasing or decreasing the Specified Amount, changing the level of premium
payments, or making a partial surrender of the Policy. Some of these changes may
have federal tax consequences. Although the consequences of each change will
depend upon individual circumstances, they can be summarized as follows:
. A decrease in Specified Amount will, subject to the applicable corridor
percentage limitations, decrease insurance protection and cost of insurance
charges.
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. An increase in Specified Amount may increase pure insurance protection,
depending on the amount of Accumulation Value and the corridor percentage
limitation. If insurance protection is increased, the monthly expense charges
and monthly expense fees generally increase as well.
. If Option A is in effect, increased premium payments may reduce pure
insurance protection, until the corridor percentage of Accumulation Value
exceeds the Specified Amount. Increased premiums should also increase the
amount of funds available to keep the Policy in force.
. If Option A is in effect, reduced premium payments generally will increase
the amount of pure insurance protection, depending on the corridor percentage
limitations. Reducing premium payments may also result in a reduced amount of
Accumulation Value and increase the possibility that the Policy will lapse.
. A partial surrender will reduce the Death Benefit. However, a partial
surrender affects only the amount of pure insurance protection if the
percentage from the Corridor Percentage Table is applicable in determining
the Death Benefit. Otherwise, the decrease in Death Benefit is offset by the
amount of Accumulation Value withdrawn. The primary use of a partial
surrender is to withdraw Accumulation Value.
GUARANTEED COVERAGE BENEFIT
We will keep the Policy in force for the period stipulated under the Guaranteed
Coverage Benefit so long as the sum of premiums paid at any time during such
period is at least:
. the sum of Guaranteed Coverage Premium for each month from the start of the
period, including the current month, plus
. partial surrenders and Policy Debt.
The Guaranteed Coverage Benefit is based on Age at Issue according to the
following table:
AGE AT ISSUE POLICY YEARS
------------ ------------
20 - 30 First 6 Years
31 - 40 First 5 Years
41 - 50 First 4 Years
50 + First 3 Years
An increase in Specified Amount does not start a new Guaranteed Coverage Benefit
period, but does increase Guaranteed Coverage Premium.
DURATION OF THE POLICY
The Policy will remain in force so long as the Surrender Value is sufficient to
pay the Monthly Deduction. The tax consequences associated with continuing the
Policy beyond the younger Insured's age 100 are unclear and a tax advisor should
be consulted. Where, however, the Surrender Value is insufficient to pay the
Monthly Deduction and the grace period expires without an adequate payment, the
Policy will lapse and terminate without value. (See "Grace Period and
Reinstatement," page 26.)
ACCUMULATION VALUE
Determination of Accumulation Value. On each Valuation Date, Accumulation Value
is determined as follows:
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. the aggregate of the value in each subaccount, determined by multiplying a
subaccount's unit value by the number of units in the subaccount; plus
. the value in the Fixed Account; plus
. premiums; plus
. Accumulation Value securing Policy Debt; less
. partial surrenders, and related charges, processed on that Valuation Date;
less
. any Monthly Deduction processed on that Valuation Date; less
. any federal or state income taxes.
The number of subaccount units allocated to the Policy is determined after any
transfers among subaccounts, or the Fixed Account (and deduction of transfer
charges), but before any other Policy transactions on the Valuation Date.
Determination of Unit Value. The unit value of each subaccount is equal to:
. the per share net asset value of the corresponding Eligible Portfolio on the
Valuation Date, multiplied by
. the number of shares held by the subaccount, after the purchase or redemption
of any shares on that date, minus
. the Daily Asset Charge, and divided by
. the total number of units held in the subaccount on the Valuation Date, after
any transfers among subaccounts, or the Fixed Account (and deduction of
transfer charges), but before any other Policy transactions.
PAYMENT OF POLICY BENEFITS
Death Benefit Proceeds will usually be paid within seven days after we receive
Satisfactory Proof of Death of both Insureds. Policy loans and surrenders will
ordinarily be paid within seven days after receipt of your written request. We
may defer payment of any surrender, refund, or Policy loan until a premium
payment made by check clears the banking system. Payments may also be postponed
in certain other circumstances. (See "Postponement of Payments," page 42.) You
can decide how benefits will be paid. During either Insured's lifetime, you may
arrange for the Death Benefit Proceeds to be paid in a lump sum or under one or
more of the optional methods of payment described below. These choices are also
available if the Policy is surrendered. When Death Benefit Proceeds are payable
in a lump sum and no election of an optional payment method is in force at the
death of the Second Insured, the Beneficiary may select one or more of the
optional payment methods. If you or the Beneficiary do not elect one of these
options, we will pay the benefits in a lump sum.
An election or change of method of payment must be in writing. A change in
Beneficiary revokes any previous election. Further, if the Policy is assigned,
any amount due to the assignee will be paid first in a lump sum. The balance, if
any, may be applied under any payment option. Once payments have begun, the
payment option may not be changed.
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Optional Methods of Payment. In addition to a lump sum payment of benefits under
the Policy, any proceeds to be paid under the Policy may be paid in any of the
following six methods:
. Option 1. Equal Installments for a Fixed Number of Years. Installments will
include interest at the effective rate of 2.5% per year or at a higher rate,
at our option.
. Option 2. Installments for Life with the Option to Choose a Period Certain.
The fixed period may be 10 or 20 years.
. Option 3. Equal Installments of a Fixed Amount Payable Annually, Semi-
annually, Quarterly, or Monthly. The sum of the installments paid in one year
must be at least $50.00 for each $1,000.00 of proceeds. Installments will be
paid until the total of the following amount is exhausted: (1) the net sum
payable; plus (2) interest at the effective rate of 2.5% per year; plus (3)
any additional interest that we may elect to pay. The final installment will
be the balance of the proceeds payable plus interest.
. Option 4. Interest Only. We will hold the proceeds and pay interest at the
effective rate of 2.5% per year or at a higher rate, at our option. On
interest due dates, the payee may withdraw an amount of at least $100.00 from
the amount held.
. Option 5. Payments for Joint and Surviving Spouse Annuity. The amount applied
to this option will be used by us to pay equal monthly payments to the payee
for as long as the payee lives. Thereafter, we will pay a portion of those
monthly payments to the payee's spouse for life, if living. The payee's
spouse must be married to the payee at the time of election. The monthly
amount paid to the spouse may not be less than one-half of, nor more than,
the monthly payments paid while both spouses are alive. If you choose this
option and the payee's spouse dies before the first payment is due: (1) the
payee will be paid equal monthly payments based on Option 2; or with our
agreement, you may elect another method of payment to the payee.
. Option 6. Minimum Payout. The proceeds will be paid in a series of
substantially equal periodic payments (not less than annually) for the life
(or the life expectancy) of the payee consistent with the requirements of
Section 72(q)(2)(D) of the Internal Revenue Code of 1986, as amended.
Any amount left with us for payment under a settlement option will be
transferred to our General Account and will not be affected by the investment
performance associated with the Separate Account. We may make other options
available in the future.
When proceeds become payable in accordance with a settlement option, the Policy
will be exchanged for a supplementary contract specifying all rights and
benefits. The effective date will be the date of the Insured's death or other
termination of the Policy.
Amounts under the supplemental contact remaining payable after the Beneficiary's
death will be paid to the estate of the Beneficiary or in any other manner
provided for in the supplementary contract or as otherwise provided under
applicable law.
General Provisions for Settlement Options. If the amount held falls below
$2,000.00, we will pay the entire amount held to the payee. The first
installment under Option 1, 2 or 3 will be paid the date the proceeds are
available. With our consent, the first installment may be postponed for up to
ten years. If payment is postponed, the proceeds will accumulate with compound
interest at the effective rate of 2.5% per year.
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To avoid paying installments of less than $20.00 each, we will:
. change the installments to a quarterly, semi-annual or annual basis; and/or
. reduce the number of installments.
If you elect an option, you may restrict the Beneficiary's right to assign,
encumber, or obtain the discounted present value of any unpaid amount.
Except as permitted by law, unpaid amounts are not subject to claims of a
Beneficiary's creditors.
At our option, a Beneficiary may be permitted to receive the discounted present
value of installments, except under option 2, 5, or 6. If the payee dies, under
Option 1, 2, or 6 (if 6 is paid over life expectancy) we will pay the discounted
present value of any unpaid fixed-period installments to the payee's estate
except Option 2 lifetime. Under Option 3 or 4, we will pay any balance to the
payee's estate. The effective interest rate used to compute discounted present
value is the interest rate used in computing the settlement option plus 1%. With
our consent, the option elected may provide for payment in another manner.
Limitations. You must obtain our consent to have an option under which proceeds
are payable to:
. successive payees, or
. other than a natural person.
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POLICY RIGHTS
LOAN BENEFITS
Loan Privileges. You can borrow money from us using your Policy as security for
the loan. The minimum loan amount is $100. Except as otherwise required by
applicable state law or regulation:
. during the first three Policy Years, you cannot borrow more than 75% of the
Surrender Value, as calculated at the end of the Valuation Period during
which your loan request is received;
. after the first three Policy Years, you can borrow up to 90% of the Surrender
Value, as calculated at the end of the Valuation Period during which your
loan request is received.
Preferred loans accrue interest at a lower rate. You cannot obtain a preferred
loan until after the seventh Policy Year. We determine whether a loan is
preferred at the time the loan is made. The amount available for a preferred
loan is equal to the lesser of:
. the above-mentioned loan limits, or
. the Accumulation Value less Policy Debt and less premiums paid (adjusted by
partial surrenders).
The loan may be repaid in whole or in part during the Insured's lifetime. Each
loan repayment must be at least $10 or the full amount of Policy Debt, if less.
Loans generally are funded within seven days after receipt of a written request.
(See "Postponement of Payments," page 42.) Loans may have tax consequences.
(See "Federal Income Tax Considerations," page 36.)
Interest. Loans will accrue interest on a daily basis at a rate of 5.0% per
year, 3.0% on preferred loans. Interest is due and payable on each Policy
anniversary date or when a loan payment is made if earlier. If unpaid, interest
will be added to the amount of the loan and bear interest at the same rate.
Amounts held to secure Policy loans will earn interest at the annual rate of
3.0% credited on the Policy anniversary. We will allocate interest to the
subaccounts and the Fixed Account on each Policy anniversary in the same
proportion that premiums are being allocated to those subaccounts and the Fixed
Account at that time.
Effect of Policy Loans. When a loan is made, we transfer Accumulation Value
equal to the loan amount from the Separate Account and the Fixed Account to our
General Account as security for the Policy Debt. The Accumulation Value
transferred will be deducted from the subaccounts and the Fixed Account in
accordance with your instructions. The minimum amount which can remain in a
subaccount or the Fixed Account as a result of a loan is $100. If you do not
provide allocation instructions, the Accumulation Value transferred will be
allocated among the subaccounts and the Fixed Account pro-rata. If allocation
instructions conflict with the $100 minimum described above, we may allocate the
Accumulation Value transferred among the subaccounts and the Fixed Account pro-
rata. We will also transfer Accumulation Value from the subaccounts and the
Fixed Account to the General Account to secure unpaid loan interest.
We will allocate this transfer among the subaccounts and the Fixed Account as
described above.
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We will not impose a charge for these transfers. A Policy loan may have tax
consequences. (See "Federal Income Tax Considerations," page 36.)
A Policy loan may permanently affect the Accumulation Value, even if repaid. The
effect could be favorable or unfavorable depending on whether the investment
performance of the subaccount(s)/Fixed Account chosen by you is greater or less
than the interest rate credited to the Accumulation Value held in the General
Account to secure the loan. In comparison to a Policy under which no loan was
made, the Accumulation Value will be lower if the General Account interest rate
is less than the investment performance of the subaccount(s)/Fixed Account, and
greater if the General Account interest rate is higher than the investment
performance of the subaccount(s)/Fixed Account. Since your Death Benefit may be
affected by Accumulation Value, a Policy loan may also affect the amount of the
Death Benefit, even if repaid.
Policy Debt. Policy Debt reduces Death Benefit Proceeds and Surrender Value. If
the Policy Debt exceeds the Accumulation Value less any surrender charge, you
must pay the excess or your Policy will lapse. We will notify you of the amount
which must be paid. (See "Grace Period and Reinstatement," page 26.)
Repayment of Policy Debt. If we receive payments while a Policy loan is
outstanding, those payments are treated as additional premiums, unless you
request otherwise. As Policy Debt is repaid, we will transfer Accumulation Value
equal to the loan amount repaid from the General Account to the subaccounts and
the Fixed Account. We will allocate the transfers among the subaccounts and the
Fixed Account in the same proportion that premiums are being allocated at the
time of repayment. We will make the allocation at the end of the Valuation
Period during which the repayment is received. If you do not repay the Policy
Debt, we will deduct the amount of the Policy Debt from any amount payable under
the Policy.
SURRENDERS
During the life of either Insured, you can surrender the Policy in whole or in
part by sending us a written request. The maximum amount available for surrender
is the Surrender Value at the end of the Valuation Period during which the
surrender request is received at our Home Office. Surrenders will generally be
paid within seven days of receipt of the written request. (See "Postponement of
Payments," page 42.) Any proceeds payable upon full surrender shall be paid in
one sum unless an optional method of payment is elected. (See "Payment of Policy
Benefits," page 17.) Surrenders may have tax consequences. (See "Federal Income
Tax Considerations," page 36.)
Full Surrenders. If the Policy is being fully surrendered, you must return the
Policy to us with your request. Coverage under the Policy will terminate as of
the date of a full surrender.
Partial Surrenders. The amount of a partial surrender may not exceed the
Surrender Value at the end of the Valuation Period during which the request is
received less an amount sufficient to cover Monthly Deductions for three months.
The minimum partial surrender is $100.
The Accumulation Value will be reduced by the amount of partial surrender and
any applicable partial surrender charge. (See "Partial Surrender Charge," page
28.) This amount will be deducted from the Accumulation Value at the end of the
Valuation Period
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during which the request is received. The deduction will be allocated to the
subaccounts and the Fixed Account according to your instructions, provided that
the minimum amount remaining in a subaccount as a result of the allocation is
$100. If you do not provide allocation instructions or if your allocation
instructions conflict with the $100 minimum described above, we will allocate
the partial surrender among the subaccounts and the Fixed Account pro-rata.
Partial surrenders reduce the Death Benefit by the amount the Accumulation Value
is reduced. If Option A is in effect, the Specified Amount will be reduced by
the amount of the partial surrender. Where increases in Specified Amount
occurred, a partial surrender will reduce the increases in order of the more
recent increase first, and finally the initial Specified Amount. Thus, partial
surrenders may affect the cost of insurance charge and the Net Amount at Risk.
(See "Cost of Insurance," page 27; "Methods of Affecting Insurance Protection,"
page 15.) If Option B is in effect, the Specified Amount will not change, but
the Accumulation Value will be reduced.
The Specified Amount remaining in force after a partial surrender may not be
less than $100,000.
The amount of any partial surrender will generally be paid within seven (7) days
after receipt of your written request. (See "Postponement of Payments," page
42.)
TRANSFERS
You can transfer Accumulation Value among the subaccounts or from the
subaccounts to the Fixed Account as often as you like. You can make transfers in
person, by mail, or, if a telephone transfer authorization form is on file, by
telephone. The minimum transfer from a subaccount is $250, or the balance of the
subaccount, if less. The minimum that may remain in a subaccount after a
transfer is $100. We will make transfers and determine all values in connection
with transfers on the later of the end of the Valuation Period which includes
the requested transfer date or during which the transfer request is received.
Accumulation Value on the date of a transfer will not be affected except to the
extent of the transfer charge, if applicable. The first twelve transfers in a
Policy Year will be free. We will charge $10 for each additional transfer. Such
charge will be deducted from the amount transferred. (See "Transfer Charge,"
page 27.) Transfers resulting from Policy loans, the dollar cost averaging
program, or the rebalancing program will not be subject to a transfer charge or
be counted for purposes of determining the number of free transfers.
During the thirty-day period beginning on the Policy anniversary, you may make
one transfer from the Fixed Account to the subaccounts. This transfer is free.
The amount you can transfer from the Fixed Account to the subaccounts is the
greater of:
. twenty-five percent of the amount in the Fixed Account, or
. $1,000.
If we receive a request to transfer funds out of the Fixed Account before the
Policy anniversary, the transfer will be made at the end of the Valuation Period
during which the Policy anniversary occurs. If we receive a proper transfer
request within 30 days after the Policy anniversary, the transfer will be made
as of the end of the Valuation Period in which we received the transfer request.
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We will employ reasonable procedures to confirm that the transfer instructions
communicated by telephone are genuine. These procedures may include some form of
personal identification before acting, providing you written confirmation of the
transaction, and making a tape recording of the telephoned instructions.
REFUND PRIVILEGE
Under state law, you have a free look period in which to examine a Policy and
return it for a refund. The length of the free look period varies among
different states, but generally runs for 10 days after your receipt of the
Policy. If the Policy is canceled during the free look period, you will receive
a refund equal to premiums paid adjusted by investment gains during the 15-day
period such premiums have been allocated to the AN Money Market Portfolio. (See
"Allocation of Premiums," page 26.) A free look period also applies to any
increase in Specified Amount. If you cancel the increase, you will receive the
amount of premiums paid attributable to such increase in Specified Amount
adjusted by investment gains or losses.
To cancel the Policy, you should mail or deliver the Policy to our Home Office
or to the office of one of our agents. We may delay paying a refund of premiums
paid by check until the check has cleared your bank. (See "Postponement of
Payments," page 42.)
DOLLAR COST AVERAGING
Under the dollar cost averaging program, you can instruct us to automatically
transfer, on a periodic basis, a predetermined amount or percentage from any one
subaccount or Fixed Account, to any subaccount(s) or Fixed Account. The
automatic transfers can occur monthly, quarterly, semi-annually, or annually.
The amount transferred each time must be at least $1,000. The minimum transfer
to each subaccount must be at least $100. At the time the program begins, you
must have at least $10,000 Accumulation Value. Transfers under dollar cost
averaging will be made, and values resulting from the transfers determined, at
the end of the Valuation Period that includes the transfer date designated in
your instructions.
Using dollar cost averaging, you purchase more units when the unit value is low,
and fewer units when the unit value is high. There is no guarantee that the
dollar cost averaging program will result in higher Accumulation Value or
otherwise be successful.
You can specify that only a certain number of transfers will be made, in which
case the program will terminate when that number of transfers has been made. In
addition, the program will terminate if Accumulation Value is less than $5,000
on a transfer date.
You can increase or decrease the amount of transfers or discontinue the program
by sending us written notice or, if a telephone transfer authorization form is
on file, notifying us by phone. There is no charge for this program and
transfers made pursuant to this program will not be counted in determining the
number of free transfers.
REBALANCING
Because the subaccounts and the Fixed Account may have different investment
results, your Accumulation Value may not stay in the same percentages as your
initial allocation instructions. At your request, we will rebalance your
Accumulation Value by allocating premiums and transferring Accumulation Value to
ensure conformity with your
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allocation instructions. We will rebalance your allocation on a calendar
quarter, semi-annual, or annual basis according to your instructions. We will
rebalance, and determine any values resulting from the rebalancing, at the end
of the Valuation Period that includes the rebalancing date in your request.
There is no charge for this program and transfers made pursuant to this program
will not be counted in determining the number of free transfers. At the time the
program begins, you must have at least $10,000 of Accumulation Value. If the
Accumulation Value is less than $5,000 on a rebalancing date, the program will
be discontinued.
You can request participation in the rebalancing program at any time. You can
discontinue the program by sending us written notice or, if a telephone transfer
authorization form is on file, by calling by telephone.
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PAYMENT AND ALLOCATION
OF PREMIUMS
ISSUANCE OF A POLICY
If you want to purchase a Policy, you must complete an application and submit it
to our Home Office. We will issue a Policy only to two individuals between the
ages of 20 and 80 on their last birthdays who supply satisfactory evidence of
insurability. Acceptance is subject to our underwriting rules.
