WM STRATEGIC ASSET MANAGER
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
OFFERED BY
AMERICAN GENERAL LIFE INSURANCE COMPANY
ANNUITY ADMINISTRATION DEPARTMENT
P.O. BOX 1401, HOUSTON, TEXAS 77251-1401
1-800-247-6584 713/831-3505
American General Life Insurance Company ("AGL") is offering the flexible
payment deferred individual annuity contracts (the "Contracts") described in
this Prospectus.
You may use AGL's Separate Account D for a variable investment return under
the Contracts based on one or more of the following mutual fund series of The
WM Variable Trust (the "Trust"): the Strategic Growth Portfolio, the
Conservative Growth Portfolio, the Balanced Portfolio, the Flexible Income
Portfolio, and the Income Portfolio (the "Portfolios"), and the Money Market
Fund, the Short Term High Quality Bond Fund, the Bond & Stock Fund, the
Northwest Fund, the U.S. Government Securities Fund, the Income Fund, the
Growth & Income Fund, the Growth Fund, the Emerging Growth Fund, and the
International Growth Fund (the "Funds"). The Portfolios and the Funds together
are referred to as the "Series."
You may also use AGL's guaranteed interest accumulation option. This option
has a one-year guarantee period with a guaranteed interest rate.
This Prospectus is designed to provide information about the Contracts that
you ought to know before investing. Please read it carefully and keep it for
future reference. Information about certain aspects of the Contracts, in
addition to that found in this Prospectus, has been filed with the Securities
and Exchange Commission in the Statement of Additional Information (the
"Statement"). The Statement, dated April 1, 1998, is incorporated by reference
into this Prospectus. The "Table of Contents" of the Statement appears at page
41 of this Prospectus. You may obtain a free copy of the Statement upon
written or oral request to AGL's Annuity Administration Department in our Home
Office, which is located at 2727-A Allen Parkway, Houston, Texas 77019-2191.
The mailing address and telephone numbers are set forth above.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE RELATED
STATEMENT (OR ANY SALES LITERATURE APPROVED BY AGL) IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THE
CONTRACTS ARE NOT AVAILABLE IN ALL STATES AND THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER WOULD
BE UNLAWFUL THEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF
THE WM VARIABLE TRUST APPLICABLE TO THE FUNDS AND THE PORTFOLIOS.
Prospectus dated April 1, 1998
<PAGE>
<TABLE>
CONTENTS
<S> <C>
Glossary................................................................. 4
Fee Table................................................................ 7
Synopsis of Contract Provisions.......................................... 11
Minimum Investment Requirements........................................ 11
Purchase Payment Accumulation.......................................... 11
Fixed and Variable Annuity Payments.................................... 11
Changes in Allocations Among Divisions and Guarantee Periods........... 12
Surrenders, Withdrawals and Cancellations.............................. 12
Death Proceeds......................................................... 12
Limitations Imposed by Retirement Plans and Employers.................. 13
Communications to Us................................................... 13
Financial and Performance Information.................................. 13
Selected Accumulation Unit Data.......................................... 14
AGL...................................................................... 15
Separate Account D....................................................... 15
The Series............................................................... 15
Voting Privileges...................................................... 17
The Fixed Account........................................................ 17
Contract Issuance and Purchase Payments.................................. 19
Owner Account Value...................................................... 20
Variable Account Value................................................. 20
Fixed Account Value.................................................... 20
Transfer, Surrender and Partial Withdrawal of Owner Account Value........ 21
Transfers.............................................................. 21
Automatic Rebalancing.................................................. 22
Surrenders and Partial Withdrawals..................................... 22
Annuity Period and Annuity Payment Options............................... 23
Annuity Commencement Date.............................................. 23
Application of Owner Account Value..................................... 23
Fixed and Variable Annuity Payments.................................... 24
Annuity Payment Options................................................ 24
Transfers.............................................................. 26
Death Proceeds........................................................... 27
Death Proceeds Prior to the Annuity Commencement Date.................. 27
Death Proceeds After the Annuity Commencement Date..................... 28
Proof of Death......................................................... 28
Charges Under the Contracts.............................................. 28
Premium Taxes.......................................................... 28
Surrender Charge....................................................... 29
Transfer Charges....................................................... 30
Annual Contract Fee.................................................... 30
Charge to Separate Account D........................................... 31
Miscellaneous.......................................................... 31
Systematic Withdrawal Plan............................................. 31
One-Time Reinstatement Privilege....................................... 31
2
<PAGE>
Reduction in Surrender Charges or Administrative Charges............... 32
Long-Term Care and Terminal Illness...................................... 32
Long-Term Care......................................................... 32
Terminal Illness....................................................... 32
Other Aspects of the Contracts........................................... 32
Owners, Annuitants and Beneficiaries; Assignments...................... 32
Reports................................................................ 33
Rights Reserved by Us.................................................. 33
Payment and Deferment.................................................. 33
Federal Income Tax Matters............................................... 34
General................................................................ 34
Non-Qualified Contracts................................................ 34
Individual Retirement Annuities ("IRAs")............................... 36
Roth IRAs.............................................................. 37
Simplified Employee Pension Plans...................................... 37
Simple Retirement Accounts............................................. 38
Other Qualified Plans.................................................. 38
Private Employer Unfunded Deferred Compensation Plans.................. 39
Federal Income Tax Withholding and Reporting......................... 39
Taxes Payable by AGL and Separate Account D............................ 39
Distribution Arrangements................................................ 40
Services Agreement....................................................... 40
Legal Matters............................................................ 40
Other Information on File................................................ 40
Contents of Statement of Additional Information.......................... 41
</TABLE>
3
<PAGE>
GLOSSARY
WE, OUR AND US - American General Life Insurance Company ("AGL").
YOU AND YOUR - a reader of this Prospectus who is contemplating making
purchase payments or taking any other action in connection with a Contract.
This would generally be the Owner.
ACCOUNT VALUE - the sum of your Fixed Account Value and Variable Account
Value.
ACCUMULATION UNIT - a measuring unit used in calculating your interest in a
Division of Separate Account D prior to the Annuity Commencement Date.
ANNUITANT - the person named as such in the Contract and on whose life annuity
payments may be based.
ANNUITY COMMENCEMENT DATE - the date on which we begin making payments under
an Annuity Payment Option, unless a lump-sum distribution is elected instead.
ANNUITY PAYMENT OPTION - one of the several forms in which you can request us
to make annuity payments.
ANNUITY PERIOD - the period during which we make annuity payments under an
Annuity Payment Option.
ANNUITY UNIT - a measuring unit used in calculating the amount of Variable
Annuity Payments.
BENEFICIARY - the person that you designate to receive any proceeds due under
a Contract following the death of an Owner or an Annuitant.
CODE - the Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT - a person that you designate under a Non-Qualified
Contract to become the Annuitant if the Annuitant dies before the Annuity
Commencement Date and the Contingent Annuitant survives the Annuitant.
CONTINGENT BENEFICIARY - a person that you designate to receive any proceeds
due under a Contract following the death of an Owner or an Annuitant, if the
Beneficiary has died but the Contingent Beneficiary survives at the time such
proceeds become payable.
CONTRACT - an individual annuity Contract offered by this Prospectus.
CONTRACT ANNIVERSARY - each anniversary of the date of issue of the Contract.
CONTRACT YEAR - each year beginning with the date of issue of the Contract.
DIVISION - one of the several different investment options into which Separate
Account D is divided.
FIXED ACCOUNT - the name of the investment alternative under which purchase
payments are allocated to AGL's General Account.
4
<PAGE>
FIXED ACCOUNT VALUE - the amount of your Account Value which is in the Fixed
Account.
FIXED ANNUITY PAYMENTS - annuity payments that are fixed in amount and do not
vary with the investment experience of any Division of Separate Account D.
GENERAL ACCOUNT - all assets of AGL other than those in Separate Account D or
any other legally-segregated separate account established by AGL.
GUARANTEED INTEREST RATE - the rate of interest we credit during any Guarantee
Period, on an effective annual basis.
GUARANTEE PERIOD - the period for which a Guaranteed Interest Rate is
credited.
HOME OFFICE - our office at the following addresses and phone numbers:
American General Life Insurance Company, Annuity Administration Department,
2727-A Allen Parkway, Houston, Texas 77019-2191; mailing address - P.O. Box
1401, Houston, Texas 77251-1401; 1-800-247-6584 or 713-831-3505.
INVESTMENT COMPANY ACT OF 1940, AS AMENDED ("1940 ACT") - a federal law
governing the operations of investment companies such as the Trust and
Separate Account D.
NON-QUALIFIED - not eligible for the special federal income tax treatment
applicable in connection with retirement plans pursuant to Sections 401, 403,
408, or 408A of the Code.
OWNER - the holder of record of a Contract, except that the employer or
trustee may be the Owner of the Contract in connection with a retirement plan.
QUALIFIED - eligible for the special federal income tax treatment applicable
in connection with retirement plans pursuant to sections 401, 403, 408, or
408A of the Code.
SEPARATE ACCOUNT D - the segregated asset account referred to as American
General Life Insurance Company Separate Account D established to receive and
invest purchase payments allocated to the Divisions under the Contracts.
SERIES - An individual investment fund or portfolio available for investment
under the Contracts. Currently, the Series available under the Contracts are
the Funds and the Portfolios of The WM Variable Trust.
SURRENDER CHARGE - a charge for sales expenses that may be assessed upon
surrenders of and payments of certain other amounts from a Contract.
VALUATION DATE - all days on which we are open for business except, with
respect to any Division, days on which the related Series does not value its
shares.
VALUATION PERIOD - the period that starts at the close of regular trading on
the New York Stock Exchange on a Valuation Date and ends at the close of
regular trading on the exchange on the next succeeding Valuation Date.
5
<PAGE>
VARIABLE ANNUITY PAYMENTS - annuity payments that vary in amount based on the
investment experience of one or more of the Divisions of Separate Account D.
VARIABLE ACCOUNT VALUE - the amount of your Account Value that is in Separate
Account D.
WRITTEN - signed, dated, in form and substance satisfactory to us and received
at our Home Office. See "Synopsis of Contract Provisions - Communications to
Us." You must use special forms provided by us or your sales representative to
authorize telephone transfers, elect an Annuity Option or exercise your
one-time reinstatement privilege.
6
<PAGE>
FEE TABLE
The purpose of this Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly pursuant
to your Contract. The Fee Table reflects all expenses of Separate Account D,
the Portfolios and the Funds, but does not include state premium taxes or
similar assessments that may be imposed by your state. For a more complete
description of the expenses of Separate Account D, see "Charges Under the
Contracts." For a more complete description of the expenses of the Portfolios
and the Funds, see the prospectus for the Trust.
<TABLE>
PARTICIPANT TRANSACTION CHARGES
<S> <C>
Front-End Sales Charge Imposed on Purchases ..................... 0%
Maximum Surrender Charge1........................................ 7.0%
(computed as a percentage of purchase payments)
Transfer Fee..................................................... $ 0 (2)
ANNUAL CONTRACT FEE (3)................................................. $35
SEPARATE ACCOUNT D ANNUAL EXPENSES (as a percentage of average daily net
asset value)
Mortality and Expense Risk Charge................................ 1.25%
Administrative Expense Charge.................................... .15%
Total Separate Account D Annual Expenses....................... 1.40%
<FN>
(1) This charge does not apply or is reduced under certain circumstances.
See "Surrender Charge"
(2) This charge is $25 after the twelfth transfer (unless such transfer is
associated with the dollar cost averaging program, special automatic
transfer plans, or Automatic Rebalancing; see "Transfers" and "Automatic
Rebalancing") during each Contract Year prior to the Annuity
Commencement Date.
(3) This charge is waived for cumulative premiums of $50,000 or more and is
not imposed during the Annuity Period. See "Annual Contract Fee."
</FN>
</TABLE>
7
<PAGE>
PORTFOLIO AND UNDERLYING FUND EXPENSES
ANNUAL OPERATING EXPENSES OF THE PORTFOLIOS AND OF THE FUNDS
(as percentage of average net assets)
<TABLE>
<CAPTION>
Total Operating
Portfolios Management Fees Other Expenses Expenses (1)
---------- --------------- -------------- ---------------
<S> <C> <C> <C>
Strategic Growth Portfolio 0.10% 0.25% 0.35%
Conservative Growth Portfolio 0.10% 0.25% 0.35%
Balanced Portfolio 0.10% 0.25% 0.35%
Flexible Income Portfolio 0.10% 0.24% 0.34%
Income Portfolio (2) 0.10% 0.25% 0.35%
</TABLE>
<TABLE>
<CAPTION>
Total Operating
Other Expenses Expenses After
After Fee Waivers Fee Waivers and
Funds Management Fees and Credits (3,4) Credits (3,4)
----- --------------- -------------- ---------------
<S> <C> <C> <C>
Money Market Fund 0.40% 0.35% 0.75%
Short Term High Quality Bond Fund 0.50% 0.50% 1.00%
Bond & Stock Fund 0.63% 0.87% 1.50%
Northwest Fund 0.63% 0.87% 1.50%
U.S. Government Securities Fund 0.60% 0.30% 0.90%
Income Fund 0.65% 0.31% 0.96%
Growth & Income Fund 0.80% 0.28% 1.25%
Growth Fund 0.89% 0.29% 1.18%
Emerging Growth Fund 0.88% 0.32% 1.20%
International Growth Fund 0.93% 0.42% 1.35%
<FN>
(1) The Total Operating Expenses of the Portfolios, combined with the Total
Operating Expenses of the Underlying Funds, is set out under "Annual
Operating Expenses of the Portfolios and Underlying Funds Combined,"
immediately below.
(2) Because the Income Portfolio has no operating history, Other Expenses
and Total Operating Expenses have been estimated for the 1997 fiscal
year.
(3) The Other Expenses for the Money Market Fund, Short Term High Quality
Bond Fund, U.S. Government Securities Funds, Income Fund, Growth &
Income Fund, Growth Fund, Emerging Growth Fund, and International Growth
Fund are based on 1997 operating experience, which have been restated to
reflect current expenses and the modification of certain voluntary fee
waivers and credits allowed by the custodian. Absent fee waivers and
credits allowed by the custodian, the total annual operating expenses
for the Money Market Fund, Short Term High Quality Bond Fund, U.S.
Government Securities Fund, Income Fund, Growth & Income Fund , Growth
Fund, Emerging Growth Fund, and International Growth Fund for the 1997
fiscal year would have been 0.85%, 1.03%, 0.91%, 0.96%, 1.08%, 1.19%,
1.21% and 1.36% respectively.
(4) Because the Bond & Stock Fund and the Northwest Fund have no operating
history, Other Expenses and Total Operating Expenses have been estimated
for the 1997 fiscal year.
</FN>
</TABLE>
8
<PAGE>
Annual Operating Expenses of the Portfolios and Underlying Funds Combined
Because each Portfolio will invest in Funds of the Trust, in the WM High Yield
Fund (a series of WM Trust I) and in the WM Prime Income Fund, you will
indirectly bear certain expenses associated with those Funds. Set out below
are estimated combined annual expenses for each Portfolio and the Funds in
which that Portfolio may invest. The estimates are based upon estimated
expenses of each Portfolio for the current year and actual expenses of the
underlying Funds for the fiscal year ended December 31, 1997, which have been
restated to reflect current expenses and the modifications of certain
voluntary waivers and credits allowed by the custodian. (Because the Bond &
Stock Fund and the Northwest Fund have no operating history, expenses have
been estimated for the 1997 fiscal year.) Please refer to the Trust prospectus
for more details.
The estimates assume a constant allocation by each Portfolio (other than the
Income Portfolio) of its assets among the Funds identical to its actual
allocation at December 31, 1997. Estimates for the Income Portfolio reflect
the range of combined expenses assuming allocation by the Income Portfolio of
its assets among the Funds in a manner that would, within its permissible
asset allocation parameters, result in the lowest and highest combined
expenses.
<TABLE>
<CAPTION>
Portfolios Combined Total Operating Expenses (5)
---------- -------------------------------------
<S> <C>
Strategic Growth Portfolio 1.48%
Conservative Growth Portfolio 1.45%
Balanced Portfolio 1.36%
Flexible Income Portfolio 1.25%
Income Portfolio 1.16% to 1.35%
<FN>
(5) Absent underlying fund fee waivers and credits allowed by the custodian,
the combined annual expenses for each Portfolio are estimated to be:
Strategic Growth Portfolio, 1.50%; Conservative Growth Portfolio, 1.47%;
Balanced Portfolio, 1.40%; Flexible Income Portfolio, 1.30%; and Income
Portfolio, 1.27% to 1.38%.
</FN>
</TABLE>
9
<PAGE>
EXAMPLES
If you surrender your Contract (or if you commence an Annuity Payment Option
under circumstances where a Surrender Charge is payable (1) at the end of the
applicable time period, you would pay the following expenses (2) on a $1,000
investment in each of the Series below, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS(3) 10 YEARS(3)
------ ------- ------- --------
<S> <C> <C> <C> <C>
Strategic Growth Portfolio $93 $137 N/A N/A
ConservativeGrowth Portfolio $93 $136 N/A N/A
Balanced Portfolio $92 $133 N/A N/A
Flexible Income Portfolio $91 $130 N/A N/A
Income Portfolio $91 $130 N/A N/A
Money Market Fund $86 $115 $156 $256
Short Term High Quality Bond Fund $88 $122 $168 $281
Bond & Stock Fund $93 $137 N/A N/A
Northwest Fund $93 $137 N/A N/A
U.S. Government Securities Fund $87 $119 $163 $271
Income Fund $88 $121 $166 $277
Growth & Income Fund $89 $125 $172 $289
Growth Fund $90 $128 $177 $299
Emerging Growth Fund $90 $128 $178 $301
International Growth Fund $92 $133 $186 $316
</TABLE>
If you do NOT surrender your Contract (or if you commence an Annuity Payment
Option under circumstances where a Surrender Charge is payable)1, you would
pay the following expenses2 on a $1,000 investment in each of the Series
below, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS(3) 10 YEARS(3)
------ ------- ------- --------
<S> <C> <C> <C> <C>
StrategicGrowth Portfolio $30 $92 N/A N/A
ConservativeGrowth Portfolio $30 $91 N/A N/A
Balanced Portfolio $29 $88 N/A N/A
Flexible Income Portfolio $28 $85 N/A N/A
Income Portfolio $28 $85 N/A N/A
Money Market Fund $23 $70 $120 $256
Short Term High Quality Bond Fund $25 $77 $132 $281
Bond & Stock Fund $30 $92 N/A N/A
Northwest Fund $30 $92 N/A N/A
U.S. Government Securities Fund $24 $74 $127 $271
Income Fund $25 $76 $130 $277
Growth & Income Fund $26 $80 $136 $289
Growth Fund $27 $83 $141 $299
Emerging Growth Fund $27 $83 $142 $301
International Growth Fund $29 $88 $150 $316
<FN>
(1) For a description of the circumstances under which a Surrender Charge
may be payable under an Annuity Payment Option, see "Surrender Charge."
10
<PAGE>
(2) The Examples use the estimated combined annual expenses for the
Portfolios (except for the Income Portfolio, for which the midpoint is
used) , which invest in underlying Funds,and use estimated expenses for
the Funds, which do not invest in other Funds of the Trust.
(3) "N/A" indicates that SEC rules require that the Portfolios, the Bond &
Stock Fund and the Northwest Fund complete the Examples for only the one
and three year periods.
</FN>
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. IN
ADDITION, THE ASSUMED 5% ANNUAL RATE OF RETURN IS NOT AN ESTIMATE OR A
GUARANTEE OF FUTURE INVESTMENT PERFORMANCE.
SYNOPSIS OF CONTRACT PROVISIONS
This synopsis should be read together with the other information set forth in
this Prospectus. Variations due to requirements particular to your state are
described in supplements which are attached to this Prospectus, or in
endorsements to your Contract, as appropriate.
The Contracts are designed to provide retirement benefits through the
accumulation of purchase payments on a fixed or variable basis, and by the
application of such accumulations to provide Fixed or Variable Annuity
Payments.
MINIMUM INVESTMENT REQUIREMENTS
Your initial purchase payment must be at least $5,000. The amount of any
subsequent purchase payment that you make must be at least $100. We may also
transfer funds from a Division (other than theMoney Market Division) or from
the Guarantee Period under your Contract without charge to the Money Market
Division if the Account Value of that Division or Guarantee Period falls below
$500. If your Account Value falls below $500, we may cancel your interest in
the Contract and treat it as a full surrender. See "Contract Issuance and
Purchase Payments."
PURCHASE PAYMENT ACCUMULATION
Purchase payments will be accumulated on a variable or fixed basis until the
Annuity Commencement Date. For variable accumulation, you may allocate part or
all of your Account Value to one or more of the 15 available Divisions of
Separate Account D. Each such Division invests solely in shares of one of 15
corresponding Series of the Trust. See "The Series." As the value of the
investments in a Series's shares increases or decreases, the value of
accumulated purchase payments allocated to the corresponding Division
increases or decreases, subject to applicable charges and deductions. See
"Variable Account Value."
For fixed accumulation, you may allocate part or all of your Account Value to
the Guarantee Period currently available in our Fixed Account. While allocated
to a Guarantee Period, the value of accumulated purchase payments increases at
the Guaranteed Interest Rate applicable to that Guarantee Period. See "The
Fixed Account."
FIXED AND VARIABLE ANNUITY PAYMENTS
You may elect to receive Fixed or Variable Annuity Payments, or a combination
thereof, commencing
11
<PAGE>
on the Annuity Commencement Date. Fixed Annuity Payments are periodic payments
from AGL, the amount of which is fixed and guaranteed by AGL. The amount of
the payments will depend on the Annuity Payment Option chosen, the age and, in
some cases, sex of the Annuitant, and the total amount of Account Value
applied to the fixed Annuity Payment Option.
Variable Annuity Payments are similar to Fixed Annuity Payments, except that
the amount of each periodic payment from AGL will vary reflecting the net
investment return of the Division or Divisions chosen in connection with a
variable Annuity Payment Option. If the net investment return for a given
month exceeds an annual rate of 3.5%, the monthly payment will be greater than
the previous payment. If the net investment return for a month is less than
3.5%, the monthly payment will be less than the previous payment. See "Annuity
Period and Annuity Payment Options."
CHANGES IN ALLOCATIONS AMONG DIVISIONS AND GUARANTEE PERIODS
Prior to the Annuity Commencement Date, you may modify your election with
respect to the allocation of future purchase payments to each of the various
Divisions and the Guarantee Period, without charge.
In addition, you may reallocate your Account Value among the Divisions and
Guarantee Period prior to the Annuity Commencement Date. Transfers out of the
Guarantee Period, however, are subject to limitations as to amount. For these
and other terms and conditions of transfer, see "Transfer, Surrender and
Partial Withdrawal of Owner Account Value - Transfers."
After the Annuity Commencement Date, you may make transfers among the
Divisions or to a fixed Annuity Payment Option, but you may not make transfers
from a fixed Annuity Payment Option. See "Annuity Period and Annuity Payment
Options - Transfers."
SURRENDERS, WITHDRAWALS AND CANCELLATIONS
You may make a total surrender of or partial withdrawal from your Contract at
any time prior to the Annuity Commencement Date, by Written request to us. A
Surrender Charge may be assessed and some surrenders and withdrawals may
subject you to tax penalties. See "Surrenders and Partial Withdrawals."
You may cancel your Contract by delivering it or mailing it with a Written
cancellation request to our Home Office or to the sales representative through
whom it was purchased, before the close of business on the tenth day after you
receive the Contract. (In some cases, the Contract may provide for a 20 or 30-
day, rather than a ten-day, period). If the foregoing items are sent by mail,
properly addressed and postage prepaid, they will be deemed to be received by
us on the date actually received.
We will refund to you the Owner Account Value plus any premium taxes and
Annual Contract Fee that have been deducted. In states where the law so
requires, however, we will refund the greater of that amount or the amount of
your purchase payments, or, if the law permits, the amount of your purchase
payments.
DEATH PROCEEDS
In the event that the Annuitant or Owner dies prior to the Annuity
Commencement Date, a benefit may be payable to the Beneficiary. See "Death
Proceeds Prior to the Annuity Commencement Date."
12
<PAGE>
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
Certain rights you would otherwise have under a Contract may be limited by the
terms of any applicable employee benefit plan. These limitations may restrict
such things as total and partial surrenders, the amount or timing of purchase
payments that may be made, when annuity payments must start and the type of
annuity options that may be selected. Accordingly, you should familiarize
yourself with these and all other aspects of any retirement plan in connection
with which a Contract is used. We are not responsible for monitoring or
assuring compliance with the provisions of any retirement plan.
COMMUNICATIONS TO US
All communications to us should include your Contract number, your name and,
if different, the Annuitant's name. Communications may be directed to the
addresses and phone numbers on the cover of this Prospectus.
Except as otherwise specified in this Prospectus, purchase payments or other
communications are deemed received at our Home Office on the actual date of
receipt there in proper form unless received (1) after the close of regular
trading on The New York Stock Exchange or (2) on a date that is not a
Valuation Date. In either of these two cases, the date of receipt will be
deemed to be the next Valuation Date.
FINANCIAL AND PERFORMANCE INFORMATION
Financial statements of AGL and Separate Account D, including information
about the Divisions that invest in the Funds and the Portfolios of the Trust,
are included in the Statement of Additional Information. See "Contents of
Statement of Additional Information."
Advertising and other sales materials may include yield and total return
figures for the Divisions of Separate Account D. These figures are based on
historical results and are not intended to indicate future performance.
"Yield" is the return generated by an investment in a Division over a period
of time specified in the advertisement, excluding capital changes in the
corresponding Fund or Portfolio investments. This rate of return is assumed to
be earned over a full year and is shown as a percentage of the investment.
"Effective yield" may also be quoted for the Money Market Fund Division.
"Effective yield" is higher than "yield" because it assumes weekly compounding
over the course of the year.
Total return is the total change in value of an investment in the Division
over a period of time specified in the advertisement. The rate of "average
annual total return" shown would produce that change in value over the
specified period, if compounded annually. The rate of "aggregate total return"
is the cumulative amount of such change over the specified period, expressed
as a percentage of the initial investment.
Yield figures do not reflect the Surrender Charge, and yield and total return
figures do not reflect premium tax charges. Such total return figures may be
used together with total return figures that also exclude the Surrender
Charge. The exclusion of charges makes the performance shown more favorable. A
Fund's adviser may waive or reimburse certain fees or charges, which will
enhance the related Division's performance results. Additional information
concerning the Divisions' performance figures appears in the Statement.
13
<PAGE>
AGL may also advertise or report to Owners its ratings as an insurance company
by the A. M. Best Company. Each year, A. M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings.
These ratings reflect their current opinion of the relative financial strength
and operating performance of an insurance company in comparison to the norms
of the life/health industry. Best's Ratings range from A++ to F. An A++ rating
means, in the opinion of A. M. Best, that the insurer has demonstrated the
strongest ability to meet its respective policyholder and other contractual
obligations. A. M. Best publishes Best's Insurance Reports, Life-Health
Edition. The 1997 Edition reaffirmed AGL's rating of A++ (Superior), as of
July 1997, for financial position and operating performance.
In addition, the claims-paying ability of AGL as measured by the Standard &
Poor's Corporation may be referred to in advertisements or in reports to
Owners. A Standard & Poor's insurance claims-paying ability rating is an
assessment of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Standard
& Poor's ratings range from AAA to D. The Company's claims-paying ability is
A++ (Excellent), reaffirmed as of June 1997.
AGL may additionally advertise its rating from Duff & Phelps Credit Rating Co.
A Duff & Phelps rating is an assessment of a company's insurance claims paying
ability. Duff & Phelps ratings range from AAA to CCC. Duff & Phelps rates the
claims-paying ability of AGL as AAA, the highest level, reaffirmed as of
August 1997.
The ratings from A. M. Best, Standard & Poors, and Duff & Phelps reflect the
claims paying ability and financial strength of AGL. THEY ARE NOT A RATING OF
INVESTMENT PERFORMANCE THAT PURCHASERS OF INSURANCE PRODUCTS HAVE EXPERIENCED
OR ARE LIKELY TO EXPERIENCE IN THE FUTURE.
SELECTED ACCUMULATION UNIT DATA
The table below shows the Accumulation Unit value for the below-listed
Divisions of Separate Account D on the date purchase payments were first
allocated to each Division, as well as the Accumulation Unit value and number
of Accumulation Units outstanding for the indicated date thereafter. Nine of
the Divisions available under the Contracts were not previously available. No
information is reported for those Divisions.
<TABLE>
<CAPTION>
Accumulation
Unit Values Accumulation Accumulation
(Beginning of Unit Values Units outstanding
Division of Period) (1) at 12/31/97 at 12/31/97
-------- -------------- ------------- -----------------
<S> <C> <C> <C>
Strategic Growth Portfolio $ 5.00 $ 5.306927 111,494.836
Conservative Growth Portfolio $ 5.00 $ 5.202749 264,038.616
Balanced Portfolio $ 5.00 $ 5.192835 453,339.806
Flexible Income Portfolio $ 5.00 $ 5.092810 19,655.774
Income Portfolio $ 5.00 $ 5.0475072 -0-
Money Market Fund $ 5.00 $ 5.081131 17,424.448
<FN>
(1) Purchase payments were first allocated to the Strategic Growth Portfolio
Division on June 3, 1997; to the Conservative Growth Portfolio Division
on June 3, 1997; to the Balanced Portfolio Division on June 3, 1997; to
the Flexible Income Portfolio Division
14
<PAGE>
on September 9, 1997; to the Income Portfolio Division on October 22,
1997; and to the Money Market Fund Division on July 16, 1997.
(2) The unit value for the Income Portfolio Division has not changed since
November 4, 1997, the date on which all remaining Accumulation Units
were withdrawn.
</FN>
</TABLE>
AGL
AGL is a stock life insurance company organized under the laws of the State of
Texas, which is a successor in interest to a company originally organized
under the laws of the State of Delaware in 1917. AGL is an indirect,
wholly-owned subsidiary of American General Corporation (formerly American
General Insurance Company), a diversified financial services holding company
engaged primarily in the insurance business. The commitments under the
Contracts are AGL's, and American General Corporation has no legal obligation
to back those commitments.
