<PAGE>
PLATINUM INVESTOR(SM) VARIABLE ANNUITY
FLEXIBLE PAYMENT VARIABLE AND FIXED
INDIVIDUAL DEFERRED ANNUITY CONTRACTS
OFFERED BY
AMERICAN GENERAL LIFE INSURANCE COMPANY
ANNUITY ADMINISTRATION DEPARTMENT
P.O. BOX 1401, HOUSTON, TEXAS 77251-1401
1 (800) 360-4268; (713) 831-3505
American General Life Insurance Company ("AGL") is offering, the flexible
payment variable and fixed individual deferred annuity contracts (the
"Contracts") described in this Prospectus.
You may use AGL's Separate Account D ("Separate Account") for a variable
investment return under the Contracts based on one or more of the following
mutual fund series: AIM Variable Insurance Funds, Inc.; American General Series
Portfolio Company; Dreyfus Variable Investment Fund; The Dreyfus Socially
Responsible Growth Fund, Inc.; MFS Variable Insurance Trust; Morgan Stanley Dean
Witter Universal Funds, Inc.; SAFECO Resource Series Trust; Templeton Variable
Products Series Fund or Van Kampen Life Investment Trust.
. AIM Variable Insurance Funds, Inc.
. AIM V.I. International Equity Fund
. AIM V.I. Value Fund
. American General Series Portfolio Company
. International Equities Fund
. MidCap Index Fund
. Money Market Fund
. Stock Index Fund
. Dreyfus Variable Investment Fund
. Quality Bond Portfolio
. Small Cap Portfolio
. The Dreyfus Socially Responsible Growth Fund, Inc.
. MFS Variable Insurance Trust
. MFS Emerging Growth Series
. Morgan Stanley Dean Witter Universal Funds, Inc.
. Equity Growth Portfolio
. High Yield Portfolio
. SAFECO Resource Series Trust
. Equity Portfolio
. Growth Portfolio
. Templeton Variable Products Series Fund
. Templeton Asset Allocation Fund-Class 2
. Templeton International Fund-Class 2
. Van Kampen Life Investment Trust
. Strategic Stock Portfolio
You may also use AGL's guaranteed interest option. This option currently has
one Guarantee Period, with a guaranteed interest rate.
We have designed this Prospectus to provide you with information that you should
have before investing in the Contracts. Please read the Prospectus carefully
and keep it for future reference.
For additional information about the Contracts, you may request a copy of the
Statement of Additional Information (the "Statement"), dated May 3, 1999. We
have filed the Statement with the Securities and Exchange Commission ("SEC") and
have incorporated it by reference into this Prospectus. The "Table of Contents"
of the Statement appears at page 51 of this Prospectus. You may obtain a free
copy of the Statement if you write or call AGL's Annuity Administration
Department, in our Home Office, which is located at 2727-A Allen Parkway,
Houston, Texas 77019-2191. The telephone number is 1-800-360-4268. You may
also obtain the Statement through the SEC's Web site at http://www.sec.gov.
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES.
This Prospectus is valid only if you also receive current prospectuses of the
AIM Variable Insurance Funds, Inc.; American General Series Portfolio Company;
Dreyfus Variable Investment Fund; The Dreyfus Socially Responsible Growth Fund,
Inc.; MFS Variable Insurance Trust; Morgan Stanley Dean Witter Universal Funds,
Inc.; SAFECO Resource Series Trust; Templeton Variable Products Series Fund or
Van Kampen Life Investment Trust.
This Prospectus is dated May 3, 1999.
<PAGE>
TABLE OF CONTENTS
Definitions.......................................................... 4
Fee Table............................................................ 7
Synopsis of Contract Provisions...................................... 10
Minimum Investment Requirements................................. 10
Purchase Payment Accumulation................................... 11
Fixed and Variable Annuity Payments............................. 11
Changes in Allocations among Divisions and Guarantee Periods.... 12
Surrenders and Withdrawals...................................... 12
Cancellation Right.............................................. 12
Death Proceeds.................................................. 13
Limitations Imposed by Retirement Plans and Employers........... 13
Communications to Us............................................ 13
Financial and Performance Information........................... 13
Other Information............................................... 15
Financial Information................................................ 15
AGL.................................................................. 15
Separate Account D................................................... 15
The Series........................................................... 16
Voting Privileges............................................... 18
The Fixed Account.................................................... 19
Guarantee Periods............................................... 20
Crediting Interest.............................................. 20
New Guarantee Periods........................................... 21
Contract Issuance and Purchase Payments.............................. 21
Minimum Requirements............................................ 22
Payments........................................................ 22
Owner Account Value.................................................. 22
Variable Account Value.......................................... 22
Fixed Account Value............................................. 23
Transfer, Automatic Rebalancing, Surrender and Partial Withdrawal of
Owner Account Value................................................. 23
Transfers....................................................... 23
Automatic Rebalancing........................................... 26
Surrenders...................................................... 26
Partial Withdrawals............................................. 26
Annuity Period and Annuity Payment Options........................... 27
Annuity Commencement Date....................................... 27
Application of Owner Account Value.............................. 27
Fixed and Variable Annuity Payments............................. 28
Annuity Payment Options......................................... 28
Election of Annuity Payment Option.............................. 29
Available Annuity Payment Options............................... 30
Transfers....................................................... 31
Death Proceeds....................................................... 32
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Death Proceeds Before the Annuity Commencement Date............. 32
Death Proceeds After the Annuity Commencement Date.............. 33
Proof of Death.................................................. 34
Charges Under the Contracts.......................................... 34
Premium Taxes................................................... 34
Surrender Charge................................................ 35
Transfer Charges................................................ 36
Charge to the Separate Account.................................. 37
Miscellaneous................................................... 37
Systematic Withdrawal Plan...................................... 37
One-Time Reinstatement Privilege................................ 37
Reduction in Surrender Charges and Administrative Charges....... 38
Long-Term Care and Terminal Illness.................................. 38
Long-Term Care.................................................. 38
Terminal Illness................................................ 38
Other Aspects of the Contracts....................................... 38
Owners, Annuitants and Beneficiaries; Assignments............... 38
Reports......................................................... 39
Rights Reserved by Us........................................... 39
Payment and Deferment........................................... 40
Federal Income Tax Matters........................................... 41
General......................................................... 41
Non-Qualified Contracts......................................... 41
Individual Retirement Annuities ("IRAs")........................ 43
Roth IRAs....................................................... 45
Simplified Employee Pension Plans............................... 46
Simple Retirement Accounts...................................... 46
Other Qualified Plans........................................... 46
Private Employer Unfunded Deferred Compensation Plans........... 47
Federal Income Tax Withholding and Reporting.................... 48
Taxes Payable by AGL and the Separate Account................... 48
Distribution Arrangements............................................ 48
Services Agreements.................................................. 49
Legal Matters........................................................ 49
Year 2000 Considerations............................................. 49
Other Information on File............................................ 51
Contents of Statement of Additional Information...................... 51
3
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DEFINITIONS
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 is
generally the Owner of a Contract.