The Date of Issue is used to determine Policy anniversary dates, Policy Years,
and Policy months.
PREMIUMS
You must pay the initial premium for the Policy to be in force. The initial
premium must be at least 1/12 of the first year Guaranteed Coverage Premium.
The initial premium and all other premiums are payable at our Home Office.
Subject to certain limitations, you have flexibility in determining the
frequency and amount of premiums since the Planned Periodic Premium schedule is
not binding on you.
PREMIUM FLEXIBILITY
You may make unscheduled premium payments at any time in any amount, subject to
the premium limitations described herein.
Planned Periodic Premiums. At the time the Policy is issued, you can determine a
Planned Periodic Premium schedule. The amounts and frequency of the Planned
Periodic Premiums will be shown on the Policy Data Page. During the Guaranteed
Coverage Benefit period, the Planned Periodic Premium must be at least the
Guaranteed Coverage Premium. You are not required to pay premiums in accordance
with this schedule.
You can change the frequency and amount of Planned Periodic Premiums by sending
a written request to our Home Office. We may limit any increase in premium to
comply with applicable federal tax law. We will send premium payment notices
annually, semi-annually, quarterly, or monthly depending upon the frequency of
the Planned Periodic Premiums. Payment of the Planned Periodic Premiums does not
guarantee that the Policy will remain in force, unless the Guaranteed Coverage
Benefit provision is in effect.
Premium Limitations. Total premiums paid cannot exceed the current maximum
premium limitations established by federal tax laws. If a premium is paid which
would cause total premiums to exceed such maximum premium limitations, we will
accept only that portion of the premium equal to the maximum. We will return any
part of the premium in excess of that amount or apply it as otherwise agreed. No
further premiums will be accepted until permitted under the laws prescribing
maximum premium limitations. We may refuse to accept a premium or require
additional evidence of insurability if the premium would increase Net Amount at
Risk. Additional premiums are not accepted after the younger Insured's 100th
birthday. We may also establish a minimum acceptable premium amount.
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Premiums Upon Increase in Specified Amount. If you request an increase in the
Specified Amount, we will notify you if any additional premium is required.
Whether additional premium will be required will depend upon
. the Accumulation Value of the Policy at the time of the increase, and
. the amount of the increase you request.
ALLOCATION OF PREMIUMS AND ACCUMULATION VALUE
Allocation of Premiums. Premiums are allocated according to your instructions.
You can change the allocation without charge by providing proper notification to
our Home Office. Your notice must include the policy number to which the
instructions apply. Your revised allocation instructions will apply to premiums
received by us on or after the date proper notification is received.
Accumulation Value. The value of subaccounts will vary with the investment
performance of these subaccounts, and you bear the risk that those investments
might actually lose money. The performance of these investments affects the
Policy's Accumulation Value and may affect the Death Benefit as well.
GRACE PERIOD AND REINSTATEMENT
Grace Period. If the Surrender Value is insufficient to pay the Monthly
Deduction, you have a grace period of sixty-one days to pay an additional
premium. The grace period starts when written notice of lapse is mailed to your
last known address and expires 61 days later. The notice will advise you of
the necessary additional premium. If you do not pay the additional premium
during the grace period, the Policy will terminate. If the Insured dies during
the grace period, any overdue Monthly Deductions and Policy Debt will be
deducted from the Death Benefit Proceeds.
Reinstatement. A Policy may be reinstated any time within five years after
termination. A Policy cannot be reinstated if it was surrendered. Reinstatement
will be effected based on each Insured's underwriting classification at the time
of the reinstatement.
Reinstatement is subject to the following:
. evidence of insurability of each Insured satisfactory to us;
. reinstatement or repayment of Policy Debt;
. payment of Monthly Deductions not collected during the grace period; and
. payment of the premium sufficient to pay the Monthly Deduction for three
months after the date of reinstatement.
Both Insureds must be living at the time of reinstatement.
The original Date of Issue, and the Effective Dates of increases in Specified
Amount (if applicable), will be used for purposes of calculating Monthly
Deductions and the surrender charge. If any Policy Debt was reinstated, the
amount of the debt will be held in our General Account. During the lapse period,
Policy Debt will accrue interest at a rate of 6%. Accumulation Value will then
be calculated as described under "Accumulation Value" on page 16. The Effective
Date of reinstatement will be the first Monthly Deduction Date on or next
following the date we approve the application for reinstatement.
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CHARGES AND DEDUCTIONS
PREMIUM CHARGES
The premium charge will be deducted from each premium payment before allocating
such premiums among the subaccounts and the Fixed Account. We are currently not
charging the premium charge after Policy Year ten. We may, however, assess the
premium charge after Policy Year ten. We will notify you in writing if a
premium charge is to be assessed after Policy Year ten.
CHARGES FROM ACCUMULATION VALUE
We will deduct the following charges from the Accumulation Value:
Monthly Deduction. The Monthly Deduction is the sum of the cost of insurance
charge, applicable charges for any riders, and the monthly expense fee and
monthly expense charge. The Monthly Deduction compensates us for providing the
insurance benefits and administering the Policy. We deduct the Monthly Deduction
as of the Date of Issue and on each Monthly Deduction Date thereafter. We will
allocate the deduction among the subaccounts and the Fixed Account pro-rata. The
cost of insurance, the monthly expense charge, and the monthly expense fee are
described in more detail below. Because portions of the Monthly Deduction, such
as the cost of insurance, can vary from month to month, the Monthly Deduction
itself may vary in amount from month to month.
We are currently not charging the monthly expense charge after Policy Year five.
We are currently charging the maximum monthly expense fee. We may reduce the
monthly expense charge or the monthly expense fee. Any change will be on a
uniform basis for all insureds with this Policy, for the same Specified Amount,
and that have been in force the same time. A change in health or other risk
factors after the Date of Issue will not affect these charges. We will not
reduce or increase any of these charges more than once each Policy Year. We will
notify you in writing before a new monthly expense charge is effective.
Cost of Insurance. For the initial Specified Amount, the cost of insurance rate
will not exceed those in the Schedule of Monthly Guaranteed Maximum Cost of
Insurance Rates shown on the Policy Data Page. These guaranteed rates are based
on each Insured's age last birthday. The current rates range between 51.39% and
100% of the guaranteed rates. Any change in the current cost of insurance rates
will apply to all combinations of Insureds of the same ages, sexes, risk
classes, Policy Years, and Specified Amounts.
Guaranteed maximum cost of insurance rates are calculated based on the 1980
Commissioners Standard Ordinary (CSO) Smoker or Nonsmoker Mortality Tables (Age
Last Birthday).
The underwriting risk classes for the initial Specified Amount and the Specified
Amount for any increase may be different. The issue date and Ages at Issue will
be different for each increase. As a result the cost of insurance rate for the
initial Specified Amount and each increase in Specified Amount will be
different. Decreases will also be reflected in the cost of insurance rate. (See
"Change in Specified Amount," page 14.)
The actual charges made during the Policy Year will be shown in the annual
report delivered to you.
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The rate class of each Insured will affect the cost of insurance rate. We
currently place insureds into the standard rate class, a substandard rate class,
or an uninsurable rate class, the latter two categories involving a higher
mortality risk. In an otherwise identical Policy, Insureds in the standard rate
class will typically have a lower cost of insurance than Insureds in a
substandard rate class. If a Policy is rated at issue with a tabular extra
rating, the guaranteed rate is generally a multiple of the guaranteed rate for a
standard issue.
One or both Insureds may also be assigned a flat extra rating to reflect certain
additional risks. The flat extra rating will not impact the cost of insurance
rate, but 1/12 of any annualized flat extra cost will be deducted as part of
the Monthly Deduction.
Surrender Charge. If a Policy is surrendered, we may assess a surrender charge.
Surrender charges are intended to compensate us for the costs of distributing
the Policy.
We may also assess a surrender charge upon decreases in Specified Amount or upon
Death Benefit option changes that result in a decrease in Specified Amount. (See
"Change in Specified Amount," page 14.)
The surrender charge is more substantial in early Policy Years. (See "Surrender
Charges," page 10.) Accordingly, the Policy is more suitable for long-term
purposes.
Transfer Charge. We will make the first 12 transfers of Accumulation Value in
any Policy Year without a transfer charge. A charge of $10 will be deducted from
the amount transferred for each additional transfer among the subaccounts or
from the subaccounts to the Fixed Account. This charge compensates us for the
costs of effecting the transfer. The transfer charge cannot be increased.
Partial Surrender Charge. We will impose a $25 fee for each partial surrender.
In addition, if Death Benefit Option A is in effect, a partial surrender charge
will be charged for a decrease in Specified Amount. (See "Change in Specified
Amount," page 14.)
Daily Charges Against the Separate Account. On each Valuation Date, we will
deduct a Daily Asset Charge from the Separate Account. This charge is to
compensate us for mortality and expense risks. The mortality risk is that
Insureds may live for a shorter time than we assumed. If so, we will have to pay
Death Benefits greater than we estimated. The expense risk is that expenses
incurred in issuing and administering the Policies will exceed our estimates.
Such charge shall not exceed 0.90% annually of the average daily Accumulation
Value of each subaccount, but not the Fixed Account. We will deduct the daily
charge from the Accumulation Value of the Separate Account on each Valuation
Date. The deduction will equal the 0.90% annual rate divided by 365 with the
result multiplied by the number of days since the last Valuation Date. We are
currently charging only 0.60% for the Daily Asset Charge in Policy Year twenty-
one and thereafter. We will notify you in writing if the Daily Asset Charge
changes. We will not deduct a Daily Asset Charge from the Fixed Account.
Fees and Expenses Incurred by Eligible Portfolios. In addition, the managers of
the Eligible Portfolios will charge certain fees and expenses against the
Eligible Portfolios. (See "Eligible Portfolio Annual Expenses," page 9. Also,
see the funds' prospectuses.) No portfolio fees or expenses will be charged
from the Fixed Account.
Taxes. Currently, we will not make a charge against the Separate Account for
federal, state or local income taxes. We may, however, make such a charge in the
future if income
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or gains within the Separate Account will incur any federal tax, or any
significant state or local tax treatment of our Company changes. We would deduct
such charges, if any, from the Separate Account and/or the Fixed Account. We
would not realize a profit on such tax charges with respect to the Policies.
EXCEPTIONS TO CHARGES
We may reduce the premium charge, surrender charge, monthly expense charge, the
monthly expense fee, cost of insurance, and daily asset charge for, or credit
additional amounts on, sales of the Policy to a trustee, employer, or similar
entity where we determine that such sales result in savings of sales or
administrative expenses. In addition, directors, officers, and bona fide full-
time employees (and their spouses and minor children) of the Company or
Securities Management and Research, Inc. may be permitted to purchase the Policy
with substantial reductions of surrender charge, monthly expense charge, monthly
expense fee, premium charge, cost of insurance, or daily asset charge.
The Policy may be sold directly, without compensation, to: (1) a registered
representative, (2) employees, officers, directors, and trustees of our Company
and its affiliated companies, and spouses and immediate family members (i.e.,
children, siblings, parents, and grandparents) of the foregoing, and (3)
employees, officers, directors, trustees, and registered representatives of any
broker-dealer authorized to sell the Policy, and spouses and immediate family
members of the foregoing. If sold under these circumstances, a Policy may be
credited in part or in whole with any cost savings resulting from the sale being
direct, rather than through an agent with an associated commission, but only if
such credit will not be unfairly discriminatory to any person.
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AMERICAN NATIONAL INSURANCE COMPANY,
THE SEPARATE ACCOUNT, THE FUNDS, AND
THE FIXED ACCOUNT
AMERICAN NATIONAL INSURANCE COMPANY
We are a stock life insurance company chartered under Texas law in 1905. We
write life, health, and accident insurance and annuities, and we are licensed to
do life insurance business in 49 states, the District of Columbia, Puerto Rico,
Guam, and American Samoa. Our home office is located at the American National
Insurance Building, One Moody Plaza, Galveston, Texas 77550. The Moody
Foundation, a charitable foundation established for charitable and educational
purposes, owns approximately 23.7% of our stock and the Libbie S. Moody Trust, a
private trust, owns approximately 37.6%.
We are subject to regulation by the Texas Department of Insurance. In addition,
we are subject to the insurance laws and regulations of other states within
which we are licensed to operate. On or before March 1 of each year we must
submit to the Texas Department of Insurance a filing describing our operations
and reporting on our financial condition and that of the Separate Account as of
December 31 of the preceding year. Periodically, the Department examines our
liabilities and reserves and those of the Separate Account and certifies their
adequacy. A full examination of our operations is also conducted periodically by
the National Association of Insurance Commissioners.
THE SEPARATE ACCOUNT
We established the Separate Account under Texas law on July 30, 1987. The assets
of the Separate Account are held exclusively for your benefit and the benefit of
other people entitled to payments under variable life policies we issue. We are
the legal holder of the Separate Account's assets. The assets are held separate
and apart from the General Account assets. We maintain records of all purchases
and redemptions of shares of Eligible Portfolios by each of the subaccounts. We
will at all times maintain assets in the Separate Account with a total market
value at least equal to the reserve and other contract liabilities of the
Separate Account. Liabilities arising out of other aspects of our business
cannot be charged against the assets of the Separate Account. Income, as well as
both realized and unrealized gains or losses from the Separate Account's assets,
are credited to or charged against the Separate Account without regard to
income, gains, or losses arising out of other aspects of our business. If,
however, the Separate Account's assets exceed its liabilities, the excess shall
be available to cover the liabilities of our General Account.
The Separate Account is registered with the Securities and Exchange Commission
("SEC") as a unit investment trust, which is a type of investment company. Such
registration does not involve any SEC supervision of the management or
investment policies or practices of the Separate Account.
The Separate Account will purchase and redeem shares of the Eligible Portfolios
at net asset value. The net asset value of a share is equal to the total assets
of the portfolio less the total liabilities of the portfolio divided by the
number of shares outstanding.
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We will redeem shares in the Eligible Portfolios as needed to:
. collect charges,
. pay the Surrender Value,
. secure Policy loans,
. provide benefits, or
. transfer assets from one subaccount to another, or to the Fixed Account.
Any dividend or capital gain distribution received from an Eligible Portfolio
will be reinvested immediately at net asset value in shares of that Eligible
Portfolio and retained as assets of the corresponding subaccount.
The Separate Account may include other subaccounts that are not available under
the Policy. We may from time to time discontinue the availability of some of the
subaccounts. If the availability of a subaccount is discontinued, we may redeem
any shares in the corresponding Eligible Portfolio and substitute shares of
another registered, open-end management company.
We may also establish additional subaccounts. Each new subaccount would
correspond to a portfolio of a registered, open-end management company. We would
establish the terms upon which existing Policyowners could purchase shares in
such portfolios.
If any of these substitutions or changes are made, we may change the Policy by
sending an endorsement. We may:
. operate the Separate Account as a management company,
. de-register the Separate Account if registration is no longer required,
. combine the Separate Account with other separate accounts,
. restrict or eliminate any voting rights associated with the Separate Account,
or
. transfer the assets of the Separate Account relating to the Policies to
another separate account.
We would, of course, not make any changes to the menu of Eligible Portfolios or
to the Separate Account without complying with applicable laws and regulations.
Such laws and regulations may require notice to and approval from the
Policyholders, the SEC, and state insurance regulatory authorities.
Since we are the legal holder of the Eligible Portfolio shares held by the
Separate Account, we can vote on any matter that may be voted upon at a
shareholders' meeting. To the extent required by law, we will vote all shares of
the Eligible Portfolios held in the Separate Account at shareholders' meetings
in accordance with instructions we receive from you and other policyowners. The
number of votes for which each policyowner has the right to provide instructions
will be determined as of the record date selected by the Board of Directors of
the American National Fund, the Fidelity Funds, or the T. Rowe Price Funds, as
the case may be. We will furnish Policyowners with the proper forms, materials,
and reports to enable them to give us these instructions. We will vote Eligible
Portfolio shares held in each subaccount for which no timely instructions from
policyowners are received and shares held in each subaccount which do not
support Policyowner interests in the same proportion as those shares in that
subaccount for which
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timely instructions are received. Voting instructions to abstain on any item to
be voted will be applied on a pro rata basis to reduce the votes eligible to be
cast. Should applicable federal securities laws or regulations permit, we may
vote shares of the American National Fund, the Fidelity Funds or the T. Rowe
Price Funds in our own right. We may, if required by state insurance officials,
disregard voting instructions if those instructions would require shares to be
voted to cause a change in the subclassification or investment objectives or
policies of one or more of the Eligible Portfolios, or to approve or disapprove
an investment adviser or principal underwriter for the Eligible Portfolios. In
addition, we may disregard voting instructions that would require changes in the
investment objectives or policies of any Eligible Portfolio or in an investment
adviser or principal underwriter for the Eligible Portfolios, if we reasonably
disapprove those changes in accordance with applicable federal regulations. If
we do disregard voting instructions, we will advise Policyowners of that action
and our reasons for the action in the next annual report or proxy statement to
Policyowners.
The Separate Account is not the only separate account that invests in the
Eligible Portfolios. Other separate accounts, including those funding other
variable life policies, variable annuity contracts, other insurance contracts
and retirement plans, invest in certain of the Eligible Portfolios. We do not
currently see any disadvantages to you resulting from the Eligible Portfolios
selling shares to fund products other than the Policy. However, there is a
possibility that a material conflict of interest may arise between the
Policyowners and the owners of variable life insurance policies and the owners
of variable annuity contracts whose values are allocated to another separate
account investing in the Eligible Portfolios. In addition, there is a
possibility that a material conflict may arise between the interests of
Policyowners or owners of other contracts and the retirement plans which invest
in the Eligible Portfolios or those plans participants. If a material conflict
arises, we will take any necessary steps, including removing the Eligible
Portfolio from the Separate Account, to resolve the matter. The Board of
Directors of each Eligible Portfolio will monitor events in order to identify
any material conflicts that may arise and determine what action, if any, should
be taken in response to those events or conflicts. See the accompanying
prospectuses for the Eligible Portfolios for more information.
THE FUNDS
Each of the twenty-one subaccounts of the Separate Account will invest in shares
of a corresponding Eligible Portfolio.
The investment objectives and policies of each Eligible Portfolio are summarized
below. The Eligible Portfolios may not achieve their stated objectives. You will
be notified of any material change in the investment policy of any portfolio in
which you have an interest.
Each Eligible Portfolio's total operating expenses will include fees for
management, shareholder services, and other expenses, such as custodial, legal,
and other miscellaneous fees. The prospectuses for the American National Fund,
the Fidelity Funds, and the T. Rowe Price Funds contain more detailed
information about the Eligible Portfolios, including a description of investment
objectives, restrictions, expenses and risks. You should carefully read those
prospectuses and retain them for future reference.
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You should periodically review your allocation to make sure that your investment
choices are still appropriate in light of any market developments or changes in
your personal financial situation.
. The American National Fund's current Eligible Portfolios and respective
investment objectives are as follows:
. The AN MONEY MARKET PORTFOLIO seeks the highest current income consistent
with the preservation of capital and maintenance of liquidity.
. The AN GROWTH PORTFOLIO seeks to achieve capital appreciation.
. The AN BALANCED PORTFOLIO seeks to conserve principal, produce reasonable
current income, and achieve long-term capital appreciation.
. The AN MANAGED PORTFOLIO seeks to achieve growth of capital and/or current
income.
Securities Management and Research, Inc. ("SM&R") is the investment adviser and
manager of the American National Fund. SM&R also provides investment advisory
and portfolio management services to our Company and other clients. SM&R
maintains a staff of experienced investment personnel and related support
facilities.
. The Fidelity Funds' current Eligible Portfolios and respective investment
objectives are as follows:
. VIP MONEY MARKET PORTFOLIO seeks as high a level of current income as is
consistent with the preservation of capital and liquidity.