SEPARATE ACCOUNT D
Separate Account D was originally established on November 19, 1973 and
consists of 58 Divisions, 15 of which are available under the Contracts
offered by this Prospectus. Separate Account D is registered with the
Securities and Exchange Commission as a unit investment trust under the 1940
Act.
Each Division of Separate Account D is part of AGL's general business and the
assets of Separate Account D belong to AGL. Under Texas law and the terms of
the Contracts, the assets of Separate Account D will not be chargeable with
liabilities arising out of any other business which AGL may conduct, but will
be held exclusively to meet AGL's obligations under variable annuity
contracts. Furthermore, the income, gains, and losses, whether or not
realized, from assets allocated to Separate Account D are, in accordance with
the Contracts, credited to or charged against the Separate Account without
regard to other income, gains, or losses of AGL.
THE SERIES
The variable benefits under the Contracts are funded by 15 Divisions of the
Separate Account. These Divisions invest in shares of 15 Series (consisting of
the five Portfolios and the 10 Funds) of the Trust. Series shares are sold,
without sales charges, exclusively to Separate Account D. In the future,
however, the Trust may offer its shares to separate accounts funding variable
annuities of insurance companies affiliated or unaffiliated with AGL and to
separate accounts which fund variable life insurance or other variable funding
arrangements. We do not foresee any disadvantage to Owners of Contracts
arising out of these arrangements. Nevertheless, differences in treatment
under tax and other laws, as well as other considerations, could cause the
interests of various owners to conflict. For example, violation of the federal
tax laws by one separate account investing in the Trust could cause the
contracts funded through another separate account to lose their tax-deferred
status, unless remedial action were taken. If a material irreconcilable
conflict arises between separate accounts, a separate account may be required
to withdraw its participation in the Trust. If it becomes necessary for any
separate account to replace shares of the Trust with another investment, the
Trust may have to liquidate portfolio securities on a disadvantageous basis.
At the same time, the Trust's Board of Trustees and we will monitor events for
any material irreconcilable conflicts that may possibly arise and determine
what action, if any, should be taken to remedy or eliminate the conflict.
15
<PAGE>
Any dividends or capital gain distributions attributable to Contracts are
automatically reinvested in shares of the Series from which they are received
at the Series' net asset value on the date payable. Such dividends and
distributions will have the effect of reducing the net asset value of each
share of the corresponding Series and increasing, by an equivalent value, the
number of shares outstanding of the Series. However, the value of your
interest in the corresponding Division will not change as a result of any such
dividends and distributions.
The investment adviser to the Funds and the Portfolios is WM Advisors, Inc. WM
Advisors, Inc. is not affiliated with AGL.
The names of the Series in which each available Division invests are as
follows:
o Strategic Growth Portfolio
o Conservative Growth Portfolio
o Balanced Portfolio
o Flexible Income Portfolio
o Income Portfolio
o Money Market Fund
o Short Term High Quality Bond Fund
o Bond & Stock Fund
o Northwest Fund
o U.S. Government Securities Fund
o Income Fund
o Growth & Income Fund
o Growth Fund
o Emerging Growth Fund
o International Growth Fund
Before selecting any Division, you should carefully read the Trust prospectus,
which is attached at the end of this Prospectus. The Trust prospectus includes
detailed information about the Series in which each Division invests,
including investment objectives and policies, charges and expenses. The Trust
prospectus also includes detailed information about the Trust's allocation of
the assets of each Portfolio among the other Series of the Trust (except for
the Bond & Stock Fund), the WM High Yield Fund, and the WM Prime Income Fund
(the "Underlying Funds"), and about the predetermined investment limits and
the diversification requirements of the Code that govern this allocation
("allocation limitations"). Each Portfolio will invest in different
combinations of the Underlying Funds. AGL understands that the effect of the
Portfolios' allocation limitations is that each Portfolio will allocate its
assets to at least five of the Underlying Funds. AGL also understands that the
effect of the Portfolios' voting procedures is that owners will have the
privilege of voting Portfolio shares and not Underlying Fund shares. See
"Voting Privileges." Please refer to the Trust prospectus for more details.
You may obtain additional copies of such a prospectus by contacting AGL's
Annuity Administration Department at the addresses and phone number set forth
on the cover page of this Prospectus. When making your request, please specify
the Series in which you are interested.
Lower rated securities such as those in which the Bond & Stock, Growth &
Income, Growth and Emerging Growth Funds may each invest up to 35% of their
total assets are subject to greater market fluctuations and risk of loss of
income and principal than investments in lower yielding fixed-income
securities. Potential investors in these
16
<PAGE>
Divisions should carefully read the prospectus and related statement of
additional information that pertains to these Funds and consider their ability
to assume the risks of making an investment in these Divisions.
VOTING PRIVILEGES
The Owner prior to the Annuity Commencement Date and the Annuitant or other
payee during the Annuity Period will be entitled to give us instructions as to
how Series shares held in the Divisions of Separate Account D attributable to
their Contract should be voted on matters pertaining to that Series at
meetings of shareholders of the Series. Those persons entitled to give voting
instructions and the number of votes for which they may give directions will
be determined as of the record date for a meeting. Separate Account D will
vote all shares of each Series that it holds of record in accordance with
instructions received with respect to all AGL annuity contracts participating
in that Series.
Prior to the Annuity Commencement Date, the number of votes each Owner is
entitled to direct with respect to a particular Series is equal to (a) the
Owner's Variable Account Value attributable to that Series divided by (b) the
net asset value of one share of that Series. In determining the number of
votes, fractional votes will be recognized. While a variable Annuity Payment
Option is in effect, the number of votes an Annuitant or payee is entitled to
direct with respect to a particular Series will be computed in a comparable
manner, based on our liability for future Variable Annuity Payments with
respect to that Annuitant or payee as of the record date. Such liability for
future payments will be calculated on the basis of the mortality assumptions
and the assumed interest rate used in determining the number of Annuity Units
under a Contract and the applicable value of an Annuity Unit on the record
date.
Series shares held by insurance company separate accounts other than Separate
Account D will generally be voted in accordance with instructions of
participants in such other separate accounts.
We believe that the foregoing voting instruction procedures comply with
current federal securities law requirements and interpretations thereof.
However, AGL reserves the right to modify these procedures in any manner
consistent with applicable legal requirements and interpretations as in effect
from time to time.
THE FIXED ACCOUNT
AMOUNTS IN THE FIXED ACCOUNT OR SUPPORTING FIXED ANNUITY PAYMENTS BECOME PART
OF OUR GENERAL ACCOUNT. BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS,
INTERESTS IN THE GENERAL ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, NOR IS THE GENERAL ACCOUNT REGISTERED AS AN INVESTMENT COMPANY
UNDER THE 1940 ACT. WE HAVE BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS THAT
RELATE TO THE FIXED ACCOUNT OR FIXED ANNUITY PAYMENTS. DISCLOSURES REGARDING
THESE MATTERS, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY-APPLICABLE
PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND
COMPLETENESS OF STATEMENTS IN PROSPECTUSES.
THE FIXED ACCOUNT IS NOT AVAILABLE UNDER CONTRACTS PURCHASED IN OREGON.
Our obligations with respect to the Fixed Account are legal obligations of AGL
and are supported by our General Account assets, which also support
obligations incurred by us under other insurance and annuity
17
<PAGE>
contracts. Investments purchased with amounts allocated to the Fixed Account
are the property of AGL, and Owners have no legal rights in such investments.
Account Value that is allocated by the Owner to the Fixed Account earns a
Guaranteed Interest Rate commencing with the date of such allocation. This
Guaranteed Interest Rate continues for the length of the Guarantee Period. At
the end of a Guarantee Period, the Owner's Account Value in that Guarantee
Period, including interest accrued thereon, will be allocated to a new
Guarantee Period of the same length unless AGL has received a Written request
from the Owner to allocate this amount to a different Guarantee Period or
periods or to one or more of the Divisions of Separate Account D. We must
receive this Written request at least three business days prior to the end of
the Guarantee Period. If the Owner has not provided such Written request and
the renewed Guarantee Period would extend beyond the scheduled Annuity
Commencement Date, we will nevertheless contact the Owner regarding the
scheduled Annuity Commencement Date. See "Annuity Payment Options" and
"Surrender Charge." If the Owner does not elect to annuitize on that scheduled
date, the Annuity Commencement Date will be extended to the earlier of (1) the
end of the renewed Guarantee Period or (2) the latest possible Annuity
Commencement Date. See "Annuity Commencement Date." The first day of the new
Guarantee Period (or other reallocation) will be the day after the end of the
prior Guarantee Period. We will notify the Owner at least 30 days and not more
than 60 days prior to the end of any Guarantee Period. If the Owner's Account
Value in a Guarantee Period is less than $500, we reserve the right, to
without charge, automatically transfer the balance to the Money Market
Division at the end of that Guarantee Period, unless we have received in good
order Written instructions to transfer such balance to a different Division.
We declare the Guaranteed Interest Rate from time to time as market conditions
dictate. We advise an Owner of the Guaranteed Interest Rate for a Guarantee
Period at the time a purchase payment is received, a transfer is effectuated
or a Guarantee Period is renewed. A different rate of interest may be credited
to one Guarantee Period than to another Guarantee Period that began on a
different date. The minimum Guaranteed Interest Rate is an effective annual
rate of 3%.
Each Guarantee Period has its own Guaranteed Interest Rate, which may differ
from those for other Guarantee Periods. From time to time we will, at our
discretion, change the Guaranteed Interest Rate for future Guarantee Periods
of various lengths. These changes will not affect the Guaranteed Interest
Rates being paid on Guarantee Periods that have already commenced. Each
allocation or transfer of an amount to a Guarantee Period commences the
running of a new Guarantee Period with respect to that amount, which will earn
a Guaranteed Interest Rate that will continue unchanged until the end of that
period. The Guaranteed Interest Rate will never be less than the minimum
Guaranteed Interest Rate shown in your Contract. One or more Guarantee Periods
may be offered with a required dollar cost averaging feature. See "Transfers."
Currently we make available a one-year Guarantee Period and no others.
However, we reserve the right to change the Guarantee Periods that we are
making available at any time.
AGL'S MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST
RATES TO BE DECLARED. AGL CANNOT PREDICT OR ASSURE THE LEVEL OF ANY FUTURE
GUARANTEED INTEREST RATES IN EXCESS OF THE MINIMUM GUARANTEED INTEREST RATE
STATED IN YOUR CONTRACT.
Information concerning the Guaranteed Interest Rates applicable to the various
Guarantee Periods at any
18
<PAGE>
time may be obtained from your sales representative or from the addresses or
phone numbers set forth on the cover page of this Prospectus.
CONTRACT ISSUANCE AND PURCHASE PAYMENTS
The minimum initial purchase payment is $5,000 The amount of any subsequent
purchase payment must be at least $100. We reserve the right to modify these
minimums, at our discretion.
An application to purchase a Contract must be made by a signed written
application form provided by AGL or by such other medium or format as may be
agreed to by AGL and WM FundServices, Inc., as distributor of the Contracts.
When a purchase payment accompanies an application to purchase a Contract, and
the application is properly completed, we will either process the application,
credit the purchase payment, and issue the Contract, or reject the application
and return the purchase payment within two Valuation Dates after receipt of
the application at our Home Office.
If the application is not in a proper form or does not include all necessary
information, we will request additional documents or information within five
Valuation Dates after receipt of the application at our Home Office. If the
application is not made proper and complete within this five day period, we
will return the purchase payment immediately unless the prospective purchaser
specifically consents to retention of the purchase payment until the
application is made proper and complete, in which case the initial purchase
payment is credited within two Valuation Dates after receipt of the last item
required to process the application. Subsequent purchase payments are credited
as of the end of the Valuation Period in which they and any required Written
identifying information, are received at our Home Office. We reserve the right
to reject any application or purchase payment for any reason.
If the Owner's Account Value in any Division (except the Money Market
Division) falls below $500 because of a partial withdrawal from the Contract,
we reserve the right to transfer, without charge, the remaining balance to the
Money Market Division. If the Owner's Account Value in any Division falls
below $500 because of a transfer to another Division or to the Fixed Account,
we reserve the right to transfer the remaining balance in that Division,
without charge and pro rata, to the Division, Divisions or Fixed Account to
which the transfer was made. If the Owner's total Account Value falls below
$500, we may cancel the Contract. Such a cancellation would be considered a
full surrender of the Contract. We will provide you with 60 days' advance
notice of any such cancellation.
So long as the Account Value does not fall below $500, you need make no
further purchase payments. You may, however, elect to make subsequent purchase
payments at any time prior to the Annuity Commencement Date and while the
Owner and Annuitant are still living. Checks for subsequent purchase payments
should be made payable to American General Life Insurance Company and
forwarded directly to our Home Office. If we receive proper instructions, we
may also accept purchase payments by wire, by direct transfer from your
checking, savings or brokerage account, or by exchange from another insurance
company. You may obtain further information about how to make purchase
payments by any of these methods from your sales representative or from us at
the addresses and telephone numbers on the cover page of this Prospectus.
Purchase payments pursuant to salary reduction plans may be made only with our
agreement.
Your purchase payments begin to earn a return in the Divisions of Separate
Account D (gains or losses) or the Guarantee Period of the Fixed Account as of
the date we credit the purchase payments to your Contract. When you apply for
a Contract, you select (in whole percentages) the amount of each purchase
19
<PAGE>
payment that is to be allocated to each Division and the Guarantee Period. You
can change these allocation percentages at any time by Written notice to us.
OWNER ACCOUNT VALUE
Prior to the Annuity Commencement Date, your Account Value under a Contract is
the sum of your Variable Account Value and Fixed Account Value, as discussed
below.
VARIABLE ACCOUNT VALUE
Your Variable Account Value as of any Valuation Date prior to the Annuity
Commencement Date is the sum of your Variable Account Values in each Division
of Separate Account D as of that date. Your Variable Account Value in any such
Division is the product of the number of your Accumulation Units in that
Division multiplied by the value of one such Accumulation Unit as of that
Valuation Date. There is no guaranteed minimum Variable Account Value. To the
extent that your Account Value is allocated to Separate Account D, you bear
the entire risk of investment losses.
Accumulation Units in a Division are credited to you when you allocate
purchase payments or transferred amounts to that Division. Similarly, such
Accumulation Units are canceled to the extent you transfer or withdraw amounts
from a Division or to the extent necessary to pay certain charges under the
Contract. The crediting or cancellation of Accumulation Units is based on the
value of such Accumulation Units at the end of the Valuation Date as of which
the related amounts are being credited to or charged against your Variable
Account Value, as the case may be.
The value of an Accumulation Unit for a Division on any Valuation Date is
equal to the previous value of that Division's Accumulation Unit multiplied by
that Division's net investment factor for the Valuation Period ending on that
Valuation Date.
The net investment factor for a Division is determined by dividing (1) the net
asset value per share of the Series shares held by the Division, determined at
the end of the current Valuation Period, plus the per share amount of any
dividend or capital gains distribution made with respect to the Series shares
held by the Division during the current Valuation Period, by (2) the net asset
value per share of the Series shares held in the Division as determined at the
end of the previous Valuation Period, and subtracting from that result a
factor representing the mortality risk, expense risk and administrative
expense charge.
FIXED ACCOUNT VALUE
Your Fixed Account Value as of any Valuation Date prior to the Annuity
Commencement Date is your Fixed Account Value in the Guarantee Period as of
that date. Your Fixed Account Value in the Guarantee Period is equal to the
following amounts, in each case increased by accrued interest at the
applicable Guaranteed Interest Rate: (1) the amount of net purchase payments,
renewals and transferred amounts allocated to the Guarantee Period less (2)
the amount of any transfers or withdrawals out of the Guarantee Period,
including withdrawals to pay applicable charges.
Your Fixed Account Value is guaranteed by AGL. Therefore, AGL bears the
investment risk with respect to amounts allocated to the Fixed Account, except
to the extent that AGL may vary the Guaranteed Interest Rate for future
Guarantee Periods (subject to the 3% effective annual minimum).
20
<PAGE>
TRANSFER, SURRENDER AND PARTIAL WITHDRAWAL
OF OWNER ACCOUNT VALUE
TRANSFERS
Commencing 30 days after the Contract's date of issue and prior to the Annuity
Commencement Date, you may transfer your Account Value at any time among the
available Divisions of Separate Account D and the Guarantee Period, subject to
the conditions described below. Such transfers will be effective at the end of
the Valuation Period in which we receive your Written or telephone transfer
request.
If a transfer would cause your Account Value in any Division or the Guarantee
Period to fall below $500, we reserve the right to also transfer the remaining
balance in that Division or the Guarantee Period in the same proportions as
the transfer request.
Prior to the Annuity Commencement Date and after the first 30 days following
the date the Contract was issued, you may make up to twelve transfers each
Contract Year without charge, but each additional transfer will be subject to
a $25 charge.
No more than 25% of the Account Value you allocated to the Guarantee Period at
its inception may be transferred during any Contract Year. This 25% limitation
does not apply to transfers within 15 days before or after the end of the
Guarantee Period in which the transferred amounts were being held.
Subject to the above general rules concerning transfers, you may establish an
automatic transfer plan, whereby amounts are automatically transferred by us
from the Money Market Division or the one-year Guarantee Period (or any other
Guarantee Period that is available at that time) to one or more other
Divisions on a monthly, quarterly, semi-annual or annual basis. This kind of
automatic transfer plan is also referred to as a dollar cost averaging plan,
under which the Owner will select the amount to be transferred and the period
of time over which transfers are to occur. We may offer certain automatic
transfer plans to Contract Owners who are not presently owners of any annuity
contract offered by AGL or an affiliate of AGL. Under such plans, known as
"special automatic transfer plans," we will establish the period of time over
which equal monthly transfers will be made, and we may offer a higher
Guaranteed Interest Rate, than would otherwise be available for another
Guarantee Period of the same duration that is not offered under a special
automatic transfer plan. Transfers under all automatic transfer plans will not
count towards the 12 free transfers each Contract Year, nor incur the $25
charge on additional transfers, nor will such transfers from the Guarantee
Period be subject to the 25% limitation or the Account Value minimum
requirement described above. See "Contract Issuance and Purchase Payments."
If the person or persons who are entitled to make transfers have provided a
Written request for Telephone Transfer Authorization that is on file with us,
transfers may be made pursuant to telephone instructions, subject to the above
terms and the terms of the Telephone Transfer Authorization. We will honor
telephone transfer instructions from any person who provides the correct
information, so there is a risk of possible loss to you if unauthorized
persons use this service in your name. Under a Telephone Transfer
Authorization we are not liable for any acts or omissions based upon
instructions that we reasonably believe to be genuine, including losses
arising from errors in the communication of transfer instructions. We have
established procedures for accepting telephone transfer instructions, which
include verification of the Contract number, the identity of the caller, both
the annuitant's and Owner's names, and a form of personal identification from
the caller. We will mail to the Owner a written confirmation
21
<PAGE>
of the transaction. If several persons seek to effect telephone transfers at
or about the same time, or if our recording equipment malfunctions, it may be
impossible for you to make a telephone transfer at the time you wish. If this
occurs, you should submit a Written transfer request. Also, if, due to
malfunction or other circumstances, the recording of your telephone request is
incomplete or not fully comprehensible, we will not process the transaction.
The phone number for telephone exchanges is 1-800-247-6584.
The Contracts are not designed for professional market timing organizations or
other entities utilizing programmed and frequent transfers. We reserve the
right to restrict or terminate transfers at any time.
AUTOMATIC REBALANCING
Automatic Rebalancing within the Separate Account is available for Contracts
with an Account Value of $25,000 and larger at the time the application for
Automatic Rebalancing is received. Application for Automatic Rebalancing can
be made either at issue or after issue, and may subsequently be discontinued.
The five Portfolios are not available for rebalancing.
Automatic Rebalancing occurs when funds are transferred by us among the
Separate Account Divisions so that the values in each Division match the
Owner's percentage allocation for Automatic Rebalancing then in effect.
Automatic Rebalancing is available on a quarterly, semi-annual or annual
basis, measured from the Contract Anniversary date. A Contract Anniversary
date which falls on the 29th, 30th, or 31st of the month will result in
Automatic Rebalancing as of the 1st of the next month. Automatic Rebalancing
does not permit transfers to or from any Guarantee Period. Transfers under
Automatic Rebalancing will not count towards the twelve free transfers each
Contract Year, and will not incur a $25 charge.
SURRENDERS AND PARTIAL WITHDRAWALS
At any time prior to the Annuity Commencement Date and while the Annuitant is
still living, the Owner may make a full surrender of or partial withdrawal
from his or her Contract.
The amount payable to the Owner upon full surrender is the Owner's Account
Value at the end of the Valuation Period in which we receive a Written
surrender request in good order, minus any applicable Surrender Charge minus
the amount of any Contract Fee and minus any applicable premium tax. See
"Annual Contract Fee." Our current practice is to require that you return the
Contract with any request for a full surrender. After a full surrender, or if
the Owner's Account Value falls to zero, all rights of the Owner, Annuitant or
any other person with respect to the Contract will terminate subject to a
right to reinstate See "One-Time Reinstatement Privilege." All collateral
assignees of record must consent to any full surrender or partial withdrawal.
Your Written request for a partial withdrawal should specify the Divisions of
Separate Account D, or the Guarantee Period of the Fixed Account, from which
you wish the partial withdrawal to be made. If you do not specify, or if the
withdrawal cannot be made in accordance with your specification, to the extent
necessary the withdrawal will be taken pro-rata from the Divisions and the
Guarantee Period, based on your Account Value in each. Partial withdrawal
requests must be for at least $100 or, if less, all of your Account Value. If
your remaining Account Value in the Division or Guarantee Period would be less
than $500 (except for the Money Market Division), we reserve the right to
transfer, without charge, the remaining balance to the Money Market Division.
Unless you request otherwise, upon a partial
22
<PAGE>
withdrawal, your Accumulation Units and Fixed Account interests that are
canceled will have a total value equal to the amount of the withdrawal
request, plus any Surrender Charge, and premium tax if applicable, payable
upon the partial withdrawal. The amount payable to you, therefore, will be the
amount of the withdrawal request.
We also make available a systematic withdrawal plan under which you may make
automatic partial withdrawals at periodic intervals in a specified amount,
subject to the terms and conditions applicable to other partial withdrawals.
Additional information about how to establish such a systematic withdrawal
program may be obtained from your sales representative or from us at the
addresses and phone numbers set forth on the cover page of this Prospectus. We
reserve the right to modify or terminate our procedures for systematic
withdrawals at any time.
The Code provides that a penalty tax will be imposed on certain premature
surrenders or withdrawals. For a discussion of this and other tax implications
of total surrenders and systematic and other partial withdrawals, including
withholding requirements, see "Federal Income Tax Matters."
ANNUITY PERIOD AND ANNUITY PAYMENT OPTIONS
ANNUITY COMMENCEMENT DATE
The Owner may elect to have annuity payments made beginning on the Annuity
Commencement Date under any one of the Annuity Payment Options described
below. We will notify the Owner 60 to 90 days prior to the scheduled Annuity
Commencement Date that the Contract is scheduled to mature, and request that
an Annuity Payment Option be selected. If the Owner has not selected an
Annuity Payment Option ten days prior to the Annuity Commencement Date, we
will proceed as follows: (1) if the scheduled Annuity Commencement Date is any
date prior to the Annuitant's one hundredth birthday, we will extend the
Annuity Commencement Date to the Annuitant's one hundredth birthday; or (2) if
the scheduled Annuity Commencement Date is the Annuitant's one hundredth
birthday, the Account Value less any applicable charges and premium taxes will
be paid in one sum to the Owner. This procedure is different in Pennsylvania
because the Annuity Commencement Date cannot exceed age 90. The Owner may
select the Annuity Commencement Date when applying to purchase a Contract and
may change a previously-selected date at any time prior to the beginning of an
Annuity Payment Option by submitting a written request, subject to Company
approval. The Annuity Commencement Date specified at the time of application
may be any day of any month up to Annuitant's one hundredth birthday
inclusive. (Pennsylvania has special limitations which may require the Annuity
Commencement Date to be as early as age 85 but in no event beyond age 90.) See
"Federal Income Tax Matters" for a description of the penalties that may
attach to distributions prior to the Annuitant's attaining age 59 1/2 under
any Contract or after April 1 of the year following the calendar year in which
the Annuitant attains age 70 1/2 under Qualified Contracts.
APPLICATION OF OWNER ACCOUNT VALUE
We will automatically apply your Variable Account Value in any Division to
provide Variable Annuity Payments based on that Division and your Fixed
Account Value to provide Fixed Annuity Payments. However, if you give us other
Written instructions at least thirty days prior to the Annuity Commence ment
Date, we will apply your Account Value in different proportions.
We deduct any applicable state and local premium taxes from the amount of
Account Value being applied to an Annuity Payment Option. In some cases, we
may deduct a Surrender Charge from the amount
23
<PAGE>
being applied. See "Surrender Charge." Subject to any such adjustments, your
Variable and Fixed Account Values are applied to an Annuity Payment Option, as
discussed below, as of the end of the Valuation Period that contains the tenth
day prior to the Annuity Commencement Date.
FIXED AND VARIABLE ANNUITY PAYMENTS
The amount of the first monthly Fixed or Variable Annuity Payment will be at
least as favorable as that produced by the annuity tables set forth in the
Contract, based on the amount of your Account Value that is applied to provide
the Fixed or Variable Annuity Payments. Thereafter, the amount of each monthly
Fixed Annuity Payment is fixed and specified by the terms of the Annuity
Payment Option selected.
Account Value that is applied to provide Variable Annuity Payments is
converted to a number of Annuity Units by dividing the amount of the first
Variable Annuity Payment by the value of an Annuity Unit of the relevant
Division as of the end of the Valuation Period that includes the tenth day
prior to the Annuity Commencement Date. This number of Annuity Units
thereafter remains constant with respect to any Annuitant, and the amount of
each subsequent Variable Annuity Payment is determined by multiplying this
number by the value of an Annuity Unit as of the end of the Valuation Period
that contains the tenth day prior to the date of each payment. If the Variable
Annuity Payments are based on more than one Division, these calculations are
performed separately for each Division. The value of an Annuity Unit at the
end of a Valuation Period is the value of the Annuity Unit at the end of the
previous Valuation Period, multiplied by the net investment factor (see
"Variable Account Value") for the Valuation Period, with an offset for the
3.5% assumed interest rate used in the Contract's annuity tables.
As a result of the foregoing computations, if the net investment return for a
Division for any month is at an annual rate of more than 3.5%, any Variable
Annuity Payment based on that Division will be greater than the Variable
Annuity Payment based on that Division for the previous month. If the net
investment return for a Division for any month is at an annual rate of less
than 3.5%, any variable annuity payment based on that Division will be less
than the Variable Annuity Payment based on that Division for the previous
month.
ANNUITY PAYMENT OPTIONS
The Owner may elect to have annuity payments made beginning on the Annuity
Commencement Date under any one of the Annuity Payment Options described
below. We will notify the Owner 60 to 90 days prior to the scheduled Annuity
Commencement Date that the Contract is scheduled to mature, and request that
an Annuity Payment Option be selected. If the Owner has not selected an
Annuity Payment Option ten days prior to the Annuity Commencement Date, we
will proceed as follows: (1) if the scheduled Annuity Commencement Date is any
date prior to the Annuitant's one hundredth birthday, we will extend the
Annuity Commencement Date to the Annuitant's one hundredth birthday; or (2) if
the scheduled Annuity Commencement Date is the Annuitant's one hundredth
birthday, the Account Value less any applicable charges and premium taxes will
be paid in one sum to the Owner. This procedure is different in Pennsylvania
because the Annuity Commencement Date cannot exceed age 90.
The Annuity Commencement Date will be extended to the Annuitant's age one
hundred unless otherwise requested. The Code imposes minimum distribution
requirements that have a bearing on the Annuity Payment Option that should be
chosen in connection with Qualified Contracts. See "Federal Income Tax
Matters." We are not responsible for monitoring or advising Owners as to
whether the minimum distribution requirements are being met, unless we have
received a specific Written request to do so.
24
<PAGE>
No election of any Annuity Payment Option may be made unless an initial
annuity payment of at least $100 would be provided, where only Fixed or only
Variable Annuity Payments are elected, and $50 on each basis when a
combination of Variable and Fixed Annuity Payments is elected. If these
minimums are not met, we will first reduce the frequency of annuity payments,
and if the minimums are still not met, we will make a lump-sum payment to the
Annuitant or other properly-designated payee in the amount of the Owner's
Account Value, less any applicable Surrender Charge, any uncollected Annual
Contract Fee, and any applicable premium tax.
Within 60 days after the death of the Owner or Annuitant, the Owner, or if the
Owner has not done so, the Beneficiary, may elect that any amount due to the
Beneficiary be applied under any option described below, subject to certain
tax law requirements. See "Death Proceeds." Thereafter, the Beneficiary will
have all the remaining rights and powers under the Contract and be subject to
all the terms and conditions thereof. The first annuity payment will be made
at the beginning of the second month following the month in which we approve
the settlement request. Annuity Units will be credited based on Annuity Unit
Values at the end of the Valuation Period that contains the tenth day prior to
the beginning of said second month.
When an Annuity Payment Option becomes effective, the Contract must be
delivered to our Home Office, in exchange for a payment contract providing for
the option elected.
Information about the relationship between the Annuitant's sex and the amount
of annuity payments, including requirements for gender-neutral annuity rates
in certain states and in connection with certain employee benefit plans is set
forth under "Gender of Annuitant" in the Statement. See "Contents of Statement
of Additional Information."
OPTION 1 - LIFE ANNUITY - Annuity payments are payable monthly during the
lifetime of the Annuitant, ceasing with the last payment due prior to the
death of the Annuitant. It would be possible under this arrangement for the
Annuitant or other payee to receive only one annuity payment if the Annuitant
died prior to the second annuity payment, since no minimum number of payments
is guaranteed.