ACCOUNT - any of the Divisions or the Fixed Account.
ACCOUNT VALUE - the sum of your Fixed Account Value and your Variable Account
Value after deduction of any fees. We may subtract certain other charges from
your Account Value in the case of transfers or distributions of your Account
Value.
ACCUMULATION UNIT - a measuring unit used in calculating your interest in a
Division of Separate Account D before the Annuity Commencement Date.
ANNUITANT - the person named as Annuitant in the application for a Contract and
on whose life annuity payments may be based.
ANNUITY ADMINISTRATION DEPARTMENT - our annuity service center in our Home
Office to which you should direct all purchase payments, requests, instructions
and other communications. Our Annuity Administration Department is located at
2727-A Allen Parkway, Houston, Texas 77019-2191. The mailing address is P.O.
Box 1401, Houston, Texas 77251-1401.
ANNUITY COMMENCEMENT DATE - the date on which we begin making payments under an
Annuity Payment Option, unless you elect a single sum payment instead.
ANNUITY PAYMENT OPTION - one of the ways in which you can request us to make
annuity payments to you. An Annuity Payment Option will control the amount of
each payment, how often we make payments, and for how long we make payments.
ANNUITY PERIOD - the period of time during which we make annuity payments under
an Annuity Payment Option.
ANNUITY UNIT - a measuring unit used to calculate the amount of Variable Annuity
Payments.
BENEFICIARY - the person who will 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 whom you designate under a Non-Qualified
Contract to become the Annuitant if the Annuitant dies before the Annuity
Commencement Date and the Contingent Annuitant is alive when the Annuitant dies.
CONTINGENT BENEFICIARY - a person whom 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 is alive when the proceeds
become payable.
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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. Each Division invests in shares of a Series.
FIXED ACCOUNT - the name of the investment option that allows you to allocate
purchase payments to AGL's General Account.
FIXED ACCOUNT VALUE - the sum of your net purchase payments and tranfers in the
Fixed Account, plus accumulated interest, less any partial withdrawals and
transfers you make out of 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 we credit a Guaranteed Interest Rate.
HOME OFFICE - our office at the following address and phone number: American
General Life Insurance Company, Annuity Administration Department, 2727-A Allen
Parkway, Houston, TX 77019-2191; Mailing Address - P.O. Box 1401, Houston, Texas
77251-1401; 1-800-360-4268 or 713-831-3505.
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT") - a federal law governing the
operations of investment companies such as the Series and the Separate Account.
NON-QUALIFIED - not eligible for the kind of federal income tax treatment that
occurs with retirement plans allowed by 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 kind of federal income tax treatment that occurs
with retirement plans allowed by sections 401, 403, 408 or 408A of the Code.
SEPARATE ACCOUNT - the segregated asset account of AGL named Separate Account D
which receives and invests purchase payments under the Contracts.
SERIES - an individual portfolio of a mutual fund that you may choose for
investment under the Contracts. Currently, the Series are part of either the
AIM Variable Insurance Funds, Inc.; American General Series Portfolio Company
("AGSPC"); Dreyfus Variable Investment Fund; The Dreyfus Socially Responsible
Growth Fund, Inc. ("Dreyfus Socially Responsible Growth Fund"); MFS Variable
Insurance Trust; Morgan Stanley Dean Witter Universal Funds, Inc.; SAFECO
Resource Series Trust; Templeton Variable Products Series Fund or Van Kampen
Life Investment Trust.
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SURRENDER CHARGE - a charge for sales expenses that we may assess when you
surrender a Contract or receive payment of certain other amounts from a
Contract.
VALUATION DATE - a day when we are open for business. However, a day is not a
Valuation Date, if the Series in which a Division invests does not calculate the
value of its shares on that day.
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 Valuation Date.
VARIABLE ACCOUNT VALUE - the sum of your account values in the Separate Account
Divisions. Your account value in a Separate Account Division equals the value
of a Division's Accumulation Unit multiplied by the number of Accumulation Units
you have in that Division.
VARIABLE ANNUITY PAYMENTS - annuity payments that vary in amount based on the
investment earnings and losses of one or more of the Divisions.
WRITTEN - signed, dated, and in a form satisfactory to us and received at our
Home Office. (See "Synopsis of Contract Provisions - Communications to Us.")
You must use special forms your sales representative or we provide to elect an
Annuity Option or exercise your one-time reinstatement privilege.
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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 under a Contract.
The table reflects expenses of the Separate Account and the Series. We may also
deduct amounts for state premium taxes or similar assessments, where applicable.
TRANSACTION CHARGES
Front-End Sales Charge Imposed on Purchases 0%
Maximum Surrender Charge/1/ 7%
(computed as a percentage of purchase payments surrendered)
Transfer Fee $ 0/2/
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average daily Variable
Account Value)
Mortality and Expense Risk Charge 1.20%
Administrative Expense Charge 0.15%
-----
Total Separate Account Annual Expenses 1.35%
=====
- --------------
/1/ This charge does not apply or is reduced under certain circumstances. See
"Surrender Charge."
/2/ AGL reserves the right to charge $25 for each transfer during the Contract
Year before the Annuity Commencement Date.
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THE SERIES' ANNUAL EXPENSES/1/ (as a percentage of average net assets)
<TABLE>
<CAPTION>
Management Other Annual Expenses
Fees After Expenses After
Expense 12b-1 After Expense Expense
Series Reimbursement/2/ Fees Reimbursement/3/ Reimbursement/2,3/
- ------ ---------------- ------ ---------------- ------------------
<S> <C> <C> <C> <C>
AIM V.I. International Equity Fund 0.75% 0.16% 0.91%
AIM V.I. Value Fund 0.61% 0.05% 0.66%
AGSPC International Equities Fund 0.35% 0.05% 0.40%
AGSPC MidCap Index Fund 0.32% 0.04% 0.36%
AGSPC Money Market Fund 0.50% 0.04% 0.54%
AGSPC Stock Index Fund 0.27% 0.04% 0.31%
Dreyfus Quality Bond Portfolio 0.65% 0.08% 0.73%
Dreyfus Small Cap Portfolio 0.75% 0.02% 0.77%
Dreyfus Socially Responsible Growth Fund 0.75% 0.05% 0.80%
MFS Emerging Growth Series 0.75% 0.10% 0.85%
Morgan Stanley Dean Witter Equity Growth Portfolio/2/ 0.09% 0.76% 0.85%
Morgan Stanley Dean Witter High Yield Portfolio/2/ 0.15% 0.65% 0.80%
SAFECO Equity Portfolio 0.74% 0.04% 0.78%
SAFECO Growth Portfolio 0.74% 0.06% 0.80%
Templeton Asset Allocation Fund-Class 2/4/ 0.60% 0.25% 0.18% 1.03%
Templeton International Fund-Class 2/4/ 0.69% 0.25% 0.17% 1.11%
Van Kampen Strategic Stock Portfolio/2,3/ 0.00% 0.65% 0.65%
</TABLE>
_____________________
/1/ Certain of the unaffiliated Series' advisers reimburse AGL for
administrative costs incurred in connection with administering the Series as
variable funding options. These reimbursements are paid out of the advisers'
investment advisory fees as a percentage of assets under management. (See
"Services Agreements. ")
/2/ If certain voluntary expense reimbursements from the investment adviser were
terminated, management fees for the Morgan Stanley Dean Witter Equity Growth
and High Yield Portfolios would have been .55% and .50%, respectively, and
for the Van Kampen Strategic Stock Portfolio would have been .50%. The other
Series do not have such expense reimbursements.