. VIP INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income
as is consistent with the preservation of capital.
. VIP HIGH INCOME PORTFOLIO seeks a high level of current income while also
considering growth of capital.
. VIP ASSET MANAGER PORTFOLIO seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term
instruments.
. VIP ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return by
allocating its assets among stocks, bonds, short-term instruments, and other
investments.
. VIP BALANCED PORTFOLIO seeks both income and growth of capital.
. VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The fund will also
consider the potential for capital appreciation. The fund seeks a yield
which exceeds the composite yield on the securities comprising the S&P 500.
. VIP INDEX 500 PORTFOLIO seeks investment results that correspond to the
total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
. VIP GROWTH AND INCOME PORTFOLIO seeks high total return through a
combination of current income and capital appreciation.
. VIP MID CAP PORTFOLIO seeks long-term growth of capital.
. VIP GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth.
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. VIP CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
. VIP GROWTH PORTFOLIO seeks capital appreciation.
. VIP OVERSEAS PORTFOLIO seeks long-term growth of capital.
Fidelity Management and Research Company ("FMR"), the Fidelity Funds' investment
adviser, was founded in 1946. FMR provides a number of mutual funds and other
clients with investment research and portfolio management services. It maintains
a large staff of experienced investment personal and a full compliment of
related support facilities. Fidelity Management & Research (U.K.) Inc. ("FMR
U.K.") and Fidelity Management and Research (Far East) Inc. ("FMR Far East") are
wholly owned subsidiaries of FMR that provide research with respect to foreign
securities. FMR U.K. and FMR Far East maintain their principal business offices
in London and Tokyo, respectively. As of December 31, 1998, FMR advised funds
having more than 39 million shareholder accounts with a total value of more than
$694 billion. Fidelity Distributors Corporation distributes shares for the
Fidelity Funds. FMR Corp. is the holding company for the Fidelity companies.
Through ownership of voting common stock, Edward C. Johnson 3d , President and a
Trustee of the Fidelity Funds, and various trusts for the benefit of Johnson
family members form a controlling group with respect to FMR Corp.
. The T. Rowe Price Funds' current Eligible Portfolios and respective investment
objectives are as follows:
T. ROWE PRICE INTERNATIONAL SERIES, INC.
. T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO seeks to provide long-term
growth of capital through investments primarily in common stocks of
established non-U.S. companies.
T. ROWE PRICE EQUITY SERIES, INC.
. T. ROWE PRICE MID-CAP GROWTH PORTFOLIO seeks to provide long-term capital
appreciation by investing in mid-cap stocks with potential for above-average
earnings growth.
. T. ROWE PRICE EQUITY INCOME PORTFOLIO seeks to provide substantial dividend
income as well as long-term growth of capital through investments in common
stocks of established companies.
T. Rowe Price Associates, Inc. is responsible for selection and management of
the portfolio investments of T. Rowe Price Equity Series, Inc. Rowe Price-
Fleming International, Inc., incorporated in 1979 as a joint venture between T.
Rowe Price Associates, Inc. and Robert Fleming Holdings Limited, is responsible
for selection and management of the portfolio investments of T. Rowe Price
International Series, Inc.
We have entered into or may enter into agreements with the investment advisor or
distributor for certain of the Eligible Portfolios. These agreements require us
to provide administrative and other services. In return, we receive a fee based
upon an annual percentage of the average net assets amount we invested on behalf
of the Separate Account and our other separate accounts. Some advisors or
distributors may pay us a greater percentage than others.
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FIXED ACCOUNT
You can allocate some or all of your premium payments to the Fixed Account. You
can also, subject to certain limitations, transfer amounts from the Separate
Account to the Fixed Account or from the Fixed Account to the Separate Account.
(See "Transfers," page 22.)
We establish the Declared Rate and may adjust the rate each month; however, we
guarantee an effective annual rate of at least 3.0% compounded daily.
Payments allocated to the Fixed Account and transfers from the Separate Account
to the Fixed Account are placed in our General Account which supports insurance
and annuity obligations. The General Account includes all of our assets, except
those assets segregated in our separate accounts. We have discretion over the
investment of assets of the General Account, subject to applicable law. We bear
the risk that the investments in the General Account will lose money. You bear
the risk that the Declared Rate will fall to a lower rate.
Interests in the General Account have not been registered with the SEC as
securities, and the General Account has not been registered as an investment
company. Accordingly, neither the General Account nor any interest in the
General Account is generally subject to the provisions of federal securities
laws. The SEC has not reviewed the disclosures in this prospectus relating to
the Fixed Account portion of the Contract; however, disclosures regarding the
Fixed Account portion of the Contract may be subject to generally applicable
provisions of the federal securities laws regarding the accuracy and
completeness of statements made in prospectuses.
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FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT TAX ADVICE.
INTRODUCTION
The following summary provides a general description of the federal income tax
considerations relating to the Policy. This summary is based upon our
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service ("IRS"). Because of the complexity
of such laws and the fact that tax results will vary according to the factual
status of the specific Policy involved, tax advice from a qualified tax advisor
may be needed by a person contemplating the purchase of a Policy or the exercise
of certain elections under the Policy. These comments concerning federal income
tax consequences are not an exhaustive discussion of all tax questions that
might arise under the Policy. Further, these comments do not take into account
any federal estate and gift tax, state, or local tax considerations which may be
involved in the purchase of a Policy or the exercise of certain elections under
the Policy. For complete information on such federal and state tax
considerations, a qualified tax advisor should be consulted. We do not make any
guarantee regarding the tax status of any Policy, and the following summary is
not tax advice.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for federal income tax purposes
and to receive the tax treatment normally accorded life insurance contracts
under federal tax law, a Policy must satisfy certain requirements which are set
forth in the Internal Revenue Code (the "Code"). Guidance as to how these
requirements apply is limited. Nevertheless, we believe that Policies issued on
a standard basis, should satisfy the applicable requirements. There is less
guidance, however, with respect to Policies issued on a sub-standard basis and
it is not clear whether such Policies will in all cases satisfy the applicable
requirements. We reserve the right to restrict Policy transactions and to make
other modifications in order to bring the Policy into compliance with such
requirements.
In certain circumstances, owners of variable life insurance contracts may be
considered for federal income tax purposes to be the owners of the assets of the
separate account supporting their contracts due to their ability to exercise
investment control over those assets. Where this is the case, the contract
owners would be taxed on income and gains attributable to separate account
assets. There is little guidance in this area, and some features of the
Policies, such as the flexibility of a Policyowner to allocate premium payments
and transfer Accumulation Value, have not been explicitly addressed in published
rulings. While we believe that the Policies do not give Policyowners investment
control over Separate Account assets, we reserve the right to modify the
Policies as necessary to prevent a Policyowner from being treated as the owner
of the Separate Account assets.
In addition, the Code requires that the investments of the Separate Account be
"adequately diversified" in order for the Policies to be treated as life
insurance contracts for federal income tax purposes. It is intended that the
Separate Account, through the Eligible Portfolios, will satisfy these
diversification requirements.
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The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY PROCEEDS
In General. We believe that the Death Benefit Proceeds under a Policy will be
excludable from the gross income of the Beneficiary.
Generally, the Policyowner will not be deemed to be in constructive receipt of
the Accumulation Value until there is a distribution. When distributions from a
Policy occur, or when loans are taken out from or secured by a Policy, the tax
consequences depend on whether the Policy is classified as a "Modified Endowment
Contract."
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit option, a Policy loan, a partial or full surrender, the
addition of the Accelerated Death Benefit, the continuation of the Policy beyond
the younger Insured's 100th birthday, a change in ownership, or an assignment of
the Policy may have federal income tax consequences.
Modified Endowment Contracts. Whether a Policy is treated as a Modified
Endowment Contract depends upon the amount of premiums paid in relation to the
Death Benefit provided under the Policy. The rules for determining whether a
Policy is a Modified Endowment Contract are extremely complex. In general,
however, a Policy will be considered to be a Modified Endowment Contract if the
accumulated premium payments made at any time during the first seven Policy
Years exceed the sum of the net level premiums which would have been paid on or
before such time if the Policy provided for paid-up future benefits after the
payment of seven level annual premium payments.
In addition, if a Policy is "materially changed," it may cause such Policy to be
treated as a Modified Endowment Contract. The material change rules for
determining whether a Policy is a Modified Endowment Contract are also extremely
complex. In general, however, the determination of whether a Policy will be a
Modified Endowment Contract after a material change depends upon (i) the
relationship of the Death Benefit at the time of change to the Accumulation
Value at the time of such change, and (ii) the additional premiums paid in the
seven Policy Years following the date on which the material change occurs.
The manner in which the premium limitation and material change rules should be
applied to certain features of the Policy and its riders is unclear. If we
determine that a Policyowner has made excessive premium payments which will
cause a Policy to be considered a Modified Endowment Contract, we will notify
the Policyowner of the tax consequences and give the Policyowner the option of
having the excessive premiums refunded. If the Policyowner requests a refund
within 30 days after receipt of such notice, we will refund the excessive
premium payments to prevent the Policy from becoming a Modified Endowment
Contract.
Due to the Policy's flexibility, classification of a Policy as a Modified
Endowment Contract will depend upon the individual circumstances of each Policy.
Accordingly, a prospective Policyowner should contact a qualified tax advisor
before purchasing a Policy to determine the circumstances under which the Policy
would be a Modified Endowment Contract. In addition, a Policyowner should
contact a tax advisor before making any change to a Policy, exchanging a Policy,
or reducing Policy benefits, to
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determine whether such change would cause the Policy (or the new Policy in the
case of an exchange) to be treated as a Modified Endowment Contract.
If a Policy becomes a Modified Endowment Contract, distributions such as partial
surrenders and Policy loans that occur during the Policy Year it becomes a
Modified Endowment Contract and any subsequent Policy Year will be taxed as
distributions from a Modified Endowment Contract. In addition, distributions
from a Policy within two years before it becomes a Modified Endowment Contract
will be taxed in this manner. This means that a distribution made from a Policy
that is not a Modified Endowment Contract could later become taxable as a
distribution from a Modified Endowment Contract.
Whether a Policy is or is not a Modified Endowment Contract, upon a complete
surrender or a lapse or termination of a Policy, if the amount received plus the
amount of any indebtedness exceeds the total investment in the policy (described
below), the excess will generally be treated as ordinary income subject to tax.
Distributions Other Than Death Benefit Proceeds from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts will be subject
to the following tax rules:
(1) All distributions from such a Policy (including distributions upon partial
or full surrender and benefits paid at maturity) are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) of the
Accumulation Value immediately before the distribution over the investment
in the policy at such time.
(2) Loans taken from (or secured by) such a Policy are treated as distributions
from such a Policy and taxed accordingly. This includes unpaid loan interest
that is added to the principal of a loan.
(3) A 10 percent penalty tax is imposed on the portion of any distribution from
such a Policy that is included in income. This includes any loan taken from
or secured by such a Policy. This penalty tax does not apply if the
distribution or loan:
(a) is made on or after the Policyowner reaches actual age 59 1/2;
(b) is attributable to the Policyowner's becoming disabled; or
(c) is part of a series of substantially equal periodic payments for (i) the
life (or life expectancy) of the Policyowner, or (ii) the joint lives (or
joint life expectancies) of the Policyowner and the Beneficiary.
Distributions Other Than Death Benefit Proceeds from Policies that are not
Modified Endowment Contracts. Distributions other than Death Benefit Proceeds
from a Policy that is not classified as a Modified Endowment Contract generally
are treated first as a recovery of the Policyowner's investment in the policy.
After the recovery of all investment in the policy, additional amounts
distributed are taxable income. However, certain distributions that must be made
in order to enable the Policy to continue to qualify as a life insurance
contract for federal income tax purposes if Policy benefits are reduced during
the first 15 Policy Years may be treated in whole or in part as ordinary income
subject to tax.
Policy Loans. Loans from a Policy (or secured by a Policy) that is not a
Modified Endowment Contract are generally not treated as distributions. Instead,
such loans are
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treated as indebtedness of the Policyowner. However, the tax consequences
associated with Policy loans that are outstanding after the first 15 Policy
Years are less clear and a tax adviser should be consulted about such loans.
Interest paid on a Policy loan generally is not be tax-deductible. The
Policyowner should consult a tax advisor regarding the deductibility of interest
paid on a Policy loan.
Finally, neither distributions from nor loans from (or secured by) a Policy that
is not a Modified Endowment Contract are subject to the 10 percent additional
income tax.
Investment in the Policy. "Investment in the policy" means:
(a) the aggregate amount of any premium payments or other consideration paid
for a Policy; minus
(b) the aggregate amount of distributions received under the Policy that is
excluded from the gross income of the Policyowner (except that the amount
of any loan from, or secured by, a Policy that is a Modified Endowment
Contract, to the extent such amount is excluded from gross income, will be
disregarded); plus
(c) the amount of any loan from, or secured by, a Policy that is a Modified
Endowment Contract to the extent that such amount is included in the gross
income of the Policyowner.
Multiple Policies. All Modified Endowment Contracts that are issued by us (or
our affiliates) to the same Policyowner during any calendar year are treated as
one Modified Endowment Contract. This applies to determining the amount
includible in the Policyowner's income when a taxable distribution occurs.
Other Policyowner Tax Matters. The tax consequences of continuing the Policy
beyond the younger Insured's 100th year are unclear. You should consult a tax
advisor if you intend to keep the Policy in force beyond the younger Insured's
100th year.
Businesses can use the Policies in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, tax exempt and nonexempt welfare benefit plans, retiree
medical benefit plans and others. The tax consequences of such plans may vary
depending on the particular facts and circumstances. If you are purchasing the
Policy for any arrangement the value of which depends in part on its tax
consequences, you should consult a qualified tax adviser. In recent years,
moreover, Congress has adopted new rules relating to life insurance owned by
businesses. Any business contemplating the purchase of a new Policy or a change
in an existing Policy should consult a tax adviser.
Federal, state and local estate, inheritance, transfer, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Policyowner or Beneficiary. A tax advisor should be
consulted on these consequences.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the Policy
could change by legislation or otherwise. Moreover, it is possible that any
change could be retroactive (that is, effective prior to the date of change).
Consult a tax adviser with respect to legislative developments and their effect
on the Policy.
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AMERICAN NATIONAL'S INCOME TAXES
American National is taxed as a life insurance company under the Code. Under
current federal income tax law, American National is not taxed on the Separate
Account's operations. Thus, we currently do not deduct a charge from the
Separate Account for federal income taxes. Nevertheless, we reserve the right in
the future to make a charge for any such tax that we determine to be properly
attributable to the Separate Account or to the Policies.
Under current laws in some states, we may incur state and local taxes (in
addition to premium taxes for which a deduction from premium payments is
currently made). At present, these taxes are not significant, and we are not
currently charging for them. However, we may deduct charges for such taxes in
the future.
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OTHER INFORMATION
SALE OF THE POLICY
SM&R, one of our wholly-owned subsidiaries, is the principal underwriter of the
Policy. SM&R was organized December 15, 1964 under the laws of the State of
Florida. SM&R is a registered broker-dealer and a member of the National
Association of Securities Dealers. (See the American National Fund's
prospectus.)
SM&R will pay commissions to its registered representatives who sell the
Policies based upon a commission schedule. In Policy Years one through five, the
commissions to the registered representatives will not exceed 13% of the total
premium contribution. In later years, the registered representatives will
receive renewal commissions which will not exceed 0.25% of the Accumulation
Value. We may pay registered representatives who meet certain production
standards additional compensation. SM&R will pay overriding commissions to
managers, and we may pay bonuses to the managers for the sale of the Policy.
SM&R and the Company may also authorize other registered broker-dealers and
their registered representatives to sell the Policy.
YEAR 2000
Many of the services provided to the Separate Account and Policyowners depend on
the smooth functioning of computer systems. Many computer software systems in
use today cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated, referred to as the "Year 2000 Problem." The
Year 2000 Problem could have a negative impact on handling securities trades,
payment of interest and dividends, pricing, and account services. Like all
financial services providers, we utilize systems that may be affected by Year
2000 Problems, and we rely on service providers, including the Eligible
Portfolios, that may also be affected. We have developed, and are continuing to
implement, a Year 2000 transition plan, and we are confirming that our service
providers are doing the same. It is difficult to predict with precision whether
the outcome of these efforts will have any negative impact on our Company. As of
the date of this prospectus, we do not anticipate that you will experience any
negative effects on your Accumulation Value, or on the services provided in
connection with your Policy, as a result of Year 2000 Problems. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Separate Account or the Policyowners.
THE CONTRACT
The Policy, the application, any supplemental applications, and any riders,
amendments, or endorsements make up the entire contract. Only statements in the
application attached to the Policy and any supplemental applications made a part
of the Policy can be used to contest a claim or the validity of the Policy. Any
changes must be approved in writing by the President, Vice President, or
Secretary of American National. No agent has the authority to alter or modify
any of the terms, conditions, or agreements of the Policy or to waive any of its
provisions. Differences in state laws may require us to offer a Policy in a
state which has suicide, incontestability, refund provisions, surrender charges,
or other provisions more favorable than provisions in other states.
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Control of Policy. Subject to the rights of any irrevocable Beneficiary and
assignee of record, all rights, options, and privileges belong to the
Policyowner or owners, if living; otherwise to any contingent owner or owners,
if living; otherwise to the estate of the last Policyowner to die.
Beneficiary. You can name primary and contingent beneficiaries. Initial
Beneficiary(ies) are specified in the application. Payments will be shared
equally among Beneficiaries of the same class unless otherwise stated. If a
Beneficiary dies before the Second Insured dies, payments will be made to any
surviving Beneficiaries of the same class; otherwise to any Beneficiary(ies) of
the next class; otherwise to the estate of the Second Insured.
Change of Beneficiary. Unless the Beneficiary designation is irrevocable, you
can change the Beneficiary by written request on a Change of Beneficiary form at
any time during either Insured's lifetime. We may require that the Policy be
returned to the Home Office for endorsement of any change, or that other forms
be completed. The change will take effect as of the date the change is recorded
at the Home Office. We will not be liable for any payment made or action taken
before the change is recorded. There is no limit on the number of changes that
may be made.
Change in Policyowner or Assignment. In order to change any Policyowner or
assign Policy rights, an assignment of the Policy must be made in writing and
filed at our Home Office. The change will take effect as of the date the change
is recorded at our Home Office, and we will not be liable for any payment made
or action taken before the change is recorded. Payment of proceeds is subject to
the rights of any assignee of record. No partial or contingent assignment of the
Policy will be permitted. A collateral assignment is not a change of ownership.
Incontestability. The Policy is incontestable after it has been in force for two
years from the Date of Issue during the lifetime of both Insureds. An increase
in the Specified Amount or addition of a rider after the Date of Issue shall be
incontestable after such increase or addition has been in force for two years
from its Policy Date during the lifetime of both Insureds. However, this two
year provision shall not apply to riders that provide disability or accidental
death benefits. Any reinstatement of a Policy shall be incontestable during the
lifetime of both Insureds only after having been in force for two years after
the Policy Date of the reinstatement.
Misstatement of Age or Sex. If the age or sex of either Insured has been
misstated, the amount of the Death Benefit will be adjusted as provided for in
the Policy.
Suicide. Suicide within two years after Date of Issue is not covered by the
Policy unless otherwise provided by a state's insurance law. If either Insured,
while sane or insane, commits suicide within two years after the Date of Issue,
we will pay only the premiums received less any partial surrenders and Policy
Debt. If either Insured, while sane or insane, commits suicide within two years
after the Policy Date of any increase in the Specified Amount, our liability
with respect to such increase will be only the total cost of insurance applied
to the increase. If either Insured, while sane or insane, commits suicide within
two years from the Policy Date of reinstatement, our liability with respect to
such reinstatement will only be for the return of cost of insurance and
expenses, if any, paid on or after the reinstatement.