OPTION 2 - LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN -
Annuity payments are payable monthly during the lifetime of an Annuitant;
provided, that if the Annuitant dies during the period certain, the
Beneficiary is entitled to receive monthly payments for the remainder of the
period certain.
OPTION 3 - JOINT AND LAST SURVIVOR LIFE ANNUITY - Annuity payments are payable
monthly during the lifetime of the Annuitant and another payee and continue
during the lifetime of the survivor, ceasing with the last payment prior to
the death of the survivor. It is possible under this option for the Annuitant
or other payee to receive only one annuity payment if both die before the
second annuity payment, since no minimum number of payments is guaranteed. If
one of these persons dies before the Annuity Commence ment Date, the election
of this option is revoked, the survivor becomes the sole Annuitant, and no
death proceeds are payable by virtue of the death of the other Annuitant.
OPTION 4 - PAYMENTS FOR DESIGNATED PERIOD - Annuity payments are payable
monthly to an Annuitant or other properly-designated payee, or at his or her
death, the Beneficiary, for a selected number of years ranging from five to
forty. However, the designated period may not exceed the life expectancy of
such Annuitant or other properly-designated payee.
25
<PAGE>
OPTION 5 - PAYMENTS OF A SPECIFIC DOLLAR AMOUNT - The amount due is paid in
equal monthly installments of a designated dollar amount (not less than $125
nor more than $200 per annum per $1,000 of the original amount due) until the
remaining balance is less than the amount of one installment. If the person
receiving these payments dies, the remaining payments continue to be made to
the Beneficiary. Payments under this option are available on a fixed basis
only. To determine the remaining balance at the end of any month, such balance
at the end of the previous month is decreased by the amount of any installment
paid during the month and the result will be accumulated at an interest rate
not less than 3.5% compounded annually. If the remaining balance at any time
is less than the amount of one installment, such balance will be paid and will
be the final payment under the option.
Under the fourth option there is no mortality guarantee by us, even though
Variable Annuity Payments will be reduced as a result of a charge to Separate
Account D which is partially for mortality risks. See "Charge to Separate
Account D."
A payee receiving Variable (but not Fixed) Annuity Payments under the fourth
option can elect at any time to commute (terminate) such option and receive
the current value of the annuity, which would be based on the values next
determined after the Written request for payment is received by us. The
current value of the annuity under the fourth option is the value of all
remaining annuity payments, assumed to be level, discounted to present value
at an annual rate of 3.5%. Other than by election of such a lump-sum payment
under the fourth option, an Annuity Payment Option may not be terminated once
annuity payments have commenced.
Under federal tax regulations, the election of the fourth or fifth options may
be treated in the same manner as a surrender of the total account. For tax
consequences of such treatment, see "Federal Income Tax Matters." Also, in
such a case, tax-deferred treatment of subsequent earnings may not be
available.
ALTERNATIVE AMOUNT UNDER FIXED LIFE ANNUITY OPTIONS - Each Contract provides
that when Fixed Annuity Payments are to be made under one of the first three
Annuity Payment Options described above, the Owner (or if the Owner has not
elected a payment option, the Beneficiary) may elect monthly payments to the
Annuitant or other properly-designated payee equal to the monthly payment
available under similar circumstances based on single payment immediate fixed
annuity rates then in use by us. The purpose of this provision is to assure
the Annuitant that, at retirement, if the fixed annuity purchase rate then
offered by us for new single payment immediate annuity contracts is more
favorable than the annuity rates guaranteed by the Contract, the Annuitant or
other properly-designated payee will be given the benefit of the new annuity
rates.
In lieu of monthly payments, payments may be elected on a quarterly,
semi-annual or annual basis, in which case the amount of each annuity payment
will be determined on a basis consistent with that described above for monthly
payments.
TRANSFERS
After the Annuity Commencement Date, the Annuitant or other
properly-designated payee may make one transfer every 180 days among the
available Divisions of Separate Account D or from the Divisions to a fixed
Annuity Payment Option. No charge will be assessed for such transfer. No
transfers from a fixed to
26
<PAGE>
a variable Annuity Payment Option are permitted. If a transfer would cause the
value that is attributable to a Contract in any Division to fall below $500,
we reserve the right to transfer the remaining balance in that Division in the
same proportion as the transfer request. Transfers will be effected at the end
of the Valuation Period in which we receive the Written transfer request at
our Home Office. We reserve the right to terminate or restrict transfers at
any time.
DEATH PROCEEDS
DEATH PROCEEDS PRIOR TO THE ANNUITY COMMENCEMENT DATE
The death proceeds described below are payable to the Beneficiary under the
Contract if, prior to the Annuity Commencement Date, any of the following
events occurs: (a) the Annuitant dies and no Contingent Annuitant has been
named under a Non-Qualified Contract; (b) the Annuitant dies and we also
receive proof of death of any named Contingent Annuitant; or (c ) the Owner
(including the first to die in the case of joint Owners) of a Non-Qualified
Contract dies, regardless of whether said deceased Owner was also the
Annuitant (however, if the Beneficiary is the Owner's surviving spouse, the
Beneficiary may elect to continue the Contract as described in the second
paragraph below). The death proceeds, prior to deduction of any applicable
premium taxes, will equal the greatest of (1) the sum of all net purchase
payments made (less any previously-deducted premium taxes and all prior
partial withdrawals), (2) the Owner's Account Value as of the end of the
Valuation Period in which we receive, at our Home Office, proof of death and
the Written request as to the manner of payment, or (3) the Highest
Anniversary Value prior to the date of death, as defined below.
The Highest Anniversary Value prior to the date of death will be determined as
follows:
First, we will calculate the Account Values at the end of each of the
past Contract Anniversaries that occurred prior to the deceased's 81st
birthday;
Second, each of the Account Values will be increased by the amount of
net purchase payments made since the end of such Contract Years; and
Third, the result will be reduced by the amount of any withdrawals made
since the end of such Contract years.
The Highest Anniversary Value will be an amount equal to the highest of such
values. The Highest Anniversary Value will not be calculated after the 81st
birthday. Net purchase payments are purchase payments less applicable premium
tax.
If the Owner has not already done so, the Beneficiary may, within sixty days
after the date the proceeds become payable, elect to receive the death
proceeds as a lump sum or in the form of one of the Annuity Payment Options
provided in the Contract. See "Annuity Payment Options." If we receive no
request as to the manner of payment, we will make a lump-sum payment, based on
values determined at that time.
If the Owner, including the first to die in the case of joint owners, under a
Non-Qualified Contract dies prior to the Annuity Commencement Date, the Code
requires that all amounts payable under the Contract be
27
<PAGE>
distributed (a) within five years of the date of death or (b) as annuity
payments beginning within one year of the date of death and continuing over a
period not extending beyond the life expectancy of the Beneficiary. If the
Beneficiary is the Owner's surviving spouse, the spouse may elect to continue
the Contract as the new Owner and, if the original Owner was the Annuitant, as
the new Annuitant. If the Owner is not a natural person, these requirements
apply upon the death of the primary Annuitant within the meaning of the Code.
Failure to satisfy these Code distribution requirements may result in serious
adverse tax consequences. Under a parallel section of the Code, similar
requirements apply to retirement plans in connection with which Qualified
Contracts are issued.
DEATH PROCEEDS AFTER THE ANNUITY COMMENCEMENT DATE
If the Annuitant dies following the Annuity Commencement Date, the only
amounts payable to the Beneficiary or other properly-designated payee are any
continuing payments provided for under the Annuity Payment Option selected.
See "Annuity Payment Options." In such a case, the payee will have all the
remaining rights and powers under a Contract and be subject to all the terms
and conditions thereof. Also, if the Annuitant dies following the Annuity
Commencement Date, no Contingent Annuitant can become the Annuitant.
If the payee under a Non-Qualified Contract dies after the Annuity
Commencement Date, any remaining amounts payable under the terms of the
Annuity Payment Option must be distributed at least as rapidly as under the
method of distribution then in effect. If the payee is not a natural person,
this requirement applies upon the death of the primary Annuitant within the
meaning of the Code. Failure to satisfy these requirements of the Code may
result in serious adverse tax consequences. Under a parallel section of the
Code, similar requirements apply to the retirement plans in connection with
which Qualified Contracts are issued.
PROOF OF DEATH
We accept the following as proof of any person's death: a copy of a certified
death certificate; a copy of a certified decree of a court of competent
jurisdiction as to the finding of death; a written statement by a medical
doctor who attended the deceased at the time of death; or any other proof
satisfactory to us.
Once we have paid the death proceeds, the Contract terminates and we have no
further obligations thereunder.
CHARGES UNDER THE CONTRACTS
PREMIUM TAXES
When applicable, we will deduct an amount to cover premium taxes imposed by
certain states. We may deduct such amount either at the time the tax is
imposed or later. Such deduction may be made, in accordance with applicable
state law:
(1) from purchase payment(s) when received: or
(2) from the Owner's Account Value at the time annuity payments begin; o
(3) from the amount of any partial withdrawal; or
(4) from proceeds payable upon termination of the Contract for any other
reason, including death of
28
<PAGE>
the Annuitant or Owner, or surrender of the Contract.
If premium tax is paid, AGL may reimburse itself for such tax when deduction
is being made under items 2, 3, or 4 above calculated by multiplying the sum
of Purchase Payments being withdrawn by the applicable premium tax percentage.
Applicable premium tax rates depend upon the Owner's then-current place of
residence. Applicable rates currently range from 0% to 3.5% and are subject to
change by legislation, administrative interpretations or judicial acts. We
will not make a profit on this charge.
SURRENDER CHARGE
The Surrender Charge reimburses us for part of our expenses related to
distributing the Contracts. We believe, however, that the amount of such
expenses will exceed the amount of revenues generated by the Surrender Charge.
We will pay such excess out of our general surplus, which might include
profits from the charge for the assumption of mortality and expense risks.
Unless a withdrawal is exempt from the Surrender Charge (as discussed below),
the Surrender Charge is a percentage of the amount of each purchase payment
that is withdrawn during the seven years after it was received. The percentage
declines depending on how many years have passed since the withdrawn purchase
payment was originally credited to your Account Value, as follows:
<TABLE>
<CAPTION>
Surrender Charge as a
Years Elapsed Percentage of Purchase
Since Received Payment Withdrawn
<S> <C>
Less than 1 7%
1 or more, but less than 2 6%
2 or more, but less than 3 5%
3 or more, but less than 4 5%
4 or more, but less than 5 4%
5 or more, but less than 6 3%
6 or more, but less than 7 2%
7 or more 0%
</TABLE>
Only for the purpose of computing the Surrender Charge, the earliest purchase
payments are deemed to be withdrawn first, and before any amounts in excess of
purchase payments are withdrawn from your Account Value. The following
transactions will be considered as withdrawals, for purposes of assessing the
Surrender Charge: total surrender, partial withdrawal, commencement of an
Annuity Payment Option, and termination due to insufficient Account Value.
Nevertheless, the Surrender Charge will NOT apply:
To the amount of withdrawals that exceeds the cumulative amount of your
purchase payments;
Upon the death of the Annuitant, at any age, after the Annuity
Commencement Date;
29
<PAGE>
Upon the death of the Annuitant, at any age, prior to the Annuity
Commencement Date, provided no Contingent Annuitant survives;
Upon the death of the Owner, including the first to die in the case of
joint Owners of a NonQualified Contract, unless the Contract is being
continued under the special rule for a surviving spouse as defined in
the Code.
Upon annuitization over at least 10 years, or life contingent
annuitization where the life expectancy is at least 10 years;
Within the 30 day window under the One-Time Reinstatement Privilege;
If the Annuitant has been confined to a long-term care facility or is
subject to a terminal illness (to the extent that the rider for these
matters is available in your state), as set forth under "Long-Term Care
and Terminal Illness".
The Surrender Charge does NOT apply to the portion of your first withdrawal or
total surrender in any Contract Year that does not exceed 10% of the amount of
your purchase payments that (a) have not previously been withdrawn and (b)
have been credited to the Contract for at least one year. If multiple
withdrawals are made during a Contract Year, the amount eligible for the free
withdrawal will be recalculated at the time of each withdrawal. After the
first Contract Year, non-automatic and automatic withdrawals may be made in
the same Contract Year subject to the 10% limitation. For withdrawals under a
systematic withdrawal plan, Purchase Payments credited for 30 days or more are
eligible for the 10% free withdrawal.
The Surrender Charge will not apply to any amounts withdrawn which are in
excess of the amount permitted by the 10% free withdrawal privilege, described
above, if such amounts are required to be withdrawn to obtain or retain
favorable tax treatment. This exception is subject to our approval.
A free withdrawal pursuant to any of the foregoing Surrender Charge exceptions
is not deemed to be a withdrawal of purchase payments, except for purposes of
computing the 10% free withdrawal described in the preceding paragraph. See
"Penalty Tax on Premature Distributions."
TRANSFER CHARGES
The charges to defray the expense of effecting transfers are described under
"Transfer, Surrender and Partial Withdrawal of Owner Account Value -
Transfers" and "Annuity Period and Annuity Payment Options - Transfers." These
charges are designed not to yield a profit to us.
ANNUAL CONTRACT FEE
An Annual Contract Fee of $35 will be deducted from each Owner's Account Value
at the end of each Contract Year prior to the Annuity Commencement Date. This
Fee is waived on Contracts for cumulative premiums of $50,000 or more and is
not imposed during the Annuity Period. This Fee is for administrative expenses
(which do not include expenses of distributing the Contracts), and we do not
expect that the revenues we will derive from this Fee will exceed such
expenses. Unless paid directly, the Fee will be allocated among the Guarantee
Period and Divisions in proportion to your Account Value in each. The
30
<PAGE>
entire Fee for the year will be deducted from the proceeds of any full
surrender. We reserve the right to waive the Fee.
CHARGE TO SEPARATE ACCOUNT D
To cover administrative expenses and to compensate us for assuming mortality
and expense risks under the Contracts, Separate Account D will incur a daily
charge at an annualized rate of 1.40% of the average daily net asset value of
Separate Account D attributable to the Contracts. Of this amount, .15% is for
administrative expenses and 1.25% is for the assumption of mortality and
expense risks. We do not expect to earn a profit on that portion of the charge
which is for administrative expenses, but we do expect to derive a profit from
the portion which is for the assumption of mortality and expense risks. There
is no necessary relationship between the amount of administrative charges
imposed on a given Contract and the amount of expenses actually attributable
to that Contract.
In assuming the mortality risk, we are subject to the risk that our actuarial
estimate of mortality rates may prove erroneous and that Annuitants will live
longer than expected, or that more Owners or Annuitants than expected will die
at a time when the death benefit guaranteed by us is higher than the net
surrender value of their interests in the Contracts.
MISCELLANEOUS
Charges and expenses are paid out of the assets of each Series as described in
the prospectus of the Trust that is attached at the end of this Prospectus. We
reserve the right to impose charges or establish reserves for any federal or
local taxes incurred or that may be incurred by us, and that may be deemed
attributable to the Contracts.
We have entered into an arrangement with WM Fund Services, Inc. to provide
certain services and discharge certain obligations. Under the arrangement, WM
Fund Services, Inc. reimburses us on a monthly basis, for certain
administrative and contract and contract owner support expenses, up to an
annual rate of 0.15% of the average daily net asset value of shares of the
Portfolios purchased by AGL at the instruction of Owners.
SYSTEMATIC WITHDRAWAL PLAN
Automatic partial withdrawals, with minimum payments of $100, may be made at
periodic intervals through a systematic withdrawal program and the Contract
Owner may choose from payment schedules of monthly, quarterly, semi-annually,
or annually, and may start, stop, increase or decrease payments. The minimum
payment is $100. Withdrawals may start as early as 30 days after the issue
date of the Contract and may be taken from the Fixed Account or any Division,
as specified by the Owner. Systematic withdrawals are subject to the terms and
conditions applicable to other partial withdrawals, including Surrender
Charges and exceptions to Surrender Charges.
ONE-TIME REINSTATEMENT PRIVILEGE
If the Account Value is at least $500, the Owner may elect to reinvest all of
the proceeds that were previously liquidated from the Contract within the past
30 days and have the Surrender Charge and any Annual Contract Fee not then due
credited back to the Contract. The funds will be reinvested at the value next
following the date of receipt of the reinstated Account Value. Unless you
request otherwise, the reinstated Account Value will be allocated among the
Divisions and the Guarantee Period (or Guarantee
31
<PAGE>
Periods) in the same proportions as the prior surrender. You may use this
privilege only once. This privilege is not available under Contracts purchased
in Oregon.
REDUCTION IN SURRENDER CHARGES OR ADMINISTRATIVE CHARGES
We may reduce the surrender charges or administrative charges imposed under
certain Qualified Contracts in connection with employer-sponsored plans. Any
such reductions will reflect differences in costs or services (due to such
factors as reduced sales expenses or administrative efficiencies relating to
serving a large number of employees of a single employer and functions assumed
by the employer that we otherwise would have to perform) and will not be
unfairly discriminatory as to any person.
LONG-TERM CARE AND TERMINAL ILLNESS
THE RIDER DESCRIBED BELOW IS NOT AVAILABLE IN ALL STATES, AND YOU SHOULD
THEREFORE CONSULT YOUR SALES REPRESENTATIVE OR OUR HOME OFFICE AS TO WHETHER
IT WILL APPLY TO YOU. THERE IS NO SEPARATE CHARGE FOR THIS RIDER.
LONG-TERM CARE
Pursuant to a special Contract rider, no Surrender Charge will apply to a
partial withdrawal or total surrender made during any period of time that the
Annuitant is confined for 30 days or more (or within 30 days after discharge)
in a hospital or state-licensed in-patient nursing facility. We must receive
Written proof of such confinement that is satisfactory to us.
TERMINAL ILLNESS
The rider also provides that no Surrender Charge will apply to a partial
withdrawal or total surrender made if we have received a physician's Written
certification that the Annuitant is terminally ill and not expected to live
more than twelve months and have waived or exercised our right to a second
physician's opinion.
OTHER ASPECTS OF THE CONTRACTS
Only an officer of AGL can agree to change or waive the provisions of any
Contract. The Contracts are non-participating and are not entitled to share in
any dividends, profits or surplus of AGL.
OWNERS, ANNUITANTS, AND BENEFICIARIES; ASSIGNMENTS
The Owner of a Contract will be the same as the Annuitant, unless the
purchaser designates a different Owner when applying to purchase a Contract.
In the case of joint ownership, both Owners must join in the exercise of any
rights or privileges under the Contract. The Annuitant and any Contingent
Annuitant are designated by the purchaser when applying for a Contract and may
not thereafter be changed.
The Beneficiary and, under a Non-Qualified Contract, any Contingent
Beneficiary are designated by the purchaser when applying for a Contract. A
Beneficiary or Contingent Beneficiary may be changed by the Owner prior to the
Annuity Commencement Date, while the Annuitant is still alive, and by the
payee following the Annuity Commencement Date. Any designation of a new
Beneficiary or Contingent Beneficiary is effective as of the date it is
signed, but will not affect any payments we make or action we take before
receiving the Written request. We also need the Written consent of any
irrevocably-named
32
<PAGE>
Beneficiary or Contingent Beneficiary before making a change. Under certain
retirement programs, spousal consent may be required to name a Beneficiary
other than the spouse, or to change a Beneficiary to a person other than the
spouse. We are not responsible for the validity of any designation of a
Beneficiary or Contingent Beneficiary.
If no named Beneficiary or Contingent Beneficiary is living at the time any
payment is to be made, the Owner will be the Beneficiary, or if the Owner is
not then living, the Owner's estate will be the Beneficiary.
Rights under a Qualified Contract may be assigned only in certain narrow
circumstances referred to therein. Owners and other payees may assign their
rights under Non-Qualified Contracts, including their ownership rights. We
take no responsibility for the validity of any assignment. A change in
ownership rights must be made in Writing and a copy must be sent to our Home
Office. The change will be effective on the date it was made, although we are
not bound by a change until the date we record it. The rights under a Contract
are subject to any assignment of record at our Home Office. An assignment or
pledge of a Contract may have adverse tax consequences. See "Federal Income
Tax Matters."
REPORTS
We will mail to Owners (or persons receiving payments following the Annuity
Commencement Date), at their last known address of record, any reports and
communications required by applicable law or regulation. You should therefore
give us prompt written notice of any address change.
RIGHTS RESERVED BY US
Upon notice to the Owner, a Contract may be modified by us, to the extent
necessary in order to (1) operate Separate Account D in any form permitted
under the 1940 Act or in any other form permitted by law; (2) transfer any
assets in any Division to another Division, or to one or more separate
accounts, or the Fixed Account; (3) add, combine or remove Divisions in
Separate Account D or combine the Separate Account with another separate
account; (4) add, restrict or remove Guarantee Periods of the Fixed Account;
(5) make any new Division available to you on a basis to be determined by us;
(6) substitute, for the shares held in any Division, the shares of another
Fund or Portfolio or the shares of another investment company or any other
investment permitted by law; (7) make any changes required by the Code or by
any other applicable law, regulation or interpretation in order to continue
treatment of the Contract as an annuity; (8) commence deducting premium taxes
or adjust the amount of premium taxes deducted in accordance with applicable
state law; or (9) make any changes required to comply with the rules of any
Fund or Portfolio. When required by law, we will obtain your approval of
changes and the approval of any appropriate regulatory authority.
PAYMENT AND DEFERMENT
Amounts surrendered or withdrawn from a Contract will normally be paid within
seven calendar days after the end of the Valuation Period in which we receive
the Written surrender or withdrawal request in good order. In the case of
payment of death proceeds, if we do not receive a Written request as to the
manner of payment within 60 days after the death of the Owner or Annuitant,
any death benefit proceeds will be paid as a lump sum, normally within seven
calendar days after the end of the Valuation Period that contains the last day
of said 60 day period. We reserve the right, however, to defer payment or
transfers of amounts out of the Fixed Account for up to six months. Also, we
reserve the right to defer payment of that portion
33
<PAGE>
of your Account Value that is attributable to a purchase payment made by check
for a reasonable period of time (not to exceed 15 days) to allow the check to
clear the banking system.
Finally, we reserve the right to defer payment of any surrender and annuity
payment amounts or death benefit amounts of any portion of the Variable
Account Value if (a) the New York Stock Exchange is closed other than
customary weekend and holiday closings, or trading on the New York Stock
Exchange is restricted; (b) an emergency exists, as a result of which disposal
of securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Variable Account Value; or (c) the
Securities and Exchange Commission by order permits the delay for the
protection of Owners. Transfers and allocations of Account Value among the
Divisions and the Fixed Account may also be postponed under these
circumstances.
FEDERAL INCOME TAX MATTERS
GENERAL
It is not possible to comment on all of the federal income tax consequences
associated with the Contracts. Federal income tax law is complex and its
application to a particular person may vary according to facts peculiar to
such person. Consequently, this discussion is not intended as tax advice, and
you should consult with a competent tax adviser before purchasing a Contract.
The discussion is based on the law, regulations and interpretations existing
on the date of this Prospectus. Congress has in the past and may again in the
future enact legislation changing the tax treatment of annuities in both the
Qualified and the Non-Qualified markets. The Treasury Department may issue new
or amended regulations or other interpretations of existing tax law. Judicial
interpretations may also affect the tax treatment of annuities. It is possible
that such changes could have a retroactive effect. We suggest that you consult
your legal or tax adviser on these issues.
The discussion does not address state or local tax or estate and gift tax
consequences associated with the Contracts.
NON-QUALIFIED CONTRACTS
PURCHASE PAYMENTS. Purchasers of a Contract that does not qualify for special
tax treatment and is therefore "Non-Qualified" may not deduct from their gross
income the amount of purchase payments made.
TAX DEFERRAL PRIOR TO ANNUITY COMMENCEMENT DATE. Owners who are natural
persons are not taxed currently on increases in their Account Value resulting
from interest earned in the Fixed Account or, if certain diversification
requirements are met, the investment experience of Separate Account D. This
treatment applies to Separate Account D only if the Funds and the Portfolios
in which it invests are "adequately diversified" in accordance with Treasury
Department regulations. Although we do not control the Funds or the
Portfolios, the investment advisers to the Funds and the Portfolios have
undertaken to operate the Funds and the Portfolios in compliance with these
diversification requirements. A Contract investing in a Fund or Portfolio that
failed to meet the diversification requirements would, unless and until the
failure can be corrected in a procedure afforded by the Internal Revenue
Service, subject Owners to taxation of income in the Contract for that or any
subsequent period. Income means the excess of the Account Value over the
Owner's investment in the Contract (discussed below).
34
<PAGE>
Current regulations do not provide guidance as to any circumstances in which
control over allocation of values among different investment alternatives may
cause Owners or persons receiving annuity payments to be treated as the owners
of Separate Account D assets for tax purposes. We reserve the right to amend
the Contracts in any way necessary to avoid any such result. The Treasury
Department has stated that it may establish standards in this regard through
regulations or rulings and has informally indicated that a regulation or
ruling could limit the number of underlying funds or the frequency of
transfers among those funds. Such standards may apply only prospectively,
although retroactive application is possible if such standards are considered
not to embody a new position.
Owners that are not natural persons -- that is, Owners such as corporations --
are taxable currently on annual increases in their Account Value unless an
exception applies. Exceptions exist for, among other things, Owners that are
not natural persons but that hold the Contract as an agent for a natural
person.
TAXATION OF ANNUITY PAYMENTS. Each annuity payment received after the Annuity
Commencement Date is excludible from gross income in part. In the case of
Fixed Annuity Payments, the excludible portion is determined by multiplying
the amount paid by the ratio of the investment in the Contract (discussed
below) to the expected return under the fixed Annuity Payment Option. In the
case of Variable Annuity Payments, the amount paid is multiplied by the ratio
of the investment in the Contract to the number of expected payments. In both
cases, the remaining portion of each annuity payment, and all payments made
after the investment in the Contract has been reduced to zero, are included in
the payee's income. Should annuity payments cease on account of the death of
the Annuitant before the investment in the Contract has been fully recovered,
the payee is allowed a deduction for the unrecovered amount. If the payee is
the Annuitant, the deduction is taken on the final tax return. If the payee is
a Beneficiary, that Beneficiary may recover the balance of the total
investment as payments are made or on the Beneficiary's final tax return. An
Owner's "investment in the Contract" is the amount equal to the portions of
purchase payments made by or on behalf of the Owner that have not been
excluded or deducted from the individual's gross income, less amounts
previously received under the Contract that were not included in income.
TAXATION OF PARTIAL WITHDRAWALS AND TOTAL SURRENDERS. Partial withdrawals from
a Contract are includible in income to the extent that the Owner's Account
Value exceeds the investment in the Contract. In the event a Contract is
surrendered in its entirety, any amount received in excess of the investment
in the Contract is includible in income, and any remaining amount received is
excludible from income. All annuity contracts issued by us to the same Owner
during any calendar year are to be aggregated for purposes of determining the
amount of any distribution that is includible in gross income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS. A penalty tax is imposed on
distributions under a Contract equal to 10% of the amount includable in
income. The penalty tax will not apply, however, to (1) distributions made
after the recipient attains age 59 1/2, (2) distributions on account of the
recipient's becoming disabled, (3) distributions that are made after the death
of the Owner prior to the Annuity Commencement Date or the payee after the
Annuity Commencement Date (or if such person is not a natural person, that are
made after the death of the primary Annuitant, as defined in the Code), and
(4) distributions that are part of a series of substantially equal periodic
payments made over the life (or life expectancy) of the Annuitant or the joint
life (or joint life expectancies) of the Annuitant and the Beneficiary.
Premature distributions may result, for example, from an early Annuity
Commencement Date, an early surrender, partial withdrawal from or assignment
of a Contract, or the early death of an Annuitant, unless clause (3) above
applies.
35
<PAGE>
PAYMENT OF DEATH PROCEEDS. Special rules apply to the distribution of any
death proceeds payable under the Contract. See "Death Proceeds."
ASSIGNMENTS AND LOANS. An assignment, loan, or pledge with respect to a
Non-Qualified Contract is taxed in the same manner as a partial withdrawal, as
described above. Repayment of a loan or release of an assignment or pledge is
treated as a new purchase payment.
INDIVIDUAL RETIREMENT ANNUITIES ("IRAS")
PURCHASE PAYMENTS. Individuals who are not active participants in a tax
qualified retirement plan may, in any year, deduct from their taxable income
purchase payments for an IRA equal to the lesser of $2,000 or 100% of the
individual's earned income. In the case of married individuals filing a joint
return, the deduction will, in general, be the lesser of $4,000 or 100% of the
combined earned income of both spouses, reduced by any deduction for an IRA
purchase payment allowed to the spouse. Single persons who participate in a
tax-qualified retirement plan and who have adjusted gross income not in excess
of $30,000 may fully deduct their IRA purchase payments. Those who have
adjusted gross income in excess of $40,000 will not be able to deduct purchase
payments, and for those with adjusted gross income between $30,000 and $40,000
the deduction is phased out based on the amount of income. Beginning in 1999,
the income range over which the otherwise deductible portion of an IRA
purchase payment will be phased out for single persons will increase, as
follows: 1999--$31,000 to $41,000; 2000--$32,000 to $42,000; 2001-- $33,000 to
$43,000; 2002--$34,000 to $44,000; 2003--$40,000 to $50,000; 2004--$45,000 to
$55,000; and 2005 and thereafter--$50,000 to $60,000.
Similarly, the otherwise deductible portion of an IRA purchase payment will be
phased out, in the case of married individuals filing joint tax returns, with
adjusted gross income between $50,000 and $60,000, and in the case of married
individuals filing separately, with adjusted gross income between $0 and
$10,000. Beginning in 1999, the income range over which the otherwise
deductible portion of an IRA purchase payment will be phased out for married
individuals filing joint tax returns will increase as follows: 1999-- $51,000
to $61,000; 2000--$52,000 to $62,000; 2001--$53,000 to $63,000; 2002-- $54,000
to $64,000; 2003--$60,000 to $70,000; 2004--$65,000 to $75,000; 2005--$70,000
to $80,000; 2006--$75,000 to $85,000; and 2007 and thereafter--$80,000 to
$100,000.