/3/ If certain voluntary expense reimbursements from the investment adviser were
terminated, other expenses for the Van Kampen Strategic Stock Portfolio
would have been .75%. The other Series do not have such expense
reimbursements.
/4/ The Fund's Class 2 distribution plan or "Rule 12b-1 Plan" is described in
the Fund's prospectuses.
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EXAMPLE: The following expenses would apply to a $1,000 investment at the end
of the applicable time period, if you surrender your Contract (or if you
annuitize under circumstances where you owe a Surrender Charge)/1/ and if you
assume a 5% annual return on assets:
<TABLE>
<CAPTION>
If all amounts are invested
in one of the following Series 1 year 3 years 5 years 10 years
- ------------------------------ ---------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
AIM V.I. International
Equity Fund $79 $111 $153 $260
AIM V.I. Value Fund $76 $103 $140 $234
AGSPC International Equities
Fund $74 $ 95 $127 $206
AGSPC MidCap Index Fund $73 $ 94 $125 $202
AGSPC Money Market Fund $75 $ 99 $134 $221
AGSPC Stock Index Fund $73 $ 92 $122 $197
Dreyfus Quality Bond
Portfolio $77 $105 $144 $241
Dreyfus Small Cap Portfolio $78 $106 $146 $245
Dreyfus Socially Responsible
Growth Fund $78 $107 $147 $248
MFS Emerging Growth Series $78 $109 $150 $253
Morgan Stanley Dean Witter
Equity Growth Portfolio $78 $109 $150 $253
Morgan Stanley Dean Witter
High Yield Portfolio $78 $107 $147 $248
SAFECO Equity Portfolio $78 $107 $146 $246
SAFECO Growth Portfolio $78 $107 $147 $248
Templeton Asset Allocation
Fund-Class 2 $80 $114 $159 $272
Templeton International
Fund-Class 2 $81 $117 $163 $280
Van Kampen Strategic Stock
Portfolio $76 $103 $140 $233
</TABLE>
EXAMPLE: The following expenses would apply to a $1,000 investment at the end of
the applicable time period, if you do not surrender your Contract (or if you
annuitize under circumstances where a Surrender Charge is not payable) /1/, and
if you assume a 5% annual return on assets:
<TABLE>
<CAPTION>
If all amounts are invested
in one of the following Series 1 year 3 years 5 years 10 years
- ------------------------------ ---------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
AIM V.I. International
Equity Fund $23 $ 71 $121 $260
AIM V.I. Value Fund $20 $ 63 $108 $234
AGSPC International Equities
Fund $18 $ 55 $ 95 $206
AGSPC MidCap Index Fund $17 $ 54 $ 93 $202
AGSPC Money Market Fund $19 $ 59 $102 $221
AGSPC Stock Index Fund $17 $ 52 $ 90 $197
Dreyfus Quality Bond
Portfolio $21 $ 65 $112 $241
Dreyfus Small Cap Portfolio $22 $ 66 $114 $245
Dreyfus Socially Responsible
Growth Fund $22 $ 67 $115 $248
MFS Emerging Growth Series $22 $ 69 $118 $253
Morgan Stanley Dean Witter
Equity Growth Portfolio $22 $ 69 $118 $253
Morgan Stanley Dean Witter
High Yield Portfolio $22 $ 67 $115 $248
SAFECO Equity Portfolio $22 $ 67 $114 $246
SAFECO Growth Portfolio $22 $ 67 $115 $248
Templeton Asset Allocation
Fund-Class 2 $24 $ 74 $127 $272
Templeton International
Fund-Class 2 $25 $ 77 $131 $280
Van Kampen Strategic Stock
Portfolio $20 $ 63 $108 $233
</TABLE>
/1/ See "Surrender Charge" for a description of the circumstances when you may
be required to pay the Surrender Charge upon annuitization.
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The examples are not a representation of past or future expenses. Actual
expenses may be greater or less than those shown. The assumed 5% annual rate of
return is not an estimate or a guarantee of future investment performance. The
examples assume an estimated average Account Value of $40,000 for each of the
Divisions.
Platinum Investor Variable Annuity is a new variable annuity Contract.
Therefore, there is no Accumulation Unit data available.
SYNOPSIS OF CONTRACT PROVISIONS
You should read this synopsis together with the other information in this
Prospectus. The purpose of the Contracts is to provide retirement benefits
through
. the accumulation of purchase payments on a fixed or variable basis, and
. the application of such accumulations to provide Fixed or Variable Annuity
Payments.
MINIMUM INVESTMENT REQUIREMENTS
Your initial purchase payment must be at least $2,000, if you are buying a
Qualified Contract, and $5,000, if you are buying a Non-Qualified Contract.
(See "Federal Income Tax Matters" for a discussion of the various tax aspects
involved in purchasing Qualified and Non-Qualified Contracts.) The amount of any
subsequent purchase payment that you make must be at least $100. If your
Account Value falls below $500, we may cancel your Contract and treat it as a
full surrender. We also may transfer funds, without charge, from a Division
(other than the Money Market Division) or Guarantee Period under your Contract
to the Money Market Division, if the Account Value of that Division or Guarantee
Period falls below $500. (See "Contract Issuance and Purchase Payments.")
You have a right to examine your Contract for 10 days after it is delivered.
During that time, you can cancel the Contract and return it to us for a refund.
There will be no Surrender Charge if you cancel your Contract. (See
"Cancellation Right" and "Surrender Charge. ") In some states, the right to
cancel the Contract and return it to us is longer than 10 days.