Postponement of Payments. Payment of any amount upon refund, full surrender,
partial surrender, Policy loans, benefits payable at death, and transfers, which
require valuation
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of a subaccount, may be postponed whenever: (1) the New York Stock Exchange is
closed other than customary week-end and holiday closings, or trading on the New
York Stock Exchange is restricted as determined by the SEC; (2) the SEC by order
permits postponement for the protection of Policyowners; or (3) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or determination of the value of the Separate
Account's Accumulation Value is not reasonably practicable. Surrenders, loans,
or partial surrenders from the Fixed Account may be deferred for up to 6 months
from the date of written request.
Additional Insurance Benefits (Riders). Subject to certain requirements, certain
additional optional benefits may be obtained. The cost of any such additional
insurance benefits, which will be provided by "riders" to the Policy, will be
deducted as part of the Monthly Deduction. Riders in force during the time the
Guaranteed Coverage Benefit is in effect will increase the Guaranteed Coverage
Premium requirement.
POLICY SPLIT OPTION
Subject to evidence of insurability satisfactory to us at the time of split
request, we will issue separate Policies to each of the Insureds upon your
request and upon surrender of the Policy within 180 days after the Insureds'
(who were married to one another at the effective date) legal divorce or upon a
tax law change which disallows the estate tax marital deduction. We may require
proof of the legal divorce.
At the time of request for the split is made you must specify the manner in
which the Surrender Value and Death Benefit are to be allocated between the two
Policies to be issued; provided that no more than 50% of Death Benefit may be
allocated to one Policy. The Policies issued in replacement of this Policy will
be on substantially the same terms as the exchanged Policy, with the Surrender
Value and the amount of any Policy Debt under the exchanged Policy allocated
between the new Policies in the same percentages as the Surrender Value. Each
of the new policies will be subject to new time periods for the surrender charge
schedule. Premiums for the new Policies will reflect the sex and class of the
Insured at the time of the original issue.
This option will terminate when the elder of the two Insureds reaches age 80 or
if the Policy terminates.
DIVIDENDS
The Policy is non-participating and therefore is not eligible for dividends and
does not participate in any distribution of our surplus.
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LEGAL MATTERS
Greer, Herz and Adams, L.L.P., our general counsel, has reviewed various matters
of Texas law pertaining to the Policy, including the validity of the Policy and
our right to issue the Policy.
LEGAL PROCEEDINGS
The Company and its affiliates, like other life insurance companies, are
involved in lawsuits, including class action lawsuits. In some class action and
other lawsuits involving insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the outcome of any
litigation cannot be predicted with certainty, we believe that at the present
time no lawsuits are pending or threatened that reasonably likely to have a
material adverse impact on the Separate Account or on us.
REGISTRATION STATEMENT
We filed a registration statement covering information about the Policy with the
SEC. The registration statement, and its subsequent amendments, included this
prospectus, but it also contained additional information. This prospectus is
simply a summary of the contents of the Policy and related legal instruments. If
you want more complete information regarding any of the matters described in
this prospectus, you should consult the registration statement.
EXPERTS
The consolidated financial statements and schedules of American National
Insurance Company and subsidiaries as of December 31, 1998 and 1997, and for the
years then ended and the related statements of operations and statements of
changes in net assets for each of the two years in the periods then ended,
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
As stated in his opinion which was filed as an exhibit to the registration
statement, Rex D. Hemme has examined the actuarial matters included in this
prospectus.
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SENIOR EXECUTIVE OFFICERS AND
DIRECTORS OF AMERICAN NATIONAL INSURANCE COMPANY
NAME
POSITION(S) WITH AMERICAN NATIONAL INSURANCE COMPANY
Principal Occupations Last Five Years and Other Positions Held
- --------------------------------------------------------------------------------
ROBERT L. MOODY
CHAIRMAN OF THE BOARD, DIRECTOR, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
American National: President, January 1996 to present; Chairman of the Board,
April 1982 to present; Chief Executive Officer, July 1991 to present; and
Director, March 1960 to present.
ANREM Corporation: Director, September 1985 to present. Moody Bancshares, Inc.:
Director and President, 1982 to present. Moody Bank Holding Company, Inc.:
Director and President, 1988 to present. Moody National Bank of Galveston:
President, 1980 to 1993; Chairman of the Board, Director and Chief Executive
Officer, 1980 to present. National Western Life Insurance Company: Chairman of
the Board, Director and Chief Executive Officer, 1971 to present. The Moody
Foundation: Trustee, 1955 to present. Gal-Tex Hotel Corporation: Chairman of the
Board and Director, 1954 to present. Gal-Tenn Hotel Corporation: Director. GTG
Corporation: Director. Gal-Tex Management Co.: Director. Gal-Tex Woodstock,
Inc.: Director. New Paxton Hotel Corporation: Director. Transitional Learning
Community at Galveston: Chairman of the Board and Director. The Moody Endowment:
Chairman of the Board and Director.
G. RICHARD FERDINANDTSEN
DIRECTOR, SENIOR EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER
American National: Director, 1998 to present; Senior Executive Vice President
and Chief Operating Officer, April 1997 to present; Senior Executive Vice
President and Chief Administrative Officer, April 1996 to April 1997; Senior
Vice President, Health Insurance Operations, April 1993 to April 1996; Senior
Vice President, Director of Group Insurance, July 1990 to April 1993. American
National Life Insurance Company of Texas: Chairman of the Board, President and
Director, 1998 to present; and Vice President, Health Insurance Operations,
April 1993 to 1998. American National Property and Casualty Company: Director,
November 1992 to present; and Vice Chairman of the Board, 1998 to present.
American National General Insurance Company: Director, November 1992 to present;
and Vice Chairman of the Board, 1998 to present. McMarr Properties (formerly
American Securities Company): Director, April 1978 to present. McCreless
Foundation: Director, April 1992 to present. United Land: Director, January 1985
to present. Commonwealth Life and Accident Insurance Company: Director, June
1993 until company was merged in December 1994. American National Lloyds
Insurance Company: Underwriter, March 1994 to present. Pacific P & C, Inc.:
Director, 1995 to
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present; and Vice Chairman of the Board. Standard Life and Accident Insurance
Company: Director, January 1996 to present; Chairman of the Board, President and
Chief Executive Officer, 1998 to present. Garden State Life Insurance Company:
Director. Securities Management & Research, Inc.: Director. Comprehensive
Investment Services, Inc.: Director. Alternative Benefit Management, Inc.:
Director, President and Chief Executive Officer. ANMEX International Services,
Inc.: Director and President. ANMEX International, Inc.: Director and President.
IRWIN M. HERZ, JR.
DIRECTOR
American National: Director: 1984 to present. Greer, Herz & Adams, L.L.P.:
Partner, March 1980 to present, General Counsel to American National. Three R
Trust: Trustee, April 1971 to present. Commonwealth Life and Accident Insurance
Company: Director, April 1983 until company was merged in December 1994. Garden
State Life Insurance Company: Director, June 1992 to present. American National
Property and Casualty Company: Director. American National General Insurance
Company: Director. Pacific P & C, Inc.: Director.
R. EUGENE LUCAS
DIRECTOR
American National: Director, April 1981 to present. Gal-Tex Hotel Corporation:
President and Director, March 1971 to present. Gal-Tenn Hotel Corporation:
President and Director, March 1971 to present. Gal-Tex Management Company:
President and Director, May 1985 to present. Gal-Tex Woodstock, Inc.: President
and Director, November 1995 to present. New Paxton Hotel Corporation: President
and Director. Securities Management and Research, Inc.: Director, November 1982
to present. ANREM Corporation: Director, September 1982 to present. Colonel
Museum, Inc.: Director, March 1985 to present.
E. DOUGLAS MCLEOD
DIRECTOR
American National: Director, April 1984 to present. ANREM Corporation: Director,
October 1979 to present. National Western Life Insurance Company: Director, 1986
to present. Independent County Mutual Fire Insurance Company of Texas: Director,
June 1984 to present. Attorney. The Moody Foundation: Director of Development,
May 1982 to present. McLeod Properties: Owner. Texas State House of
Representatives: Past Member. Moody Gardens, Inc.: Chairman and Director, 1988
to present. Colonel Museum, Inc.: Vice President and Director, 1985 to present.
Center for Transportation and Commerce: Director, 1983 to present.
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FRANCES ANNE MOODY
DIRECTOR
American National: Director, April 1987 to present. The Moody Foundation:
Executive Director, January 1998 to present and Regional Grants Advisor,
September 1996 to present. National Western Life Insurance Company: Director,
1990 to present. The Moody Endowment: Director, 1991 to present. Investments,
Dallas, Texas.
RUSSELL S. MOODY
DIRECTOR
American National: Director, April 1986 to present. National Western Life
Insurance Company: Director, 1988 to March 1996. Gal-Tex Hotel Corporation:
Director, 1981 to 1997. Seal Fleet, Inc.: Director, 1982 to 1996.
WILLIAM L. MOODY IV
DIRECTOR
American National: Director, March 1951 to present. Moody National Bank of
Galveston: Director, January 1969 to March 1996, and Advisory Director, March
1996 to present. Moody Ranches, Inc.: President and Director, May 1959 to
present. American National Life Insurance Company of Texas: Director, November
1969 to present. Rosenberg Library: Board of Trustees, 1970 to present.
University of Texas Medical Branch Development Board: Director, 1970 to present.
JOE MAX TAYLOR
DIRECTOR
American National: Director, April 1992 to present. County of Galveston, Texas:
Sheriff, 1980 to present. Moody Gardens, Inc.: Director and President, 1988 to
present. Transitional Learning Community at Galveston: Director, 1985 to
present. Galveston County Bail-Bond Board: President, 1981 to present. Fifty
Club Board of Galveston: Director, 1981 to present. Landry's Seafood
Restaurants, Inc.: Director, 1992 to present. Pre-Trial Release Board of
Galveston County: 1982 to present. Juvenile Crime Prevention-Intervention Task
Force: Chairman, 1993 to present. University of Texas Medical Branch:
President's Cabinet, 1994 to present.
ROBERT A. FRUEND
EXECUTIVE VICE PRESIDENT
American National: Executive Vice President, Director of Multiple Line
Marketing, April 1989 to present. American National Life Insurance Company of
Texas: Director and Vice President, April 1989 to present. American National
Property and Casualty Insurance Company: Chairman of the Board; and Director,
November 1979 to present. American National General Insurance Company: Chairman
of the Board; and Director, November 1981 to present. Securities Management and
Research, Inc.: Director, November 1988 to present: Pacific P & C, Inc.:
Director, 1995 to present; and Chairman of the Board.
American National Insurance Service Company: Director, November 1988 to present.
ANPAC Lloyds Insurance Management, Inc.: Director, December 1995 to present.
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American National Lloyds Insurance Company: Director, December 1995 to present.
BILL J. GARRISON
EXECUTIVE VICE PRESIDENT
American National: Executive Vice President, Director of Home Service Division,
April 1991 to present. ANMEX International Services, Inc.: Vice President. ANMEX
International, Inc.: Vice President. Commonwealth Life and Accident Insurance
Company: Director, February 1993 until company was merged in December 1994.
MICHAEL W. McCROSKEY
EXECUTIVE VICE PRESIDENT
American National: Executive Vice President-Investments, 1995 to present; and
Senior Vice President-Real Estate and Mortgage Loans, 1986 to 1995. ANREM
Corporation: Director, June 1977 to present; and President, October 1986 to
present. American National Life Insurance Company of Texas: Assistant Secretary,
December 1986 to present. Standard Life and Accident Insurance Company: Vice
President, May 1988 to present. ANTAC, Inc.: President and Director, 1995 to
present. Securities Management and Research, Inc.: President, Chief Executive
Officer and Director, 1994 to present. American National Funds Group: President
and Director, 1994 to present. SM&R Investments, Inc. (formerly SM&R Capital
Funds, Inc.): Chief Executive Officer; President and Director, 1994 to present.
American National Investment Accounts, Inc.: President and Director, 1994 to
present. Pacific P & C, Inc.: Vice President, 1995 to present. Garden State Life
Insurance Company: Vice President, May 1994 to present. American National
Property and Casualty Company: Vice President, June 1994 to present. American
National General Insurance Company: Vice President, June 1994 to present. SM&R
Growth Fund, Inc.: Director and President. SM&R Equity Income Fund, Inc.:
Director and President. SM&R Balanced Fund, Inc.: Director and President. ANDV
'97: Director and President. Comprehensive Investment Services, Inc.: Director.
JAMES E. POZZI
EXECUTIVE VICE PRESIDENT
American National: Executive Vice President, Independent Markets, April 1996 to
present; and Senior Vice President, Corporate Planning and Development, June
1992 to April 1996. American National Life Insurance Company of Texas: Vice
President, April 1993 to present.
RONALD J. WELCH
EXECUTIVE VICE PRESIDENT
American National: Executive Vice President and Chief Actuary, April 1996 to
present; and Senior Vice President and Chief Actuary, April 1986 to April 1996.
Standard Life and Accident Insurance Company: Director, December 1987 to
present. American National Property and Casualty Company: Director, November
1987 to present. American National General Insurance Company: Director, November
1987 to present.
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American National Life Insurance Company of Texas: Director, November 1986 to
present, Actuary, April 1980 to present, and Senior Vice President, April 1990
to present. Commonwealth Life and Accident Insurance Company: Vice President,
until company was merged in December 1994. Garden State Life Insurance Company:
Chairman of the Board and Director, June 1992 to present: Pacific P & C, Inc.:
Director, 1995 to present. American National Insurance Service Company:
Director, December 1995 to present. Securities Management & Research, Inc.:
Director. ANMEX International Services, Inc.: Director and Vice President. ANMEX
International, Inc.: Director and Vice President. Alternative Benefit
Management, Inc.: Director.
CHARLES H. ADDISON
SENIOR VICE PRESIDENT
American National: Senior Vice President, Systems Planning and Computing, April
1978 to present. American National Property and Casualty Company: Director,
November 1981 to present. American National General Insurance Company: Director,
November 1981 to present. Pacific P & C, Inc.: Director, 1995 to present.
Standard Life and Accident Insurance Company: Director, January 1996 to present.
ALBERT L. AMATO
SENIOR VICE PRESIDENT
American National: Senior Vice President, Life Policy Administration, April 1994
to present; and Vice President, Life Policy Administration, April 1984 to April
1994. American National Life Insurance Company of Texas: Vice President, May
1984 to present. Garden State Life Insurance Company: Vice President, August
1992 to present, Director, August 1992 to December 1993, and Advisory Director,
December 1993 to present. Standard Life and Accident Insurance Company: Vice
President, Life Policy Administration. Alternative Benefit Management, Inc.:
Director and Senior Vice President. Commonwealth Life and Accident Insurance
Company: Director, August 1992 until company was merged in December 1994.
GLENN C. LANGLEY
SENIOR VICE PRESIDENT
American National: Senior Vice President, Human Resources, November 1995 to
present; Vice President, Assistant Personnel Director, April 1983 to November
1995; Assistant Vice President, Equal Employment Opportunity/Affirmative Action
Program Coordinator, April 1976 to April 1983; and Assistant Vice President,
Personnel Placement Director, April 1969 to April 1976. Standard Life and
Accident Insurance Company: Vice President, Director of Human Resources.
STEPHEN E. PAVLICEK
SENIOR VICE PRESIDENT AND CONTROLLER
American National: Senior Vice President and Controller, April 1996 to present;
Vice President and Controller, 1994 to April 1996; and Assistant Vice President
- - Financial Reports, 1983 to 1994. ANTAC, Inc.: Assistant Treasurer, 1995 to
present. Garden State
49
<PAGE>
Life Insurance Company: Controller, June 1992 to present. American National Life
Insurance Company of Texas: Controller, August 1994 to present. ANREM
Corporation: Director. American National Property and Casualty Company:
Director. American National General Insurance Company: Director. Pacific P & C,
Inc.: Director. Standard Life and Accident Insurance Company: Vice President,
Controller and Director. ANDV `97: Assistant Treasurer. ANMEX International
Services, Inc.: Controller. ANMEX International, Inc.: Controller. Alternative
Benefit Management, Inc.: Senior Vice President, Controller and Director.
STEVEN H. SCHOUWEILER
SENIOR VICE PRESIDENT
American National: Senior Vice President, Health Insurance Operations, May 1998
to present. Standard Life and Accident Insurance Company: Vice President,
Claims, May 1998 to present. American National Life Insurance Company of Texas:
Director and Senior Vice President, May 1998 to present. Alternative Benefit
Management, Inc.: Chief Administrative Officer, Senior Vice President and
Director. Galveston Health Network, Inc.: President. Conseco Group Risk
Management: President and Chief Executive Officer, December 1989 to April 1998.
JAMES R. THOMASON
SENIOR VICE PRESIDENT
American National: Senior Vice President, Credit Insurance Services, April 1987
to present.
GARETH W. TOLMAN
SENIOR VICE PRESIDENT
American National: Senior Vice President, Corporate Affairs, April 1996 to
present; and Vice President, Corporate Affairs, April 1976 to April 1996.
VINCENT E. SOLER, JR.
VICE PRESIDENT, SECRETARY AND TREASURER
American National: Vice President, Secretary and Treasurer, 1994 to present; and
Vice President and Controller, March, 1984 to 1994. ANREM Corporation:
Treasurer, October 1984 to present. American National Life Insurance Company of
Texas: Treasurer, April 1984 to present; Controller, April 1984 to August 1994;
and Secretary, August 1994 to present. Standard Life and Accident Insurance
Company: Secretary and Treasurer, 1998 to present; Assistant Secretary, January
1996 to 1998. ANTAC, Inc.: Secretary, 1995 to present. Garden State Life
Insurance Company: Secretary and Treasurer, August 1994 to present. American
National Property and Casualty Company: Assistant Secretary, August 1994 to
present. American National General Insurance Company: Assistant Secretary.
Pacific P & C, Inc.: Assistant Secretary. Galveston Health Network, Inc.:
Secretary. ANDV '97: Secretary. ANMEX International Services, Inc.: Secretary
and Treasurer. ANMEX International, Inc.: Secretary and Treasurer. Comprehensive
Investment Services, Inc.: Secretary. Alternative Benefit Management, Inc.:
Secretary and Treasurer.
The principal business address of each person listed above is American National
Insurance Company, One Moody Plaza, Galveston, Texas 77550-7999.
50
<PAGE>
FINANCIAL STATEMENTS
Our financial statements which are included in this prospectus should be
considered only as bearing on our ability to meet our obligations under the
Policy. Our financial statements should not be considered as bearing on the
investment performance of the assets held in the Separate Account. The most
current financial statements of American National are those for the period
ending and as of the end of the most recent fiscal year. American National does
not prepare financial statements more often than annually and believes that any
incremental benefit to prospective policy holders that may result from preparing
and delivering more current financial statements, though unaudited, does not
justify the additional cost that would be incurred. In addition, American
National represents that there have been no adverse changes in the financial
condition or operations of American National between the end of the most current
fiscal year and the date of this prospectus.
Financial statements for the Separate Account have not been included because the
Policy has not been sold prior to the date of this prospectus, and,
consequently, the Subaccounts associated with this Policy have not had any
operations as of the date of this prospectus.