A married individual filing a joint tax return, who is not an active
participant in a tax qualified retirement plan, but whose spouse is an active
participant in such a plan, may, in any year, deduct from his or her taxable
income purchase payments for an IRA equal to the lesser of $2,000 or 100% of
the individual's earned income. For such an individual, the income range over
which the otherwise deductible portion of an IRA purchase payment will be
phased out is $150,000 to $160,000.
TAX FREE ROLLOVERS. Amounts may be transferred in a tax-free rollover from a
tax-qualified plan to an IRA (and from one IRA to another IRA) if certain
conditions are met. All taxable distributions ("eligible rollover
distributions") from tax qualified plans are eligible to be rolled over with
the exception of (1) annuities paid over a life or life expectancy, (2)
installments for a period of ten years or more,and (3) required minimum
distributions under section 401(a)(9) of the Code.
Rollovers may be accomplished in two ways. First, an eligible rollover
distribution may be paid directly to an IRA (a "direct rollover"). Second, the
distribution may be paid directly to the Annuitant and then, within 60 days of
receipt, the amount may be rolled over to an IRA. However, any amount that was
not distributed as a direct rollover will be subject to 20% income tax
withholding
36
<PAGE>
DISTRIBUTIONS FROM AN IRA. Amounts received under an IRA as annuity payments,
upon partial withdrawal or total surrender, or on the death of the Annuitant,
are included in the Annuitant's or other recipient's income. If nondeductible
purchase payments have been made, a pro rata portion of such distributions may
not be included in income. A 10% penalty tax is imposed on the amount
includible in gross income from distributions that occur before the Annuitant
attains age 59 1/2 and that are not made on account of death or disability,
with certain exceptions, including distributions for qualified first-time home
purchases for the individual, a spouse, children, grandchildren or ancestor,
subject to a $10,000 lifetime maximum, and distributions for higher education
expenses for the individual, a spouse, children, or grandchildren. These
exceptions include distributions that are part of a series of substantially
equal periodic payments made over the life (or life expectancy) of the
Annuitant or the joint lives (or joint life expectancies) of the Annuitant and
the Beneficiary. Distributions of minimum amounts specified by the Code must
commence by April 1 of the calendar year following the calendar year in which
the Annuitant attains age 70 1/2. Additional distribution rules apply after
the death of the Annuitant. These rules are similar to those governing
distributions on the death of an Owner (or other payee during the Annuity
Period) under a Non-Qualified Contract. See "Death Proceeds." Failure to
comply with the minimum distribution rules will result in the imposition of a
penalty tax of 50% of the amount by which the minimum distribution required
exceeds the actual distribution.
ROTH IRAS
Beginning in 1998, individuals may purchase a new type of non-deductible IRA,
known as a Roth IRA. Purchase payments for a Roth IRA are limited to $2,000
per year. This limitation is reduced for adjusted gross income beginning at
$95,000 and is eliminated at $110,000 in the case of single taxpayers, between
$150,000 and $160,000 in the case of married taxpayers filing joint returns,
and between $0 and $15,000 in the case of married taxpayers filing separately.
An overall $2,000 annual limitation continues to apply to all of a taxpayer's
IRA contributions, including Roth IRAs and non-Roth IRAs.
An individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or
a previously deductible IRA contribution. For rollovers in 1998, the
individual may pay that tax ratably in 1998 and over the succeeding three
years. There are no similar limitations on rollovers from a Roth IRA to
another Roth IRA.
Qualified distributions from Roth IRAs are entirely tax free. A qualified
distribution requires that the individual has held the Roth IRA for at least
five years and, in addition, that the distribution is made either after the
individual reaches age 59 1/2 on the individual's death or disability, or as a
qualified first-time home purchase, subject to a $10,000 lifetime maximum, for
the individual, a spouse, child, grandchild, or ancestor.
SIMPLIFIED EMPLOYEE PENSION PLANS
Employees and employers may establish an IRA plan known as a simplified
employee pension plan ("SEP") if certain requirements are met. An employee may
make contributions to a SEP in accordance with the rules applicable to IRAs
discussed above. Employer contributions to an employee's SEP are deductible by
the employer and are not currently includible in the taxable income of the
employee. However, total employer contributions are limited to 15% of an
employee's compensation or $30,000, whichever is less.
37
<PAGE>
SIMPLE RETIREMENT ACCOUNTs
Employees and employers may establish an IRA plan known as a simple retirement
account ("SRA"), if certain requirements are met. Under an SRA, the employer
contributes elective employee compensation deferrals up to a maximum of $6,000
a year. The employer must, in general, make a fully vested matching
contribution for employee deferrals up to 3% of compensation.
OTHER QUALIFIED PLANS
PURCHASE PAYMENTS. Purchase payments made by an employer under a pension,
profit-sharing, or annuity plan qualified under section 401 or 403(a) of the
Code, not in excess of certain limits, are deductible by the employer. Such
purchase payments are also excluded from the current income of the employee.
DISTRIBUTIONS PRIOR TO THE ANNUITY COMMENCEMENT DATE. To the extent that
purchase payments are includible in an employee's taxable income, they (less
any amounts previously received that were not includible in the employee's
taxable income) represent his or her "investment in the Contract." Amounts
received prior to the Annuity Commencement Date under a Contract in connection
with a section 401 or 403(a) plan are generally allocated on a pro-rata basis
between the employee's investment in the Contract and other amounts. With
respect to the taxable portion of a lump-sum distribution (as defined in the
Code), an averaging rule may be applicable that allows computation of tax as
if the amount were received over a period of five years. A lump-sum
distribution will not be includible in income in the year of distribution if
the employee transfers, within 60 days of receipt, all amounts received, less
the employee's investment in the Contract, to another tax-qualified plan or to
an individual retirement account or an IRA in accordance with the rollover
rules under the Code. However, any amount that is not distributed as a direct
rollover will be subject to 20% income tax withholding. See "Tax Free
Rollovers." Special tax treatment may be available in the case of certain
lump-sum distributions that are not rolled over to another plan or IRA.
A 10% penalty tax is imposed on the amount includible in gross income from
distributions that occur before the employee's attaining age 59 1/2 and that
are not made on account of death or disability, with certain exceptions. These
exceptions include distributions that are (1) part of a series of
substantially equal periodic payments beginning after the employee separates
from service and made over the life (or life expectancy) of the employee or
the joint lives (or joint life expectancies) of the employee and the
Beneficiary, (2) made after the employee's separation from service on account
of early retirement after age 55, or (3) made to an alternate payee pursuant
to a qualified domestic relations order.
ANNUITY PAYMENTS. A portion of annuity payments received under Contracts in
connection with section 401 and 403(a) plans after the Annuity Commencement
Date may be excludible from the employee's income, in the manner discussed
above, in connection with Variable Annuity Payments under "NonQualified
Contracts - Taxation of Annuity Payments", except that the number of expected
payments is determined under a provision in the Code. Distributions of minimum
amounts specified by the Code generally must commence by April 1 of the
calendar year following the calendar year in which the employee attains age 70
1/2 or retires, if later. Failure to comply with the minimum distribution
rules will result in the imposition of a penalty tax of 50% of the amount by
which the minimum distribution required exceeds the actual distribution.
SELF-EMPLOYED INDIVIDUALS. Various special rules apply to tax-qualified plans
established by self-employed individuals.
38
<PAGE>
PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS
PURCHASE PAYMENTS. Private taxable employers may establish unfunded,
Non-Qualified deferred compensation plans for a select group of management or
highly compensated employees and/or for independent contractors. These types
of programs allow individuals to defer receipt of up to 100% of compensation
that would otherwise be includible in income and therefore to defer the
payment of federal income taxes on such amounts, as well as earnings thereon.
Purchase payments made by the employer, however, are not immediately
deductible by the employer, and the employer is currently taxed on any
increase in Account Value.
Deferred compensation plans represent a contractual promise on the part of the
employer to pay current compensation at some future time. The Contract is
owned by the employer and is subject to the claims of the employer's
creditors. The individual has no right or interest in the Contract and is
entitled only to payment from the employer's general assets in accordance with
plan provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
FEDERAL INCOME TAX WITHHOLDING AND REPORTING
Amounts distributed from a Contract, to the extent includible in taxable
income, are subject to federal income tax withholding. The payee may, however,
elect to have no income tax withheld by submitting a withholding exemption
certificate to us.
In some cases, if you own more than one Qualified annuity contract, such
contracts may be aggregated for purposes of determining whether the federal
tax law requirement for minimum distributions after age 70 1/2, or retirement,
in appropriate circumstances, has been satisfied. If, under this aggregation
procedure, you are relying on distributions pursuant to another annuity
contract to satisfy the minimum distribution requirement under a Qualified
Contract issued by us, you must sign a waiver releasing us from any liability
to you for not calculating and reporting the amount of taxes and penalties
payable for failure to make required minimum distributions under the Contract.
TAXES PAYABLE BY AGL AND SEPARATE ACCOUNT D
AGL is taxed as a life insurance company under the Code. The operations of
Separate Account D are part of the total operations of AGL and are not taxed
separately. Under existing federal income tax laws, AGL is not taxed on
investment income derived by Separate Account D (including realized and
unrealized capital gains) with respect to the Contracts. AGL reserves the
right to allocate to the Contracts any federal, state or other tax liability
that may result in the future from mainenance of Separate Account D or the
Contracts.
Certain Series may make an election to pass through to AGL any taxes withheld
by foreign taxing jurisdictions on foreign source income. Such an election
will result in additional taxable income and income tax to AGL. The amount of
additional income tax, however, may be more than offset by credits for the
foreign taxes withheld, which are also passed through. These credits may
provide a benefit to AGL.
39
<PAGE>
DISTRIBUTION ARRANGEMENTS
The Contracts will be sold by individuals who, in addition to being licensed
by state insurance authorities to sell the Contracts of AGL, are also
registered representatives of American General Securities Incorporated
("AGSI"), the principal underwriter of the Contracts, or registered
representatives of WM Fund Services, Inc. or other broker-dealer firms or
representatives of other firms that are exempt from broker-dealer regulation.
AGSI, WM Fund Services, Inc. and any such other broker-dealer firms are
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as broker-dealers and are members of the National
Association of Securities Dealers, Inc. AGSI is a wholly-owned subsidiary of
AGL. AGSI's principal business address is the same as that of our Home Office.
The interests under the Contracts are offered on a continuous basis. AGSI and
WM Fund Services, Inc. have entered into certain revenue and cost-sharing
arrangements in connection with the marketing of the Contracts.
AGL compensates WM Fund Services, Inc. and other broker-dealers that sell the
Contracts according to one or more compensation schedules. The schedules
provide for commissions ranging from 3.50% up to 6.25% of first year purchase
payments received pursuant to the Contracts. In addition, depending on the
schedule selected, AGL may pay continuing "trail" commissions ranging from
0.25% to 0.50% of Contract Account Value. AGL also has agreed to pay WM Fund
Services, Inc. for its promotional activities such as the solicitation of
selling group agreements between broker-dealers and AGL, agent appointments
with AGL, printing and development of sales literature to be used by AGL
appointed agents as well as related marketing support and related special
promotional campaigns. These distribution expenses do not result in any
additional charges under the Contracts that are not described under "Charges
under the Contracts."
SERVICES AGREEMENT
American General Independent Producer Division ("AGIPD") is party to an
existing general services agreement with AGL. AGIPD, an affiliate of AGL, is a
corporation incorporated in Delaware on November 24, 1997. Pursuant to this
agreement, AGIPD provides services to AGL, including most of the
administrative, data processing, systems, customer services, product
development, actuarial, auditing, accounting and legal services for AGL and
the Contracts.
LEGAL MATTERS
The legality of the Contracts described in this Prospectus has been passed
upon by Steven A. Glover, Esquire, Senior Counsel of American General
Independent Producer Division. Freedman, Levy, Kroll & Simonds, Washington,
D.C., has advised AGL on certain federal securities law matters.
OTHER INFORMATION ON FILE
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 with respect to the Contracts
discussed in this Prospectus. Not all of the information set forth in the
Registration Statement and exhibits thereto has been included in this
Prospectus. Statements contained in this Prospectus concerning the Contracts
and other legal instruments are intended to be summaries. For a complete
statement of the terms of these documents, reference should be made to the
instruments filed with the Securities and Exchange Commission.
A Statement of Additional Information is available from us on request. Its
contents are as follows:
40
<PAGE>
<TABLE>
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
General Information...................................................... 2
Regulation and Reserves.................................................. 2
Independent Auditors..................................................... 2
Services................................................................. 3
Principal Underwriter.................................................... 3
Annuity Payments......................................................... 3
Gender of Annuitant.................................................... 3
Misstatement of Age or Sex and Other Errors............................ 3
Change of Investment Adviser or Investment Policy........................ 4
Performance Data for the Divisions....................................... 4
Financial Statements..................................................... 10
Index to Financial Statements............................................ 11
</TABLE>
41
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT D
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
OFFERED BY
AMERICAN GENERAL LIFE INSURANCE COMPANY
ANNUITY ADMINISTRATION DEPARTMENT
P.O. BOX 1401, HOUSTON, TEXAS 77251-1401
1-800-247-6584 713-831-3505
STATEMENT OF ADDITIONAL INFORMATION
Dated April 1, 1998
This Statement of Additional Information ("Statement") is not a prospectus. It
should be read with the Prospectus for American General Life Insurance Company
Separate Account D ("Separate Account D") concerning flexible premium deferred
annuity WM Strategic Asset Manager Contracts ("Contracts") investing in
certain mutual fund Series of the WM Variable Trust, dated April 1, 1998. You
can obtain a copy of the Prospectus for the Contracts by contacting American
General Life Insurance Company ("AGL") at the address or telephone numbers
given above. You have the option of receiving benefits on a fixed basis
through AGL's Fixed Account or through AGL's Separate Account D. Terms used in
this Statement have the same meanings as are defined in the Prospectus under
the heading "Glossary."
<TABLE>
TABLE OF CONTENTS
<S> <C>
General Information.......................................................... 2
Regulation and Reserves...................................................... 2
Independent Auditors......................................................... 2
Services..................................................................... 3
Principal Underwriter........................................................ 3
Annuity Payments............................................................. 3
Gender of Annuitant......................................................... 3
Misstatement of Age or Sex and Other Errors................................. 3
Change of Investment Adviser or Investment Policy............................ 4
Performance Data for the Divisions........................................... 4
Financial Statements......................................................... 10
Index to Financial Statements................................................ 11
</TABLE>
1
<PAGE>
GENERAL INFORMATION
AGL (formerly American General Life Insurance Company of Delaware) is a
successor in interest to a company previously organized as a Delaware
corporation in 1917. Effective December 31, 1991, AGL redomesticated as a
Texas insurer and changed its name to American General Life Insurance Company.
AGL is a wholly-owned subsidiary of AGC Life Insurance Company, a Missouri
corporation ("AG Missouri") engaged primarily in the life insurance business
and annuity business. AG Missouri, in turn, is a wholly-owned subsidiary of
American General Corporation, a Texas holding corporation engaged primarily in
the insurance business.
REGULATION AND RESERVES
AGL is subject to regulation and supervision by the insurance departments of
the states in which it is licensed to do business. This regulation covers a
variety of areas, including benefit reserve requirements, adequacy of
insurance company capital and surplus, various operational standards, and
accounting and financial reporting procedures. AGL's operations and accounts
are subject to periodic examination by insurance regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent insurance companies. The amount of any
future assessments of AGL under these laws cannot be reasonably estimated.
Most of these laws do provide, however, that an assessment may be excused or
deferred if it would threaten an insurer's own financial strength.
Although the federal government generally has not directly regulated the
business of insurance, federal initiatives often have an impact on the
business in a variety of ways. Federal measures that may adversely affect the
insurance business include employee benefit regulation, tax law changes
affecting the taxation of insurance companies or of insurance products,
changes in the relative desirability of various personal investment vehicles,
and removal of impediments on the entry of banking institutions into the
business of insurance. Also, both the executive and legislative branches of
the federal government have under consideration various insurance regulatory
matters, which could ultimately result in direct federal regulation of some
aspects of the insurance business. It is not possible to predict whether this
will occur or, if so, what the effect on AGL would be.
Pursuant to state insurance laws and regulations, AGL is obligated to carry on
its books, as liabilities, reserves to meet its obligations under outstanding
insurance contracts. These reserves are based on assumptions about, among
other things, future claims experience and investment returns. Neither the
reserve requirements nor the other aspects of state insurance regulation
provide absolute protection to holders of insurance contracts, including the
Contracts, if AGL were to incur claims or expenses at rates significantly
higher than expected, for example, due to acquired immune deficiency syndrome
or other infectious diseases or catastrophes, or significant unexpected losses
on its investments.
INDEPENDENT AUDITORS
The consolidated financial statements of AGL and the financial statements of
Separate Account D appearing in this Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein. Such financial statements have been
2
<PAGE>
included in this Statement in reliance upon such reports of Ernst & Young LLP
given upon the authority of such firm as experts in accounting and auditing.
Ernst & Young LLP is located at One Houston Center, Suite 2400, 1221 McKinney
Street, Houston, TX 77010-2007.
SERVICES
AGL and American General Independent Producer Division ("AGIPD") are parties
to a services agreement which has been entered into among most of the
affiliated companies within the American General Corporation holding company
system, including certain life insurance companies. AGIPD is a corporation
incorporated in Delaware on November 24, 1997, with its home office located at
2727-A Allen Parkway, Houston, Texas 77019. AGIPD provides shared services
including data processing, systems, customer services, product development,
actuarial, auditing, accounting and legal to AGL and certain other life
insurance companies at cost. AGL did not pay any fees to AGIPD in 1997 because
no services were performed.
PRINCIPAL UNDERWRITER
American General Securities Incorporated ("AGSI") is the principal underwriter
with respect to the Contracts. AGSI also serves as principal underwriter to
American General Life Insurance Company of New York Separate Account E, AGL's
Separate Account A, and AGL's Separate Account VL-R, all of which are unit
investment trusts registered under the Investment Company Act of 1940, as
amended.
As principal underwriter with respect to all contracts issued by AGL and
funded through Separate Account D, AGSI has received from AGL $13,954 in 1997
and less than $1,000 of compensation for each of the previous two years.
ANNUITY PAYMENTS
GENDER OF ANNUITANT
When annuity payments are based on life expectancy, the amount of each annuity
payment ordinarily will be higher if the Annuitant or other measuring life is
a male, as compared with a female under an otherwise identical Contract. This
is because, statistically, females tend to have longer life expectancies than
males.
However, there will be no differences between males and females in any
jurisdiction, including Montana, where such differences are not permitted. We
will also make available Contracts with no such differences in connection with
certain employer-sponsored benefit plans. Employers should be aware that,
under most such plans, Contracts that make distinctions based on gender are
prohibited by law.
MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the age or sex of an Annuitant has been misstated to us, any amount payable
will be that which the purchase payments paid would have purchased at the
correct age and sex. If we made any overpayments because of incorrect
information about age or sex, or any error or miscalculation, we will deduct
the overpayment from the next payment or payments due. We will add any
3
<PAGE>
underpayments to the next payment. The amount of any adjustment will be
credited or charged with interest at the assumed interest rate used in the
Contract's annuity tables.
CHANGE OF INVESTMENT ADVISER OR INVESTMENT POLICY
Unless otherwise required by law or regulation, neither the investment adviser
to any Portfolio or Fund nor any investment policy may be changed without the
consent of AGL. If required, approval of or change of any investment objective
will be filed with the insurance department of each state where a Contract has
been delivered. The Owner (or, after annuity payments start, the payee) will
be notified of any material investment policy change that has been approved.
You will be notified of any investment policy change prior to its
implementation by Separate Account D if your comment or vote is required for
such change.
PERFORMANCE DATA FOR THE DIVISIONS
Investment results for the available Divisions of Separate Account D may be
quoted from time to time. Such results will not be an estimate or guarantee of
future investment performance, and will not represent the actual experience of
amounts invested by a particular Owner. Performance figures will be carried to
the nearest one-hundredth of one percent and may include the effect of
voluntary fee waivers and expense reimbursements in favor of the Funds from
their investment adviser and administrator.
AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
Each Division may advertise its average annual total return. Each Division's
average annual total return quotation is computed in accordance with a
standard method prescribed by the Securities and Exchange Commission ("SEC").
The average annual total return for a Division for a specific period is found
by first taking a hypothetical $1,000 investment in the Division's
Accumulation Units on the first day of the period at the then-applicable
Accumulation Unit value per unit ("initial investment"), and computing the
ending redeemable value ("redeemable value") of that investment at the end of
the period. The redeemable value reflects the effect of the applicable
Surrender Charge that may be imposed at the end of the period as well as all
other recurring charges and fees applicable under the Contract to all Owner
accounts. Such other charges and fees include the mortality and expense risk
charge, the administrative expense charge and the Annual Contract Fee, but do
not include the charges for any applicable premium taxes. The redeemable value
is then divided by the initial investment, and this quotient is taken to the
Nth root (N represents the number of years in the period) and 1 is subtracted
from the result, which is then expressed as a percentage. In addition, a
Division may, from time to time, advertise average annual total return on a
non-standardized basis, where the actual historical performance of the
corresponding series in which the Division invests pre-dates the effective
date of the Division.
Average annual total return quotations for the period ended December 31, 1997
are set forth, for the indicated Divisions, in the table below.
<TABLE>
<CAPTION>
Since Division
Division Inception*
-------- --------------
<S> <C>
Strategic Growth Portfolio (0.45)%
Conservative Growth Portfolio (4.05)%
Balanced Portfolio (4.39)%
Flexible Income Portfolio (14.05)%
<FN>
* The Strategic Growth, Conservative Growth, and Balanced Portfolio
Divisions commenced operations on June 3, 1997; the Flexible Income
Portfolio Division commenced operations on September 9, 1997.
</FN>
</TABLE>
4
<PAGE>
TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER CHARGE OR ANNUAL CONTRACT FEE)
Each Division may also advertise its non-standardized total return, which is
calculated in the same manner and for the same time periods as the
standardized average annual total returns described immediately above, except
that the redeemable value does not reflect the deduction of any applicable
Surrender Charge that may be imposed at the end of the period, since it is
assumed that the Contract will continue through the end of each period, or the
deduction of the Annual Contract Fee. If reflected, these charges would reduce
the performance results presented.
Total return quotations (without Surrender Charge of Annual Contract Fee) for
the period ended December 31, 1997 are set forth, for the indicated Divisions,
in the table below.
<TABLE>
<CAPTION>
Since Division
Division Inception*
-------- --------------
<S> <C>
Strategic Growth Portfolio 10.97%
Conservative Growth Portfolio 7.19%
Balanced Portfolio 6.83%
Flexible Income Portfolio 6.18%
<FN>
* See footnote to previous table for dates when Divisions commenced
operations.
</FN>
</TABLE>
CUMULATIVE TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER
CHARGE OR ANNUAL CONTRACT FEE)
No standard formula has been prescribed by the SEC for calculating cumulative
total return performance. Cumulative total return performance is the compound
rate of return on a hypothetical initial investment of $1,000 in each
Division's Accumulation Units on the first day of the period at the maximum
offering price, which is the Accumulation Unit value per unit ("initial
investment"). Cumulative total return figures (and the related "Growth of a
$1,000 Investment" figures set forth below) do not include the effect of any
applicable Surrender Charge or the Annual Contract Fee. Cumulative total
return quotations reflect changes in Accumulation Unit value and are
calculated by finding the cumulative rates of return of the hypothetical
initial investment over various periods, according to the following formula,
and then expressing that as a percentage.
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: i.e., the value at the
end of the applicable period of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
5
<PAGE>
Cumulative total return quotations (without Surrender Charge or Annual
Contract Fee) for the period ended December 31, 1997 are set forth, for the
indicated Divisions, in the table below.
<TABLE>
<CAPTION>
Since Division
Division Inception*
-------- --------------
<S> <C>
Strategic Growth Portfolio 10.97%
Conservative Growth Portfolio 7.19%
Balanced Portfolio 6.83%
Flexible Income Portfolio 6.18%
<FN>
* See footnote to previous table for dates when Divisions commenced
operations.
</FN>
</TABLE>
HYPOTHETICAL PERFORMANCE
The tables below provide hypothetical performance information for the Money
Market Fund, Short Term High Quality Bond Fund, U.S. Government Securities
Fund, Income Fund, Growth & Income Fund, Growth Fund, Emerging Growth Fund and
International Growth Fund Divisions of Separate Account D based on the actual
historical performance of the corresponding Series in which the Division
invests. This information reflects all actual charges and deductions of the
Series and all Separate Account charges and deductions, with respect to the
Contracts, that hypothetically would have been made had the Separate Account,
with respect to the Contracts, been invested in the Series for all the periods
indicated. This information has not been provided for the Income Portfolio,
Bond & Stock Fund and Northwest Fund Divisions because the Series in which
these Divisions invest had not commenced operations as of the date of this
Statement.
<TABLE>
HYPOTHETICAL HISTORICAL AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1997)
<CAPTION>
Since
Series
Investment Division One Year Inception
<S> <C> <C>
Money Market Fund (2.86)% 2.28%
Short Term High Quality Bond Fund (2.03)% 1.73%
U.S. Government Securities Fund 1.46% 3.65%
Income Fund 3.42% 4.64%
Growth & Income Fund 20.43% 17.28%
Growth Fund 3.18% 14.66%
Emerging Growth Fund 4.62% 12.03%
International Growth Fund (10.38)% 3.72%
</TABLE>
6
<PAGE>
<TABLE>
HYPOTHETICAL HISTORICAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1997)
<CAPTION>
Since
Series
Investment Division One Year Inception
<S> <C> <C>
Money Market Fund 3.54% 3.00%
Short Term High Quality Bond Fund 4.36% 2.81%
U.S. Government Securities Fund 7.85% 4.34%
Income Fund 9.81% 5.30%
Growth & Income Fund 26.83% 18.00%
Growth Fund 9.58% 15.14%
Emerging Growth Fund 11.02% 12.86%
International Growth Fund (3.99)% 4.40%
</TABLE>
<TABLE>
HYPOTHETICAL HISTORICAL CUMULATIVE TOTAL RETURNS
(THROUGH DECEMBER 31, 1997)
<CAPTION>
Since
Series
Investment Division One Year Inception
<S> <C> <C>
Money Market Fund 3.54% 14.74%
Short Term High Quality Bond Fund 4.36% 11.64%
U.S. Government Securities Fund 7.85% 21.88%
Income Fund 9.81% 27.19%
Growth & Income Fund 26.83% 92.90%
Growth Fund 9.58% 92.72%
Emerging Growth Fund 11.02% 61.64%
International Growth Fund (3.99)% 22.20%
</TABLE>
<TABLE>
HYPOTHETICAL HISTORICAL GROWTH OF A $1,000 INVESTMENT IN THE DIVISION
(THROUGH DECEMBER 31, 1997)
<CAPTION>
Since
Series
Investment Division One Year Inception
<S> <C> <C>
Money Market Fund $1,035.38 $1,147.40
Short Term High Quality Bond Fund $1,043.61 $1,116.42
U.S. Government Securities Fund $1,078.52 $1,218.84
Income Fund $1,098.14 $1,271.92
Growth & Income Fund $1,268.26 $1,929.03
Growth Fund $1,095.78 $1,927.23
Emerging Growth Fund $1,110.17 $1,616.37
International Growth Fund $ 960.12 $1,222.04
</TABLE>
7
<PAGE>
YIELD CALCULATIONS
The yields for the U.S. Government Securities Fund, Short Term High Quality
Bond Fund, and Income Fund Divisions are each computed in accordance with a
standard method prescribed by the SEC. The yields for the U.S. Government
Securities Fund, Short Term High Quality Bond Fund, and Income Fund Divisions,
based upon the one month period ended December 31, 1997, were 3.77%, 4.51% and
4.23%, respectively. The yield quotation is computed by dividing the net
investment income per Accumulation Unit earned during the specified one month
or 30-day period by the Accumulation Unit value on the last day of the period,
according to the following formula that assumes a semi-annual reinvestment of
income:
a - b 6
YIELD = 2[(------- +1) - 1]
cd
Where:
a = Net dividends and interest earned during the period by the Fund
attributable to the Division.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding during the
period.
d = The Accumulation Unit value per unit on the last day of the period.
The yield of each Division reflects the deduction of all recurring fees and
charges applicable to each Division, such as the mortality and expense risk
charge and the administrative expense charge, but does not reflect the
deduction of Surrender Charges or the charge for any applicable premium taxes.
MONEY MARKET FUND DIVISION YIELD AND EFFECTIVE YIELD CALCULATIONS
The Money Market Fund Division's yield is computed in accordance with a
standard method prescribed by the SEC. Under that method, the current yield
quotation is based on a seven-day period and computed as follows: the net
change in the Accumulation Unit value during the period is divided by the
Accumulation Unit value at the beginning of the period to obtain the base
period return; the base period return is then multiplied by the fraction 365/7
to obtain the current yield figure. Realized capital gains or losses and
unrealized appreciation or depreciation of the Money Market Fund's assets are
not be included in the calculation. The Money Market Fund Division's yield for
the seven-day period ended December 31, 1997 was 3.58%.
The Money Market Fund Division's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period
365/7
return +1 -1 . The Money Market Fund Division's effective yield for the
seven-day period ended December 31, 1997 was 3.65%.
Yield and effective yield do not reflect the deduction of Surrender Charges or
the charges for any applicable premium taxes.
8
<PAGE>
PERFORMANCE COMPARISONS
The performance of any or all of the Divisions of Separate Account D may be
compared in advertisements and sales literature to the performance of other
variable annuity issuers in general or to the performance of particular types
of variable annuities investing in mutual funds, or series of mutual funds,
with investment objectives similar to each of the Divisions of Separate
Account D. Lipper Analytical Services, Inc. ("Lipper") and the Variable
Annuity Research and Data Service ("VARDS(R)") are independent services which
monitor and rank the performance of variable annuity issuers in each of the
major categories of investment objectives on an industry-wide basis. Lipper's
rankings include variable life issuers as well as variable annuity issuers.