There are some states that require us to refund an amount equal to your purchase
payments. In these states where we are required to refund an amount equal to
purchase payments, we will allocate any net purchase payment received before the
first valuation date following the 15th day (the 25th day in Idaho) after the
Contract's date of issue as follows:
. Any amount scheduled to be applied to the Fixed Account will be applied to the
Fixed Account;
. Any amount scheduled to be applied to a Separate Account Division will be
applied to the Money Market Division. (See "Cancellation Right.")
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On the first Valuation Date following the 15th day (25th day in Idaho) after the
date of issue, the Account Value of the Money Market Division will be allocated
to the Separate Account Divisions which you selected. The allocation of Net
Purchase Payments (following the 15th or 25th day after the date of issue) is
shown on Page 3 of your Contract, and will remain in effect until changed by
Written Notice.
PURCHASE PAYMENT ACCUMULATION
We accumulate purchase payments 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 17 available Divisions of the Separate Account. Each
Division invests solely in shares of one of 17 corresponding Series. (See "The
Series.") The value of accumulated purchase payments allocated to a Division
increases or decreases, as the value of the investments in a Series' shares
increases or decreases, subject to reduction by charges and deductions. (See
"Variable Account Value.")
For fixed accumulation, you may allocate part or all of your Account Value to
one or more of the Guarantee Periods available in our Fixed Account at the time
you make your allocation. Each Guarantee Period is for a different period of
time and has a different Guaranteed Interest Rate. The value of accumulated
purchase payments increases at the Guaranteed Interest Rate applicable to that
Guarantee Period. (See "The Fixed Account.")
Over the lifetime of your Contract, you may allocate part or all of your Account
Value to no more than 18 Divisions and Guarantee Periods. This limit includes
those Divisions and Guarantee Periods from which you have either transferred or
withdrawn all of your Account Value previously allocated to such Divisions or
Guarantee Periods. For example, if you allocate 100% of your initial purchase
payment to the Money Market Division, you have selected the Money Market
Division as one of the 18 Divisions and Guarantee Periods available to you.
When you transfer all of your Account Value from the Money Market Division, it
remains in one of the 18 Divisions and Guarantee Periods available to you, even
if you never again allocate any of your Account Value on a new purchase payment
to the Money Market Division.
FIXED AND VARIABLE ANNUITY PAYMENTS
You may elect to receive Fixed or Variable Annuity Payments or a combination of
Fixed and Variable Annuity Payments beginning on the Annuity Commencement Date.
Fixed Annuity Payments are periodic payments from AGL in a fixed amount
guaranteed by AGL. The amount of the Payments will depend on the Annuity
Payment Option chosen, the age and, in some cases, the gender 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 you selected under your variable Annuity
Payment Option. The payment for a given month will exceed the previous month's
payment, if the net investment return for a given month exceeds the assumed
interest rate used in the Contract's annuity tables. The monthly payment will
be less than the previous payment, if the net investment return for a month is
less than the assumed interest rate. The assumed interest rate used in the
Contract's annuity tables is 3.5%. AGL may offer other forms of the Contract
11
<PAGE>
with a lower assumed interest rate and reserves the right to discontinue the
offering of the higher interest rate form of Contract. (See "Annuity Period and
Annuity Payment Options.")
CHANGES IN ALLOCATIONS AMONG DIVISIONS AND GUARANTEE PERIODS
Before the Annuity Commencement Date, you may change your allocation of future
purchase payments to the various Divisions and Guarantee Periods, without
charge.
In addition, you may reallocate your Account Value among the Divisions and
Guarantee Periods before the Annuity Commencement Date. However, you are
limited in the amount that you may transfer out of a Guarantee Period. See
"Transfer, Automatic Rebalancing, Surrender and Partial Withdrawal of Owner
Account Value - Transfers," for these and other conditions of transfer.
After the Annuity Commencement Date, you may make transfers from a Division to
another Division or to a fixed Annuity Payment Option. However, you may not
make transfers from a fixed Annuity Payment Option. (See "Annuity Period and
Annuity Payment Options - Transfers.")
SURRENDERS AND WITHDRAWALS
You may make a total surrender of or partial withdrawal from your Contract at
any time before the Annuity Commencement Date by Written request to us. A
surrender or partial withdrawal may require you to pay a Surrender Charge, and
some surrenders and partial withdrawals may require you to pay tax penalties.
(See "Surrenders and Partial Withdrawals.")
CANCELLATION RIGHT
You may cancel your Contract by delivering it or mailing it with a Written
cancellation request to our Home Office or to your sales representative, before
the close of business on the 10th day after you receive the Contract. In some
states the Contract provides for a 20 or 30 day period. If you send the items
by mail, properly addressed and postage prepaid, we will consider them received
at our Home Office on the date we actually receive them.
We will refund to you, in most states, the sum of:
. your Account Value, and
. any premium taxes or other tax charges that have been deducted.
Some states require us to refund the sum of your purchase payments if it is
larger than the amount just described. Other states allow us to refund only the
sum of your purchase payments.
If your initial purchase payment was automatically allocated to the Money Market
Division, we will refund to you the greater of:
. your Account Value plus any premium taxes or other tax charges that have been
deducted; or
. all purchase payments received by us.
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DEATH PROCEEDS
If the Annuitant or Owner dies before the Annuity Commencement Date, we will pay
a benefit to the Beneficiary. (See "Death Proceeds Before the Annuity
Commencement Date.")
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
An employer or trustee who is the Owner under a retirement plan may limit
certain rights you would otherwise have under a Contract. These limitations may
restrict total and partial withdrawals, the amount or timing of purchase
payments, the start of annuity payments, and the type of Annuity Payment Options
that you may select. You should familiarize yourself with the provisions of any
retirement plan in which a Contract is used. We are not responsible for
monitoring or assuring compliance with the provisions of any retirement plan.
COMMUNICATIONS TO US
You should include, in communications to us, your Contract number, your name,
and, if different, the Annuitant's name. You may direct communications to the
addresses and phone numbers on the first page of this Prospectus.
Unless the Prospectus states differently, we will consider purchase payments or
other communications to be received at our Home Office on the date we actually
receive them, if they are in proper form. However, we will consider purchase
payments to be received on the next Valuation Date if we receive them (1) after
the close of regular trading on the New York Stock Exchange or (2) on a date
that is not a Valuation Date.
FINANCIAL AND PERFORMANCE INFORMATION
We include financial statements of AGL in the Statement of Additional
Information. (See "Contents of Statement of Additional Information.")
From time to time, the Separate Account may include in advertisements and other
sales materials several types of performance information for the Divisions.
This information may include "average annual total return," "total return," and
"cumulative total return." The Morgan Stanley Dean Witter High Yield Portfolio
Division and the Dreyfus Quality Bond Portfolio Division may also advertise
"yield." The AGSPC Money Market Division may advertise "yield" and "effective
yield."