51
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS,
AMERICAN NATIONAL INSURANCE COMPANY
We have audited the accompanying consolidated statements of financial position
of American National Insurance Company and subsidiaries (the Company) as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American National
Insurance Company and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 22, 1999
52
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREMIUMS AND OTHER REVENUE
Life and annuity premiums $ 340,286 $ 348,973
Accident and health premiums 393,602 378,621
Property and casualty premiums 354,820 312,987
Other policy revenue 105,041 99,930
Net investment income 475,242 472,895
Gain from sale of investments 49,768 103,320
Other income 25,906 23,178
- ----------------------------------------------------------------------------------------------------------
Total revenue 1,744,665 1,739,904
- ----------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Death and other benefits:
Life and annuity 259,010 246,855
Accident and health 289,553 280,376
Property and casualty 280,036 233,887
Increase/(decrease) in liability for future policy benefits:
Life and annuity 162,049 185,827
Accident and health (262) (4,862)
Commissions for acquiring and servicing policies 247,015 239,633
Other operating costs and expenses 199,294 176,988
Decrease/(increase) in deferred policy acquisition costs,
net of amortization 9,795 12,267
Taxes, licenses and fees 32,334 29,778
- ----------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,478,824 1,376,215
- ----------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS BEFORE EQUITY IN EARNINGS OF
UNCONSOLIDATED AFFILIATES AND FEDERAL INCOME TAXES 265,841 363,689
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES 8,048 9,333
- ----------------------------------------------------------------------------------------------------------
GAIN FROM OPERATIONS BEFORE FEDERAL INCOME TAXES 273,889 373,022
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current 77,707 134,271
Deferred (1,216) (9,606)
NET INCOME $ 197,398 $ 248,357
==========================================================================================================
NET INCOME PER COMMON SHARE - BASIC & DILUTED $ 7.45 $ 9.38
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, other than investments in
unconsolidated affiliates
Debt securities:
Bonds held-to-maturity, at amortized cost $3,565,974 $3,605,927
Bonds available-for-sale, at market 720,818 600,380
Marketable equity securities, at market:
Preferred stocks 41,664 40,744
Common stocks 1,051,926 882,864
Mortgage loans on real estate 1,025,683 1,103,333
Policy loans 296,109 300,574
Investment real estate, net of accumulated depreciation
of $109,415 and $100,298 238,714 258,210
Short-term investments 90,368 126,786
Other invested assets 112,207 63,081
- -----------------------------------------------------------------------------------------------------------
Total investments 7,143,463 6,981,899
Cash 22,228 5,497
Investments in unconsolidated affiliates 120,098 100,888
Accrued investment income 104,405 102,361
Reinsurance ceded receivables 65,667 49,499
Prepaid reinsurance premiums 171,116 141,270
Premiums due and other receivables 91,518 84,275
Deferred policy acquisition costs 731,703 748,341
Property and equipment 40,860 32,142
Other assets 94,302 58,577
Separate account assets 230,292 179,027
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $8,815,652 $8,483,776
===========================================================================================================
LIABILITIES
Policyholder funds
Future policy benefits:
Life and annuity $2,029,396 $1,993,723
Accident and health 60,113 60,589
Policy account balances 2,324,310 2,422,828
Policy and contract claims 359,953 326,985
Other policyholder funds 510,130 457,952
- -----------------------------------------------------------------------------------------------------------
Total policyholder liabilities 5,283,902 5,262,077
Current federal income taxes (20,515) 14,340
( Deferred federal income taxes 259,243 215,606
Other liabilities 148,118 107,309
Separate account liabilities 230,292 179,027
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,901,040 5,778,359
- -----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock 30,832 30,832
Additional paid-in capital 211 211
Accumulated other comprehensive income 299,176 215,883
Retained earnings 2,687,120 2,561,218
Treasury stock at cost (102,727) (102,727)
- -----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,914,612 2,705,417
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,815,652 $8,483,776
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except for per share data)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
CAPITAL PAID-IN COMPREHENSIVE RETAINED TREASURY
STOCK CAPITAL INCOME EARNINGS STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 $30,832 $ 211 $163,352 $2,382,238 $(102,727) $2,473,906
Comprehensive income (net of taxes):
Net income 248,357 248,357
Unrealized gains on marketable securities 52,531 52,531
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 300,888
Dividends to stockholders
($2.62 per share) (69,377) (69,377)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $30,832 $ 211 $215,883 $2,561,218 $(102,727) $2,705,417
Comprehensive income (net of taxes):
Net income 197,398 197,398
Unrealized gains on marketable securities 83,293 83,293
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 280,691
Dividends to stockholders
($2.70 per share) (71,496) (71,496)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $30,832 $ 211 $299,176 $2,687,120 $(102,727) $2,914,612
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 197,398 $ 248,357
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in liabilities for policyholders' funds 121,016 145,663
Charges to policy account balances (104,059) (99,625)
Interest credited to policy account balances 126,914 135,478
Deferral of policy acquisition costs (140,707) (151,891)
Amortization of deferred policy acquisition costs 149,116 138,710
Deferred federal income tax benefit (1,216) (9,606)
Depreciation 19,073 20,454
Accrual and amortization of discounts (69,760) (34,416)
Gain from sale of investments (49,768) (103,320)
Equity in earnings of unconsolidated affiliates (8,048) (9,333)
Increase in premiums receivable (7,243) (15,023)
Increase in accrued investment income (2,044) (4,478)
Capitalization of interest on policy and mortgage loans (16,750) (14,475)
Other changes, net (52,366) (26,937)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 161,556 219,558
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale or maturity of investments:
Bonds 316,067 196,807
Stocks 247,951 331,679
Real estate 33,186 89,448
Other invested assets 171 5,706
Principal payments received on:
Mortgage loans 154,333 168,603
Policy loans 40,069 40,207
Purchases of investments:
Bonds (373,401) (424,721)
Stocks (237,868) (279,690)
Real estate (7,462) (1,537)
Mortgage loans (35,420) (151,471)
Policy loans (21,988) (23,023)
Other invested assets (79,081) (15,250)
Decrease (increase) in short-term investments, net 36,418 (121,262)
Increase in investment in unconsolidated affiliates, net (19,210) (4,281)
Increase in property and equipment, net (5,721) (3,173)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 48,044 (191,958)
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Policyholders' deposits to policy account balances 288,984 391,607
Policyholders' withdrawals from policy account balances (410,357) (357,878)
Dividends to stockholders (71,496) (69,377)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (192,869) (35,648)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 16,731 (8,048)
Cash:
Beginning of the year 5,497 13,545
- -------------------------------------------------------------------------------------------------------------------------
End of the year $ 22,228 $ 5,497
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
(1) NATURE OF OPERATIONS
American National Insurance Company (American National) is a multiple line
insurance company offering a broad line of insurance coverages, including
individual and group life, health, and annuities; personal lines property and
casualty; and credit insurance. In addition, through subsidiaries, American
National also offers mutual funds and real estate management services. The
majority (99%) of revenues is generated by the insurance business. With the
exception of New York, business is conducted in all states, as well as Puerto
Rico, Guam and American Samoa. American National is also authorized to sell its
products to American military personnel in Western Europe. Various distribution
systems are utilized, including home service, multiple line ordinary, group
brokerage, credit and independent third party marketing organizations.
American National's insurance subsidiaries are American National Life
Insurance Company of Texas (ANTEX), Garden State Life Insurance Company,
Standard Life and Accident Insurance Company, American National Property and
Casualty Company (ANPAC), American National General Insurance Company (ANGIC)
and American National Lloyds Insurance Company (ANPAC Lloyds). The major non-
insurance subsidiaries are Securities Management and Research, Inc.;
Comprehensive Investment Services, Inc.; Alternative Benefit Management, Inc.;
ANTAC, Inc.; and ANREM Corporation. As part of its investment portfolio,
American National also owns interests in unconsolidated affiliates, primarily
several real estate joint ventures and partnerships.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION--The consolidated
financial statements include the accounts of American National Insurance Company
and its wholly owned subsidiaries. All significant inter company transactions
have been eliminated in consolidation. Investments in unconsolidated affiliates
are shown at cost plus equity in undistributed earnings since the dates of
acquisition.
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles which, for the insurance companies,
differs from the basis of accounting followed in reporting to insurance
regulatory authorities. (See Note 14.)
Certain reclassifications have been made to the 1997 financial information to
conform to the 1998 presentation.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from reported results using
those estimates.
ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE--As of December 31, 1997, American National adopted FAS
No. 128, "Earnings per Share." This statement establishes standards for
computing and presenting earnings per share. As American National has a simple
capital structure, the adoption of this new standard did not have any effect on
the calculation of earnings per share.
REPORTING COMPREHENSIVE INCOME--Effective January 1, 1998, American National
adopted FAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for presenting comprehensive income and its components
prominently in the financial statements. American National has elected to
display comprehensive income as part of the consolidated statements of changes
in stockholders' equity. Additional information regarding the components of
comprehensive income is reported in Note 11.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION--
Effective January 1, 1998, American National adopted FAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes standards for presenting information about operating segments in
financial statements. The statement requires disclosure of information on
operating segments that are evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and assess performance. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of this new standard required
the restatement of prior period segment disclosures to conform with the new
format, but had no effect on American National's financial position or results
from operations. The segment disclosures are presented in Note 13.
PENSION AND OTHER POST RETIREMENT BENEFIT DISCLOSURES--As of December 31,
1998, American National adopted FAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits." This
57
<PAGE>
statement establishes revised standards for disclosures about pensions and other
post retirement benefit plans. The adoption of this new standard required the
restatement of prior period disclosures to conform with the new requirements,
but had no effect on American National's financial position or results from
operations. The retirement benefits disclosures are presented in Note 15.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS--FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for all quarters
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.
American National will adopt FAS No. 133 on July 1, 1999. Management believes
that the adoption of FAS No. 133 will not have a significant effect on American
National's financial position or results from operations.
INVESTMENTS
DEBT SECURITIES--Bonds that are intended to be held-to-maturity are carried
at amortized cost. American National has the ability and intent to hold these
securities until maturity.
Bonds held as available-for-sale are carried at market.
PREFERRED STOCKS--All preferred stocks are classified as available-for-sale,
and are carried at market.
COMMON STOCKS--All common stocks are classified as available-for-sale, and
are carried at market.
UNREALIZED GAINS--For all investments carried at market, the unrealized gains
or losses (differences between amortized cost and market value), net of
applicable federal income taxes, are reflected in stockholders' equity as a
component of accumulated other comprehensive income.
MORTGAGE LOANS--Mortgage loans on real estate are carried at amortized cost,
less allowance for valuation impairments.
The mortgage loan portfolio is closely monitored through the review of loan
and property information, such as debt service coverage, annual operating
statements and property inspection reports. This information is evaluated in
light of current economic conditions and other factors, such as geographic
location and property type. As a result of this review, impaired loans are
identified and valuation allowances are established. Impaired loans are loans
where, based on current information and events, it is probable that American
National will be unable to collect all amounts due according to the contractual
terms of the loan agreement.
POLICY LOANS--Policy loans are carried at cost.
INVESTMENT REAL ESTATE--Investment real estate is carried at cost, less
allowance for depreciation and valuation impairments. Depreciation is provided
over the estimated useful lives of the properties (15 to 50 years), using
straight-line and accelerated methods.
American National's real estate portfolio is closely monitored through the
review of operating information and periodic inspections. This information is
evaluated in light of current economic conditions and other factors, such as
geographic location and property type. As a result of this review, if there is
any indication of an adverse change in the economic condition of a property, a
complete cash flow analysis is performed to determine whether or not an
impairment allowance is necessary. If a possible impairment is indicated, the
fair market value of the property is estimated using a variety of techniques,
including cash flow analysis, appraisals and comparison to the values of similar
properties. If the book value is greater than the estimated fair market value,
an impairment allowance is established.
SHORT-TERM INVESTMENTS--Short-term investments (primarily commercial paper)
are carried at amortized cost.
OTHER INVESTED ASSETS--Other invested assets are carried at cost, less
allowance for valuation impairments. Valuation allowances for other invested
assets are considered on an individual basis in accordance with the same
procedures used for investment real estate.
INVESTMENT VALUATION ALLOWANCES AND IMPAIRMENTS--Investment valuation
allowances are established for impairments of mortgage loans, real estate and
other assets in accordance with the policies established for each class of
invested asset. The increase in the valuation allowances is reflected in current
period income as a realized loss.
Management believes that the valuation allowances are adequate. However, it
is possible that a significant change in economic conditions in the near term
could result in losses exceeding the amounts established.
CASH AND CASH EQUIVALENTS--American National considers cash on hand and in
banks, as cash for purposes of the consolidated statements of cash flows.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES--These assets are primarily
investments in real estate joint ventures, and are accounted for under the
equity method of accounting.
58
<PAGE>
PROPERTY AND EQUIPMENT--These assets consist of buildings occupied by the
companies, electronic data processing equipment, and furniture and equipment.
These assets are carried at cost, less accumulated depreciation. Depreciation is
provided using straight-line and accelerated methods over the estimated useful
lives of the assets (3 to 50 years).
INSURANCE SPECIFIC ASSETS AND LIABILITIES
DEFERRED POLICY ACQUISITION COSTS--Certain costs of acquiring new insurance
business have been deferred. For life, annuity, and accident and health
business, such costs consist of inspection report and medical examination fees,
commissions, related fringe benefit costs and the cost of insurance in force
gained through acquisitions. The amount of commissions deferred includes first-
year commissions and certain subsequent year commissions that are in excess of
ultimate level commission rates.
The deferred policy acquisition costs on traditional life and health products
are amortized with interest over the anticipated premium-paying period of the
related policies, in proportion to the ratio of annual premium revenue to be
received over the life of the policies. Expected premium revenue is estimated by
using the same mortality and withdrawal assumptions used in computing
liabilities for future policy benefits. The amount of deferred policy
acquisition costs is reduced by a provision for possible inflation of
maintenance and settlement expenses in the determination of such amounts by
means of grading interest rates.
Costs deferred on universal life, limited pay and investment-type contracts
are amortized as a level percentage of the present value of anticipated gross
profits from investment yields, mortality, and surrender charges. The effect on
the deferred policy acquisition costs that would result from realization of
unrealized gains (losses) is recognized with an offset to net unrealized gains
(losses) in consolidated stockholders' equity as of the balance sheet date. It
is possible that a change in interest rates could have a significant impact on
the deferred policy acquisition costs calculated for these contracts.
Deferred policy acquisition costs associated with property and casualty
insurance business consist principally of commissions, underwriting and issue
costs. These costs are amortized over the coverage period of the related
policies, in relation to premium revenue recognized.
FUTURE POLICY BENEFITS--For traditional products, liabilities for future
policy benefits have been provided on a net level premium method based on
estimated investment yields, withdrawals, mortality, and other assumptions that
were appropriate at the time that the policies were issued. Estimates used are
based on the companies' experience, as adjusted to provide for possible adverse
deviation. These estimates are periodically reviewed and compared with actual
experience. When it is determined that future expected experience differs
significantly from the assumed, the estimates are revised for current and future
issues.
Future policy benefits for universal life and investment-type contracts
reflect the current account value before applicable surrender charges. In the
near term, it is possible that a change in interest rates could have a
significant impact on the values calculated for these contracts.
RECOGNITION OF PREMIUM REVENUE AND POLICY BENEFITS
TRADITIONAL ORDINARY LIFE AND HEALTH--Life and accident and health premium is
recognized as revenue when due. Benefits and expenses are associated with earned
premiums to result in recognition of profits over the life of the policy
contracts. This association is accomplished by means of the provision for
liabilities for future policy benefits and the amortization of deferred policy
acquisition costs.
ANNUITIES--Revenues from annuity contracts represent amounts assessed against
contract holders. Such assessments are principally surrender charges and, in the
case of variable annuities, administrative fees. Policy account balances for
annuities represent the premiums received plus accumulated interest less
applicable accumulated administrative fees. It is possible that a change in
interest rates could have a significant impact on the values calculated for
these contracts.
UNIVERSAL LIFE AND SINGLE PREMIUM WHOLE LIFE--Revenues from universal life
policies and single premium whole life policies represent amounts assessed
against policyholders. Included in such assessments are mortality charges,
surrender charges actually paid, and earned policy service fees. Policyholder
account balances consist of the premiums received plus credited interest, less
accumulated policyholder assessments. Amounts included in expense represent
benefits in excess of account balances returned to policyholders.
PROPERTY AND CASUALTY--Property and casualty premiums are recognized
proportionately as revenue over the contract period. Policy benefits consist of
actual claims and the change in reserves for losses and loss adjustment
expenses. The reserves for losses and loss adjustment expenses are estimates of
future payments of reported and unreported claims, and the related expenses with
respect to insured events that have occurred. These reserves are calculated
using case basis estimates for reported losses and experience for claims
incurred
59
<PAGE>
but not reported. These loss reserves are reported net of an allowance for
salvage and subrogation. Management believes that American National's reserves
have been appropriately calculated, based on available information as of
December 31, 1998. However, it is possible that the ultimate liabilities may
vary significantly from these estimated amounts.
PARTICIPATING INSURANCE POLICIES--The allocation of dividends to
participating policyowners is based upon a comparison of experienced rates of
mortality, interest and expenses, as determined periodically for representative
plans of insurance, issue ages and policy duration, with the corresponding rates
assumed in the calculation of premiums. Participating business comprised
approximately 2.7% of the life insurance in force at December 31, 1998 and 5.1%
of life premiums in 1998.
FEDERAL INCOME TAXES--American National and all but one of its subsidiaries
will file a consolidated life/non-life federal income tax return for 1998.
Alternative Benefit Management, Inc files a separate return. In 1997, Garden
State Life Insurance Company filed a separate return.
Deferred federal income tax assets and liabilities have been recognized to
reflect the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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.
SEPARATE ACCOUNT ASSETS AND LIABILITIES--The separate account assets and
liabilities represent funds maintained to meet the investment objectives of
contract holders who bear the investment risk. The investment income and
investment gains and losses from these separate funds accrue directly to the
contract holders of the policies supported by the separate accounts. The assets
of each separate account are legally segregated, and are not subject to claims
that arise out of any other business of American National. The assets of these
accounts are carried at market value. Deposits, net investment income and
realized investment gains and losses for these accounts, are excluded from
revenues, and related liability increases are excluded from benefits and
expenses in this report.
NET INCOME PER COMMON SHARE--Net income per common share is based on the
weighted average number of shares outstanding (26,479,165 shares for 1998 and
1997).