VARDS(R) rankings compare only variable annuity issuers. The performance
analyses prepared by Lipper and VARDS(R) rank such issuers on the basis of
total return, assuming reinvestment of dividends and distributions, but do not
take sales charges, redemption fees or certain expense deductions at the
separate account level into consideration. In addition, VARDS(R) prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance.
In addition, each Division's performance may be compared in advertisements and
sales literature to the following benchmarks: (1) the Standard & Poor's 500
Composite Stock Price Index, an unmanaged weighted index of 500 leading
domestic companies that represents approximately 80% of the market
capitalization of the United States equity market; (2) the Dow Jones
Industrial Average, an unmanaged unweighted average of thirty blue chip
industrial corporations listed on the New York Stock Exchange and generally
considered representative of the United States stock market; (3) the Consumer
Price Index, published by the U.S. Bureau of Labor Statistics, a statistical
measure of change, over time, in the prices of goods and services in major
expenditure groups and generally considered to be a measure of inflation; (4)
the Lehman Brothers Government and Corporate Bond Index, the Salomon Brothers
High Grade Corporate Bond Index, and the Merrill Lynch Government/Corporate
Master Index, unmanaged indices that are generally considered to represent the
performance of intermediate and long term bonds during various market cycles;
and (5) the Morgan Stanley Capital International Europe Australia Far East
Index, an unmanaged index that is considered to be generally representative of
major non-United States stock markets.
9
<PAGE>
EFFECT OF TAX-DEFERRED ACCUMULATIONS
The charts below compare accumulations attributable to a single initial
contribution of $100,000, compounded annually, to (1) investments on which
earnings are not taxed until withdrawn, and (2) investments on which earnings
are taxed currently.
<TABLE>
<CAPTION>
5 YEARS 10 YEARS 20 YEARS
------- -------- --------
<S> <C> <C> <C>
(7.125% earnings rate)
Tax-Deferred........................... $141,076 $199,025 $396,111
Tax-Deferred (after taxes)............. $128,343 $168,327 $304,316
Taxable Investment..................... $127,120 $161,595 $261,129
(10.00% earnings rate)
Tax-Deferred........................... $161,051 $259,374 $672,750
Tax-Deferred (after taxes).............. $142,125 $209,968 $495,197
Taxable Investment...................... $139,601 $194,884 $379,799
</TABLE>
These hypothetical charts assume a 31% tax rate. The charts also assume that
no fees or charges are deducted from any of the investments. In the case of
the Contracts, the annual mortality and expense risk charge is 1.25 %, the
maximum surrender charge is 7% for withdrawals within the first seven years,
and annual administrative expense is .15%. The currently taxable investments
may incur comparable fees and charges. The application of fees and charges
would reduce the performance of the Contracts or any other investment. Taxes
are payable upon withdrawal under the Contracts, either at one time in the
case of a lump sum withdrawal, or on each payment in the case of
annuitization. An additional 10% penalty may apply to withdrawals before age
59 1/2.
This information is for illustrative purposes only and is not a guarantee of
future return.
FINANCIAL STATEMENTS
Separate Account D has 58 Divisions as of the date of this Statement, 15 of
which are available under the Contracts that are the subject of this
Statement. The December 31, 1997 financial statements for Separate Account D
which are included herein relate only to the 44 Divisions which had operations
as of December 31, 1997, one of which has discontinued operations as of
December 31, 1997. The remaining 15 Divisions of Separate Account D had no
operations as of December 31, 1997. Twelve of the 15 are not available under
the Contracts that are the subject of this Statement. The financial statements
of AGL that are included in this Statement should be considered primarily as
bearing on the ability of AGL to meet its obligations under the Contracts.
10
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
PAGE NO.
I. Financial Statements of American General Life Insurance Company
Separate Account D
Report of Ernst & Young LLP, Independent Auditors.................. 12
Statement of Net Assets ........................................... 14
Statement of Operations............................................ 14
Statement of Changes in Net Assets................................. 16
Notes to Financial Statements...................................... 17
II. AGL Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors.................. 34
Consolidated Balance Sheets........................................ 35
Consolidated Statements of Income.................................. 37
Consolidated Statements of Shareholder's Equity.................... 38
Consolidated Statements of Cash Flows.............................. 39
Notes to Consolidated Financial Statements......................... 40
11
<PAGE>
Report of Independent Auditors
Board of Directors
American General Life Insurance Company
and
Contract Owners
American General Life Insurance Company
Sierra Asset Manager Divisions
of Separate Account D
We have audited the accompanying statement of net assets of American General
Life Insurance Company (the "Company") Separate Account D as of December 31,
1997, the related statements of operations for the year then ended, and the
statement of changes in net assets for each of the two years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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. Our
procedures included confirmation of securities owned as of December 31,1997,
by correspondence with the transfer agents. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American General Life
Insurance Company Separate Account D at December 31, 1997, the results of its
operations for the year then ended, and the changes in its net assets for each
of the two years in the period then ended, in conformity with generally
accepted accounting principles.
/s/ERNST & YOUNG LLP
--------------------
Ernst & Young LLP
Houston, Texas
February 20, 1998
Page 12
<PAGE>
ASSETS:
Investment securities - at market (cost $556,585,333)
Due from (to) American General Life Insurance Company
NET ASSETS
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts
Reserves for annuity contracts on benefit
TOTAL CONTRACT OWNER RESERVES
INVESTMENT INCOME:
Dividends from mutual funds
EXPENSES:
Expense and mortality fee
NET INVESTMENT INCOME (EXPENSE)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments
Capital gain distributions from mutual funds
Net unrealized gain (loss) on investments
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
Page 13
<PAGE>
American General Life Insurance Company
SEPARATE ACCOUNT D
<TABLE>
STATEMENT OF NET ASSETS
December 31, 1997
<CAPTION>
TOTAL Sierra Sierra Asset VAriety All
ALL Generations Advantage Manager Plus Other
DIVISIONS Divisions Divisions Divisions Divisions Divisions
<S> <C> <C> <C> <C> <C>
$615,345,727 $ 65,816,261 $490,422,882 $ 4,508,584 $ 8,015,628 $ 46,582,372
26,463 2,087 31,578 (404) (4,328) ($2,470)
------------- ------------- ------------- ------------- ------------- -------------
$615,372,190 $ 65,818,348 $490,454,460 $ 4,508,180 $ 8,011,300 $ 46,579,902
============= ============= ============= ============= ============= =============
$613,489,997 $ 65,818,348 $490,164,695 $ 4,508,180 $ 8,011,300 $ 44,987,474
1,882,193 0 289,765 0 0 1,592,428
------------- ------------- ------------- ------------- ------------- -------------
$615,372,190 $ 65,818,348 $490,454,460 $ 4,508,180 $ 8,011,300 $ 46,579,902
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<CAPTION>
TOTAL Sierra Sierra Asset VAriety All
ALL Generations Advantage Manager Plus Other
DIVISIONS Divisions Divisions Divisions Divisions Divisions
<S> <C> <C> <C> <C> <C>
$ 15,595,064 $ 783,848 $ 12,394,967 $ 1,864 $ 276,472 $ 2,137,913
8,357,529 367,057 7,330,194 16,608 193,594 450,076
------------- ------------- ------------- ------------- ------------- -------------
7,237,535 416,791 5,064,773 (14,744) 82,878 1,687,837
------------- ------------- ------------- ------------- ------------- -------------
14,707,782 115,840 10,638,305 1,065 2,998,131 954,441
31,835,202 2,054,895 25,830,621 0 812,434 3,137,252
2,912,499 (163,184) 2,175,791 (18,848) (650,934) 1,569,674
------------- ------------- ------------- ------------- ------------- -------------
49,455,483 2,007,551 38,644,717 (17,783) 3,159,631 5,661,367
------------- ------------- ------------- ------------- ------------- -------------
$ 56,693,018 $ 2,424,342 $ 43,709,490 $ (32,527) $ 3,242,509 $ 7,349,204
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
Page 14
<PAGE>
OPERATIONS:
Net investment income (loss)
Net realized gain on investments
Capital gain distributions from mutual funds
Net unrealized gain (loss) on investments
Increase (decrease) in net assets resulting from operations
PRINCIPAL TRANSACTIONS:
Contract purchase payments, less sales and
administrative expenses and premium taxes
Mortality reserve transfers
Payments to contract owners:
Annuity benefits
Terminations and withdrawals
Increase (decrease) in net assets resulting
from principal transactions
TOTAL INCREASE (DECREASE) IN NET ASSETS
NET ASSETS:
Beginning of year
End of year
OPERATIONS:
Net investment income
Net realized gain on investments
Capital gain distributions from mutual funds
Net unrealized gain on investments
Increase in net assets resulting from
operations
PRINCIPAL TRANSACTIONS:
Contract purchase payments, less sales and
administrative expenses and premium taxes
Mortality reserve transfers
Payments to contract owners:
Annuity benefits
Terminations and withdrawals
Increase in net assets resulting from
principal transactions
TOTAL INCREASE IN NET ASSETS
NET ASSETS:
Beginning of year
End of year
Page 15
<PAGE>
American General Life Insurance Company
SEPARATE ACCOUNT D
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, 1997
<CAPTION>
TOTAL Sierra Sierra Asset VAriety All
ALL Generations Advantage Manager Plus Other
DIVISIONS Divisions Divisions Divisions Divisions Divisions
<S> <C> <C> <C> <C> <C>
$ 7,237,535 $ 416,791 $ 5,064,773 $ (14,744) $ 82,878 $ 1,687,837
14,707,782 115,840 10,638,305 1,065 2,998,131 954,441
31,835,202 2,054,895 25,830,621 0 812,434 3,137,252
2,912,499 (163,184) 2,175,791 (18,848) (650,934) 1,569,674
------------- ------------- ------------- ------------- ------------- -------------
56,693,018 2,424,342 43,709,490 (32,527) 3,242,509 7,349,204
------------- ------------- ------------- ------------- ------------- -------------
83,881,683 64,192,290 14,585,220 4,629,606 365,153 109,414
94,362 0 0 0 0 94,362
(864,001) 0 (75,522) 0 0 (788,479)
(66,416,425) (798,284) (48,587,933) (88,899) (12,284,089) (4,657,220)
------------- ------------- ------------- ------------- ------------- -------------
16,695,619 63,394,006 (34,078,235) 4,540,707 (11,918,936) (5,241,923)
------------- ------------- ------------- ------------- ------------- -------------
73,388,637 65,818,348 9,631,255 4,508,180 (8,676,427) 2,107,281
541,983,553 0 480,823,205 0 16,687,727 44,472,621
------------- ------------- ------------- ------------- ------------- -------------
$615,372,190 $ 65,818,348 $490,454,460 $ 4,508,180 $ 8,011,300 $ 46,579,902
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, 1996
<CAPTION>
TOTAL Sierra VAriety All
ALL Advantage Plus Other
DIVISIONS Divisions Divisions Divisions
<S> <C> <C> <C>
$ 7,876,766 $ 5,933,703 $ 150,434 $ 1,792,629
8,687,632 8,253,869 170,962 262,801
22,461,539 19,044,845 1,050,929 2,365,765
4,104,554 1,870,223 939,264 1,295,067
------------- ------------- ------------ ------------
43,130,491 35,102,640 2,311,589 5,716,262
------------- ------------- ------------ ------------
63,920,172 62,319,889 1,434,892 165,391
144,841 0 0 144,841
(839,183) (21,080) 0 (818,103)
33,720,448 38,172,970 291,213 (4,598,894)
------------- ------------- ------------ ------------
76,850,939 73,275,610 2,602,802 (1,117,368)
464,987,773 407,547,595 14,084,925 43,355,253
$541,838,712 $480,823,205 $16,687,727 $44,472,621
============= ============= ============ ============
<FN>
* Includes 1996 total Death Benefits of $6,009,362; reclassified from
Annuity Benefits for Sierra Advantage: $5,785,466; VAriety Plus: $4,946;
and All Other: $218,950.
</FN>
</TABLE>
See accompanying notes.
Page 16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPARATE ACCOUNT D
NOTE A - ORGANIZATION
Separate Account D (the "Separate Account"), established by American General
Life Insurance Company (the "Company") on November 19, 1973, is registered
under the Investment Company Act of 1940 as a unit investment trust. At
December 31, 1997, the Separate Account consisted of forty-four Divisions,
forty-two of which are currently available to purchasers through six different
American General annuity contracts. In late May 1997, an exchange offer was
extended to VAriety Plus contract owners whereby these contract owners could
exchange their current VAriety Plus contracts for the new Generations
contract. The new contract would have the same account value as the exchanged
contract. As of December 31, 1997, approximately 14% of the Generations
Division's contract purchase payments were a result of exchanges from VAriety
Plus contracts. The Van Kampen American Capital Life Investment Trust
Strategic Stock Portfolio was made available to contract owners in October
1997. During November 1997, purchases of shares in the Sierra Asset Manager
Income Portfolio were suspended, but these shares are expected to become
available again during the first quarter of 1998.
Also, several additional Divisions funded by series of the Sierra Variable
Trust ("Trust") are expected to become available to the Sierra Asset Manager
contract owners during the first quarter of 1998.
During January 1998, the Short Term Global Government Division of Separate
Account D was eliminated due to the fund merger of the Short Term Global
Government Fund into the Short Term High Quality Bond Fund of the Trust. On
January 30, 1998, all contract owner account values which had been previously
allocated to the Short Term Global Government Division were transferred to the
Short Term High Quality Bond Division. The Divisions available through the six
variable annuity contracts at December 31, 1997 were as follows:
<TABLE>
<S> <C>
GENERATIONS: VARIETY PLUS:
Morgan Stanley Universal Funds, Inc. Van Kampen American Capital Life Investment Trust ("LIT")
Asian Equity Portfolio LIT Money Market Portfolio
Emerging Markets Equity Portfolio LIT Domestic Income Portfolio
Fixed Income Portfolio LIT Enterprise Portfolio
Global Equity Portfolio LIT Government Portfolio
Equity Growth Portfolio LIT Asset Allocation Portfolio
High Yield Portfolio Variable Insurance Products ("VIP") Fund and ("VIP") Fund II
International Magnum Portfolio VIPFII Asset Manager Portfolio
Mid Cap Value Portfolio VIPF Overseas Portfolio
Value Portfolio VIPFII Index 500 Portfolio
Van Kampen American Capital Life Investment Trust ("LIT") Neuberger & Berman Advisors Management Trust ("AMT")
LIT Domestic Income Portfolio AMT Balanced Portfolio
LIT Emerging Growth Portfolio AMT Partners Portfolio
LIT Enterprise Portfolio American General Series Portfolio Company ("AGSPC")
LIT Government Portfolio AGSPC Stock Index Fund
LIT Growth and Income Portfolio AGSPC Social Awareness Fund
LIT Money Market Portfolio AGSPC International Equities Fund
LIT Morgan Stanley Real Estate Securities Portfolio
LIT Strategic Stock Portfolio
SIERRA ADVANTAGE: SEPARATE ACCOUNT D (DEFERRED LOAD):
International Growth Fund Van Kampen American Capital Life Investment Trust ("LIT")
Short Term Global Government Fund LIT Money Market Portfolio
Growth Fund LIT Domestic Income Portfolio
Global Money Fund LIT Enterprise Portfolio
U.S. Government Fund
Growth and Income Fund
Corporate Income Fund ALL OTHER SEPARATE ACCOUNT D CONTRACTS:
Short Term High Quality Bond Fund (Issued prior to January 1, 1982)
Emerging Growth Fund Van Kampen American Capital
Comstock Fund
SIERRA ASSET MANAGER: Corporate Bond Fund
Capital Growth Portfolio Reserve Fund
Growth Portfolio High Income Corporate Bond Fund
Balanced Portfolio Van Kampen American Capital Life Investment Trust ("LIT")
Value Portfolio LIT Money Market Portfolio
Global Money Fund LIT Domestic Income Portfolio
LIT Enterprise Portfolio
</TABLE>
Page 17
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES & BASIS OF PRESENTATION
The accompanying financial statements of the Divisions of the Separate Account
have been prepared on the basis of generally accepted accounting principles
("GAAP"). The accounting principles followed by the Divisions and the methods
of applying those principles are presented below or in the footnotes which
follow:
SECURITY VALUATION - The investment in shares of Van Kampen, Morgan Stanley,
AGSPC, ("VIP") Funds, Neuberger & Berman and Sierra mutual funds or portfolios
are valued at the closing net asset value (market) per share as determined by
the fund on the day of measurement.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions
are accounted for on the date the order to buy or sell is executed (trade
date). Dividend income and distributions of capital gains are recorded on the
ex-dividend date and reinvested upon receipt. Realized gains and losses from
security transactions are determined on the basis of identified cost.
ADMINISTRATIVE EXPENSES AND MORTALITY AND EXPENSE RISK CHARGE - Deductions for
administrative expenses and mortality and expense risk charges assumed by the
Company are calculated daily, at an annual rate, on the average daily net
asset value of the Separate Account and are paid to the Company.
An annual maintenance charge may be imposed on the last day of each contract
year during the accumulation period for administrative expenses with respect
to each contract. A surrender charge is applicable to certain withdrawal
amounts and is payable to the Company. The deductions are as follows for the
period ended December 31, 1997:
<TABLE>
<CAPTION>
Annual
Administrative Expenses, Annual Maintenance Surrender
Mortality & Expense Risk Maintenance Charges Charges
Contracts Annual Rate Charge Collected Collected
--------- ------------------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Generations.................................. 1.40% 30 0 $3,303
Sierra Asset Manager......................... 1.40% 35 0 $1,353
Sierra Advantage............................. 1.50% N/A N/A $1,341,792
VAriety Plus................................. 1.55% 36 $10,296 $43,974
Separate Account D (deferred load)........... 1.25% 30 $15,720 $512
Separate Account D (Issued prior to
January 1, 1982)........................... 0.75% N/A N/A N/A
</TABLE>
Sales and other administrative charges are applicable to certain transaction
amounts on contracts, excluding Generations, Sierra Advantage, Sierra Asset
Manager, and VAriety Plus contracts, and are payable to the Company. The total
sales and administrative charges collected for the period ended December 31,
1997 were $1,070.
The funds pay their investment advisors, Van Kampen American Capital Asset
Management, Inc., Morgan Stanley Asset Management, Inc., Miller Anderson &
Sherrerd, LLP, The Variable Annuity Life Insurance Company ("VALIC"), Fidelity
Management & Research Company, Neuberger & Berman Management Incorporated,
Sierra Investment Services Corporation, and Sierra Investment Advisors
Corporation, a monthly fee based on the fund's or portfolio's, average net
asset value.
ANNUITY RESERVES - Generations, Sierra Advantage, Sierra Asset Manager, and
VAriety Plus annuity reserves are computed for currently payable contracts
according to the 1983a Individual Annuity Mortality Table projected under
Scale G factors at an assumed interest rate of 3.5%. For all other contracts,
annuity reserves are computed according to the Progressive Annuity Mortality
Table at an assumed interest rate of 3%. Charges to annuity reserves for
mortality and expense risk experience are reimbursed to the Company if the
reserves required are less than originally estimated. If additional reserves
are required, the Company reimburses the separate account.
NOTE C - FEDERAL INCOME TAXES
The Company is taxed as a life insurance company under the Internal Revenue
Code and includes the operations of the Separate Account in determining its
federal income tax liability. Under existing federal income tax law, the
investment income and capital gains from sale of investments realized by the
Separate Account are not taxable. Therefore, no federal income tax provision
has been made.
Page 18
<PAGE>
NOTE D - INVESTMENTS
Fund or portfolio shares are purchased at net asset value with net contract
payments (contract purchase payments less surrenders and amounts payable to
the Company for administrative and surrender charges) and reinvestment of
distributions made by the funds or portfolios. The following is a summary of
fund or portfolio shares owned as of December 31, 1997. Net Value of Cost of
Unrealized Asset Shares at Shares Appreciation/
<TABLE>
<CAPTION>
Net Value of Cost of Unrealized
Asset Shares at Shares Appreciation/
Fund Shares Value Market Held (Depreciation)
<S> <C> <C> <C> <C>
Morgan Stanley Asian Equity Portfolio.............. 35,708.541 $ 5.64 $ 201,396 316,249 $ (114,853)
Morgan Stanley Emerging Markets Equity Portfolio... 155,981.070 9.43 1,470,902 1,764,716 (293,814)
Morgan Stanley Fixed Income Portfolio.............. 113,784.004 10.41 1,184,491 1,174,177 10,314
Morgan Stanley Global Equity Portfolio............. 216,773.902 11.74 2,544,926 2,488,964 55,962
Morgan Stanley Equity Growth Portfolio............. 415,846.751 12.74 5,297,888 5,006,513 291,375
Morgan Stanley High Yield Portfolio................ 280,998.087 10.59 2,975,770 3,022,332 (46,562)
Morgan Stanley International Magnum Portfolio...... 496,079.929 10.38 5,149,310 5,554,496 (405,186)
Morgan Stanley Mid Cap Value Portfolio............. 496,657.187 13.32 6,615,474 6,393,881 221,593
Morgan Stanley Value Portfolio..................... 731,164.223 11.78 8,613,115 8,634,924 (21,809)
Sierra International Growth Fund................... 4,009,881.994 12.26 49,161,153 48,822,903 338,250
Sierra Short Term Global Government Fund........... 7,298,973.514 2.48 18,101,454 17,792,874 308,580
Sierra Growth Fund................................. 7,835,129.120 15.41 120,739,340 104,025,962 16,713,378
Sierra Global Money Fund........................... 32,211,066.350 1.00 32,211,066 32,211,066 0
Sierra U.S. Government Fund........................ 6,081,727.705 10.04 61,060,546 59,051,369 2,009,177
Sierra Growth and Income Fund...................... 5,939,800.160 16.92 100,501,419 76,357,854 24,143,565
Sierra Corporate Income Fund....................... 5,068,889.130 10.19 51,651,980 48,930,724 2,721,256
Sierra Short Term High Quality Bond Fund........... 4,898,665.602 2.43 11,903,757 12,069,364 (165,607)
Sierra Emerging Growth Fund........................ 2,890,657.924 15.63 45,180,984 37,734,797 7,446,187
Sierra Asset Manager Capital Growth Portfolio...... 55,291.599 10.70 591,620 597,069 (5,449)
Sierra Asset Manager Growth Portfolio.............. 130,945.783 10.49 1,373,621 1,392,117 (18,496)
Sierra Asset Manager Balanced Portfolio............ 224,852.388 10.47 2,354,205 2,350,275 3,930
Sierra Asset Manager Value Portfolio............... 9,806.546 10.23 100,321 99,154 1,167
Van Kampen Comstock Fund........................... 454,021.315 16.20 7,355,145 6,701,970 653,175
Van Kampen Corporate Bond Fund..................... 78,446.633 7.10 556,971 541,886 15,085
Van Kampen High Income Corporate Bond Fund......... 1,978,268.772 6.55 12,957,660 12,022,849 934,811
Van Kampen Reserve Fund............................ 1,165,892.074 1.00 1,165,892 1,165,892 0
Van Kampen LIT Asset Allocation Portfolio.......... 202,483.225 11.91 2,411,575 2,302,744 108,831
Van Kampen LIT Domestic Income Portfolio........... 830,535.312 8.25 6,851,915 6,730,892 121,023
Van Kampen LIT Emerging Growth Portfolio........... 302,956.112 16.45 4,983,628 4,705,712 277,916
Van Kampen LIT Enterprise Portfolio................ 1,372,481.285 18.11 24,855,637 22,454,079 2,401,558
Van Kampen LIT Government Portfolio................ 167,289.758 8.92 1,492,224 1,446,158 46,066
Van Kampen LIT Growth and Income Portfolio........ 915,240.691 12.12 11,092,717 10,693,042 399,675
Van Kampen LIT Money Market Portfolio.............. 5,914,006.650 1.00 5,914,007 5,914,007 0
Van Kampen LIT MS Real Estate Securities Portfolio 127,771.132 15.85 2,025,172 2,037,240 (12,068)
Van Kampen LIT Strategic Stock Portfolio........... 226,576.405 10.25 2,322,408 2,312,791 9,617
VIPF II Asset Manager Portfolio.................... 20,844.319 18.01 375,406 318,832 56,574
VIPF Overseas Portfolio............................ 10,506.174 19.20 201,719 177,639 24,080
VIPF II Index 500 Portfolio........................ 2,009.369 114.39 229,852 184,443 45,409
Neuberger & Berman AMT Balanced Portfolio.......... 7,486.741 17.80 133,264 116,879 16,385
Neuberger & Berman AMT Partners Portfolio.......... 12,088.749 20.60 249,028 208,525 40,503
AGSPC Stock Index Fund............................. 35,190.927 29.70 1,045,171 625,193 419,978
AGSPC Social Awareness Fund........................ 2,737.671 19.75 54,069 42,188 11,881
AGSPC International Equities Fund.................. 8,288.733 10.56 87,529 90,592 (3,063)
------------- ----------- ------------
$615,345,727 556,585,333 $58,760,394
============= =========== ============
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments for the
period ended December 31, 1997 were $177,270,367 and $121,531,701,
respectively. The cost of total investments owned at December 31, 1997 was the
same for both financial reporting and federal income tax purposes. Gross
unrealized appreciation and gross unrealized depreciation as of December 31,
1997 were $59,847,301 and $1,086,907, respectively.