The performance information that we may present is not an estimate or guarantee
of future investment performance and does not represent the actual investment
experience of amounts invested by a particular Owner. Additional information
concerning a Division's performance appears in the Statement.
Total Return and Yield Quotations. Average annual total return, total return,
and cumulative total return figures measure the net income of a Division and any
realized or unrealized gains or losses of the underlying investments in the
Division, over the period stated. Average annual total return figures are
annualized and represent the average annual percentage change in the value of an
investment in a Division over the period stated. Total return figures are also
annualized, but do not, as described
13
<PAGE>
below, reflect deduction of any applicable Surrender Charge. Cumulative total
return figures represent the cumulative change in value of an investment in a
Division for various periods stated.
Yield is a measure of the net dividend and interest income earned over a
specific one-month or 30-day period (seven-day period for the Money Market
Division), expressed as a percentage of the value of the Division's Accumulation
Units. Yield is an annualized figure, which means that we assume that the
Division generates the same level of net income over a one-year period and
compound that income on a semi-annual basis. We calculate the effective yield
for the Money Market Division similarly, but include the increase due to assumed
compounding. The Money Market Division's effective yield will be slightly
higher than its yield due to this compounding effect.
Average annual total return figures reflect deduction of all recurring charges
and fees applicable under the Contract to all Owner accounts, including the
following:
. the Mortality and Expense Risk Charge,
. the Administrative Expense Charge,
. the applicable Surrender Charge that may be charged at the end of the period
in question.
Yield, effective yield, total return, and cumulative total return figures do not
reflect deduction of any Surrender Charge that we may impose upon partial
withdrawal, and thus may be higher than if such charge were deducted.
Division Performance. The investment performance for each Division that invests
in a corresponding Series will reflect the investment performance of that Series
for the periods stated. This information appears in the Statement. For periods
before the date the Contracts became available, we calculate the performance
information for a Division on a hypothetical basis. In so doing, we reflect
deductions of current Separate Account fees and charges under the Contract from
the historical performance of the corresponding Series. We may waive or
reimburse certain fees or charges applicable to the Contract. Such waivers or
reimbursements will affect each Division's performance results.
Information about the investment experience of the Series of the Funds appears
in the prospectuses of the Fund.
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 A.M. Best's 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.
AGL may also advertise or report to Owners its ratings as to claims-paying
ability by the Standard & Poor's Corporation. 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.
14
<PAGE>
AGL may additionally advertise its ratings as to claims-paying ability by the
Duff & Phelps Credit Rating Co. A Duff & Phelps claims-paying ability rating is
an assessment of a company's insurance claims-paying ability. Duff & Phelps'
ratings range from AAA to CCC.
Current ratings from A.M. Best, Standard & Poor's, and Duff & Phelps may be used
from time to time in any advertising about the Contracts, as well as in any
reports that publish the ratings.
The ratings from A.M. Best, Standard & Poor's, and Duff & Phelps Credit Rating
Co. reflect the claims paying ability and financial strength of AGL. They are
not a rating of investment performance that purchasers of insurance products
funded through separate accounts, such as the Separate Account, have experienced
or are likely to experience in the future.
OTHER INFORMATION
AGL may also advertise endorsements from organizations, individuals or other
parties that recommend AGL or the Contracts. AGL may occasionally include in
advertisements (1) comparisons of currently taxable and tax-deferred investment
programs, based on selected tax brackets, or (2) discussions of alternative
investment vehicles and general economic conditions.
FINANCIAL INFORMATION
The financial statements of AGL appear in the Statement. Please see the first
page of this Prospectus for information on how to obtain a copy of the
Statement. You should consider the financial statements of AGL only as bearing
on the ability of AGL to meet its contractual obligations under the Contracts.
The financial statements do not bear on the investment performance of the
Separate Account. (See "Contents of Statement of Additional Information.")
AGL
AGL is a stock life insurance company, which was organized under the laws of the
State of Texas which is a successor in interest to a company originally
organized under the laws of Delaware in 1917. AGL is an indirect, wholly-owned
subsidiary of American General Corporation, 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
AGL established the Separate Account D on November 19, 1973. The Separate
Account has 69 Divisions, 17 of which are available under the Contracts offered
by the Prospectus. The Separate Account is registered with the Securities and
Exchange Commission as a unit investment trust under the 1940 Act.
Each Division of the Separate Account is part of AGL's general business, and the
assets of the Separate Account belong to AGL. Under Texas law and the terms of
the Contracts, the assets of the Separate Account will not be chargeable with
liabilities arising out of any other business that AGL may conduct.
15
<PAGE>
These assets will be held exclusively to meet AGL's obligations under variable
annuity Contracts. Furthermore, AGL credits or charges the Separate Account with
the income, gains, and losses from the Separate Account's assets, whether or not
realized, without regard to other income, gains, or losses of AGL.
THE SERIES
The Separate Account has 17 Divisions funding the variable benefits under the
Contracts. These Divisions invest in shares of nine separate Series of mutual
funds.
The funds offer shares of their Series without sales charges, exclusively to
insurance company variable annuity and variable life insurance separate accounts
and not directly to the public. The funds, other than American General Series
Portfolio Company, also offer shares to variable annuity and variable life
insurance separate accounts of insurers that are not affiliated with AGL.
We do not foresee any disadvantage to you 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 mutual funds could cause the Contracts funded through another separate
account to lose their tax deferred status. Such a result might require us to
take remedial action. A separate account may have to withdraw its participation
in the fund, if a material irreconcilable conflict arises between separate
accounts. In such event, the fund may have to liquidate portfolio securities at
a loss to pay for a separate account's redemption of fund shares. At the same
time, the fund's management and we will monitor events for any material
irreconcilable conflicts that may possibly arise and determine what action, if
any, to take to remedy or eliminate the conflict.
We automatically reinvest any dividends or capital gain distribution amounts
that we receive on shares of the Series held under Contracts. We reinvest at
the Series' net asset value on the date payable. Dividends and capital gain
distribution amounts will reduce the net asset value of each share of the
corresponding Series and increase the number of shares outstanding of the Series
by an equivalent value. However, these dividends and capital gain distribution
amounts do not change your Account Value.
The chart below indicates the names of the Series in which the Divisions invest,
as well as the investment objectives, investment adviser and sub-adviser for
each Series.
16
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT INVESTMENT
SERIES OBJECTIVES INVESTMENT ADVISER SUB-ADVISER
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM V.I. International Equity Long-term growth of capital by A I M Advisors, Inc. Not Applicable
Fund investing in a diversified portfolio of
international equity securities whose
issuers are considered to have strong
earnings momentum.