60
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
(3) INVESTMENTS
The amortized cost and estimated market values of investments in held-to-
maturity and available-for-sale securities are shown below (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Debt securities
Bonds held-to-maturity:
U. S. government and agencies $ 166,206 $ 5,503 $ -- $ 171,709
States and political subdivisions 39,427 692 (24) 40,095
Foreign governments 106,924 9,436 -- 116,360
Public utilities 1,210,677 73,784 (135) 1,284,326
All other corporate bonds 1,914,950 132,731 (491) 2,047,190
Mortgage-backed securities 127,790 8,344 (1) 136,133
- ---------------------------------------------------------------------------------------------------------
Total bonds held-to-maturity 3,565,974 230,490 (651) 3,795,813
- ---------------------------------------------------------------------------------------------------------
Bonds available-for-sale:
U. S. government and agencies 71,579 1,368 -- 72,947
Foreign governments 42,780 4,758 -- 47,538
Public utilities 230,534 16,738 -- 247,272
All other corporate bonds 328,132 25,310 (381) 353,061
- ---------------------------------------------------------------------------------------------------------
Total bonds available-for-sale 673,025 48,174 (381) 720,818
- ---------------------------------------------------------------------------------------------------------
Total debt securities 4,238,999 278,664 (1,032) 4,516,631
- ---------------------------------------------------------------------------------------------------------
Marketable equity securities:
Preferred stock 39,264 2,427 (27) 41,664
Common stock 619,197 473,099 (40,370) 1,051,926
- ---------------------------------------------------------------------------------------------------------
Total marketable equity securities 658,461 475,526 (40,397) 1,093,590
- ---------------------------------------------------------------------------------------------------------
Total investments in securities $4,897,460 $754,190 $ (41,429) $5,610,221
=========================================================================================================
DECEMBER 31, 1997
Debt securities
Bonds held-to-maturity:
U. S. government and agencies $ 180,156 $ 5,662 $ (220) $ 185,598
States and political subdivisions 11,367 261 (15) 11,613
Foreign governments 121,643 7,147 -- 128,790
Public utilities 1,198,814 39,353 (2,374) 1,235,793
All other corporate bonds 1,885,700 85,963 (1,925) 1,969,738
Mortgage-backed securities 208,247 12,809 (2) 221,054
- ---------------------------------------------------------------------------------------------------------
Total bonds held-to-maturity 3,605,927 151,195 (4,536) 3,752,586
- ---------------------------------------------------------------------------------------------------------
Bonds available-for-sale:
U. S. government and agencies 49,990 1,348 -- 51,338
Foreign governments 47,141 4,328 -- 51,469
Public utilities 185,078 12,330 -- 197,408
All other corporate bonds 280,860 19,311 (6) 300,165
- ---------------------------------------------------------------------------------------------------------
Total bonds available-for-sale 563,069 37,317 (6) 600,380
- ---------------------------------------------------------------------------------------------------------
Total debt securities 4,168,996 188,512 (4,542) 4,352,966
- ---------------------------------------------------------------------------------------------------------
Marketable equity securities:
Preferred stock 39,313 1,510 (79) 40,744
Common stock 575,058 331,280 (23,474) 882,864
- ---------------------------------------------------------------------------------------------------------
Total marketable equity securities 614,371 332,790 (23,553) 923,608
- ---------------------------------------------------------------------------------------------------------
Total investments in securities $4,783,367 $521,302 $ (28,095) $5,276,574
=========================================================================================================
</TABLE>
61
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
DEBT SECURITIES--The amortized cost and estimated market value, by
contractual maturity of debt securities at December 31, 1998, are shown below
(in thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
BONDS-HELD- BONDS-AVAILABLE-
TO-MATURITY FOR-SALE
- ---------------------------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
- ---------------------------------------------------------------------------
Due in one year
or less $ 20,555 $ 20,665 $ -- $ --
Due after one year
through five years 781,869 823,428 198,820 212,534
Due after five years
through ten years 2,600,777 2,780,095 448,940 481,640
Due after ten years 34,984 35,494 25,265 26,644
- ---------------------------------------------------------------------------
3,438,185 3,659,682 673,025 720,818
Without single
maturity date 127,789 136,131 -- --
- ---------------------------------------------------------------------------
$3,565,974 $3,795,813 $673,025 $720,818
===========================================================================
Proceeds from sales of investments in securities classified as available-for-
sale (bonds and stocks) were $317,556,000 for 1998. Gross gains of $71,935,000
and gross losses of $36,975,000 were realized on those sales. Included in the
proceeds from sales of available-for-sale securities are $40,454,000 of proceeds
from the sale of bonds that had been reclassified from bonds held-to-maturity.
The bonds had been reclassified due to evidence of a significant deterioration
in the issuer's creditworthiness. The net gain from the sale of these bonds was
$1,073,000.
Bonds were called by the issuers during 1998, which resulted in proceeds of
$89,205,000 from the disposal. Gross gains of $747,000 were realized on those
disposals.
Proceeds from sales of investments in securities classified as available-for-
sale (bonds and stocks) were $331,679,000 for 1997. Gross gains of $118,985,000
and gross losses of $12,301,000 were realized on those sales. Bonds were called
by the issuers during 1997, which resulted in proceeds from the disposal of
$11,442,000. Gross gains of $531,000 were realized on those disposals.
All gains and losses were determined using specific identification of the
securities sold.
UNREALIZED GAINS ON SECURITIES--Unrealized gains on marketable equity
securities and bonds available-for-sale, presented in the stockholders' equity
section of the consolidated statements of financial position, are net of
deferred tax liabilities of $160,912,000 and $116,062,000 for 1998 and 1997,
respectively.
The change in the net unrealized gains on investments for the years ended
December 31 are summarized as follows (in thousands):
1998 1997
- -------------------------------------------------------------
Bonds available-for-sale $ 10,482 $ 13,391
Preferred stocks 969 352
Common stocks 124,923 71,152
Amortization of deferred
policy acquisition costs (8,229) (3,863)
- -------------------------------------------------------------
128,145 81,032
Provision for federal income taxes (44,852) (28,501)
- -------------------------------------------------------------
$ 83,293 $ 52,531
=============================================================
62
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
MORTGAGE LOANS--In general, mortgage loans are secured by first liens on
income-producing real estate. The loans are expected to be repaid from the cash
flows or proceeds from the sale of real estate. American National generally
allows a maximum loan-to-collateral-value ratio of 75% to 90% on newly funded
mortgage loans. As of December 31, 1998, mortgage loans have both fixed rates
from 5.75% to 12.5% and variable rates from 6.25% to 10.25%. The majority of the
mortgage loan contracts require periodic payments of both principal and
interest, and have amortization periods of 3 to 31 years.
American National has investments in first lien mortgage loans on real estate
with carried values of $1,025,683,000 and $1,103,333,000 at December 31, 1998
and 1997, respectively. Problem loans, on which impairment allowances were
established, totaled $2,995,000 and $6,493,900 at December 31, 1998 and 1997,
respectively.
POLICY LOANS--Policy loans have interest rates ranging from 2.75% to 8%.
Approximately 99% of the policy loan portfolio carried interest rates of 5% to
8% at December 31, 1998.
INVESTMENT INCOME AND REALIZED GAINS (LOSSES)--Investment income and realized
gains (losses) from disposals of investments, before federal income taxes, for
the years ended December 31 are summarized as follows (in thousands):
GAINS (LOSSES) FROM
INVESTMENT DISPOSALS OF
INCOME INVESTMENTS
- -------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------
Bonds $317,481 $303,426 $ 2,614 $ 530
Preferred stocks 2,584 3,173 1 21
Common stocks 16,774 18,977 33,092 106,662
Mortgage loans 97,871 109,165 1,248 (1,277)
Real estate 80,138 84,344 1,338 (5,977)
Other invested assets 29,123 26,872 (564) (83)
Investment in unconsolidated
affiliates -- -- 29 (79)
- -------------------------------------------------------------------------
543,971 545,957 37,758 99,797
Investment expenses (68,729) (73,062) -- --
Decrease in valuation
allowances -- -- 12,010 3,523
- -------------------------------------------------------------------------
$475,242 $472,895 $49,768 $103,320
=========================================================================
(4) CONCENTRATIONS OF CREDIT RISK ON INVESTMENTS
American National employs a strategy to invest funds at the highest return
possible commensurate with sound and prudent underwriting practices to ensure a
well-diversified investment portfolio.
BONDS:
American National's bond portfolio is of high investment quality and is well
diversified. The bond portfolio distributed by quality rating at December 31 is
summarized as follows:
1998 1997
------------------------------------
AAA 9% 8%
AA 14% 13%
A 55% 56%
------------------------------------
BBB & below 22% 23%
------------------------------------
100% 100%
====================================
63
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
COMMON STOCK:
American National's stock portfolio by market sector distribution at December
31 is summarized as follows:
1998 1997
------------------------------------
Basic materials 4% 8%
Capital goods 7% 10%
Consumer goods 18% 18%
Energy 5% 7%
Finance 11% 9%
Technology 16% 12%
Health care 24% 21%
Miscellaneous 15% 15%
------------------------------------
100% 100%
====================================
MORTGAGE LOANS AND INVESTMENT REAL ESTATE:
American National invests primarily in the commercial sector in areas that
offer the potential for property value appreciation. Generally, mortgage loans
are secured by first liens on income-producing real estate.
Mortgage loans and investment real estate by property type distribution at
December 31 are summarized as follows:
INVESTMENT
MORTGAGE REAL
LOANS ESTATE
- ------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------
Office buildings 21% 21% 19% 19%
Shopping centers 56% 56% 40% 40%
Commercial 3% 3% 14% 15%
Apartments 1% 2% 3% 3%
Hotels/motels 3% 3% 16% 16%
Industrial 13% 12% 4% 4%
Other 3% 3% 4% 3%
- ------------------------------------------------------
100% 100% 100% 100%
======================================================
American National has a well-diversified portfolio of mortgage loans and real
estate properties. Mortgage loans and real estate investments by geographic
distribution at December 31 are as follows:
INVESTMENT
MORTGAGE REAL
LOANS ESTATE
- -----------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------
Texas 18% 18% 41% 45%
South Central, except Texas 2% 2% 1% 1%
California 11% 11% 8% 7%
Western, except California 7% 6% 4% 4%
Southeastern 9% 10% 22% 22%
North Central U.S. 8% 10% 15% 14%
North Eastern U.S. 45% 43% 9% 7%
- -----------------------------------------------------------------
100% 100% 100% 100%
=================================================================
64
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated market values of financial instruments have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in developing the estimates of fair value.
Accordingly, these estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange, or the amounts that may
ultimately be realized. The use of different market assumptions or estimating
methodologies may have a material effect on the estimated market values.
DEBT SECURITIES:
The estimated market values for bonds represent quoted market values from
published sources or bid prices obtained from securities dealers.
MARKETABLE EQUITY SECURITIES:
Market values for preferred and common stocks represent quoted market prices
obtained from independent pricing services.
MORTGAGE LOANS:
The market value for mortgage loans is estimated using discounted cash flow
analyses based on interest rates currently being offered for comparable loans.
Loans with similar characteristics are aggregated for purposes of the analyses.
POLICY LOANS:
The carrying amounts for policy loans approximate their market value.
SHORT-TERM INVESTMENTS:
The carrying amounts for short-term investments approximates their market
value.
INVESTMENT CONTRACTS:
The market value of investment contract liabilities is estimated using a
discounted cash flow model, assuming the companies' current interest rates on
new products. The carrying value for these contracts approximates their market
value.
INVESTMENT COMMITMENTS:
American National's investment commitments are all short-term in duration,
and the market value was not significant at December 31, 1998 or 1997.
65
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
VALUES:
The carrying amounts and estimated market values of financial instruments at
December 31 are as follows (in thousands):
1998 1997
- --------------------------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
Financial assets:
Bonds:
Held-to-maturity $3,565,974 $3,795,813 $3,605,927 $3,752,586
Available-for-sale 720,818 720,818 600,380 600,380
Preferred stock 41,664 41,664 40,744 40,744
Common stock 1,051,926 1,051,926 882,864 882,864
Mortgage loans on
real estate 1,025,683 1,158,033 1,103,333 1,229,078
Policy loans 296,109 296,109 300,574 300,574
Short-term investments 90,368 90,368 126,786 126,786
Financial liabilities:
Investment contracts 1,736,223 1,736,223 1,867,233 1,867,233
- --------------------------------------------------------------------------------
(6) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs and premiums for the years ended December
31, 1998 and 1997, are summarized as follows (in thousands):
LIFE ACCIDENT PROPERTY &
& ANNUITY & HEALTH CASUALTY TOTAL
- ------------------------------------------------------------------------------
Balance at
December 31, 1996 $624,012 $107,192 $ 7,819 $ 739,023
- ------------------------------------------------------------------------------
Additions 105,268 21,373 24,336 150,977
Amortization (92,830) (23,553) (22,327) (138,710)
Effect of change in unrealized
gains on available-for-sale
securities (3,863) (3,863)
- ------------------------------------------------------------------------------
Net change 8,575 (2,180) 2,009 8,404
Acquisitions 752 162 -- 914
- ------------------------------------------------------------------------------
Balance at December 31, 1997 633,339 105,174 9,828 748,341
- ------------------------------------------------------------------------------
Additions 87,660 25,897 25,764 139,321
Amortization (98,017) (26,940) (24,159) (149,116)
Effect of change in unrealized
gains on available-for-sale
securities (8,229) (8,229)
- ------------------------------------------------------------------------------
Net change (18,586) (1,043) 1,605 (18,024)
Acquisitions 782 604 -- 1,386
- ------------------------------------------------------------------------------
Balance at December 31, 1998 $615,535 $104,735 $ 11,433 $ 731,703
==============================================================================
1998 premiums $340,286 $393,602 $354,820 $1,088,708
==============================================================================
1997 premiums $348,973 $378,621 $312,987 $1,040,581
==============================================================================
66
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Commissions comprise the majority of the additions to deferred policy
acquisition costs for each year.
Acquisitions relate to the acquisition of various insurance portfolios under
assumption reinsurance agreements.
(7) FUTURE POLICY BENEFITS
LIFE INSURANCE:
Interest assumptions used in the calculation of future policy benefits for
life policies are as follows:
PERCENTAGE OF
FUTURE POLICY
POLICY ISSUE BENEFITS
YEAR INTEREST RATE SO VALUED
- ----------------------------------------------------------------------------
ORDINARY--
1996-1998 7.5% for years 1 through 5, graded to 5.5% at the
end of year 25, and level thereafter 2%
1981-1995 8% for years 1 through 5, graded to 6% at the end
of year 25, and level thereafter 20%
1976-1981 7% for years 1 through 5, graded to 5% at the end
of year 25, and level thereafter 22%
1972-1975 6% for years 1 through 5, graded to 4% at the end
of year 25, and level thereafter 9%
1969-1971 6% for years 1 through 5, graded to 3.5% at the
end of year 30, and level thereafter 7%
1962-1968 4.5% for years 1 through 5, graded to 3.5% at the
end of year 15, and level thereafter 13%
1948-1961 4% for years 1 through 5,graded to 3.5% at the
end of year 10, and level thereafter 13%
1947 and prior Statutory rates of 3% or 3.5% 2%
INDUSTRIAL--
1948-1967 4% for years 1 through 5, graded to 3.5% at the end
of year 10, and level thereafter 6%
1947 and
prior Statutory rates of 3% 6%
- ----------------------------------------------------------------------------
100%
============================================================================
Future policy benefits for universal life are calculated from the current
account value.
Future policy benefits for other policies have been calculated using level
interest rates principally as follows: annuities at 6% and group at 4%.
Mortality and withdrawal assumptions are based on American National's
experience.
HEALTH INSURANCE:
Interest assumptions used for future policy benefits on health policies are
calculated using a level interest rate of 6%.
Morbidity and termination assumptions are based on American National's
experience.
67
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
(8) LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for accident and health, and property and casualty
unpaid claims and claim adjustment expenses is summarized as follows (in
thousands):
1998 1997
- ----------------------------------------------------------------
Balance at January 1 $249,639 $222,996
Less reinsurance recoverables 2,567 2,439
- ----------------------------------------------------------------
Net balance at January 1 247,072 220,557
- ----------------------------------------------------------------
Incurred related to:
Current year 598,681 515,202
Prior years (6,592) (1,098)
- ----------------------------------------------------------------
Total incurred 592,089 514,104
- ----------------------------------------------------------------
Paid related to:
Current year 411,352 343,333
Prior years 158,879 144,256
- ----------------------------------------------------------------
Total paid 570,231 487,589
- ----------------------------------------------------------------
Net balance at December 31 268,930 247,072
Plus reinsurance recoverables 11 2,567
- ----------------------------------------------------------------
Balance at December 31 $268,941 $249,639
================================================================
The balances at December 31 are included in policy and contract claims on the
consolidated statement of financial position.
(9) REINSURANCE
As is customary in the insurance industry, the companies reinsure portions of
certain insurance policies they write, thereby providing a greater
diversification of risk and managing exposure on larger risks. The maximum
amount that would be retained by one company (American National) would be
$700,000 individual life, $250,000 individual accidental death, $100,000 group
life and $125,000 credit life (total $1,175,000). If individual, group and
credit were in force in all companies at the same time, the maximum risk on any
one life could be $1,875,000.
The companies remain contingently liable with respect to any reinsurance
ceded, and would become actually liable if the assuming companies were unable to
meet their obligations under any reinsurance treaties.
American National 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. At December 31,
1998, amounts recoverable from reinsurers, with a carrying value of $93,551,000,
were associated with various auto dealer credit insurance program reinsurers
domiciled in the Caribbean islands of Nevis or the Turks and Caicos. American
National holds collateral related to these credit reinsurers totaling
$71,554,000. This collateral is in the form of custodial accounts controlled by
American National, which can be drawn on for amounts that remain unpaid for more
than 120 days. American National believes that the failure of any single
reinsurer to meet its obligations would not have a significant effect on its
financial position or results of operations.
68
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Premiums, premium-related reinsurance amounts and reinsurance recoveries for
the years ended December 31 are summarized as follows (in thousands):
1998 1997
- --------------------------------------------------------------------
Direct premiums $1,201,189 $1,134,615
Reinsurance premiums assumed
from other companies 42,403 25,146
Reinsurance premiums ceded
to other companies (154,884) (119,180)
- --------------------------------------------------------------------
Net premiums $1,088,708 $1,040,581
====================================================================
Reinsurance recoveries $ 88,240 $ 56,535
====================================================================
Life insurance in force and related reinsurance amounts at December 31 are
summarized as follows (in thousands):
1998 1997
- ---------------------------------------------------------------------
Direct life insurance in force $44,134,974 $43,143,187
Reinsurance risks assumed
from other companies 713,200 662,171
- ---------------------------------------------------------------------
Total life insurance in force 44,848,174 43,805,358
Reinsurance risks ceded to
other companies (7,965,042) (6,985,956)
- ---------------------------------------------------------------------
Net life insurance in force $36,883,132 $36,819,402
=====================================================================
(10) FEDERAL INCOME TAXES
The federal income tax provisions vary from the amounts computed when
applying the statutory federal income tax rate. A reconciliation of the
effective tax rate of the companies to the statutory federal income tax rate
follows (in thousands, except percentages):
1998 1997
- ------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------------------------
Income tax on pre-tax income $95,861 35.00 % $130,558 35.00 %
Tax-exempt investment income (971) (0.35)% (383) (0.10)%
Dividend exclusion (5,044) (1.84)% (3,046) (0.82)%
Exempted losses on sale of assets (9,856) (3.60)% -- -- %
Miscellaneous tax credits, net (1,467) (0.54)% (1,238) (0.33)%
Other items, net (2,032) (0.74)% (1,226) (0.33)%
- ------------------------------------------------------------------------------
$76,491 27.93 % $124,665 33.42 %
==============================================================================
69
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and December 31, 1997 are as follows (in thousands):
1998 1997
- --------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Investment in bonds, real estate and other
invested assets, principally due to
investment valuation allowances $ 10,656 $ 11,858
Policyowner funds, principally
due to policy reserve discount 78,279 81,935
Policyowner funds, principally
due to unearned premium reserve 10,020 9,527
Other assets 2,649 6,701
- --------------------------------------------------------------------------
Total gross deferred tax assets $ 101,604 $ 110,021
Less valuation allowance (3,000) (3,000)
- --------------------------------------------------------------------------
Net deferred tax assets $ 98,604 $ 107,021
- --------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Marketable equity securities, principally
due to net unrealized gains on stock $(151,396) $(107,767)
Investment in bonds, principally
due to accrual of discount on bonds (17,390) (16,312)
Deferred policy acquisition costs, due to
difference between GAAP and tax (177,057) (185,903)
Property, plant and equipment, principally
due to difference between GAAP
and tax depreciation methods (12,004) (12,563)
Other liabilities -- (82)
- --------------------------------------------------------------------------
Net deferred tax liabilities $(357,847) $(322,627)
- --------------------------------------------------------------------------
Total deferred tax $(259,243) $(215,606)
==========================================================================
Through 1983, under the provision of the Life Insurance Company Income Tax
Act of 1959, life insurance companies were permitted to defer from taxation a
portion of their income (within certain limitations) until and unless it is
distributed to stockholders, at which time it was taxed at regular corporate tax
rates. No provision for deferred federal income taxes applicable to such untaxed
income has been made, because management is of the opinion that no distributions
of such untaxed income (designated by federal law as "policyholders' surplus")
will be made in the foreseeable future. There was no change in the
"policyholders' surplus" between December 31, 1997 and December 31, 1998, and
the cumulative balance was approximately $63,000,000 at both dates.