Page 19
<PAGE>
Note E - Summary of Changes in Units
Changes in Units for the Year Ended December 31, 1997
GENERATIONS
<TABLE>
<CAPTION>
Morgan Stanley Morgan Stanley Morgan Stanley Morgan Stanley Morgan Stanley
CONTRACTS IN Asian Equity Emerging Markets Fixed Income Global Equity Equity Growth
ACCUMULATION PERIOD Portfolio Equity Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period... 0.000 0.000 0.000 0.000 0.000
Purchase payments.................... 63,928.070 292,520.126 195,502.682 410,903.211 812,548.750
Surrenders........................... 0.000 (2,711.276) (6,489.425) (4,352.239) (22,327.053)
Transfers to annuity................. 0.000 0.000 0.000 0.000 0.000
Transfers between funds.............. 6,331.977 30,474.778 29,986.603 24,376.333 58,689.072
-------------- -------------- -------------- -------------- --------------
Outstanding at end of period......... 70,260.047 320,283.628 218,999.860 430,927.305 848,910.769
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Morgan Stanley Morgan Stanley Morgan Stanley Morgan Stanley Van Kampen
High Yield International Mid Cap Value Value LIT Domestic
Portfolio Magnum Portfolio Portfolio Portfolio Income Portfolio
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period... 0.000 0.000 0.000 0.000 0.000
Purchase payments.................... 489,468.330 820,619.283 925,401.988 1,347,645.572 123,082.193
Surrenders........................... (7,003.579) (5,004.795) (12,820.318) (19,306.896) (503.766)
Transfers to annuity................. 0.000 0.000 0.000 0.000 0.000
Transfers between funds.............. 51,359.014 152,656.135 92,015.750 156,354.458 17,600.603
-------------- -------------- -------------- -------------- --------------
Outstanding at end of period......... 533,823.765 968,270.623 1,004,597.420 1,484,693.134 140,179.030
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Van Kampen
Van Kampen Van Kampen Van Kampen LIT Growth Van Kampen
LIT Emerging LIT Enterprise LIT Government and Income LIT Money Market
Growth Portfolio Portfolio Portfolio Portfolio Market Portfolio
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period... 0.000 0.000 0.000 0.000 0.000
Purchase payments.................... 537,468.499 394,842.289 104,479.532 1,669,358.574 609,179.193
Surrenders........................... (4,958.871) (4,046.252) (5,321.123) (5,980.786) (14,325.569)
Transfers to annuity................. 0.000 0.000 0.000 0.000 0.000
Transfers between funds.............. 94,994.151 45,821.575 (6,011.329) 220,107.475 (399,495.773)
-------------- -------------- -------------- -------------- --------------
Outstanding at end of period......... 627,503.779 436,617.612 93,147.080 1,883,485.263 195,357.851
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Van Kampen
LIT Morgan Stanley Van Kampen
Real Estate LIT Strategic
Securities Portfolio Stock Portfolio
<S> <C> <C>
Outstanding at beginning of period... 0.000 0.000
Purchase payments.................... 193,816.246 339,311.452
Surrenders........................... (1,772.429) 0.000
Transfers to annuity................. 0.000 0.000
Transfers between funds.............. 34,729.553 114,668.859
-------------- --------------
Outstanding at end of period......... 226,773.370 453,980.311
============== ==============
</TABLE>
Page 20
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1997
SIERRA ADVANTAGE
<TABLE>
<CAPTION>
CONTRACTS IN International Short Term Global Global U. S. Government
ACCUMULATION PERIOD Growth Fund Government Fund Growth Fund Money Fund Fund
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period.. 49,208,677.687 20,093,503.244 66,849,400.755 21,051,065.909 59,114,942.951
Purchase payments................... 1,368,306.336 302,715.958 1,588,056.880 1,276,385.612 1,469,411.569
Surrenders.......................... (4,119,589.671) (2,371,874.000) (6,223,304.506) (2,517,039.513) (5,396,986.584)
Transfers to annuity................ (25,820.684) (6,528.383) (29,264.701) 0.000 (2,956.090)
Transfers between funds............. (6,043,574.547) (1,923,793.259) 1,269,180.541 8,299,259.110 (4,891,104.175
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 40,387,999.121 16,094,023.560 63,454,068.969 28,109,671.118 50,293,307.671
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Short Term
Growth and Corporate High Quality Emerging
Income Fund Income Fund Bond Fund Growth Fund
<S> <C> <C> <C> <C>
Outstanding at beginning of period.. 41,176,555.767 51,843,333.618 11,613,016.642 38,477,387.014
Purchase payments................... 1,744,717.237 1,180,921.519 353,090.726 1,189,260.411
Surrenders.......................... (4,462,517.038) (4,553,483.320) (776,476.187) (3,312,246.151)
Transfers to annuity................ (39,050.980) (4,429.448) (6,655.461) (12,100.967)
Transfers between funds............. 13,893,842.996 (7,681,710.114) (494,001.348) (8,300,018.499)
--------------- --------------- --------------- ---------------
Outstanding at end of period........ 52,313,547.982 40,784,632.255 10,688,974.372 28,042,281.808
=============== =============== =============== ===============
</TABLE>
SIERRA ASSET MANAGER
<TABLE>
Capital Growth Growth Balanced Value Global
ACCUMULATION PERIOD Portfolio Portfolio Portfolio Portfolio Money Fund
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period.. 0.000 0.000 0.000 0.000 0.000
Purchase payments................... 103,398.584 264,167.965 466,025.153 19,655.774 19,185.017
Surrenders.......................... (934.953) (2,788.477) (13,083.700) 0.000 (209.207)
Transfers to annuity................ 0.000 0.000 0.000 0.000 0.000
Transfers between funds............. 9,031.205 2,659.128 398.353 0.000 (1,551.362)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 111,494.836 264,038.616 453,339.806 19,655.774 17,424.448
=============== =============== =============== =============== ===============
</TABLE>
VARIETY PLUS
<TABLE>
<CAPTION>
Van Kampen
Van Kampen LIT Domestic Van Kampen Van Kampen Van Kampen
LIT Money Income LIT Enterprise LIT Government LIT Asset
ACCUMULATION PERIOD Market Portfolio Portfolio Portfolio Portfolio Allocation Portfolio
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period.. 281,932.427 519,521.316 2,171,958.516 606,324.715 1,312,447.189
Purchase payments................... 1,698.102 8,640.857 27,959.540 14,867.248 1,344.446
Surrenders.......................... (138,735.041) (268,608.601) (1,554,071.789) (257,973.729) (452,861.232)
Transfers to annuity................ 0.000 0.000 0.000 0.000 0.000
Transfers between funds............. (136,285.414) (64,658.696) 10,290.907 (33,484.384) 14,621.685
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 8,610.074 194,894.876 656,137.174 329,733.850 875,552.088
=============== =============== =============== =============== ===============
</TABLE>
Page 21
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1997
VARIETY PLUS - CONTINUED
<TABLE>
<CAPTION>
Neuberger & Neuberger &
VIPF II VIPF VIPF II Berman Berman
CONTRACTS IN Asset Manager Overseas Index 500 AMT Balanced AMT Partners
ACCUMULATION PERIOD Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period.. 334,306.414 154,553.519 520,274.332 140,503.286 858,370.358
Purchase payments................... 3,442.581 500.890 36,900.318 1,490.079 63,574.571
Surrenders.......................... (205,566.403) (73,633.834) (479,514.638) (87,452.424) (828,722.898)
Transfers to annuity................ 0.000 0.000 0.000 0.000 0.000
Transfers between funds............. 20,534.555 19,182.181 17,067.801 11,769.020 23,225.970
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 152,717.147 100,602.756 94,727.813 66,309.961 116,448.001
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
ACCUMULATION PERIOD AGSPC AGSPC
AGSPC Stock Social Awareness International
Index Fund Fund Equities Fund
<S> <C> <C> <C>
Outstanding at beginning of period.. 583,158.984 50,449.583 248,580.093
Purchase payments................... 10,652.682 3,121.231 935.592
Surrenders.......................... (318,254.100) (34,733.469) (160,655.975)
Transfers to annuity................ 0.000 0.000 0.000
Transfers between funds............. 19,765.928 0.000 (15,217.003)
--------------- --------------- ---------------
Outstanding at end of period........ 295,323.494 18,837.345 73,642.707
=============== =============== ===============
</TABLE>
OTHER CONTRACTS
<TABLE>
<CAPTION>
Van Kampen
Van Kampen High Income Van Kampen
Van Kampen Corporate Bond Van Kampen Corporate Bond LIT Money
ACCUMULATION PERIOD Comstock Fund Fund Reserve Fund Fund Market Portfolio
<S> <C> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period.. 355,740.984 119,483.537 319,468.863 2,625,848.963 778,448.359
Purchase payments................... 204.006 0.000 183.990 177.705 0.000
Surrenders.......................... (47,910.651) (5,540.382) (91,704.653) (174,288.212) (35,416.799)
Transfers to annuity................ 0.000 0.000 0.000 0.000 0.000
Transfers between funds............. 152,591.091 0.000 62,031.328 851.384 (119,053.867)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 460,625.430 113,943.155 289,979.528 2,452,589.840 623,977.693
=============== =============== =============== =============== ===============
Qualified Contracts:
Outstanding at beginning of period.. 129,270.376 0.000 48,356.841 59,031.631 22,426.173
Purchase payments................... 186.039 0.000 141.957 188.358 0.000
Surrenders.......................... (9,964.955) 0.000 (2,814.944) 0.000 (2,472.924)
Transfers to annuity................ 0.000 0.000 0.000 0.000 0.000
Transfers between funds............. (119,491.460) 0.000 (45,683.854) (59,219.989) 0.000
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 0.000 0.000 0.000 0.000 19,953.249
=============== =============== =============== =============== ===============
</TABLE>
Page 22
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1997
OTHER CONTRACTS - CONTINUED
<TABLE>
<CAPTION>
Van Kampen LIT Van Kampen Van Kampen
CONTRACTS IN Money Market Van Kampen LIT Domestic Van Kampen LIT Enterprise
ACCUMULATION PERIOD Portfolio LIT Domestic Income Portfolio LIT Enterprise Portfolio
(Deferred Load) Income Portfolio (Deferred Load) Portfolio (Deferred Load)
<S> <C> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period.. 718,991.534 500,363.487 846,323.540 268,156.295 1,460,642.457
Purchase payments................... 4,420.116 0.000 2,619.935 0.000 3,303.407
Surrenders.......................... (125,129.215) (52,510.820) (161,469.372) (20,287.907) (150,491.429)
Transfers to annuity................ 0.000 0.000 0.000 0.000 0.000
Transfers between funds............. 76,638.056 112,161.622 142,204.084 31,853.982 622,330.700
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 674,920.491 560,014.289 829,678.187 279,722.370 1,935,785.135
=============== =============== =============== =============== ===============
Qualified Contracts:
Outstanding at beginning of period.. 355,591.425 41,117.046 187,682.090 4,202.245 719,775.814
Purchase payments................... 14,877.895 0.000 18.281 0.000 5,154.287
Surrenders.......................... (9,145.520) 0.000 (1,506.423) 0.000 (76,036.494)
Transfers to annuity................ 0.000 0.000 0.000 0.000 0.000
Transfers between funds............. 0.000 (41,117.046) (186,193.948) (4,202.245) (648,893.607)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 361,323.800 0.000 0.000 0.000 0.000
=============== =============== =============== =============== ===============
</TABLE>
SIERRA ADVANTAGE
<TABLE>
<CAPTION>
CONTRACTS IN International Short Term Global Global U. S. Government
ANNUITY PERIOD Growth Fund Government Fund Growth Fund Money Fund Fund
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period 14,905.021 18,793.341 15,030.132 7,893.562 19,180.553
Transfers from accumulation 25,780.084 6,374.970 29,264.701 0.000 2,886.619
Annuity benefits (7,850.282) (7,150.189) (8,740.231) (1,947.619) (5,251.986)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period 32,834.823 18,018.122 35,554.602 5,945.943 16,815.186
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Short Term
Growth and Corporate High Quality Emerging
Income Fund Income Fund Bond Fund Growth Fund
<S> <C> <C> <C> <C>
Outstanding at beginning of period 8,843.952 22,490.997 0.000 10,611.843
Transfers from accumulation 39,050.980 4,325.352 6,499.058 12,100.967
Annuity benefits (8,479.492) (7,936.717) (1,162.440) (4,549.112)
--------------- --------------- --------------- ---------------
Outstanding at end of period 39,415.440 18,879.632 5,336.618 18,163.698
=============== =============== =============== ===============
</TABLE>
Page 23
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1997
OTHER CONTRACTS
<TABLE>
<CAPTION>
Van Kampen Van Kampen
High Income Van Kampen LIT Money Market
CONTRACTS IN Van Kampen Van Kampen Corporate Bond LIT Money Portfolio
ANNUITY PERIOD Comstock Fund Reserve Fund Fund Market Fund (Deferred Load)
<S> <C> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period.. 6,075.218 47,100.155 87,580.783 16,191.671 289,556.153
Transfers from accumulation......... 0.000 0.000 0.000 0.000 0.000
Mortality Reserve Transfers......... (580.192) 0.000 3,358.714 5,026.830 5,345.304
Annuity benefits.................... (1,569.131) (11,750.280) (18,685.375) (3,162.869) (144,851.575)
Transfers between funds............. 0.000 0.000 3,912.986 0.000 0.000
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 3,925.895 35,349.875 76,167.108 18,055.632 150,049.882
Qualified Contracts:
Outstanding at beginning of period.. 0.000 0.000 4,208.266 0.000 2,281.709
Transfers from accumulation......... 0.000 0.000 0.000 0.000 0.000
Mortality Reserve Transfers......... 0.000 0.000 0.000 0.000 0.000
Annuity benefits.................... 0.000 0.000 (318.732) 0.000 (306.428)
Transfers between funds............. 0.000 0.000 (3,889.534) 0.000 0.000
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period........ 0.000 0.000 0.000 0.000 1,975.281
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Van Kampen Van Kampen
Van Kampen LIT Domestic Van Kampen LIT Enterprise
LIT Domestic Income Portfolio LIT Enterprise Portfolio
Income Portfolio (Deferred Load) Portfolio (Deferred Load)
<S> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period.. 11,436.990 60,968.140 11,508.638 85,397.440
Transfers from accumulation......... 0.000 0.000 0.000 0.000
Mortality Reserve Transfers......... 5,026.923 1,374.967 0.000 5,483.702
Annuity benefits.................... (5,021.674) (30,410.160) (1,613.722) (36,333.055)
Transfers between funds............. 95.228 357.635 0.000 0.000
--------------- --------------- --------------- ---------------
Outstanding at end of period 11,537.467 32,290.582 9,894.916 54,548.087
=============== =============== =============== ===============
Qualified Contracts:
Outstanding at beginning of period.. 89.380 12,490.782 0.000 1,504.936
Transfers from accumulation......... 0.000 0.000 0.000 0.000
Mortality Reserve Transfers......... 0.000 0.000 0.000 0.000
Annuity benefits.................... 0.000 (2,901.652) 0.000 (175.062)
Transfers between funds............. (89.380) (338.588) 0.000 0.000
--------------- --------------- --------------- ---------------
Outstanding at end of period 0.000 9,250.542 0.000 1,329.874
=============== =============== =============== ===============
</TABLE>
Page 24
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1996
SIERRA ADVANTAGE
<TABLE>
<CAPTION>
Short Term
Global
CONTRACTS IN International Government Global U. S. Government
ACCUMULATION PERIOD Growth Fund Fund Growth Fund Money Fund Fund
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period....... 38,882,135.444 23,376,496.403 65,732,670.354 19,070,427.181 47,440,751.595
Purchase payments........................ 5,764,727.855 823,425.493 7,956,730.419 5,200,191.953 6,228,720.252
Surrenders............................... (2,265,550.102) (1,734,078.214) (3,016,815.821) (1,095,488.892) (3,518,537.910)
Transfers to annuity..................... (15,963.133) (6,097.866) (12,788.652) (8,500.903) (20,672.538)
Transfers between funds.................. 6,843,327.623 (2,366,242.572) (3,810,395.545) (2,115,563.430) 8,984,681.552
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............. 49,208,677.687 20,093,503.244 66,849,400.755 21,051,065.909 59,114,942.951
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Short Term
Growth and Corporate High Quality Emerging
Income Fund Income Fund Bond Fund Growth Fund
<S> <C> <C> <C> <C>
Outstanding at beginning of period...... 36,675,025.766 52,014,100.048 11,822,728.277 34,379,287.120
Purchase payments....................... 8,537,457.784 5,251,049.786 1,617,072.331 6,624,985.814
Surrenders.............................. (1,751,987.311) (3,393,206.396) (545,483.502) (1,578,433.352)
Transfers to annuity.................... (9,531.916) (8,122.761) 0.000 (11,325.843)
Transfers between funds................. (2,274,408.556) (2,020,487.059) (1,281,300.464) (937,126.725)
--------------- --------------- --------------- ---------------
Outstanding at end of period............ 41,176,555.767 51,843,333.618 11,613,016.642 38,477,387.014
=============== =============== =============== ===============
</TABLE>
VARIETY PLUS
<TABLE>
<CAPTION>
Van Kampen Van Kampen
Van Kampen LIT Domestic Van Kampen Van Kampen LIT Asset
LIT Money Income LIT Enterprise LIT Government Allocation
ACCUMULATION PERIOD Market Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period...... 31,023.098 643,469.587 2,193,267.495 648,110.420 1,387,133.759
Purchase payments....................... 2,564.198 49,958.499 111,360.191 18,542.595 48,895.083
Surrenders.............................. (123,953.182) (34,524.433) (85,025.999) (30,217.268) (69,659.359)
Transfers to annuity.................... 0.000 0.000 0.000 0.000 0.000
Transfers between funds................. 372,298.313 (139,382.337) (47,643.171) (30,111.032) (53,922.294)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 281,932.427 519,521.316 2,171,958.516 606,324.715 1,312,447.189
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Neuberger & Neuberger &
VIPF II VIPF VIPF II Berman Berman
Asset Manager Overseas Index 500 AMT Balanced AMT Partners
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period...... 368,506.813 150,156.224 255,919.568 126,436.941 573,999.606
Purchase payments....................... 78,232.603 22,650.982 192,419.319 34,995.016 197,533.041
Surrenders.............................. (25,254.384) (224.253) (2,405.849) (10,711.695) (35,249.198)
Transfers to annuity.................... 0.000 0.000 0.000 0.000 0.000
Transfers between funds................. (87,178.618) (18,029.434) 74,341.294 (10,216.976) 122,086.909
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 334,306.414 154,553.519 520,274.332 140,503.286 858,370.358
=============== =============== =============== =============== ===============
</TABLE>
Page 25
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1996
VARIETY PLUS - CONTINUED
<TABLE>
<CAPTION>
AGSPC Stock AGSPC
CONTRACTS IN AGSPC Stock Social Awareness International
ACCUMULATION PERIOD Index Fund Fund Equities Fund
<S> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period...... 648,212.914 41,609.618 478,545.500
Purchase payments....................... 24,666.084 13,999.802 10,802.158
Surrenders.............................. (59,334.026) (5,159.837) (57,804.040)
Transfers to annuity.................... 0.000 0.000 0.000
Transfers between funds................. (30,385.988) 0.000 (182,963.525)
--------------- --------------- ---------------
Outstanding at end of period............ 583,158.984 50,449.583 248,580.093
=============== =============== ===============
</TABLE>
OTHER CONTRACTS
<TABLE>
<CAPTION>
Van Kampen Van Kampen
Van Kampen High Income LIT Money
Van Kampen Corporate Bond Van Kampen Corporate Bond Market
ACCUMULATION PERIOD Comstock Fund Fund Reserve Fund Fund Portfolio
<S> <C> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period...... 355,463.749 137,367.827 328,703.184 2,993,479.694 702,423.167
Purchase payments....................... 0.000 0.000 0.000 0.000 0.000
Surrenders.............................. 0.000 0.000 (32,775.708) (296,622.519) (32,384.793)
Transfers to annuity.................... 0.000 0.000 0.000 (3,929.146) 0.000
Transfers between funds................. 277.235 (17,884.290) 23,541.387 (67,079.066) 108,409.985
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 355,740.984 119,483.537 319,468.863 2,625,848.963 778,448.359
=============== =============== =============== =============== ===============
Qualified Contracts:
Outstanding at beginning of period...... 151,148.632 0.000 48,115.813 74,802.608 22,426.173
Purchase payments....................... 590.322 0.000 241.028 4,358.243 0.000
Surrenders.............................. (22,242.117) 0.000 0.000 (20,129.220) 0.000
Transfers to annuity.................... 0.000 0.000 0.000 0.000 0.000
Transfers between funds................. (226.461) 0.000 0.000 0.000 0.000
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 129,270.376 0.000 48,356.841 59,031.631 22,426.173
=============== =============== =============== =============== ===============
</TABLE>
Page 26
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1996
OTHER CONTRACTS - CONTINUED
<TABLE>
<CAPTION>
Van Kampen LIT Van Kampen Van Kampen
Money Market Van Kampen LIT Domestic Van Kampen LIT Enterprise
CONTRACTS IN Portfolio LIT Domestic Income Portfolio LIT Enterprise Portfolio
ACCUMULATION PERIOD (Deferred Load) Income Portfolio (Deferred Load) Portfolio (Deferred Load)
<S> <C> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period...... 848,950.504 584,683.467 951,382.221 288,310.619 1,596,083.456
Purchase payments....................... 23,268.333 0.000 3,410.320 0.000 0.000
Surrenders.............................. (162,081.382) (8,767.951) (90,790.215) (5,221.464) (128,193.870)
Transfers to annuity.................... 0.000 0.000 0.000 (11,131.252) 0.000
Transfers between funds................. 8,854.079 (75,552.029) (17,678.786) (3,801.608) (7,247.129)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 718,991.534 500,363.487 846,323.540 268,156.295 1,460,642.457
=============== =============== =============== =============== ===============
Qualified Contracts:
Outstanding at beginning of period...... 371,366.831 41,117.046 238,660.088 4,202.245 766,615.798
Purchase payments....................... 15,504.335 0.000 829.118 0.000 8,853.705
Surrenders.............................. (36,762.279) 0.000 (50,551.636) 0.000 (53,865.084)
Transfers to annuity.................... 0.000 0.000 0.000 0.000 0.000
Transfers between funds................. 5,482.538 0.000 (1,255.480) 0.000 (1,828.605)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 355,591.425 41,117.046 187,682.090 4,202.245 719,775.814
=============== =============== =============== =============== ===============
</TABLE>
SIERRA ADVANTAGE
<TABLE>
<CAPTION>
Short Term
Global
CONTRACTS IN International Government Global U. S. Government
ANNUITY PERIOD Growth Fund Fund Growth Fund Money Fund Fund
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period...... 0.000 17,801.266 4,198.762 0.000 0.000
Transfers from accumulation............. 15,963.133 6,097.866 12,788.652 8,500.903 20,672.538
Annuity benefits........................ (1,058.112) (5,105.791) (1,957.282) (607.341) (1,491.985)
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 14,905.021 18,793.341 15,030.132 7,893.562 19,180.553
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Short Term
Growth and Corporate High Quality Emerging
Income Fund Income Fund Bond Fund Growth Fund
<S> <C> <C> <C> <C>
Outstanding at beginning of period...... 0.000 20,438.943 0.000 0.000
Transfers from accumulation............. 9,531.916 8,122.761 0.000 11,325.843
Annuity benefits........................ (687.964) (6,070.707) 0.000 (714.000)
--------------- --------------- --------------- ---------------
Outstanding at end of period............ 8,843.952 22,490.997 0.000 10,611.843
=============== =============== =============== ===============
</TABLE>
Page 27
<PAGE>
NOTE E - SUMMARY OF CHANGES IN UNITS - CONTINUED
CHANGES IN UNITS FOR THE YEAR ENDED DECEMBER 31, 1996
OTHER CONTRACTS
<TABLE>
<CAPTION>
Van Kampen Van Kampen
High Income Van Kampen LIT Money Market
CONTRACTS IN Van Kampen Van Kampen Corporate Bond LIT Money Portfolio
ANNUITY PERIOD Comstock Fund Reserve Fund Fund Fund (Deferred Load)
<S> <C> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period...... 24,802.485 59,202.979 88,097.148 18,851.842 439,584.645
Transfers from accumulation............. 0.000 0.000 3,929.145 0.000 0.000
Mortality Reserve Transfer.............. 0.000 0.000 21,817.344 0.000 0.000
Annuity benefits........................ (18,727.267) (12,102.824) (26,262.854) (2,660.171) (150,028.492)
Transfers between funds................. 0.000 0.000 0.000 0.000 0.000
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 6,075.218 47,100.155 87,580.783 16,191.671 289,556.153
=============== =============== =============== =============== ===============
Qualified Contracts:
Outstanding at beginning of period...... 0.000 0.000 4,900.348 0.000 4,816.161
Transfers from accumulation............. 0.000 0.000 0.000 0.000 0.000
Mortality Reserve Transfer.............. 0.000 0.000 0.000 0.000 0.000
Annuity benefits........................ 0.000 0.000 (692.082) 0.000 (2,534.452)
Transfers between funds................. 0.000 0.000 0.000 0.000 0.000
--------------- --------------- --------------- --------------- ---------------
Outstanding at end of period............ 0.000 0.000 4,208.266 0.000 2,281.709
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Van Kampen Van Kampen
Van Kampen LIT Domestic Van Kampen LIT Enterprise
LIT Domestic Income Portfolio LIT Enterprise Portfolio
Income Portfolio (Deferred Load) Portfolio (Deferred Load)
<S> <C> <C> <C> <C>
Non-Qualified Contracts:
Outstanding at beginning of period...... 9,252.599 93,503.376 2,184.759 124,157.660
Transfers from accumulation............. 0.000 0.000 10,869.668 0.000
Mortality Reserve Transfer.............. 7,681.063 0.000 0.000 0.000
Annuity payments........................ (5,496.672) (32,535.236) (1,545.789) (38,760.220)
Transfers between funds................. 0.000 0.000 0.000 0.000
--------------- --------------- --------------- ---------------
Outstanding at end of period............ 11,436.990 60,968.140 11,508.638 85,397.440
=============== =============== =============== ===============
Qualified Contracts:
Outstanding at beginning of period...... 89.380 17,309.669 0.000 4,098.540
Transfers from accumulation............. 0.000 0.000 0.000 0.000
Mortality Reserve Transfer.............. 0.000 0.000 0.000 0.000
Annuity payments........................ 0.000 (4,818.887) 0.000 (2,593.604)
Transfers between funds................. 0.000 0.000 0.000 0.000
--------------- --------------- --------------- ---------------
Outstanding at end of period............ 89.380 12,490.782 0.000 1,504.936
=============== =============== =============== ===============
</TABLE>
Page 28
<PAGE>
NOTE F - NET ASSETS REPRESENTED BY:
DECEMBER 31, 1997
<TABLE>
CONTRACTS IN ACCUMULATION PERIOD
GENERATIONS: Units Unit Value Amount
<S> <C> <C> <C>
Morgan Stanley Asian Equity Portfolio 70,260.047 $ 2.866335 $ 201,389
Morgan Stanley Emerging Markets Equity Portfolio 320,283.628 4.592849 1,471,014
Morgan Stanley Fixed Income Portfolio 218,999.860 5.408434 1,184,446
Morgan Stanley Global Equity Portfolio 430,927.305 5.905700 2,544,927
Morgan Stanley Equity Growth Portfolio 848,910.769 6.241285 5,298,294
Morgan Stanley High Yield Portfolio 533,823.765 5.574231 2,975,657
Morgan Stanley International Magnum Portfolio 968,270.623 5.318456 5,149,705
Morgan Stanley Mid Cap Value Portfolio 1,004,597.420 6.585704 6,615,981
Morgan Stanley Value Portfolio 1,484,693.134 5.801721 8,613,775
Van Kampen LIT Domestic Income Portfolio 140,179.030 9.781081 1,371,102
Van Kampen LIT Emerging Growth Portfolio 627,503.779 7.942509 4,983,954
Van Kampen LIT Enterprise Portfolio 436,617.612 17.240471 7,527,493
Van Kampen LIT Government Portfolio 93,147.080 9.402347 875,801
Van Kampen LIT Growth and Income Portfolio 1,883,485.263 5.889714 11,093,190
Van Kampen LIT Money Market Portfolio 195,357.851 8.010579 1,564,930
Van Kampen LIT Morgan Stanley Real Estate Securities
Portfolio 226,773.370 8.930383 2,025,173
Van Kampen LIT Strategic Stock Portfolio 453,980.311 5.113696 2,321,517
-------------
65,818,348
-------------
SIERRA ADVANTAGE:
International Growth fund 40,387,999.121 1.216333 49,125,256
Short Term Global Government Fund 16,094,023.560 1.123566 18,082,698
Growth Fund 63,454,068.969 1.901874 120,681,644
Global Money Fund 28,109,671.118 1.142761 32,122,636
U.S. Government Fund 50,293,307.671 1.213519 61,031,884
Growth and Income Fund 52,313,547.982 1.919847 100,434,008
Corporate Income Fund 40,784,632.255 1.265975 51,632,325
Short Term High Quality Bond Fund 10,688,974.372 1.113184 11,898,795
Emerging Growth Fund 28,042,281.808 1.610263 45,155,449
-------------
490,164,695
-------------
SIERRA ASSET MANAGER:
Capital Growth Portfolio 111,494.836 5.306927 591,695
Growth Portfolio 264,038.616 5.202749 1,373,727
Balanced Portfolio 453,339.806 5.192835 2,354,119
Value Portfolio 19,655.774 5.092810 100,103
Global Money Fund 17,424.448 5.081131 88,536
-------------
4,508,180
-------------
</TABLE>
Page 29
<PAGE>
NOTE F - NET ASSETS REPRESENTED BY:- CONTINUED
DECEMBER 31, 1997
<TABLE>
ACCUMULATION PERIOD
VARIETY PLUS: Units Unit Value Amount
<S> <C> <C> <C>
Van Kampen LIT Money Market Portfolio 8,610.074 $ 1.579853 $ 13,603
Van Kampen LIT Domestic Income Portfolio 194,894.876 1.922982 374,779
Van Kampen LIT Enterprise Portfolio 656,137.174 3.386227 2,221,829
Van Kampen LIT Government Portfolio 329,733.850 1.868603 616,142
Van Kampen LIT Asset Allocation Portfolio 875,552.088 2.754235 2,411,476
VIPF II Asset Manager Portfolio 152,717.147 2.455920 375,061
VIPF Overseas Portfolio 100,602.756 2.003249 201,532
VIPF II Index 500 Portfolio 94,727.813 2.422917 229,518
Neuberger and Berman AMT Balanced Portfolio 66,309.961 2.000830 132,675
Neuberger and Berman AMT Partners Portfolio 116,448.001 2.139023 249,085
AGSPC Stock Index Fund 295,323.494 3.537886 1,044,821
AGSPC Social Awareness Fund 18,837.345 2.861183 53,897
AGSPC International Equities Fund 73,642.707 1.179779 86,882
-------------
8,011,300
-------------
OTHER CONTRACTS:
Non Qualified:
Van Kampen Comstock Fund 460,625.430 15.832238 7,292,731
Van Kampen Corporate Bond Fund 113,943.155 4.879717 556,010
Van Kampen Reserve Fund 289,979.528 3.582554 1,038,867
Van Kampen High Income Corporate Bond Fund 2,452,589.840 5.123925 12,566,886
Van Kampen LIT Money Market Portfolio 623,977.693 2.458040 1,533,762
Van Kampen LIT Money Market Portfolio (deferred load) 674,920.491 2.279095 1,538,140
Van Kampen LIT Domestic Income Portfolio 560,014.289 3.744334 2,096,881
Van Kampen LIT Domestic Income Portfolio (deferred load) 829,678.187 3.401203 2,821,904
Van Kampen LIT Enterprise Portfolio 279,722.370 7.057857 1,974,241
Van Kampen LIT Enterprise Portfolio (deferred load) 1,935,785.135 6.558347 12,695,551
Qualified:
Van Kampen LIT Money Market Portfolio 19,953.249 2.458040 49,046
Van Kampen LIT Money Market Portfolio (deferred load) 361,323.800 2.279095 823,455
-------------
44,987,474
-------------
Total Accumulation Period $613,489,997
-------------
</TABLE>
Page 30
<PAGE>
NOTE F - NET ASSETS REPRESENTED BY: - CONTINUED
DECEMBER 31, 1997
<TABLE>
CONTRACTS IN ANNUITY PERIOD
SIERRA ADVANTAGE: Units Unit Value Amount
<S> <C> <C> <C>
International Growth fund 32,834.823 $ 1.216333 $ 39,938
Short Term Global Government Fund 18,018.122 1.123566 20,244
Growth Fund 35,554.602 1.901874 67,620
Global Money Fund 5,945.943 1.142761 6,795
U.S. Government Fund 16,815.186 1.213519 20,406
Growth and Income Fund 39,415.440 1.919847 75,672
Corporate Income Fund 18,879.632 1.265975 23,901
Short Term High Quality Bond Fund 5,336.618 1.113184 5,941
Emerging Growth Fund 18,163.698 1.610263 29,248
-------------
289,765
-------------
OTHER CONTRACTS:
Non Qualified:
Van Kampen Comstock Fund 3,925.895 15.832238 62,156
Van Kampen Reserve Fund 35,349.875 3.582554 126,643
Van Kampen High Income Corporate Bond Fund 76,167.108 5.123925 390,275
Van Kampen LIT Money Market Portfolio 18,055.632 2.458040 44,381
Van Kampen LIT Money Market Portfolio (deferred load) 150,049.882 2.278995 341,963
Van Kampen LIT Domestic Income Portfolio 11,537.467 3.744334 43,200
Van Kampen LIT Domestic Income Portfolio (deferred load) 32,290.582 3.401203 109,827
Van Kampen LIT Enterprise Portfolio 9,894.916 7.057857 69,837
Van Kampen LIT Enterprise Portfolio (deferred load) 54,548.087 6.558347 357,745
Qualified:
Van Kampen LIT Money Market Portfolio (deferred load) 1,975.281 2.278995 4,502
Van Kampen LIT Domestic Income Portfolio (deferred load) 9,250.542 3.592546 33,233
Van Kampen LIT Enterprise Portfolio (deferred load) 1,329.874 6.516619 8,666
-------------
1,592,428
-------------
Total Annuity Period 1,882,193
-------------
Total Contract Owner Reserves $615,372,190
=============
</TABLE>
Page 31
<PAGE>
NOTE F - NET ASSETS REPRESENTED BY: - CONTINUED
DECEMBER 31, 1996
<TABLE>
CONTRACTS IN ACCUMULATION PERIOD
<CAPTION>
SIERRA ADVANTAGE: Units Unit Value Amount
<S> <C> <C> <C>
International Growth fund 49,208,677.687 $ 1.268100 $ 62,401,524
Short Term Global Government Fund 20,093,503.244 1.090434 21,910,639
Growth Fund 66,849,400.755 1.735437 116,012,924
Global Money Fund 21,051,065.909 1.104596 23,252,923
U.S. Government Fund 59,114,942.951 1.126013 66,564,194
Growth and Income Fund 41,176,555.767 1.516522 62,445,153
Corporate Income Fund 51,843,333.618 1.154101 59,832,443
Short Term High Quality Bond Fund 11,613,016.642 1.067037 12,391,518
Emerging Growth Fund 38,477,387.014 1.451796 55,861,317
-------------
480,672,635
-------------
VARIETY PLUS:
Van Kampen LIT Money Market Portfolio 281,932.417 1.526177 430,279
Van Kampen LIT Domestic Income Portfolio 519,521.316 1.745051 906,591
Van Kampen LIT Enterprise Portfolio 2,171,958.516 2.631841 5,716,250
Van Kampen LIT Government Portfolio 606,324.715 1.730000 1,048,942
Van Kampen LIT Asset Allocation Portfolio 1,312,447.189 2.296074 3,013,476
VIPF II Asset Manager Portfolio 334,306.414 2.067111 691,048
VIPF Overseas Portfolio 154,553.519 1.823575 281,840
VIPF II Index 500 Portfolio 520,274.332 1.854189 964,687
Neuberger and Berman AMT Balanced Portfolio 140,503.286 1.700950 238,989
Neuberger and Berman AMT Partners Portfolio 858,370.358 1.654969 1,420,576
AGSPC Stock Index Fund 583,158.984 2.699296 1,574,119
AGSPC Social Awareness Fund 50,449.583 2.170641 109,508
AGSPC International Equities Fund 248,580.093 1.172348 291,422
-------------
16,687,727
-------------
OTHER CONTRACTS:
Non Qualified:
Van Kampen Comstock Fund 355,740.984 12.280239 4,368,584
Van Kampen Corporate Bond Fund 119,483.537 4.442165 530,766
Van Kampen Reserve Fund 319,468.863 3.446824 1,101,153
Van Kampen High Income Corporate Bond Fund 2,625,848.963 4.599039 12,076,381
Van Kampen LIT Money Market Portfolio 778,448.359 2.356167 1,834,154
Van Kampen LIT Money Market Portfolio (deferred load) 718,991.534 2.194923 1,578,131
Van Kampen LIT Domestic Income Portfolio 500,363.487 3.371713 1,687,082
Van Kampen LIT Domestic Income Portfolio (deferred load) 846,323.540 3.077291 2,604,384
Van Kampen LIT Enterprise Portfolio 268,156.295 5.443324 1,459,662
Van Kampen LIT Enterprise Portfolio (deferred load) 1,460,642.457 5.082117 7,423,155
Qualified:
Van Kampen Comstock Fund 129,270.376 15.572965 2,013,123
Van Kampen Reserve Fund 48,356.841 3.448038 166,736
Van Kampen High Income Corporate Bond Fund 59,031.631 4.626772 273,126
Van Kampen LIT Money Market Portfolio 22,426.173 2.356167 52,840
Van Kampen LIT Money Market Portfolio (deferred load) 355,591.425 2.194923 780,496
Van Kampen LIT Domestic Income Portfolio 41,117.046 3.592272 147,704
Van Kampen LIT Domestic Income Portfolio (deferred load) 187,682.090 3.250419 610,045
Van Kampen LIT Enterprise Portfolio 4,202.245 5.026041 21,121
Van Kampen LIT Enterprise Portfolio (deferred load) 719,775.814 5.049783 3,634,712
-------------
42,363,355
-------------
Total Accumulation Period $539,723,717
=============
</TABLE>
Page 32
<PAGE>
NOTE F - NET ASSETS REPRESENTED BY: - CONTINUED
DECEMBER 31, 1996
<TABLE>
CONTRACTS IN ANNUITY PERIOD
<CAPTION>
SIERRA ADVANTAGE: Units Unit Value Amount
<S> <C> <C> <C>
International Growth Fund 14,905.021 $ 1.268100 $ 18,901
Short Term Global Government Fund 18,793.341 1.090434 20,493
Growth Fund 15,030.132 1.735437 26,084
Global Money Fund 7,893.562 1.104596 8,719
U.S. Government Fund 19,180.553 1.126013 21,598
Growth and Income Fund 8,843.952 1.516522 13,412
Corporate Income Fund 22,490.997 1.154101 25,957
Emerging Growth Fund 10,611.843 1.451796 15,406
-------------
150,570
-------------
OTHER CONTRACTS:
Non Qualified:
Van Kampen Comstock Fund 6,075.218 12.280239 74,605
Van Kampen Reserve Fund 47,100.155 3.446824 162,346
Van Kampen High Income Corporate Bond Fund 87,580.783 4.599039 402,788
Van Kampen LIT Money Market Portfolio 16,191.671 2.356167 38,150
Van Kampen LIT Money Market Portfolio (deferred load) 289,556.153 2.194923 635,553
Van Kampen LIT Domestic Income Portfolio 11,436.990 3.371713 38,562
Van Kampen LIT Domestic Income Portfolio (deferred load) 60,968.140 3.077291 187,617
Van Kampen LIT Enterprise Portfolio 11,508.638 5.443324 62,645
Van Kampen LIT Enterprise Portfolio (deferred load) 85,397.440 5.082117 434,000
Qualified:
Van Kampen High Income Corporate Bond Fund 4,208.266 4.626772 19,471
Van Kampen LIT Money Market Portfolio (deferred load) 2,281.709 2.194923 5,008
Van Kampen LIT Domestic Income Portfolio 89.380 3.592272 321
Van Kampen LIT Domestic Income Portfolio (deferred load) 12,490.782 3.250419 40,600
Van Kampen LIT Enterprise Portfolio (deferred load) 1,504.936 5.049783 7,600
-------------
2,109,266
-------------
Total Annuity Period 2,259,836
-------------
Total Contract Owner Reserves $541,983,553
=============
</TABLE>
NOTE G - YEAR 2000 CONTINGENCy
The Company is in the process of modifying its information technology to be
ready for the Year 2000. The Company expects the project to be substantially
complete by 1998. All costs associated with required modifications will be
paid for by the Company.