- -------------------------------------------------------------------------------------------------------------------------------
AIM V.I. Value Fund Long-term growth of capital by A I M Advisors, Inc. Not Applicable
investing primarily in equity
securities judged by the fund's
investment advisor to be undervalued
relative to the investment advisor's
appraisal of the current or projected
earnings of the companies issuing the
securities, or relative to current
market values of assets owned by the
companies issuing the securities, or
relative to the equity market
generally. Income is a secondary
objective.
- -------------------------------------------------------------------------------------------------------------------------------
AGSPC Long term growth of capital in equity Variable Annuity Life Not Applicable
International Equities Series securities closely corresponding to the Insurance Company
Morgan Stanley Dean Witter Capital
International EAFE Index/1/
- -------------------------------------------------------------------------------------------------------------------------------
AGSPC MidCap Growth of capital through investment in Variable Annuity Life Bankers Trust Company/4/
Index Fund common stocks corresponding to the S&P Insurance Company
MidCap 400/2/
- -------------------------------------------------------------------------------------------------------------------------------
AGSPC Money Liquidity, protection of capital and Variable Annuity Life Not Applicable
Market Fund current income through investments in Insurance Company
short term money market instruments
- -------------------------------------------------------------------------------------------------------------------------------
AGSPC Stock Long term capital growth through Variable Annuity Life Bankers Trust Company4
Index Fund investment in common stocks that, as a Insurance Company
group are expected to closely resemble
the S&P 500 Index/3/
- -------------------------------------------------------------------------------------------------------------------------------
Dreyfus Quality Bond Maximum current income consistent with The Dreyfus Corporation Not Applicable
Portfolio preservation of capital and liquidity
- -------------------------------------------------------------------------------------------------------------------------------
Dreyfus Small Cap Maximum capital appreciation The Dreyfus Corporation Not Applicable
Portfolio
- -------------------------------------------------------------------------------------------------------------------------------
Dreyfus Socially Capital growth through equity The Dreyfus Corporation NCM Capital Management
Responsible Growth Fund investment in socially responsible Group, Inc.
companies
- -------------------------------------------------------------------------------------------------------------------------------
MFS Emerging Growth Long term growth of capital Massachusetts Financial Not Applicable
Series Services Company
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
/1/ Morgan Stanley Capital International EAFE Index tracks the performance of
about 1,000 common stocks of companies in 20 foreign countries. This index
provides a measure of the performance of companies in the more developed
countries in Europe, Australia and the Far East. All indices are unmanaged.
/2/ S&P MidCap 400 Index tracks the common stock performance of 400 medium
capitalized U.S. and foreign companies that are in the manufacturing,
utilities, transportation, and financial industries. Medium capitalization
means the market value of these companies' stock is around $600 million. All
indices are unmanaged.
/3/ S&P 500 Index tracks the common stock performance of large U.S. companies in
major U.S. industry sectors. It also tracks the performance of common stocks
by foreign and smaller U.S. companies in similar industries. In total, this
index tracks 500 common stocks. All indices are unmanaged.
/4/ Bankers Trust Company (the "Sub-Adviser") is a wholly owned subsidiary of
Bankers Trust Corporation. On November 30, 1998, Bankers Trust Corporation
entered into an Agreement and Plan of Merger with Deutsche Bank AG under
which Bankers Trust Corporation and all of its subsidiaries would merge with
and into a subsidiary of Deutsche Bank AG. Deutsche Bank AG is a major
global banking institution that is engaged in a wide range of financial
services, including retail and commercial banking, investment banking and
insurance. The merger is contingent upon various regulatory approvals. On
April 20, 1999, the AGSPC Fund's Board of Directors approved a new sub-
advisory agreement with Bankers Trust Company, subject to shareholder
approval. If the merger is approved and completed, Deutsche Bank AG, as the
Sub-Adviser's new parent company, will control the operations of the Sub-
Adviser. Bankers Trust believes that, under this new arrangement, the
services provided to the Fund will be maintained at their current level.
17
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT INVESTMENT
SERIES OBJECTIVES INVESTMENT ADVISER SUB-ADVISER
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Morgan Stanley Dean Witter Long term capital appreciation in Morgan Stanley Dean Miller Anderson &
Equity Growth Portfolio equity securities of medium and large Witter Management, Inc. Sherrerd, LLP
companies
- -------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Above average total return over a Miller Anderson & Not Applicable
High Yield Portfolio market period of three to five years in Sherrerd, LLP
high yield securities
- -------------------------------------------------------------------------------------------------------------------------------
SAFECO Equity Portfolio Long term growth of capital and SAFECO Asset Management Not Applicable
reasonable current income Company
- -------------------------------------------------------------------------------------------------------------------------------
SAFECO Growth Portfolio Growth of capital and the increased SAFECO Asset Management Not Applicable
income that ordinarily follows from Company
such growth.
- -------------------------------------------------------------------------------------------------------------------------------
Templeton Asset High level of total return; invests Templeton Investment Not Applicable
Allocation Fund-Class 2 primarily in stocks and debt securities Counsel, Inc.
of any nation.
- -------------------------------------------------------------------------------------------------------------------------------
Templeton International Long term capital growth; invests Templeton Investment Not Applicable
Fund-Class 2 primarily in stocks of companies Counsel, Inc.
outside the U.S.
- -------------------------------------------------------------------------------------------------------------------------------
Van Kampen Strategic Capital appreciation and dividend Van Kampen Not Applicable
Stock Portfolio income from investment in equity Asset Management, Inc.
securities in companies included in the
Dow Jones Industrial Average
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Before selecting any Division, you should carefully read the Prospectus for each
mutual fund. The Prospectuses provide more complete information about the
Series of the funds in which the Divisions invest, including investment
objectives and policies, charges and expenses.
You can find information about the investment performance of the Series of the
funds in the Statement. You can find information about the experience of the
investment advisers to the Series of the funds in the Prospectuses for the fund.
You may obtain additional copies of the Prospectuses by contacting AGL's Home
Office at the addresses and phone numbers on the first page of this Prospectus.
When making your request, please indicate the names of the Series in which you
are interested.
High yielding fixed-income securities, such as those in which the Morgan Stanley
Dean Witter High Yield Portfolio, the Morgan Stanley Equity Growth Portfolio and
the Dreyfus Quality Bond Portfolio can invest, are subject to greater market
fluctuations and risk of loss of income and principal than investments in lower
yielding fixed-income securities. You should carefully read about this Series
in the Prospectus and related statement of additional information and consider
your ability to assume the risks of making an investment in the corresponding
Division.
VOTING PRIVILEGES
The following people may give us voting instructions for Series shares held in
the Separate Account Divisions attributable to their Contract:
. You, as the Owner, before the Annuity Commencement Date, and
. The Annuitant or other payee, during the Annuity Period.