Federal income taxes totaling approximately $111,465,000 and $136,212,000
were paid to the Internal Revenue Service in 1998 and 1997, respectively. The
statute of limitations for examination by the Internal Revenue Service of
federal income tax returns through 1994 for American National and its
subsidiaries has expired. All prior year deficiencies have been paid or provided
for, and American National has filed appropriate claims for refunds through
1995. In the opinion of management, adequate provision has been made for any tax
deficiencies that may be sustained.
70
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
(11) COMPONENTS OF COMPREHENSIVE INCOME
The only item included in comprehensive income, other than net income, is
unrealized gains. The details on the unrealized gains included in comprehensive
income, and the related tax effects thereon are as follows:
FEDERAL
INCOME NET OF
BEFORE TAX FEDERAL
FEDERAL EXPENSE INCOME
TAX (BENEFIT) TAX
- ------------------------------------------------------------------------------
DECEMBER 31, 1998
Unrealized gains 163,103 57,086 106,017
Less: reclassification adjustment for
gains realized in net income (34,960) (12,236) (22,724)
- ------------------------------------------------------------------------------
Net unrealized gains component of
comprehensive income 128,143 44,850 83,293
DECEMBER 31, 1997
Unrealized gains 187,501 65,625 121,876
Less: reclassification adjustment for
gains realized in net income (106,684) (37,339) (69,345)
- ------------------------------------------------------------------------------
Net unrealized gains component of
comprehensive income 80,817 28,286 52,531
==============================================================================
(12) STOCKHOLDERS' EQUITY
American National has only one class of common stock, no preferred stock and
no options which could be converted into common or preferred stock. At December
31, 1998 and 1997, American National had 50,000,000 authorized shares of $1.00
par value common stock. At December 31, 1998 and 1997, issued shares were
30,832,449; treasury shares were 4,353,284; and outstanding shares were
26,479,165.
American National's payment of dividends to stockholders is restricted by
statutory regulations. Generally, the restrictions require life insurance
companies to maintain minimum amounts of capital and surplus, and limit the
payment of dividends to statutory net gain from operations on an annual,
noncumulative basis in the absence of special approval. Additionally, insurance
companies are not permitted to distribute the excess of stockholders' equity, as
determined on a GAAP basis over that determined on a statutory basis.
Generally, the same restrictions apply to American National's insurance
subsidiaries regarding amounts that can transfer in the form of dividends,
loans, or advances to the parent company.
At December 31, 1998, approximately $571,986,000 of American National's
consolidated stockholders' equity represents net assets of its insurance
subsidiaries. Any transfer of these net assets to American National would be
subject to statutory restrictions and approval.
(13) SEGMENT INFORMATION
American National and its subsidiaries are engaged principally in the
insurance business. Management organizes the business around its marketing
distribution channels. Separate management of each segment is required because
each business unit is subject to different marketing strategies. There are eight
operating segments based on the company's marketing distribution channels.
The operating segments are as follows:
MULTIPLE LINE MARKETING -- This segment derives its revenues from the sale of
individual life, annuity, accident and health, and property and casualty
products marketed through American National Insurance Company, ANTEX, ANPAC,
ANGIC, and ANPAC Lloyds.
71
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
HOME SERVICE DIVISION -- This segment derives its revenues from the sale of
individual life, annuity, and accident and health insurance using a system where
the agents collect the premiums.
INDEPENDENT MARKETING -- This segment derives its revenues mainly from the
sale of life and annuity lines marketed through independent marketing
organizations.
HEALTH DIVISION -- This segment derives its revenues primarily from the sale
of accident and health insurance, plus group life insurance marketed through
group brokers and third party marketing organizations.
CREDIT INSURANCE DIVISION -- This segment derives its revenues principally
from the sale of credit life and credit accident and health insurance.
SENIOR AGE MARKETING -- This segment derives its revenues primarily from the
sale of Medicare supplement plans, individual life, annuities, and accident and
health insurance marketed through Standard Life and Accident Insurance Company.
DIRECT MARKETING -- This segment derives its revenues principally from the
sale of individual life insurance, marketed through Garden State Life Insurance
Company, using direct selling methods.
CAPITAL AND SURPLUS -- This segment derives its revenues principally from
investment instruments.
ALL OTHER -- This category comprises segments that are too small to show
individually. This category includes non-insurance, reinsurance assumed, and
retirement benefits.
All income and expense amounts specifically attributable to policy
transactions are recorded directly to the appropriate line of business within
each segment. Income and expenses, which are not specifically attributable to
policy transactions, are allocated to the lines within each segment as follows:
Net investment income from fixed income assets (bonds and mortgage loans on
real estate) is allocated based on the funds generated by each line at the
average yield available from these fixed income assets at the time such funds
become available. Net investment income from all other assets is allocated to
capital and surplus to arrive at an underwriting gain from operations. A portion
of the income allocated to capital and surplus is then re-allocated to the other
segments in accordance with the amount of equity invested in each segment.
Expenses are allocated to the lines based upon various factors, including
premium and commission ratios within the respective operating segments.
Gain or loss on the sale of investments and equity in earnings of
unconsolidated affiliates is allocated to capital and surplus.
Federal income taxes have been applied to the net earnings of each segment,
based on a fixed tax rate. Any difference between the amount allocated to the
segments and the total federal income tax amount is allocated to capital and
surplus.
72
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
The following tables summarize net income and various components of net
income by operating segment for the years ended December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
GAIN FROM
OPERATIONS
INVESTMENT BEFORE FEDERAL
PREMIUM EXPENSES INCOME EQUITY IN FEDERAL INCOME TAX
AND OTHER INTEREST AND GAIN FROM ON UNCONSOLIDATED INCOME EXPENSES NET
REVENUE REVENUE BENEFITS OPERATIONS EQUITY AFFILIATES TAXES (BENEFIT) INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
- -----------------------------------------------------------------------------------------------------------------------------------
Multiple Line Marketing $452,146 $ 72,110 $ 488,842 $ 35,414 $ 22,953 $ -- $ 58,367 $ 19,261 $ 39,106
Home Service 203,975 88,759 252,445 40,289 33,429 -- 73,718 24,327 49,391
Independent Marketing 69,714 109,604 184,655 (5,337) 12,675 -- 7,338 2,422 4,916
Health 211,249 3,175 240,194 (25,770) 4,674 -- (21,096) (6,962) (14,134)
Credit Insurance 57,727 5,743 61,181 2,289 9,472 -- 11,761 3,881 7,880
Senior Age Marketing 162,161 10,132 169,929 2,364 7,628 -- 9,992 3,297 6,695
Direct Marketing 26,619 3,050 24,035 5,634 539 -- 6,173 2,037 4,136
Capital and Surplus 81,471 123,520 761 204,230 (96,272) 8,048 116,006 24,390 91,616
All other 38,851 24,659 56,782 6,728 4,902 -- 11,630 3,838 7,792
- -----------------------------------------------------------------------------------------------------------------------------------
$1,303,913 $440,752 $1,478,824 $265,841 $ -- $8,048 $273,889 $ 76,491 $197,398
===================================================================================================================================
1997
- -----------------------------------------------------------------------------------------------------------------------------------
Multiple Line Marketing $ 408,184 $ 72,259 $ 427,132 $ 53,311 $ 21,229 $ -- $ 74,540 $ 24,598 $ 49,942
Home Service 209,082 89,638 249,127 49,593 33,064 -- 82,657 27,277 55,380
Independent Marketing 70,590 112,032 178,419 4,203 13,604 -- 17,807 5,876 11,931
Health 185,057 3,088 200,797 (12,652) 3,966 -- (8,686) (2,866) (5,820)
Credit Insurance 54,363 5,677 57,847 2,193 8,895 -- 11,088 3,659 7,429
Senior Age Marketing 168,685 15,030 182,914 801 8,298 -- 9,099 3,003 6,096
Direct Marketing 26,615 2,972 26,712 2,875 542 -- 3,417 1,128 2,289
Capital and Surplus 145,403 109,104 3,430 251,077 (94,679) 9,333 165,731 56,258 109,473
All other 36,859 25,266 49,837 12,288 5,081 -- 17,369 5,732 11,637
- -----------------------------------------------------------------------------------------------------------------------------------
$1,304,838 $435,066 $1,376,215 $363,689 $ -- $9,333 $373,022 $124,665 $248,357
===================================================================================================================================
</TABLE>
There were no significant non-cash items to report. Substantially all of the
Company's revenues are derived in the U.S.
The majority of the operating segments provide essentially the same types of
products. The following tables provide revenues within each segment by line of
business for the years ended December 31, 1998 and 1997 (in thousands):
73
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
TOTAL REVENUES (INCLUDING INTEREST INCOME)
<TABLE>
<CAPTION>
ACCIDENT & PROPERTY & ALL TOTAL
LIFE ANNUITY HEALTH CASUALTY CREDIT OTHER REVENUES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
- -----------------------------------------------------------------------------------------------------------------
Multiple Line Marketing $121,829 $ 16,826 $ 20,232 $365,369 $ -- $ -- $ 524,256
Home Service 279,531 4,410 8,793 -- -- -- 292,734
Independent Marketing 5,328 173,990 -- -- -- -- 179,318
Health Insurance 3,802 -- 210,622 -- -- -- 214,424
Credit Insurance -- -- -- -- 63,470 -- 63,470
Senior Age Marketing 32,821 1,583 137,889 -- -- -- 172,293
Direct Marketing 29,042 165 462 -- -- -- 29,669
Capital and Surplus -- -- -- -- -- 204,991 204,991
All other 31,996 18,962 1,977 -- -- 10,575 63,510
- -----------------------------------------------------------------------------------------------------------------
$504,349 $215,936 $379,975 $365,369 $63,470 $215,566 $1,744,665
=================================================================================================================
1997
- -----------------------------------------------------------------------------------------------------------------
Multiple Line Marketing $120,083 $ 16,728 $ 20,008 $323,624 $ -- $ -- $ 480,443
Home Service 284,698 4,675 9,347 -- -- -- 298,720
Independent Marketing 3,525 179,097 -- -- -- -- 182,622
Health Insurance 3,224 -- 184,920 -- -- -- 188,144
Credit Insurance -- -- -- -- 60,040 -- 60,040
Senior Age Marketing 34,583 1,549 147,583 -- -- -- 183,715
Direct Marketing 28,901 176 510 -- -- -- 29,587
Capital and Surplus -- -- -- -- -- 254,507 254,507
All other 33,331 17,684 2,791 -- -- 8,319 62,125
- -----------------------------------------------------------------------------------------------------------------
$508,345 $219,909 $365,159 $323,624 $60,040 $262,826 $1,739,903
=================================================================================================================
</TABLE>
Within all operating segments, to the extent required for reserves, fixed
income assets and policy loans have been directly assigned to the insurance
lines. Equity type assets, such as stocks, real estate and other invested
assets, have been allocated to the segments based on the equity invested in
each. Assets of the non-insurance companies are specifically associated with
those companies in the "All other" segment. Any assets not allocated are
assigned to Capital and Surplus.
The following table summarizes assets by operating segment for the years
ended December 31, 1998 and 1997 (in thousands):
1998 1997
- ------------------------------------------------------
Multiple Line Marketing $1,513,396 $1,425,919
Home Service 1,760,415 1,741,155
Independent Marketing 1,761,832 1,874,000
Health 170,301 140,179
Credit Insurance 372,787 355,789
Senior Age Marketing 330,631 326,235
Direct Marketing 83,759 76,939
Capital and surplus 2,232,612 2,066,779
All other 589,919 476,781
- ------------------------------------------------------
Total assets $8,815,652 $8,483,776
======================================================
The net assets of the Capital and Surplus segment include investments in
unconsolidated affiliates. Substantially all of the company's assets are located
in the U.S.
The amount of each segment item reported is the measure reported to the chief
operating decision maker for purposes of making decisions about allocating
resources to the segment and assessing its performance. Adjustments and
eliminations made in preparing the financial statements and allocations of
revenues, expenses and gains or losses have been included in determining
reported segment profit or loss.
74
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
The reported measures are determined in accordance with the measurement
principles most consistent with those used in measuring the corresponding
amounts in the consolidated financial statements.
The results of the operating segments of the business are affected by
economic conditions and customer demands. A significant portion of American
National's insurance business is written through one third-party marketing
organization. During 1998, approximately 11% of the total premium revenues and
policy account deposits were written through that organization, which is
included in the Independent Marketing operating segment. This compares with 18%
in 1997. Of the total business written by this one organization, the majority
was annuities.
(14) RECONCILIATION TO STATUTORY ACCOUNTING
American National and its insurance subsidiaries are required to file
statutory financial statements with state insurance regulatory authorities.
Accounting principles used to prepare these statutory financial statements
differ from those used to prepare financial statements on the basis of generally
accepted accounting principles.
Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in the
accompanying consolidated financial statements, as of and for the years ended
December 31, are as follows (in thousands):
1998 1997
- ----------------------------------------------------------------------------
Statutory net income of insurance companies $ 155,368 $ 207,998
Net gain of non-insurance companies 15,240 2,592
- ----------------------------------------------------------------------------
Combined net income 170,608 210,590
Increases/(decreases):
Deferred policy acquisition costs (9,795) 12,267
Policyholder funds 18,702 7,963
Deferred federal income tax benefit 1,216 9,606
Premiums deferred and other receivables (84) 602
Gain (loss) on sale of investments (292) 79
Change in interest maintenance reserve 2,773 1,532
Asset valuation allowances 11,492 3,524
Other adjustments, net 2,854 2,218
Consolidating eliminations and adjustments (76) (24)
- ----------------------------------------------------------------------------
Net income reported herein $ 197,398 $ 248,357
============================================================================
1998 1997
- ----------------------------------------------------------------------------
Statutory capital and surplus of insurance
companies $2,163,593 $2,011,016
Stockholders equity of non-insurance
companies 305,920 77,725
- ----------------------------------------------------------------------------
Combined capital and surplus 2,469,513 2,088,741
Increases/(decreases):
Deferred policy acquisition costs 731,703 748,341
Policyholder funds 154,445 135,262
Deferred federal income taxes (259,243) (215,606)
Premiums deferred and other receivables (78,139) (77,629)
Reinsurance in "unauthorized companies" 38,748 34,010
Statutory asset valuation reserve 344,926 370,102
Statutory interest maintenance reserve 10,762 7,989
Asset valuation allowances (28,489) (44,899)
Investment market value adjustments 48,656 39,050
Non-admitted assets and
other adjustments, net 173,877 135,680
Consolidating eliminations and adjustments (692,147) (515,624)
- ----------------------------------------------------------------------------
Stockholders' equity reported herein $2,914,612 $2,705,417
============================================================================
In accordance with various government and state regulations, American
National and its insurance subsidiaries had bonds with an amortized value of
$74,021,000 on deposit with appropriate regulatory authorities.
75
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
(15) RETIREMENT BENEFITS
American National and its subsidiaries have one tax-qualified pension plan,
which has three separate programs. One of the programs is contributory and
covers home service agents and managers. The other two programs are
noncontributory, with one covering salaried and management employees and the
other covering home office clerical employees subject to a collective bargaining
agreement. The program covering salaried and management employees provides
pension benefits that are based on years of service and the employee's
compensation during the five years before retirement. The programs covering
hourly employees and agents generally provide benefits that are based on the
employee's career average earnings and years of service. American National also
sponsors two non-tax-qualified pension plans for key executives. These plans
restore benefits that would otherwise be curtailed by statutory limits on
qualified plan benefits.
The companies' funding policy for the pension plans is to make annual
contributions in accordance with the minimum funding standards of the Employee
Retirement Income Security Act of 1974.
Actuarial computations of pension expense (before income taxes) produced a
pension debit of $3,051,000 for 1998 and $2,474,000 for 1997.
The pension debit is made up of the following (in thousands):
1998 1997
- ----------------------------------------------------------------------
Service cost--benefits earned during period $ 5,629 $ 5,402
Interest cost on projected benefit obligation 7,661 7,221
Expected return on plan assets (8,887) (8,795)
Amortization of past service cost 473 490
Amortization of transition asset (2,619) (2,619)
Amortization of actuarial loss 794 775
- ----------------------------------------------------------------------
Total pension debit $ 3,051 $ 2,474
======================================================================
76
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
The following table sets forth the funded status and amounts recognized in
the consolidated statements of financial position at December 31 for the
companies' pension plans.
Actuarial present value of benefit obligation:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vested benefit obligation $(76,916) $(19,136) $ (71,811) $(22,468)
==============================================================================================================
Accumulated benefit obligation $(79,405) $(19,136) $ (75,492) $(22,468)
==============================================================================================================
Projected benefit obligation $(96,812) $(26,340) $ (92,422) $(22,616)
Plan assets at fair value (long-term securities) 137,543 -- 129,380 --
- --------------------------------------------------------------------------------------------------------------
Funded status:
Plan assets in excess of projected benefit
obligation 40,731 (26,340) 36,958 (22,616)
Unrecognized net loss 2,341 3,729 8,305 2,614
Prior service cost not yet recognized in periodic
pension cost -- 1,028 -- 1,505
Unrecognized net transition asset at January 1
being recognized over 15 years (7,858) -- (10,477) --
- --------------------------------------------------------------------------------------------------------------
Prepaid pension cost included in other assets
or other liabilities $ 35,214 $(21,583) $ 34,786 $(18,497)
==============================================================================================================
Assumptions used at December 31:
1998 1997
- --------------------------------------------------------------------------------------------------------------
Weighted average discount rate on benefit obligation 6.50% 6.50%
Rate of increase in compensation levels 4.80% 4.80%
Expected long-term rate of return on plan assets 7.00% 7.00%
</TABLE>
OTHER BENEFITS
Under American National and its subsidiaries' various group benefit plans for
active employees, a $2,500 paid-up life insurance certificate is provided upon
retirement for eligible participants who meet certain age and length of service
requirements.
American National has one retiree health benefit plan for retirees of all
companies in the consolidated group, with the exception of Standard Life and
Accident Insurance Company (Standard). The retirees of Standard are covered
under a separate health plan. Participation in either of these plans is limited
to current retirees and their dependents and those employees and their
dependents who met certain age and length of service requirements as of December
31, 1993. No new participants will be added to these plans in the future.
The retiree health benefit plans provide major medical benefits for participants
under the age of 65 and Medicare supplemental benefits for those over 65.
Prescription drug benefits are provided to both age groups. The plans are
contributory, with the company's contribution limited to $80 per month for
retirees and spouses under the age of 65, and $40 per month for retirees and
spouses over the age of 65. All additional contributions necessary, over the
amount to be contributed by the companies, are to be contributed by the
retirees.
The accrued post-retirement benefit obligation, included in other
liabilities, was $12,989,000 and $12,970,000 at December 31, 1998 and 1997,
respectively. These amounts were approximately equal to the unfunded accumulated
post-retirement benefit obligation. Since the companies' contributions to the
cost of the retiree benefit plans are fixed, the health care cost trend rate
will have no effect on the future expense or the accumulated post-retirement
benefit obligation.
77
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
(16) COMMITMENTS AND CONTINGENCIES
American National and its subsidiaries lease office space in various cities
for their insurance sales offices. The long-term lease commitments at December
31, 1998 were approximately $5,620,000.
In the ordinary course of their operations, the companies also had
commitments outstanding at December 31, 1998 to purchase, expand or improve real
estate, and to fund mortgage loans aggregating $120,922,000, all of which are
expected to be funded in 1999. As of December 13, 1998, all of the mortgage loan
commitments have interest rates that are fixed.
The companies are defendants in various lawsuits concerning alleged failure
to honor certain loan commitments, alleged breach of certain agency and real
estate contracts, various employment matters, allegedly deceptive insurance
sales and marketing practices, and other litigation arising in the ordinary
course of operations. Certain of these lawsuits include claims for compensatory
and punitive damages. Management is of the opinion, after reviewing the above
matters with legal counsel, that the ultimate liability if any, resulting from
any of or all of the above matters would not have a material adverse effect on
the companies' consolidated financial position or results of operations.