Page 33
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN GENERAL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
Report of Independent Auditors.........................................
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................
Consolidated Income Statements.........................................
Consolidated Statements of Shareholders' Equity........................
Consolidated Statements of Cash Flows..................................
Notes to Consolidated Financial Statements.............................
<PAGE>
ERNST & YOUNG LLP One Houston Center Phone: 713 750 1500
Suite 2400 Fax: 713 750 1501
1221 McKinney Street
Houston, Texas 77010-2007
Report of Independent Auditors
Board of Directors and Stockholders
American General Life Insurance Company
We have audited the accompanying consolidated balance sheets of American
General Life Insurance Company (an indirectly wholly owned subsidiary of
American General Corporation) and subsidiaries as of December 31, 1997 and ,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American General
Life Insurance Company and subsidiaries at December 31, 1997 and , and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ERNST & YOUNG LLP
--------------------
Ernst & Young LLP
February 23, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
34
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities, at fair value (amortized cost -
$26,131,207 in 1997 and $24,762,134 in 1996) $ 27,386,715 $ 25,395,381
Equity securities, at fair value (cost - $19,208 in 1997
and $17,642 in 1996) 21,114 20,555
Mortgage loans on real estate 1,659,921 1,707,843
Policy loans 1,093,694 1,006,137
Investment real estate 129,364 145,442
Other long-term investments 55,118 43,344
Short-term investments 100,061 94,882
---------------------------------
Total investments 30,445,987 28,413,584
Cash 99,284 33,550
Investment in Parent Company (cost - $8,597 in 1997
and 1996) 37,823 28,597
Indebtedness from affiliates 96,519 86,488
Accrued investment income 433,111 392,058
Accounts receivable 208,209 170,457
Deferred policy acquisition costs 835,031 1,042,783
Property and equipment 33,827 35,414
Other assets 132,659 134,289
Assets held in separate accounts 11,242,270 7,727,189
---------------------------------
Total assets $ 43,564,720 $ 38,064,409
=================================
</TABLE>
SEE ACCOMPANYING NOTES.
35
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 27,849,893 $ 26,558,538
Other policy claims and benefits payable 42,677 41,679
Other policyholders' funds 398,314 376,675
Federal income taxes 543,379 402,361
Indebtedness to affiliates 4,712 3,376
Other liabilities 421,861 325,630
Liabilities related to separate accounts 11,242,270 7,727,189
---------------------------------
Total liabilities 40,503,106 35,435,448
Shareholders' equity:
Common stock, $10 par value, 600,000 shares authorized,
issued, and outstanding 6,000 6,000
Preferred stock, $100 par value, 8,500 shares authorized,
issued, and outstanding 850 850
Additional paid-in capital 1,184,743 933,342
Net unrealized investment gains 427,526 219,151
Retained earnings 1,442,495 1,469,618
---------------------------------
Total shareholders' equity 3,061,614 2,628,961
---------------------------------
Total liabilities and shareholders' $ 43,564,720 $ 38,064,409
equity =================================
</TABLE>
SEE ACCOMPANYING NOTES.
36
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
Consolidated Income Statements
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
(IN THOUSANDS)
Revenues:
<S> <C> <C> <C>
Revenues:
Premiums and other considerations $ 428,721 $ 382,923 $ 342,420
Net investment income 2,198,623 2,095,072 2,011,088
Net realized investment gains (losses) 29,865 28,502 (1,942)
Other 53,370 41,968 27,172
---------------------------------------------
Total revenues 2,710,579 2,548,465 2,378,738
Benefits and expenses:
Benefits 1,757,504 1,689,011 1,641,206
Operating costs and expenses 379,012 347,369 309,110
Interest expense 782 830 2,180
---------------------------------------------
Total benefits and expenses 2,137,298 2,037,210 1,952,496
---------------------------------------------
Income before income tax expense 573,281 511,255 426,242
Income tax expense 198,724 176,660 143,947
---------------------------------------------
Net income $ 374,557 $ 334,595 $ 282,295
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
37
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 6,000 $ 6,000 $ 6,000
Change during year - - -
--------------------------------------------
Balance at end of year 6,000 6,000 6,000
Preferred stock:
Balance at beginning of year 850 850 -
Change during year - - 850
--------------------------------------------
Balance at end of year 850 850 850
Additional paid-in capital:
Balance at beginning of year 933,342 858,075 850,358
Capital contribution from Parent Company 250,000 75,000 -
--------------------------------------------
Other changes during year 1,401 267 7,717
--------------------------------------------
Balance at end of year 1,184,743 933,342 858,075
Net unrealized investment gains (losses):
Balance at beginning of year 219,151 493,594 (730,900)
Change during year 208,375 (274,443) 1,224,494
--------------------------------------------
Balance at end of year 427,526 219,151 493,594
Retained earnings:
Balance at beginning of year 1,469,618 1,324,703 1,249,109
Net income 374,557 334,595 282,295
Dividends paid (401,680) (189,680) (206,701)
--------------------------------------------
Balance at end of year 1,442,495 1,469,618 1,324,703
--------------------------------------------
Total shareholders' equity $ 3,061,614 $ 2,628,961 $ 2,683,222
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
38
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 374,557 $ 334,595 $ 282,295
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts receivable (37,752) 3,846 (18,654)
Change in future policy benefits and other
policy claims (1,143,736) (543,193) (70,383)
Amortization of policy acquisition costs 115,467 102,189 68,295
Policy acquisition costs deferred (219,339) (188,001) (203,607)
Change in other policyholders' funds 21,639 63,174 (69,126)
Provision for deferred income tax expense 13,264 12,388 (9,773)
Depreciation 16,893 16,993 18,119
Amortization (28,276) (30,758) (35,825)
Change in indebtedness to/from affiliates (8,695) 4,432 7,596
Change in amounts payable to brokers 31,769 (25,260) 30,964
Net (gain) loss on sale of investments (29,865) (28,502) 1,942
Other, net 30,409 32,111 46,863
-----------------------------------------------
Net cash (used in) provided by operating activities (863,665) (378,286) 181,006
INVESTING ACTIVITIES
Purchases of investments and loans made (29,638,861) (27,245,453) (14,573,323)
Sales or maturities of investments and receipts
from repayment of loans 28,300,238 25,889,422 12,528,185
Sales and purchases of property and equipment, net (9,230) (8,057) (12,114)
-----------------------------------------------
Net cash used in investing activities (1,347,853) (1,364,088) (2,057,252)
FINANCING ACTIVITIES
Policyholder account deposits 4,187,191 3,593,380 3,372,522
Policyholder account withdrawals (1,759,660) (1,746,987) (1,258,560)
Dividends paid (401,680) (189,680) (206,701)
Capital contribution from Parent 250,000 75,000 -
Other 1,401 267 67
-----------------------------------------------
Net cash provided by financing activities 2,277,252 1,731,980 1,907,328
-----------------------------------------------
Increase (decrease) in cash 65,734 (10,394) 31,082
Cash at beginning of year 33,550 43,944 12,862
Cash at end of year $ 99,284 $ 33,550 $ 43,944
===============================================
</TABLE>
Interest paid amounted to approximately $1,004,000, $1,080,000, and $1,933,000
in 1997, 1996, and 1995, respectively.
SEE ACCOMPANYING NOTES.
39
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
DECEMBER 31, 1997
NATURE OF OPERATIONS
AMERICAN GENERAL LIFE INSURANCE COMPANY (the "Company") is a wholly owned
subsidiary of AGC Life Insurance Company, which is a wholly owned subsidiary
of American General Corporation (the "Parent Company"). The Company's wholly
owned life insurance subsidiaries are American General Life Insurance Company
of New York (AGNY) and The Variable Annuity Life Insurance Company (VALIC).
The Company offers a complete portfolio of the standard forms of universal
life, interest-sensitive whole life, term life, structured settlements, and
fixed and variable annuities throughout the United States. In addition, a
variety of equity products is sold through its broker/dealer, American General
Securities, Inc. The Company serves the estate planning needs of middle- and
upper-income households and the insurance needs of small-to medium-sized
businesses. AGNY offers a broad array of traditional and interest-sensitive
insurance, in addition to individual annuity products. VALIC provides
tax-deferred retirement annuities and employer-sponsored retirement plans to
employees of health care, educational, public sector, and other not-for-profit
organizations throughout the United States.
1. ACCOUNTING POLICIES
1.1 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company and its wholly owned life insurance subsidiaries, AGNY and VALIC.
Transactions with the Parent Company and other subsidiaries of the Parent
Company are not eliminated from the financial statements of the Company. All
other material intercompany transactions have been eliminated in
consolidation.
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
disclosures of contingent assets and liabilities. Ultimate results could
differ from those estimates.
40
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.2 STATUTORY ACCOUNTING
The Company and its wholly owned life insurance subsidiaries are required to
file financial statements with state regulatory authorities. State insurance
laws and regulations prescribe accounting practices for calculating statutory
net income and equity. In addition, state regulators may permit statutory
accounting practices that differ from prescribed practices. The use of such
permitted practices by the Company and its wholly owned life insurance
subsidiaries did not have a material effect on statutory equity at
December 31, 1997.
Statutory financial statements differ from GAAP. Significant differences were
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Net income:
Statutory net income (1997 balance is
unaudited) $ 327,813 $ 284,070 $ 197,769
Deferred policy acquisition costs 103,872 85,812 135,312
Deferred income taxes (13,264) (12,388) 9,773
Adjustments to policy reserves (30,162) (19,954) (77,591)
Goodwill amortization (2,067) (2,169) (2,195)
Net realized gain on investments 20,139 14,140 22,874
Gain on sale of subsidiary - - 661
Other, net (31,774) (14,916) (4,308)
-----------------------------------------------
GAAP net income $ 374,557 $ 334,595 $ 282,295
===============================================
Shareholders' equity:
Statutory capital and surplus (1997 balance
is unaudited) $ 1,636,327 $ 1,441,768 $ 1,298,323
Deferred policy acquisition costs 835,031 1,042,783 605,501
Deferred income taxes (535,703) (410,007) (549,663)
Adjustments to policy reserves (319,680) (297,434) (311,065)
Acquisition-related goodwill 51,424 55,626 57,795
Asset valuation reserve ("AVR") 255,975 291,205 263,295
Interest maintenance reserve ("IMR") 9,596 63 3,114
Investment valuation differences 1,272,339 643,289 1,417,775
Benefit plans, pretax 6,103 6,749 6,023
Surplus from separate accounts (150,928) (106,026) (76,645)
Other, net 1,130 (39,055) (31,231)
-----------------------------------------------
Total GAAP shareholders' equity $ 3,061,614 $ 2,628,961 $ 2,683,222
================================================
</TABLE>
41
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.2 STATUTORY ACCOUNTING (CONTINUED)
The more significant differences between GAAP and statutory accounting
principles are that under GAAP: (a) acquisition costs related to acquiring new
business are deferred and amortized (generally in proportion to the present
value of expected gross profits from surrender charges and investment,
mortality, and expense margins), rather than being charged to operations as
incurred; (b) future policy benefits are based on estimates of mortality,
interest, and withdrawals generally representing the Company's experience,
which may differ from those based on statutory mortality and interest
requirements without consideration of withdrawals; (c) deferred federal income
taxes are provided for significant timing differences between income reported
for financial reporting purposes and income reported for federal income tax
purposes; (d) certain assets (principally furniture and equipment, agents'
debit balances, computer software, and certain other receivables) are reported
as assets rather than being charged to retained earnings; (e) acquisitions are
accounted for using the purchase method of accounting rather than being
accounted for as equity investments; and (f) fixed maturity investments are
carried at fair value rather than amortized cost. In addition, statutory
accounting principles require life insurance companies to establish an AVR and
an IMR. The AVR is designed to address the credit-related risk for bonds,
preferred stocks, derivative instruments, and mortgages and market risk for
common stocks, real estate, and other invested assets. The IMR is composed of
investment- and liability-related realized gains and losses that result from
interest rate fluctuations. These realized gains and losses, net of tax, are
amortized into income over the expected remaining life of the asset sold or
the liability released.
1.3 INSURANCE CONTRACTS
The insurance contracts accounted for in these financial statements include
primarily long-duration contracts. Long-duration contracts include traditional
whole life, endowment, guaranteed renewable term life, universal life, limited
payment, and investment contracts. Long-duration contracts generally require
the performance of various functions and services over a period of more than
one year. The contract provisions generally cannot be changed or canceled by
the insurer during the contract period; however, most new contracts written by
the Company allow the insurer to revise certain elements used in determining
premium rates or policy benefits, subject to guarantees stated in the
contracts.
42
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
All fixed maturity and equity securities are currently classified as
available-for-sale and recorded at fair value. After adjusting related balance
sheet accounts as if the unrealized gains (losses) had been realized, the net
adjustment is recorded in net unrealized gains (losses) on securities within
shareholders' equity. If the fair value of a security classified as
available-for-sale declines below its cost and this decline is considered to
be other than temporary, the security is reduced to its fair value, and the
reduction is recorded as a realized loss.
MORTGAGE LOANS
Mortgage loans are reported at amortized cost, net of an allowance for losses.
The allowance for losses covers all nonperforming loans, consisting of loans
restructured or delinquent 60-days or more, and loans for which management has
a concern based on its assessment of risk factors, such as potential
nonpayment or nonmonetary default. The allowance is based on a loan-specific
review and a formula that reflects past results and current trends.
Impaired loans, those for which the Company determines it is probable that all
amounts due under the contractual terms will not be collected, are reported at
the lower of amortized cost or fair value of the underlying collateral, less
estimated costs to sell.
POLICY LOANS
Policy loans are reported at unpaid principal balances adjusted periodically
for uncollectible amounts.
INVESTMENT REAL ESTATE
Investment real estate consists of income-producing real estate, foreclosed
real estate, and the American General Center, an office complex in Houston.
The Company classifies all investment real estate, except the American General
Center, as available-for-sale. Real estate available-for-sale is carried at
the lower of cost less accumulated depreciation, if applicable, or fair value
less costs to sell. Changes in estimates of fair value less costs to sell are
recognized as realized gains (losses) through a valuation allowance.
43
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.4 INVESTMENTS (CONTINUED)
Real estate held-for-investment is carried at cost less accumulated
depreciation and impairment reserves and write-downs, if applicable.
Impairment losses are recorded whenever circumstances indicate that a property
might be impaired and the estimated undiscounted future cash flows of the
property are less than the carrying amount. In such event, the property is
written down to fair value, determined by market prices, third-party
appraisals, or expected future cash flows discounted at market rates. Any
write-down is recognized as a realized loss, and a new cost basis is
established.
INVESTMENT INCOME
Interest on fixed maturity securities, performing and restructured mortgage
loans, and policy loans is recorded as income when earned and is adjusted for
any amortization of premium or discount. Interest on impaired mortgage loans
is recorded as income when received. Dividends are recorded as income on
ex-dividend dates.
REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) are recognized using the
specific-identification method and include declines in fair value of
investments below cost that are considered to be other than temporary.
1.5 SEPARATE ACCOUNTS
Separate accounts are assets and liabilities associated with certain
contracts, principally annuities; the investment risk lies solely with the
contract holder rather than the Company. Consequently, the Company's liability
for these accounts equals the value of the account assets. Investment income,
realized investment gains (losses), and policyholder account deposits and
withdrawals related to separate accounts are excluded from the consolidated
statements of income and cash flows. Assets held in separate accounts are
primarily shares in mutual funds, which are carried at fair value based on the
quoted net asset value per share.
44
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.6 DEFERRED POLICY ACQUISITION COSTS ("DPAC")
Certain costs of writing an insurance policy, including agents' commissions,
underwriting and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life insurance contracts, insurance
investment contracts, and participating life insurance contracts, to the
extent recoverable from expected future gross profits, is deferred and
amortized generally in proportion to the present value of expected future
gross profits from surrender charges and investment, mortality, and expense
margins. Expected future gross profits are adjusted to include the impact of
realized and unrealized gains (losses) as if net unrealized investment gains
(losses) had been realized at the balance sheet date. The impact of this
adjustment is included in the net unrealized gains (losses) on securities
within shareholders' equity. DPAC associated with all other insurance
contracts, to the extent recoverable from future policy revenues, is amortized
over the premium-paying period of the related contracts using assumptions that
are consistent with those used in computing policy benefit reserves.
The Company reviews the carrying value of DPAC on at least an annual basis. In
determining whether the carrying amount is appropriate, the Company considers
estimated future gross profits or future premiums, as applicable for the type
of contract. In all cases, the Company considers expected mortality, interest
earned and credited rates, persistency, and expenses.
1.7 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance policies are
classified as deposits instead of revenue. Revenues for these contracts
consist of mortality, expense, and surrender charges assessed against the
account balance. Policy charges that compensate the Company for future
services are deferred and recognized in income over the period earned, using
the same assumptions used to amortize DPAC (see Note 1.6).
For limited-payment contracts, net premiums are recorded as revenue, and the
difference between the gross premium received and the net premium is deferred
and recognized in income in a constant relationship to insurance in force. For
all other contracts, premiums are recognized when due. When the revenue is
recorded, an estimate of the cost of the
45
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.7 PREMIUM RECOGNITION (CONTINUED)
related benefit is recorded in the future policy benefits account on the
consolidated balance sheet. Also, this cost is recorded in the consolidated
statement of income as a benefit in the current year and in all future years
during which the policy is expected to be renewed.
1.8 OTHER ASSETS
Acquisition-related goodwill, which is included in other assets, is charged to
expense in equal amounts over 40 years. The carrying value of goodwill is
regularly reviewed for indicators of impairment in value.
1.9 DEPRECIATION
Provision for depreciation of American General Center, data processing
equipment, and furniture and fixtures is computed on the straight-line method
over the estimated useful lives of the assets.
1.10 POLICY AND CONTRACT CLAIMS RESERVES
Substantially all of the Company's insurance and annuity liabilities relate to
long-duration contracts which generally require performance over a period of
more than one year. The contract provisions normally cannot be changed or
canceled by the Company during the contract period.
For interest-sensitive and investment contracts, reserves equal the sum of the
policy account balance and deferred revenue charges. In establishing reserves
for limited payment and other long-duration contracts, an estimate is made of
the cost of future policy benefits to be paid as a result of present and
future claims due to death, disability, surrender of a policy, and payment of
an endowment. Reserves for traditional insurance products are determined using
the net level premium method. Based on past experience, consideration is given
to expected policyholder deaths, policy lapses, surrenders, and terminations.
Consideration is also given to the possibility that the Company's experience
with policyholders will be worse than expected. Interest assumptions used to
compute reserves ranged from 2.0% to 13.5% at December 31, 1997.
46
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.10 POLICY AND CONTRACT CLAIMS RESERVES (CONTINUED)
The claims reserves are determined using case-basis evaluation and statistical
analyses and represent estimates of the ultimate net cost of unpaid claims.
These estimates are reviewed; and as adjustments become necessary, such
adjustments are reflected in current operations. Since these reserves are
based on estimates, the ultimate settlement of claims may vary from the
amounts included in the accompanying financial statements. Although it is not
possible to measure the degree of variability inherent in such estimates,
management believes claim reserves are reasonable.
1.11 REINSURANCE
The Company limits its exposure to loss on any single insured to $1.5 million
by ceding additional risks through reinsurance contracts with other insurers.
Ceded reinsurance becomes a liability of the reinsurer assuming the risk. The
Company diversifies its risk of exposure to reinsurance loss by using several
reinsurers that have strong claims-paying ability ratings. If a reinsurer
could not meet its obligations, the Company would reassume the liability. The
likelihood of a material reinsurance liability being reassumed by the Company
is considered to be remote.
Benefits paid and future policy benefits related to ceded reinsurance
contracts are recorded as reinsurance receivables. The cost of reinsurance is
recognized over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies.
47
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
1.12 PARTICIPATING POLICY CONTRACTS
Participating life insurance contracts contain dividend payment provisions
that entitle the policyholder to participate in the earnings of the contracts.
Participating life insurance contracts accounted for 2.22% and 2.47% of life
insurance in force at December 31, 1997 and 1996, respectively. Such business
is accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 120.
1.13 INCOME TAXES
The Company and its life insurance subsidiaries, together with certain other
life insurance subsidiaries of the Parent Company, are included in a
life/non-life consolidated tax return with the Parent Company and its
noninsurance subsidiaries. The Company participates in a tax sharing agreement
with other companies included in the consolidated tax return. Under this
agreement, tax payments are made to the Parent Company as if the companies
filed separate tax returns; and companies incurring operating and/or capital
losses are reimbursed for the use of these losses by the consolidated return
group.
Income taxes are provided for in accordance with SFAS No. 109. Under this
standard, deferred tax assets and liabilities are calculated using the
differences between the financial reporting basis and the tax basis of assets
and liabilities, using the enacted tax rate. The effect of a tax rate change
is recognized in income in the period of enactment. Under SFAS No. 109, state
income taxes are included in income tax expense.
1.14 NEW ACCOUNTING STANDARD NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, the Company must adopt this statement for all
periods presented. Application of this statement will not change recognition
or measurement of net income and, therefore, will not impact the Company's
consolidated results of operations or financial position.
48
<PAGE>
2. INVESTMENTS
2.1 INVESTMENT INCOME
Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment income:
Fixed maturities $ 1,966,528 $ 1,846,549 $ 1,759,358
Equity securities 1,067 1,842 6,773
Mortgage loans on real estate 157,035 175,833 185,022
Investment real estate 22,157 22,752 16,397
Policy loans 62,939 58,211 52,939
Other long-term investments 3,135 2,328 1,996
Short-term investments 8,626 9,280 6,234
Investment income from affiliates 11,094 11,502 12,570
-----------------------------------------------
Gross investment income 2,232,581 2,128,297 2,041,289
Investment expenses 33,958 33,225 30,201
-----------------------------------------------
Net investment income $ 2,198,623 $ 2,095,072 $ 2,011,088
===============================================
</TABLE>
The carrying value of investments that have produced no investment income
during 1997 was less than 1% of total invested assets. The ultimate
disposition of these investments is not expected to have a material effect on
the Company's results of operations and financial position.
49
<PAGE>
2. INVESTMENTS (CONTINUED)
2.2 NET REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) by type of investment were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 42,966 $ 46,498 $ 38,657
Gross losses (34,456) (47,29 (41,022)
-----------------------------------------------
Total fixed maturities 8,510 (795) (2,365)
Equity securities 1,971 18,304 9,710
Other investments 19,384 10,993 (9,287)
-----------------------------------------------
Net realized investment gains (losses)
before tax 29,865 28,502 (1,942)
Income tax expense 10,452 9,976 547
-----------------------------------------------
Net realized investment gains (losses)
after tax $ 19,413 $ 18,526 $ (2,489)
================================================
</TABLE>
50
<PAGE>
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
All fixed maturity and equity securities are classified as available-for-sale
and reported at fair value (see Note 1.4). Amortized cost and fair value at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAIN LOSS VALUE
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturity securities:
Corporate securities:
Investment-grade $ 17,913,942 $ 906,235 $ 17,551 $ 18,802,626
Below investment-grade 950,438 34,290 4,032 980,696
-------------------------------------------------------------------
Mortgage-backed securities* 6,614,704 278,143 4,260 6,888,587
U.S. government obligations 289,406 46,529 74 335,861
Foreign governments 318,212 18,076 3,534 332,754
State and political subdivisions 44,505 1,686 - 46,191
-------------------------------------------------------------------
Total fixed maturity securities $ 26,131,207 $ 1,284,959 $ 29,451 $ 27,386,715
===================================================================
Equity securities $ 19,208 $ 2,145 $ 239 $ 21,114
===================================================================
Investment in Parent Company $ 8,597 $ 29,226 $ - $ 37,823
===================================================================
</TABLE>
51
<PAGE>
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAIN LOSS VALUE
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Fixed maturity securities:
Corporate securities:
Investment grade $ 15,639,170 $ 528,602 $ 90,379 $ 16,077,393
Below investment grade 898,187 29,384 5,999 921,572
Mortgage-backed securities* 7,547,616 186,743 54,543 7,679,816
U.S. government obligations 313,759 26,597 1,050 339,306
Foreign governments 313,655 13,255 248 326,662
State and political subdivisions 48,553 1,003 226 49,330
Redeemable preferred stocks 1,194 108 - 1,302
-------------------------------------------------------------------
Total fixed maturity securities $ 24,762,134 $ 785,692 $ 152,445 $ 25,395,381
===================================================================
Equity securities $ 17,642 $ 3,021 $ 108 $ 20,555
===================================================================
Investment in Parent Company $ 8,597 $ 20,000 $ - $ 28,597
===================================================================
<FN>
* Primarily include pass-through securities guaranteed by and mortgage
obligations ("CMOs") collateralized by the U.S. government and
government agencies.