We will vote according to such instructions at meetings of shareholders of the
Series.
18
<PAGE>
We will determine who is entitled to give voting instructions and the number of
votes for which they may give directions as of the record date for a meeting.
We will calculate the number of votes in fractions. We will calculate the
number of votes for any Series as follows:
. For each Owner before the Annuity Commencement Date, we will divide (1) the
Owner's Variable Account Value invested in the corresponding Division by (2)
the net asset value of one share of that Series.
. For each Annuitant or payee during the Annuity Period, we will divide (1) our
liability for future Variable Annuity Payments to the Annuitant or payee by
(2) the value of an Annuity Unit. We will calculate our liability for future
Variable Annuity Payments based on the mortality assumptions and the assumed
interest rate that we use in determining the number of Annuity Units under a
Contract and the value of an Annuity Unit.
We will vote all shares of each Series owned by the Separate Account as follows:
. Shares for which we receive instructions, in accordance with those
instructions, and
. Shares for which we receive no instructions, in the same proportion as the
shares for which we receive instructions.
Shares of each Series may be owned by separate accounts of insurance companies
other than us. We understand that each Series will see that all insurance
companies vote shares uniformly.
We believe that our voting instruction procedures comply with current federal
securities law requirements. However, we reserve the right to modify these
procedures to conform with legal requirements and interpretations that are put
in effect or modified from time to time.
THE FIXED ACCOUNT
AMOUNTS IN THE FIXED ACCOUNT OR SUPPORTING FIXED ANNUITY PAYMENTS BECOME PART OF
OUR GENERAL ACCOUNT. WE HAVE NOT REGISTERED INTERESTS IN THE GENERAL ACCOUNT
UNDER THE SECURITIES ACT OF 1933, AND WE HAVE NOT REGISTERED THE GENERAL ACCOUNT
AS AN INVESTMENT COMPANY UNDER THE 1940 ACT, BASED ON FEDERAL LAW EXCLUSION AND
EXEMPTION. THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS ADVISED US
THAT IT HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS THAT RELATE TO THE
FIXED ACCOUNT OR FIXED ANNUITY PAYMENTS. AT THE SAME TIME, WE HAVE LEGAL
RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THIS PROSPECTUS.
The Fixed Account is not available under Contracts purchased in Oregon.
Our obligations for the Fixed Account are legal obligations of AGL. Our General
Account assets support these obligations. These General Account assets also
support our obligations under other insurance and annuity contracts.
Investments purchased with amounts allocated to the Fixed Account are the
property of AGL. Owners have no legal rights in such investments.
19
<PAGE>
GUARANTEE PERIODS
Account Value that the Owner allocates to the Fixed Account earns a Guaranteed
Interest Rate beginning with the date of the allocation. This Guaranteed
Interest Rate continues for the number of months or years that the Owner selects
from among the Guarantee Periods that we offer at the time.
At the end of a Guarantee Period, we will allocate your Account Value in that
Guarantee Period, including interest you have earned, to a new Guarantee Period
of the same length. In the alternative, the Owner may submit a Written request
to us to allocate this amount to a different Guarantee Period or Periods or to
one or more of the Divisions of the Separate Account. We must receive this
Written request at least three business days before the end of the Guarantee
Period.
We will contact the Owner regarding the scheduled Annuity Commencement Date, if
the Owner has not provided the necessary Written request and the renewed
Guarantee Period extends beyond the scheduled Annuity Commencement Date. If the
Owner elects to annuitize in this case, we will, under certain circumstances,
waive the Surrender Charge. (See "Annuity Payment Options" and "Surrender
Charge.")
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 in
writing at least 30 days and not more than 60 days before 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 transfer, without charge, the balance to the Money Market Division
at the end of that Guarantee Period. However, we will transfer such balance to
another Division selected by the Owner, if we have received Written instructions
to transfer such balance to that Division.
CREDITING INTEREST
We declare the Guaranteed Interest Rates from time to time as market conditions
dictate. We tell an Owner the Guaranteed Interest Rate for a chosen Guarantee
Period at the time we receive a purchase payment, make a transfer, or renew a
Guarantee Period. We may credit a different interest rate to one Guarantee
Period than to another Guarantee Period that is the same length but that began
on a different date. The minimum Guaranteed Interest Rate is an effective
annual rate of 3%.
Proceeds from an exchange, rollover or transfer accrue interest, if you allocate
them to the Fixed Account within 60 days following the date of application for a
Contract. We credit interest to such proceeds during the Guarantee Period
chosen. We calculate interest at a rate that is the higher of: (1) the current
interest rate we use on the date of application for the Guarantee Period
selected; or (2) the current interest rate we use on the date we receive the
proceeds. Proceeds that we receive more than 60 days after the date the
application is signed receive interest at the rate in effect on the date we
receive the proceeds. The interest rate we use remains in effect for the
duration of the applicable Guarantee Period.
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.
You may obtain information concerning the Guaranteed Interest Rates applicable
to the various Guarantee Periods at any time from your sales representative or
from the addresses or telephone numbers on the first page of this Prospectus.
20
<PAGE>
NEW GUARANTEE PERIODS
Each allocation or transfer of an amount to a Guarantee Period starts the
running of a new Guarantee Period for that amount. That new Guarantee Period
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 stated in your Contract.
Each Guarantee Period has its own Guaranteed Interest Rate. Guarantee Periods
can have different Guaranteed Interest Rates. We have the right to 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 started. Each allocation or transfer of an amount to
a Guarantee Period starts the running of a new Guarantee Period for the amount
allocated or transferred. That amount earns 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 stated in your
Contract. We may offer one or more Guarantee Periods with a required dollar
cost averaging feature. Currently, we make available a one-year Guarantee
Period and no others. However, we reserve the right to change the Guarantee
Periods that we make available at any time, except that we will always make
available a one-year Guarantee Period.
CONTRACT ISSUANCE AND PURCHASE PAYMENTS
The minimum initial purchase payment is $2,000 for a Qualified Contract and
$5,000 for a Non-Qualified Contract. The minimum subsequent purchase payment is
$100. We reserve the right to modify these minimums at our discretion.
You must complete a Written application to purchase a Contract. AGL and
American General Securities Incorporated as distributor of the Contracts, may
agree on a different medium or format for the application. When a purchase
payment accompanies a properly completed application, 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 we have not received a correctly completed application within five Valuation
Dates after receipt of the purchase payment at our Home Office, we will return
the purchase payment immediately. However, you may specifically consent to our
retaining the purchase payment until you complete the application. In that
case, we will credit the initial purchase payment as of the end of the Valuation
Period in which we receive, at our Home Office, the last information required to
process the application.
We will credit subsequent purchase payments as of the end of the Valuation
Period in which we receive them and any required Written information at our Home
Office.