However, these lawsuits are in various stages of development, and future facts
and circumstances could result in management changing its conclusions.
78
<PAGE>
APPENDIX
ILLUSTRATIONS OF DEATH BENEFITS, ACCUMULATION VALUES, AND SURRENDER VALUES
The tables on pages 81 through 84 illustrate how Accumulation Value, Surrender
Value, and Death Benefit of a Policy may change with the investment performance
of the Eligible Portfolios. These illustrations are hypothetical and may not be
used to project or predict investment results. The illustrations assume:
. a gross annual investment rate of return (i.e., investment income and capital
gains and losses) of 0%, 6% or 12%,
. a $100,000 Specified Amount,
. the Insureds are a male, age 45, and a female, age 45,
. the Policy is issued under the tobacco non-user underwriting risk
classification for each Insured,
. the premium is paid at the beginning of each Policy Year,
. all Accumulation Value is allocated to the Separate Account,
. no Policy Loans are made,
. no changes in the Specified Amount,
. no partial surrenders
. no riders
. no transfers to the Fixed Account,
. no more than twelve transfers among Subaccounts, and
. fees and expenses for the Eligible Portfolios at a hypothetical annual rate
of 0.72% of net assets (the rate is a simple average, for all Eligible
Portfolios, of the "Management Fees" and "Other Expenses", indicated for each
Eligible Portfolio in the Eligible Portfolio Annual Expenses table. Certain
fee waiver and expense reimbursement arrangements exist and are reflected in
this average. Excluding the effect of these arrangements, the simple average
of the "Management Fees" and "Other Expenses" would be 0.83%).
The Accumulation Value, Surrender Value, and Death Benefit shown in the
illustrations may be different if any of the above assumptions changed.
The second column of the tables shows the value of the premiums paid accumulated
at a 5% annual interest rate.
The tables on pages 81 and 83 are based on the current schedule of Monthly
Deductions. We may, however, change the current schedule of Monthly Deductions
at any time and for any reason. Accordingly, you should not construe the tables
as guarantees or estimates of amounts to be paid in the future.
The tables on pages 82 and 84 are based on the assumption that the maximum
allowable Monthly Deductions are made throughout the life of the Policy.
The tables show that the net investment return of each subaccount is lower than
the gross return of the assets held in its corresponding Eligible Portfolio
because of the charges against the subaccounts.
Illustrations also reflect the Daily Asset Charge, which is levied against each
Subaccount at an annual rate of 0.90% of average daily Accumulation Value in the
first 20 Policy Years and 0.60% thereafter. After adjustment to reflect the
Daily Asset Charge and the average Eligible Portfolio Annual Expenses, the
illustrated hypothetical gross annual investment rates of return of 0%, 6%, and
12% correspond to approximate hypothetical net annual rates of -1.61%, 4.34% and
10.28% in years 1 - 20; -1.31%, 4.65% and 10.61% in years 21 and thereafter.
The illustrations do not reflect any charges for federal income tax burden
attributable to the Separate Account, since we are not currently making such
charges. However, such charges may be made in the future, and, in that event,
the gross annual investment rate of return would have to exceed 0%, 6%, or 12%
by an amount sufficient to cover the tax charges in order to produce the values
illustrated. (See "Federal Income Tax Considerations," page 36.)
79
<PAGE>
If a Policy Loan is made, both Surrender Value and Death Benefit Proceeds will
be reduced by the amount of outstanding Policy Debt. Even if repaid, Policy Debt
may permanently affect the Policy's values. The effect could be favorable or
unfavorable depending on whether the investment performance of the
subaccount(s)/Fixed Account you selected is less than or greater than the
interest rate credited to the Accumulation Value held to secure the loan.
If a partial surrender is made, the surrender will immediately reduce the values
by the amount of the partial surrender, a $25 fee for each partial surrender,
and any applicable surrender charge. If the Policy is surrendered, a surrender
charge may be imposed and the Policyowner may receive less than the total
premium paid. In the illustrations, the difference between the Accumulation
Value and the Surrender Value in any year is the surrender charge.
Upon request, we will provide a comparable illustration based upon the proposed
Insured's age, sex and underwriting classification, the Specified Amount, the
Death Benefit option, Planned Periodic Premium schedule, and any available
riders requested.
80
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY
ONE MOODY PLAZA
GALVESTON, TEXAS 77550-7999
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
DEATH BENEFIT OPTION A; SPECIFIED AMOUNT - $100,000
MALE ISSUE AGE 45 FEMALE ISSUE AGE 45
TOBACCO NON-USER
CURRENT SCHEDULE OF CHARGES
PLANNED PERIODIC PREMIUM OF $810 PAID AT THE BEGINNING OF EACH POLICY YEAR
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS
ANNUAL INVESTMENT RATES OF RETURN OF
- -----------------------------------------------------------------------------------------------------------------------------------
0% 6% 12%
- -----------------------------------------------------------------------------------------------------------------------------------
END OF PREMIUMS
POLICY ACCUMULATED ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 851 584 0 100,000 624 0 100,000 665 0 100,000
2 1,701 1,156 0 100,000 1,273 0 100,000 1,396 0 100,000
3 2,552 1,716 0 100,000 1,948 0 100,000 2,200 0 100,000
4 3,402 2,265 0 100,000 2,649 77 100,000 3,083 511 100,000
5 4,253 2,802 274 100,000 3,378 850 100,000 4,055 1,527 100,000
6 5,103 3,457 974 100,000 4,269 1,786 100,000 5,260 2,777 100,000
7 5,954 4,097 1,660 100,000 5,194 2,757 100,000 6,586 4,149 100,000
8 6,804 4,724 2,334 100,000 6,157 3,767 100,000 8,045 5,655 100,000
9 7,655 5,336 2,994 100,000 7,157 4,815 100,000 9,650 7,308 100,000
10 8,505 5,935 3,643 100,000 8,196 5,904 100,000 11,416 9,124 100,000
15 12,758 8,830 6,804 100,000 14,174 12,148 100,000 23,469 21,443 100,000
20 17,010 11,308 11,308 100,000 21,377 21,377 100,000 42,987 42,987 100,000
25 21,263 13,333 13,333 100,000 30,321 30,321 100,000 75,804 75,804 100,000
30 25,515 14,301 14,301 100,000 40,858 40,858 100,000 130,350 130,350 139,475
Age 65 17,010 11,308 11,308 100,000 21,377 21,377 100,000 42,987 42,987 100,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* GUARANTEED COVERAGE PREMIUM $810
Until age 100, under Death Benefit Option A the Death Benefit is the current
Specified Amount of the Policy or, if greater, the applicable corridor
percentage of Accumulation Value at the end of the Valuation Period that
includes the date of the Insured's death. Corridor percentages are specified in
the Policy. The Death Benefit at age 100 and thereafter equals the Accumulation
Value.
American National agrees to keep the Policy in force for the period stipulated
under the Guaranteed Coverage Benefit so long as the Guaranteed Coverage Premium
is paid and other Policy provisions are met even though, in certain instances,
the minimum payment allowed by the Policy will not, after the payment of Monthly
Deductions, generate positive Surrender Value at one or more points during such
period.
Accumulation Value, Surrender Value and Death Benefit may be different if
premiums are paid with a different frequency or timing or if of different
amounts. Illustration assumes no Policy loan or partial surrender has been
made. Zero values in the Death Benefit column indicate Policy lapse in the
absence of sufficient additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RATES OF RETURN NOR A SUGGESTION THAT SUCH RESULTS WILL BE ACHIEVED. ACTUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY A POLICYOWNER,
DIFFERENT RETURNS OF ELIGIBLE PORTFOLIOS, PREVAILING INTEREST RATES AND RATES OF
INFLATION. NO REPRESENTATIONS CAN BE MADE BY AMERICAN NATIONAL THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME. ALTHOUGH THE ACTUAL RATES OF RETURN MAY AVERAGE 0%, 6%, OR
12% OVER A PERIOD OF YEARS, IF THEY HAVE FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS THE ACCUMULATION VALUE, DEATH BENEFIT AND
SURRENDER VALUE WOULD BE DIFFERENT FROM THOSE SHOWN ABOVE.
81
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY
ONE MOODY PLAZA
GALVESTON, TEXAS 77550-7999
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
DEATH BENEFIT OPTION A; SPECIFIED AMOUNT - $100,000
MALE ISSUE AGE 45 FEMALE ISSUE AGE 45
TOBACCO NON-USER
GUARANTEED SCHEDULE OF CHARGES
PLANNED PERIODIC PREMIUM OF $810 PAID AT THE BEGINNING OF EACH POLICY YEAR
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS
ANNUAL INVESTMENT RATES OF RETURN OF
- ------------------------------------------------------------------------------------------------------------------------------------
0% 6% 12%
- ------------------------------------------------------------------------------------------------------------------------------------
END OF PREMIUMS
POLICY ACCUMULATED ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 851 584 0 100,000 624 0 100,000 665 0 100,000
2 1,701 1,156 0 100,000 1,273 0 100,000 1,396 0 100,000
3 2,552 1,716 0 100,000 1,948 0 100,000 2,200 0 100,000
4 3,402 2,265 0 100,000 2,649 77 100,000 3,083 511 100,000
5 4,253 2,802 274 100,000 3,378 850 100,000 4,055 1,527 100,000
6 5,103 3,457 974 100,000 4,269 1,786 100,000 5,260 2,777 100,000
7 5,954 4,097 1,660 100,000 5,194 2,757 100,000 6,586 4,149 100,000
8 6,804 4,724 2,334 100,000 6,157 3,767 100,000 8,045 5,655 100,000
9 7,655 5,336 2,994 100,000 7,157 4,815 100,000 9,650 7,308 100,000
10 8,505 5,935 3,643 100,000 8,196 5,904 100,000 11,416 9,124 100,000
15 12,758 8,830 6,804 100,000 14,174 12,148 100,000 23,469 21,443 100,000
20 17,010 11,308 11,308 100,000 21,377 21,377 100,000 42,987 42,987 100,000
25 21,263 13,333 13,333 100,000 30,321 30,321 100,000 75,804 75,804 100,000
30 25,515 14,301 14,301 100,000 40,858 40,858 100,000 130,350 130,350 139,475
Age 65 17,010 11,308 11,308 100,000 21,377 21,377 100,000 42,987 42,987 100,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* GUARANTEED COVERAGE PREMIUM $810
Until age 100, under Death Benefit Option A the Death Benefit is the current
Specified Amount of the Policy or, if greater, the applicable corridor
percentage of Accumulation Value at the end of the Valuation Period that
includes the date of the Insured's death. Corridor percentages are specified in
the Policy. The Death Benefit at age 100 and thereafter equals the Accumulation
Value.
American National agrees to keep the Policy in force for the period stipulated
under the Guaranteed Coverage Benefit so long as the Guaranteed Coverage Premium
is paid and other Policy provisions are met even though, in certain instances,
the minimum payment allowed by the Policy will not, after the payment of Monthly
Deductions, generate positive Surrender Value at one or more points during such
period.
Accumulation Value, Surrender Value and Death Benefit may be different if
premiums are paid with a different frequency or timing or if of different
amounts. Illustration assumes no Policy loan or partial surrender has been
made. Zero values in the Death Benefit column indicate Policy lapse in the
absence of sufficient additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RATES OF RETURN NOR A SUGGESTION THAT SUCH RESULTS WILL BE ACHIEVED. ACTUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY A POLICYOWNER,
DIFFERENT RETURNS OF ELIGIBLE PORTFOLIOS, PREVAILING INTEREST RATES AND RATES OF
INFLATION. NO REPRESENTATIONS CAN BE MADE BY AMERICAN NATIONAL THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME. ALTHOUGH THE ACTUAL RATES OF RETURN MAY AVERAGE 0%, 6%, OR
12% OVER A PERIOD OF YEARS, IF THEY HAVE FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS THE ACCUMULATION VALUE, DEATH BENEFIT AND
SURRENDER VALUE WOULD BE DIFFERENT FROM THOSE SHOWN ABOVE.
82
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY
ONE MOODY PLAZA
GALVESTON, TEXAS 77550-7999
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
DEATH BENEFIT OPTION B; SPECIFIED AMOUNT - $100,000
MALE ISSUE AGE 45 FEMALE ISSUE AGE 45
TOBACCO NON-USER
CURRENT SCHEDULE OF CHARGES
PLANNED PERIODIC PREMIUM OF $810 PAID AT THE BEGINNING OF EACH POLICY YEAR
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS
ANNUAL INVESTMENT RATES OF RETURN OF
- ------------------------------------------------------------------------------------------------------------------------------------
0% 6% 12%
- ------------------------------------------------------------------------------------------------------------------------------------
END OF PREMIUMS
POLICY ACCUMULATED ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 851 584 0 100,584 624 0 100,624 665 0 100,665
2 1,701 1,156 0 101,156 1,273 0 101,273 1,396 0 101,396
3 2,552 1,716 0 101,716 1,948 0 101,948 2,199 0 102,199
4 3,402 2,265 0 102,265 2,649 77 102,649 3,083 511 103,083
5 4,253 2,802 274 102,802 3,377 849 103,377 4,054 1,526 104,054
6 5,103 3,455 972 103,455 4,267 1,784 104,267 5,258 2,775 105,258
7 5,954 4,095 1,658 104,095 5,192 2,755 105,192 6,583 4,146 106,583
8 6,804 4,721 2,331 104,721 6,153 3,763 106,153 8,039 5,649 108,039
9 7,655 5,332 2,990 105,332 7,151 4,809 107,151 9,641 7,299 109,641
10 8,505 5,929 3,637 105,929 8,187 5,895 108,187 11,403 9,111 111,403
15 12,758 8,806 6,780 108,806 14,132 12,106 114,132 23,395 21,369 123,395
20 17,010 11,237 11,237 111,237 21,230 21,230 121,230 42,671 42,671 142,671
25 21,263 13,140 13,140 113,140 29,840 29,840 129,840 74,527 74,527 174,527
30 25,515 13,820 13,820 113,820 39,392 39,392 139,392 125,854 125,854 225,854
Age 65 17,010 11,237 11,237 111,237 21,230 21,230 121,230 42,671 42,671 142,671
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* GUARANTEED COVERAGE PREMIUM $810
Until age 100, under Death Benefit Option B the Death Benefit is the current
Specified Amount plus the Accumulation Value of the Policy or, if greater, the
applicable corridor percentage of Accumulation Value at the end of the Valuation
Period that includes the date of the Insured's death. Corridor percentages are
specified in the Policy. The Death Benefit at age 100 and thereafter equals the
Accumulation Value.
American National agrees to keep the Policy in force for the period stipulated
under the Guaranteed Coverage Benefit so long as the Guaranteed Coverage Premium
is paid and other Policy provisions are met even though, in certain instances,
the minimum payment allowed by the Policy will not, after the payment of Monthly
Deductions, generate positive Surrender Value at one or more points during such
period.
Accumulation Value, Surrender Value and Death Benefit may be different if
premiums are paid with a different frequency or timing or if of different
amounts. Illustration assumes no Policy loan or partial surrender has been
made. Zero values in the Death Benefit column indicate Policy lapse in the
absence of sufficient additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RATES OF RETURN NOR A SUGGESTION THAT SUCH RESULTS WILL BE ACHIEVED. ACTUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY A POLICYOWNER,
DIFFERENT RETURNS OF ELIGIBLE PORTFOLIOS, PREVAILING INTEREST RATES AND RATES OF
INFLATION. NO REPRESENTATIONS CAN BE MADE BY AMERICAN NATIONAL THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME. ALTHOUGH THE ACTUAL RATES OF RETURN MAY AVERAGE 0%, 6%, OR
12% OVER A PERIOD OF YEARS, IF THEY HAVE FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS THE ACCUMULATION VALUE, DEATH BENEFIT AND
SURRENDER VALUE WOULD BE DIFFERENT FROM THOSE SHOWN ABOVE.
83
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY
ONE MOODY PLAZA
GALVESTON, TEXAS 77550-7999
SURVIVORSHIP VARIABLE UNIVERSAL LIFE
DEATH BENEFIT OPTION B; SPECIFIED AMOUNT - $100,000
MALE ISSUE AGE 45 FEMALE ISSUE AGE 45
TOBACCO NON-USER
GUARANTEED SCHEDULE OF CHARGES
PLANNED PERIODIC PREMIUM OF $810 PAID AT THE BEGINNING OF EACH POLICY YEAR
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS
ANNUAL INVESTMENT RATES OF RETURN OF
- ------------------------------------------------------------------------------------------------------------------------------------
0% 6% 12%
- ------------------------------------------------------------------------------------------------------------------------------------
END OF PREMIUMS
POLICY ACCUMULATED ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH ACCUMULATION SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 851 584 0 100,584 624 0 100,624 665 0 100,665
2 1,701 1,156 0 101,156 1,273 0 101,273 1,396 0 101,396
3 2,552 1,715 0 101,715 1,947 0 101,947 2,198 0 102,198
4 3,402 2,262 0 102,262 2,647 75 102,647 3,080 508 103,080
5 4,253 2,796 268 102,796 3,372 844 103,372 4,048 1,520 104,048
6 5,103 3,317 834 103,317 4,123 1,640 104,123 5,109 2,626 105,109
7 5,954 3,822 1,385 103,822 4,901 2,464 104,901 6,273 3,836 106,273
8 6,804 4,312 1,922 104,312 5,704 3,314 105,704 7,549 5,159 107,549
9 7,655 4,784 2,442 104,784 6,533 4,191 106,533 8,946 6,604 108,946
10 8,505 5,238 2,946 105,238 7,386 5,094 107,386 10,474 8,182 110,474
15 12,758 7,145 5,119 107,145 11,956 9,930 111,956 20,511 18,485 120,511
20 17,010 8,080 8,080 108,080 16,670 16,670 116,670 35,819 35,819 135,819
25 21,263 7,028 7,028 107,028 20,500 20,500 120,500 59,042 59,042 159,042
30 25,515 1,361 1,361 101,361 19,974 19,974 119,974 91,432 91,432 191,432
Age 65 17,010 8,080 8,080 108,080 16,670 16,670 116,670 35,819 35,819 135,819
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* GUARANTEED COVERAGE PREMIUM $810
Until age 100, under Death Benefit Option B the Death Benefit is the current
Specified Amount plus the Accumulation Value of the Policy or, if greater, the
applicable corridor percentage of Accumulation Value at the end of the Valuation
Period that includes the date of the Insured's death. Corridor percentages are
specified in the Policy. The Death Benefit at age 100 and thereafter equals the
Accumulation Value.
American National agrees to keep the Policy in force for the period stipulated
under the Guaranteed Coverage Benefit so long as the Guaranteed Coverage Premium
is paid and other Policy provisions are met even though, in certain instances,
the minimum payment allowed by the Policy will not, after the payment of Monthly
Deductions, generate positive Surrender Value at one or more points during such
period.
Accumulation Value, Surrender Value and Death Benefit may be different if
premiums are paid with a different frequency or timing or if of different
amounts. Illustration assumes no Policy loan or partial surrender has been
made. Zero values in the Death Benefit column indicate Policy lapse in the
absence of sufficient additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RATES OF RETURN NOR A SUGGESTION THAT SUCH RESULTS WILL BE ACHIEVED. ACTUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY A POLICYOWNER,
DIFFERENT RETURNS OF ELIGIBLE PORTFOLIOS, PREVAILING INTEREST RATES AND RATES OF
INFLATION. NO REPRESENTATIONS CAN BE MADE BY AMERICAN NATIONAL THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME. ALTHOUGH THE ACTUAL RATES OF RETURN MAY AVERAGE 0%, 6%, OR
12% OVER A PERIOD OF YEARS, IF THEY HAVE FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS THE ACCUMULATION VALUE, DEATH BENEFIT AND
SURRENDER VALUE WOULD BE DIFFERENT FROM THOSE SHOWN ABOVE.
84