</FN>
</TABLE>
52
<PAGE>
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Net unrealized gains (losses) on securities included in shareholders' equity
at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $ 1,316,330 $ 808,713
Gross unrealized losses (29,690) (152,553)
DPAC and other fair value adjustments (621,867) (315,117)
Deferred federal income taxes (237,247) (121,892)
------------------------------------
Net unrealized gains on securities $ 427,526 219,151
====================================
</TABLE>
The contractual maturities of fixed maturity securities at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities, excluding mortgage-backed securities:
Due in one year or less $ 205,719 $ 207,364
Due after one year through five years 5,008,933 5,216,174
Due after five years through ten years 9,163,681 9,604,447
Due after ten years 5,138,169 5,470,143
Mortgage-backed securities 6,614,705 6,888,587
------------------------------------
Total fixed maturity securities $ 26,131,207 $ 27,386,715
====================================
</TABLE>
Actual maturities may differ from contractual maturities, since borrowers may
have the right to call or prepay obligations. In addition, corporate
requirements and investment strategies may result in the sale of investments
before maturity. Proceeds from sales of fixed maturities were $14.8 billion,
$16.2 billion, and $7.3 billion during 1997, 1996, and 1995, respectively.
53
<PAGE>
2. INVESTMENTS (CONTINUED)
2.4 MORTGAGE LOANS ON REAL ESTATE
Diversification of the geographic location and type of property
collateralizing mortgage loans reduces the concentration of credit risk. For
new loans, the Company requires loan-to-value ratios of 75% or less, based on
management's credit assessment of the borrower. The mortgage loan portfolio
was distributed as follows at DECEMBER 31, 1997 and :
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
-----------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
DECEMBER 31, 1997
Geographic distribution:
South Atlantic $ 456 27.5% 1.8%
Pacific 340 20.5 14.4
Mid-Atlantic 288 17.3 -
East North Central 186 11.2 -
Mountain 151 9.1 2.7
West South Central 132 7.9 .1
East South Central 94 5.7 -
West North Central 19 1.1 -
New England 17 1.1 -
Allowance for losses (23) (1.4) -
-------------------------------
Total $ 1,660 100.0% 3.6%
===============================
Property type:
Office $ 622 37.5% 4.6%
Retail 463 27.9 3.0
Industrial 324 19.5 1.8
Apartments 223 13.4 6.1
Hotel/motel 40 2.4 -
Other 11 .7 -
Allowance for losses (23) (1.4) -
-------------------------------
Total $ 1,660 100.0% 3.6%
===============================
</TABLE>
54
<PAGE>
2. Investments (continued)
2.4 Mortgage Loans on Real Estate (continued)
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
-----------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
DECEMBER 31, 1996
Geographic distribution:
South Atlantic $ 522 30.6% 8.1%
Pacific 407 23.8 8.1
Mid-Atlantic 231 13.5 -
East North Central 168 9.8 -
Mountain 153 9.0 2.8
West South Central 141 8.2 5.3
East South Central 109 6.4 -
West North Central 13 0.8 -
New England 13 0.8 -
Allowance for losses (49) (2.9) -
-------------------------------
Total $ 1,708 100.0% 5.0%
===============================
Property type:
Office $ 590 34.5% -%
Retail 502 29.4 2.5
Industrial 304 17.8 6.0
Apartments 264 15.5 8.3
Hotel/motel 54 3.2 -
Other 43 2.5 78.8
Allowance for losses (49) (2.9) -
-------------------------------
Total $ 1,708 100.0% 5.0%
===============================
</TABLE>
55
<PAGE>
2. INVESTMENTS (CONTINUED)
2.4 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
Impaired mortgage loans on real estate and related interest income were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
(IN MILLIONS)
<S> <C> <C>
Impaired loans:
With allowance* $ 35 $ 60
Without allowance - -
------------------------------------
Total impaired loans $ 35 $ 60
====================================
<FN>
* Represents gross amounts before allowance for mortgage loan losses of
$10 million and $9 million, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Average investment $ 48 $ 72 $ 102
Interest income earned $ 3 $ 6 $ 8
Interest income -- cash basis $ - $ 6 $ 8
</TABLE>
56
<PAGE>
2. INVESTMENTS (CONTINUED)
2.5 INVESTMENT SUMMARY
Investments of the Company were as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
FAIR CARRYING
COST VALUE AMOUNT
-----------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government
agencies and authorities $ 289,406 $ 335,861 $ 335,861
States, municipalities, and political
subdivisions 44,505 46,191 46,191
Foreign governments 318,212 332,754 332,754
Public utilities 1,848,546 1,952,724 1,952,724
Mortgage-backed securities 6,614,704 6,888,587 6,888,587
All other corporate bonds 17,015,834 17,830,598 17,830,598
-----------------------------------------------------
Total fixed maturities 26,131,207 27,386,715 27,386,715
Equity securities:
Common stocks:
Industrial, miscellaneous, and other 5,604 5,785 5,785
Nonredeemable preferred stocks 13,604 15,329 15,329
-----------------------------------------------------
Total equity securities 19,208 21,114 21,114
Mortgage loans on real estate* 1,659,921 xxx 1,659,921
Investment real estate 129,364 xxx 129,364
Policy loans 1,093,694 xxx 1,093,694
Other long-term investments 55,118 xxx 55,118
Short-term investments 100,061 xxx 100,061
-----------------------------------------------------
Total investments $ 29,188,573 $ xxx $ 30,445,987
=====================================================
<FN>
* Amount is net of a $23 million allowance for losses.
</FN>
</TABLE>
57
<PAGE>
3. DEFERRED POLICY ACQUISITION COSTS
The balance of DPAC at DECEMBER 31 and the components of the change reported
in operating costs and expenses for the years then ended were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $ 1,042,783 $ 605,501 $ 1,479,115
Capitalization 219,339 188,001 203,607
Amortization (115,467) (102,189) (68,295)
Change in the effect of SFAS No. 115 (311,624) 351,470 (1,008,926)
------------------------------------------------------
Balance at December 31 $ 835,031 $ 1,042,783 $ 605,501
======================================================
</TABLE>
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill $ 51,424 $ 55,626
Other 81,235 78,663
------------------------------------
Total other assets $ 132,659 $ 134,289
====================================
</TABLE>
58
<PAGE>
5. FEDERAL INCOME TAXES
5.1 TAX LIABILITIES
Income tax liabilities were as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Current tax (receivable) payable $ 7,676 $ (7,646)
Deferred tax liabilities, applicable to:
Net income 298,456 288,115
Net unrealized investment gains 237,247 121,892
------------------------------------
Total deferred tax liabilities 535,703 410,007
------------------------------------
Total current and deferred tax liabilities $ 543,379 $ 402,361
====================================
</TABLE>
Components of deferred tax liabilities and assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities applicable to:
Deferred policy acquisition costs $ 226,653 $ 308,802
Basis differential of investments 486,194 254,402
------------------------------------
Other 139,298 130,423
------------------------------------
Total deferred tax liabilities 852,145 693,627
Deferred tax assets applicable to:
Policy reserves (232,539) (219,677)
Other (83,903) (63,943)
------------------------------------
Total deferred tax assets before valuation
allowance (316,442) (283,620)
Valuation allowance - -
------------------------------------
Total deferred tax assets, net of valuation
allowance (316,442) (283,620)
------------------------------------
Net deferred tax liabilities $ 535,703 $ 410,007
====================================
</TABLE>
59
<PAGE>
5. FEDERAL INCOME TAXES (CONTINUED)
5.1 TAX LIABILITIES (CONTINUED)
A portion of life insurance income earned prior to 1984 is not taxable unless
it exceeds certain statutory limitations or is distributed as dividends. Such
income, accumulated in policyholders' surplus accounts, totaled $93.6 million
at December 31, 1997. At current corporate rates, the maximum amount of tax on
such income is approximately $32.8 million. Deferred income taxes on these
accumulations are not required because no distributions are expected.
5.2 TAX EXPENSE
Components of income tax expense for the year were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense $ 185,460 $ 164,272 $ 153,720
Deferred expense (benefit):
Deferred policy acquisition cost 27,644 21,628 38,275
Policy reserves (27,496) (27,460) (49,177)
Basis differential of investments 3,769 4,129 3,710
Other, net 9,347 14,091 (2,581)
------------------------------------------------------
Total deferred expense (benefit) 13,264 12,388 (9,773)
------------------------------------------------------
Income tax expense $ 198,724 $ 176,660 $ 143,947
======================================================
</TABLE>
A reconciliation between the income tax expense computed by applying the
federal income tax rate (35%) to income before taxes and the income tax
expense reported in the financial statement is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax at statutory percentage of GAAP
pretax income $ 200,649 $ 178,939 $ 149,185
Tax-exempt investment income (9,493) (9,347) (10,185)
Goodwill 723 759 768
Tax on sale of subsidiary - - (661)
Other 6,845 6,309 4,840
------------------------------------------------------
Income tax expense $ 198,724 $ 176,660 143,947
======================================================
</TABLE>
60
<PAGE>
5. FEDERAL INCOME TAXES (CONTINUED)
5.3 TAXES PAID
Income taxes paid amounted to approximately $168 million, $182 million, and
$90 million in 1997, 1996, and 1995, respectively.
5.4 TAX RETURN EXAMINATIONS
The Parent Company and the majority of its subsidiaries file a consolidated
federal income tax return. The Internal Revenue Service has completed
examinations of the Company's tax returns through 1988 and is currently
examining tax returns for 1989 through 1996. In addition, the tax returns of
companies recently acquired are also being examined. Although the final
outcome of any issues raised in examination is uncertain, the Company believes
that the ultimate liability, including interest, will not exceed amounts
recorded in the consolidated financial statements.
6. TRANSACTIONS WITH AFFILIATES
Affiliated notes and accounts receivable were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-----------------------------------------------------------------------
PAR VALUE BOOK VALUE PAR VALUE BOOK VALUE
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
American General Corporation,
9 3/8%, due 2008 $ 4,725 $ 3,288 $ 4,725 $ 3,239
American General Corporation,
8 1/4%, due 2004 17,125 32,953 19,572 19,572
American General Corporation,
Restricted Subordinated Note,
13 1/2%, due 2002 31,494 31,494 33,550 33,550
-----------------------------------------------------------------------
Total notes receivable from
affiliates 53,344 67,735 57,847 56,361
Accounts receivable from affiliates - 28,784 - 30,127
-----------------------------------------------------------------------
Indebtedness from affiliates $ 53,344 $ 96,519 $ 57,847 $ 86,488
=======================================================================
</TABLE>
61
<PAGE>
6. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Various American General companies provide services to the Company,
principally mortgage servicing and investment advisory services. The Company
paid approximately $33,916,000, $22,083,000, and $21,006,000 for such services
in 1997, 1996, and 1995, respectively. Accounts payable for such services at
December 31, 1997 and were not material. In addition, the Company rents
facilities and provides services to various American General companies. The
Company received approximately $6,455,000, $1,255,000, and $2,086,000 for such
services and rent in 1997, 1996, and 1995, respectively. Accounts receivable
for rent and services at December 31, 1997 and were not material.
The Company has 8,500 shares of $100 par value cumulative preferred stock
authorized and outstanding with an $80 dividend rate, redeemable at $1,000 per
share after December 31, 2000. The holder of this stock, the Franklin Life
Insurance Company ("Franklin"), an affiliated company, is entitled to one vote
per share, voting together with the holders of common stock.
During 1996, the Company's residential mortgage loan portfolio of $42 million
was sold to American General Finance at carrying value plus accrued interest.
7. STOCK-BASED COMPENSATION
Certain officers of the Company participate in American General Corporation's
stock and incentive plans which provide for the award of stock options,
restricted stock awards, performance awards, and incentive awards to key
employees. Stock options constitute the majority of such awards. Expense
related to stock options is measured as the excess of the market price of the
stock at the measurement date over the exercise price. The measurement date is
the first date on which both the number of shares that the employee is
entitled to receive and the exercise price are known. Under the stock option
plans, no expense is recognized, since the market price equals the exercise
price at the measurement date.
62
<PAGE>
7. STOCK-BASED COMPENSATION (CONTINUED)
Under an alternative accounting method, compensation expense arising from
stock options would be measured at the estimated fair value of the options at
the date of grant. Had compensation expense for the stock options been
determined using this method, net income would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income as reported $ 374,557 $ 334,595 $ 282,295
Net income pro forma 373,328 334,029 281,821
</TABLE>
The average fair values of the options granted during 1997, 1996, and 1995
were $10.33, $7.07, and $6.93, respectively. The fair value of each option was
estimated at the date of grant using a Black-Scholes option pricing model. The
weighted average assumptions used to estimate the fair value of the stock
options were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 3.0% 4.0% 4.0%
Expected volatility 22.0% 22.3% 23.0%
Risk-free interest rate 6.4% 6.2% 6.9%
Expected life 6 YEARS 6 years 6 years
</TABLE>
8. BENEFIT PLANS
8.1 PENSION PLANS
The Company has noncontributory, defined benefit pension plans covering most
employees. Pension benefits are based on the participant's average monthly
compensation and length of credited service offset by an amount that complies
with federal regulations. The Company's funding policy is to contribute
annually no more than the maximum amount deductible for federal income tax
purposes. The Company uses the projected unit credit method for computing
pension expense.
63
<PAGE>
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The components of pension expense and underlying assumptions were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost - benefits earned during period $ 1,891 $ 1,826 $ 1,346
Interest cost on projected benefit obligation 2,929 2,660 2,215
Actual return on plan assets (15,617) (9,087) (10,178)
Amortization of unrecognized net asset - (261) (888)
Amortization of unrecognized prior service cost 195 197 197
Deferral of net asset gain 10,148 4,060 5,724
Amortization of gain - 68 38
------------------------------------------------------
Total pension income $ (454) $ (537) $ (1,546)
======================================================
Assumptions:
Weighted average discount rate on benefit
obligation 7.25% 7.50% 7.25%
Rate of increase in compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of return on plan assets 10.00% 10.00% 10.00%
</TABLE>
64
<PAGE>
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The funded status of the plans and the prepaid pension expenses included in
other assets at DECEMBER 31 were as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 32,926 $ 27,558
Nonvested 3,465 4,000
Additional minimum liability - 205
------------------------------------
Accumulated benefit obligation 36,391 31,763
Effect of increase in compensation levels 7,002 5,831
------------------------------------
Projected benefit obligation 43,393 37,594
Plan assets at fair value 80,102 65,159
------------------------------------
Plan assets in excess of projected benefit obligation 36,709 27,565
Unrecognized net gain (23,548) (15,881)
Unrecognized prior service cost 78 274
------------------------------------
Prepaid pension expense $ 13,239 $ 11,958
====================================
</TABLE>
More than 85% of the plan assets were invested in fixed maturity and equity
securities at the plan's most recent balance sheet date.
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its life insurance subsidiaries, together with certain other
insurance subsidiaries of the Parent Company, have life, medical, supplemental
major medical, and dental plans for certain retired employees and agents. Most
plans are contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. The Company has reserved the
right to change or eliminate these benefits at any time.
65
<PAGE>
8. BENEFIT PLANS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The life plans are fully insured. A portion of the retiree medical and dental
plans are funded through a voluntary employees' beneficiary association
("VEBA") established in 1994; the remainder is unfunded and self-insured. All
of the retiree medical and dental plans assets held in the VEBA were invested
in readily marketable securities at its most recent balance sheet date.
The plans' combined funded status and the accrued postretirement benefit cost
included in other liabilities were as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees $ 2,469 $ 5,199
Fully eligible active plan participants 259 251
Other active plan participants 3,214 2,465
------------------------------------
Accumulated postretirement benefit obligation 5,942 7,915
Plan assets at fair value 159 106
------------------------------------
Accumulated postretirement benefit obligation in excess
of plan assets at fair value 5,783 7,809
Unrecognized net gain (1,950) (243)
------------------------------------
Accrued postretirement benefit cost $ 3,833 $ 7,566
====================================
Weighted-average discount rate on postretirement benefit
obligation 7.25% 7.50%
</TABLE>
The components of postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-- benefits earned $ 211 $ 218 $ 171
Interest cost on accumulated postretirement
benefit obligation 390 626 638
------------------------------------------------------
Postretirement benefit expense $ 601 $ 844 $ 809
======================================================
</TABLE>
66
<PAGE>
9. DERIVATIVE FINANCIAL INSTRUMENTS
9.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company's use of derivative financial instruments is generally limited to
interest rate and currency swap agreements, and options to enter into interest
rate swap agreements (call swaptions). The Company accounts for its derivative
financial instruments as hedges. Hedge accounting requires a high correlation
between changes in fair values or cash flows or the derivative financial
instruments and the specific items being hedged, both at inception and
throughout the life of the hedge.
9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS
Interest rate swap agreements are used to convert specific investment
securities from a floating to a fixed-rate basis, or vice versa, and to hedge
against the risk of rising prices on anticipated investment security
purchases. Currency swap agreements are infrequently used to effectively
convert cash flows from specific investment securities denominated in foreign
currencies into U.S. dollars at specified exchange rates, and to hedge against
currency rate fluctuations on anticipated investment security purchases.
The difference between amounts paid and received on swap agreements is
recorded on an accrual basis as an adjustment to net investment income or
interest expense, as appropriate, over the periods covered by the agreements.
The related amount payable to or receivable from counterparties is included in
other liabilities or assets.
The fair values of swap agreements are recognized in the consolidated balance
sheet if they hedge investments carried at fair value or if they hedge
anticipated purchases of such investments. In this event, changes in the fair
value of a swap agreement are reported in net unrealized gains on securities
included in shareholders' equity, consistent with the treatment of the related
investment security. For swap agreements hedging anticipated investment
purchases, the net swap settlement amount or unrealized gain or loss is
deferred and included in the measurement of the anticipated transaction when
it occurs.
Swap agreements generally have terms of two to ten years. Any gain or loss
from early termination of a swap agreement is deferred and amortized into
income over the remaining term of the related investment. If the underlying
investment is extinguished or sold, any related gain or loss on swap
agreements is recognized in income. Average floating rates may change
significantly, thereby affecting future cash flows.
67
<PAGE>
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED)
Interest rate and currency swap agreements related to investment securities at
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest rate swap agreements to pay fixed rate:
Notional amount $ 15 $ 60
Average receive rate 6.74% 6.19%
Average pay rate 6.48% 6.42%
Interest rate swap agreements to receive fixed rate:
Notional amount $144 $ 44
Average receive rate 6.89% 6.84%
Average pay rate 6.37% 6.01%
Currency swap agreements (receive U.S. dollars/pay Canadian
dollars):
Notional amount (in U.S. dollars) $139 $ 99
Average exchange rate 1.50 1.57
</TABLE>
9.3 CALL SWAPTIONS
Options to enter into interest rate swap agreements are used to limit the
Company's exposure to reduced spreads between investment yields and interest
crediting rates should interest rates decline significantly over prolonged
periods. During such periods, the spread between investment yields and
interest crediting rates may be reduced as a result of certain limitations on
the Company's ability to manage interest crediting rates. Call swaptions allow
the Company to enter into interest rate swap agreements to receive fixed rates
and pay lower floating rates, effectively increasing the spread between
investment yields and interest crediting rates.
Premiums paid to purchase call swaptions are included in investments and are
amortized to net investment income over the exercise period of the swaptions.
If a call swaption is terminated, any gain is deferred and amortized to
insurance and annuity benefits over the expected life of the insurance and
annuity contracts and any unamortized premium is charged to income. If a call
swaption ceases to be an effective hedge, any related gain or loss is
recognized in income.
68
<PAGE>
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.3 CALL SWAPTIONS (CONTINUED)
During 1997, the Company purchased call swaptions which expire in 1998. These
call swaptions had a notional amount of $1.35 billion and strike rates ranging
from 4.5% to 5.5% at December 31, 1997. Should the strike rates remain below
market rates, the call swaptions will expire and the Company's exposure would
be limited to the premiums paid.
9.4 CREDIT AND MARKET RISK
Derivative financial instruments expose the Company to credit risk in the
event of non-performance by counterparties. The Company limits this exposure
by entering into agreements with counterparties having high credit ratings and
by regularly monitoring the ratings. The Company does not expect any
counterparty to fail to meet its obligation; however, non-performance would
not have a material impact on the Company's consolidated results of operations
and financial position.
The Company's exposure to market risk is mitigated by the offsetting effects
of changes in the value of the agreements and the related items being hedged.
Derivative financial instruments related to investment securities did not have
a material effect on net investment income in 1997, 1996 or 1995.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
disclosure of the fair value of financial instruments. This standard excludes
certain financial instruments and all nonfinancial instruments, including
policyholder liabilities for life insurance contracts from its disclosure
requirements. Care should be exercised in drawing conclusions based on fair
value, since (1) the fair values presented do not include the value associated
with all of the Company's assets and liabilities and (2) the reporting of
investments at fair value without a corresponding revaluation of related
policyholder liabilities can be misinterpreted.
69
<PAGE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Carrying amounts and fair values for those financial instruments covered by
SFAS 107 at DECEMBER 31, 1997 are presented below:
<TABLE>
<CAPTION>
FAIR CARRYING
VALUE AMOUNT
------------------------------------
(IN MILLIONS)
<S> <C> <C>
Assets:
Fixed maturity and equity securities * $ 27,408 $ 27,408
Mortgage loans on real estate $ 1,702 $ 1,660
Policy loans $ 1,127 $ 1,094
Investment in parent company $ 38 $ 38
Indebtedness from affiliates $ 97 $ 97
Liabilities:
Insurance investment contracts $ 24,011 $ 24,497
<FN>
* Includes derivative financial instruments with negative fair value of
$4.2 million and $10.8 million and positive fair value of $7.2 million
and $.6 million at December 31, 1997 and 1996, respectively.
</FN>
</TABLE>
The following methods and assumptions were used to estimate the fair values of
financial instruments:
FIXED MATURITY AND EQUITY SECURITIES
Fair values of fixed maturity and equity securities were based on quoted
market prices, where available. For investments not actively traded,
fair values were estimated using values obtained from independent
pricing services or, in the case of some private placements, by
discounting expected future cash flows using a current market rate
applicable to yield, credit quality, and average life of investments.
MORTGAGE LOANS ON REAL ESTATE
Fair value of mortgage loans was estimated primarily using discounted
cash flows based on contractual maturities and risk-adjusted discount
rates.
70
<PAGE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
POLICY LOANS
Fair value of policy loans was estimated using discounted cash flows and
actuarially determined assumptions incorporating market rates.
INVESTMENT IN PARENT COMPANY
The fair value of the investment in Parent Company is based on quoted
market prices of American General Corporation common stock.
INSURANCE INVESTMENT CONTRACTS
Insurance investment contracts do not subject the Company to significant
risks arising from policyholder mortality or morbidity. The majority of
the Company's annuity products are considered insurance investment
contracts. Fair value of insurance investment contracts was estimated
using cash flows discounted at market interest rates.
INDEBTEDNESS FROM AFFILIATES
Indebtedness from affiliates is composed of accounts receivable and
notes receivable from affiliates. Due to the short-term nature of
accounts receivable, fair value is assumed to equal carrying value. Fair
value of notes receivable was estimated using discounted cash flows
based on contractual maturities and discount rates that were based on
U.S. Treasury rates for similar maturity ranges.
11. DIVIDENDS PAID
American General Life Insurance Company paid $402 million, $189 million, and
$207 million in dividends on common stock to AGC Life Insurance Company in
1997, 1996, and 1995, respectively. The 1995 dividends included $701 thousand
in the form of furniture and equipment. In addition, in 1996, the Company paid
$680 thousand in dividends on preferred stock to Franklin.
71
<PAGE>
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES
The Company and its insurance subsidiaries are restricted by state insurance
laws as to the amounts they may pay as dividends without prior approval from
their respective state insurance departments. At December 31, 1997,
approximately $2.6 billion of consolidated shareholders' equity represents net
assets of the Company which cannot be transferred, in the form of dividends,
loans, or advances to the Parent Company. Approximately $2.0 billion of
consolidated shareholders' equity is similarly restricted as to transfer from
its subsidiaries to the Company.
Generally, the net assets of the Company's subsidiaries available for transfer
to the Parent are limited to the amounts that the subsidiaries' net assets, as
determined in accordance with statutory accounting practices, exceed minimum
statutory capital requirements. However, payments of such amounts as dividends
may be subject to approval by regulatory authorities and are generally limited
to the greater of 10% of policyholders' surplus or the previous year's
statutory net gain from operations.
The Company has various leases, substantially all of which are for office
space and facilities. Rentals under financing leases, contingent rentals, and
future minimum rental commitments and rental expense under operating leases
are not material.
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating, to life insurance pricing and
sales practices, and a number of these lawsuits has resulted in substantial
settlements. The Company is a defendant in such purported class action
lawsuits, asserting claims related to pricing and sales practices. These
claims are being defended vigorously by the Company. Given the uncertain
nature of litigation and the early stages of this litigation, the outcome of
these actions cannot be predicted at this time. The Company nevertheless
believes that the ultimate outcome of all such pending litigation should not
have a material adverse effect on the Company's financial position; however,
it is possible that settlements or adverse determinations in one or more of
these actions or other future proceedings could have a material adverse effect
on results of operations for a given period. No provision has been made in the
consolidated financial statements related to this pending litigation because
the amount of loss, if any, from these actions cannot be reasonably estimated
at this time.
The Company is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings arise
in jurisdictions, such as Alabama, that permit damage awards disproportionate
to the actual economic damages
72
<PAGE>
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED)
incurred. Based upon information presently available, the Company believes
that the total amounts that will ultimately be paid, if any, arising from
these lawsuits and proceedings will not have a material adverse effect on the
Company's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive
damage awards, that bear little or no relation to actual economic damages
incurred by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
The increase in the number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments
may be partially recovered through a reduction in future premium taxes in
certain states. At December 31, 1997 and , the Company has accrued $7.6
million and $16.1 million, respectively, for guaranty fund assessments, net of
$4.3 million and $4.1 million, respectively, of premium tax deductions. The
Company has recorded receivables of $9.7 million and $10.9 million at December
31, 1997 and 1996, respectively, for expected recoveries against the payment
of future premium taxes. Expenses incurred for guaranty fund assessments were
$2.1 million, $6.0 million, and $22.4 million in 1997, 1996, and 1995,
respectively.
73
<PAGE>
13. REINSURANCE
Reinsurance transactions for the years ended December 31, 1997, 1996, and 1995
were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO OTHER ASSUMED FROM OF AMOUNT
GROSS AMOUNT COMPANIES OTHER COMPANIES NET AMOUNT ASSUMED TO NET
----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1997
Life insurance in force $ 45,963,710 $ 10,926,255 $ 4,997 $ 35,042,452 0.01%2
=======================================================================
Premiums:
Life insurance and annuities $ 100,357 $ 37,294 $ 75 $ 63,138 0.12%
Accident and health insurance 1,208 172 - 1,036 0.00%
-----------------------------------------------------------------------
Total premiums $ 101,565 $ 37,466 $ 75 $ 64,174 0.12%
=======================================================================
Premiums:
Life insurance and annuities $ 104,225 $ 34,451 $ 36 $ 69,810 0.05%
Accident and health insurance 1,426 64 - 1,362 0.00%
-----------------------------------------------------------------------
Total premiums $ 105,651 $ 34,515 $ 36 $ 71,172 0.05%
=======================================================================
December 31, 1995
Life insurance in force $ 44,637,599 $ 7,189,493 $ 5,771 $ 37,453,877 0.02%
=======================================================================
Premiums:
Life insurance and annuities $ 103,780 $ 26,875 $ 171 $ 77,076 0.22%
Accident and health insurance 1,510 82 - 1,428 0.00%
-----------------------------------------------------------------------
Total premiums $ 105,290 $ 26,957 $ 171 $ 78,504 0.22%
=======================================================================
</TABLE>
74
<PAGE>
13. REINSURANCE (CONTINUED)
Reinsurance recoverable on paid losses was approximately $2,278,000,
$6,904,000, and $6,190,000 at December 31, 1997, 1996, and 1995, respectively.
Reinsurance recoverable on unpaid losses was approximately $3,210,000,
$4,282,000, and $2,775,000 at December 31, 1997, 1996, and 1995, respectively.
14. ACQUISITIONS
Effective December 31, 1995, the Company purchased Franklin United Life
Insurance Company, a subsidiary of Franklin, which is a wholly owned
subsidiary of the Parent Company. This purchase was effected through issuance
of $8.5 million in preferred stock to Franklin. The acquisition was accounted
for using the purchase method of accounting and is not material to the
operations of the Company.
15. YEAR 2000 CONTINGENCY (UNAUDITED)
Management has been engaged in a program to render the Company's computer
systems (hardware and mainframe and personal applications software) Year 2000
compliant. The Company will incur internal staff costs as well as third-party
vendor and other expenses to prepare the systems for Year 2000. The cost of
testing and conversion of systems applications has not had, and is not
expected to have, a material adverse effect on the Company's results of
operations or financial condition. However, risks and uncertainties exist in
most significant systems development projects. If conversion of the Company's
systems is not completed on a timely basis, due to nonperformance by
third-party vendors or other unforeseen circumstances, the Year 2000 problem
could have a material adverse impact on the operations of the Company.
75
<PAGE>