We reserve the right to reject any application or purchase payment for any
reason.
21
<PAGE>
MINIMUM REQUIREMENTS
If your Account Value in any 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 your 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
investment option or options to which the transfer was made.
We will waive these minimum requirements for transfers under the automatic
rebalancing program. (See "Automatic Rebalancing.")
If your total Account Value falls below $500, we may cancel the Contract. We
consider such a cancellation 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 do not have to make
further purchase payments. You may, however, elect to make subsequent purchase
payments at any time before the Annuity Commencement Date, if the Owner and
Annuitant are still living.
PAYMENTS
You should make checks for subsequent purchase payments payable to American
General Life Insurance Company and forward them directly to our Home Office. We
also accept purchase payments by wire or by exchange from another insurance
company. You may obtain further information about how to make purchase payments
by either of these methods from your sales representative or from us at the
addresses and telephone numbers on the first page of this Prospectus.
You may make purchase payments pursuant to employer sponsored plans only with
our agreement.
Your purchase payments are allocated to the Divisions of the Separate Account or
the Guarantee Periods of the Fixed Account as of the date we credit the purchase
payments to your Contract. In your application form, you select (in whole
percentages) the amount of each purchase payment that you are allocating to each
Division and Guarantee Period. You can change these allocation percentages at
any time by Written notice to us.
OWNER ACCOUNT VALUE
Before 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
As of any Valuation Date before the Annuity Commencement Date--
. Your Variable Account Value is the sum of your Variable Account Values in each
Division of the Separate Account.
22
<PAGE>
. Your Variable Account Value in a 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 the Separate Account, you bear the entire
investment risk.
We credit Accumulation Units in a Division to you when you allocate purchase
payments or transfer amounts to that Division. Similarly, we redeem
Accumulation Units when you transfer or withdraw amounts from a Division or when
we pay certain charges under the Contract. We determine the value of these
Accumulation Units at the end of the Valuation Date on which we make the credit
or charge. 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 for 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 determined at the end of the
previous Valuation Period. We then subtract from that result a factor
representing the mortality risk, expense risk and administrative expense charge.
FIXED ACCOUNT VALUE
As of any Valuation Date before the Annuity Commencement Date--
. Your Fixed Account Value is the sum of your Fixed Account Value in each
Guarantee Period.
. Your Fixed Account Value in any 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.
AGL guarantees the Fixed Account Value. AGL bears the investment risk for
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
minimum Guaranteed Interest Rate stated in your Contract).
TRANSFER, AUTOMATIC REBALANCING, SURRENDER AND PARTIAL
WITHDRAWAL OF OWNER ACCOUNT VALUE
TRANSFERS
You can transfer your Account Value beginning 30 days after we issue your
Contract and before the Annuity Commencement Date. The following rules apply:
23
<PAGE>
. You may transfer your Account Value at any time among the available Divisions
of the Separate Account and Guarantee Periods. Transfers will be effective at
the end of the Valuation Period in which we receive your Written or telephone
transfer request.
. If a transfer causes your Account Value in any Division or Guarantee Period to
fall below $500, we reserve the right to transfer the remaining balance in
that Division or Guarantee Period in the same proportions as the transfer
request.
. Before the Annuity Commencement Date and after the first 30 days following the
date the Contract was issued, you may make up to 12 transfers each Contract
Year without charge, but additional transfers will be subject to a $25 charge.
. You may transfer no more than 25% of the Account Value you allocated to a
Guarantee Period at its inception during any Contract Year. This 25%
limitation does not apply to transfers (1) within 15 days before or after the
end of the Guarantee Period in which you held the transferred amounts, or (2)
a renewal at the end of the Guarantee Period to the same Guarantee Period.
. We reserve the right to defer any transfer from the Fixed Account to any
Division for up to 6 months.
You may establish an automatic transfer plan. (We also refer to this plan as a
dollar cost averaging plan.) The rules about transfers, which we describe above,
will apply to this plan. Under this plan, we will automatically transfer
amounts 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. By transferring a set amount on a regular schedule instead of
transferring the total amount at one particular time, you may reduce the risk of
investing in the corresponding Division only when the price is high. An
automatic transfer plan does not guarantee a profit and it does not protect
against a loss if market prices decline. You will select--
. the amount we are to transfer under the plan;
. the frequency of the transfers--either monthly, quarterly, semi-annually, or
annually; and
. the duration of the plan.
We may also offer certain "special automatic transfer plans" to Owners who:
. make new purchase payments, and
. who do not own another annuity contract which AGL, or any AGL affiliate,
issued.
Under such plans, we will make equal monthly transfers over a period of time
that we will determine. We may offer a higher Guaranteed Interest Rate under
such a special automatic transfer plan than we would offer for another Guarantee
Period of the same duration that is not offered under such a plan. Any such
higher interest rate will reflect differences in costs or services and will not
be unfairly discriminatory as to any person.
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Differences in costs or services will result from such factors as reduced sales
expenses or administrative efficiencies related to transferring amounts to other
Divisions on an automatic, rather than a discretionary, basis.
Transfers under any automatic transfer plan will--
. not incur a charge,
. not be subject to the 25% limitation on transfers from a Guarantee Period, and
. not be subject to the minimum Account Value requirement described above.
You may obtain additional information about how to establish an automatic
transfer plan from your sales representative or from us at the telephone numbers
and addresses on the first page of this Prospectus. You cannot have an
automatic transfer plan in effect at the same time you have Automatic
Rebalancing, described below, in effect.
You can make transfers by telephone if you have completed a Telephone Transfer
Privilege form and given it to us. The form provides certain rules about
telephone transfers that you will have to follow. 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 an unauthorized person uses this
service in your name. Currently we try to limit the availability of telephone
transfers only to the Owner of the Contract. We are not liable for any acts or
omissions based upon telephone instructions that we reasonably believe to be
genuine. We are not responsible for 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,
. verification of the identity of the caller,
. verification of 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 of the transaction. We might
receive telephone transfer instructions from more than one person on the same
day, or our recording equipment might malfunction. 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, we will not process the transaction
if, due to malfunction or other circumstances, the recording of your telephone
request is incomplete or not fully comprehensible. The phone number for
telephone exchanges is 1-800-360-4268.
We have not designed the Contracts for professional market timing organizations
or other entities using programmed and frequent transfers. We may not
unilaterally terminate or discontinue transfer privileges. However, we reserve
the right to suspend such privileges for a reasonable period.
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AUTOMATIC REBALANCING
You may arrange for Automatic Rebalancing among the Divisions, if your Contract
has an Account Value of $25,000 or more at the time we receive the application
for Automatic Rebalancing. You may apply for Automatic Rebalancing either at
issue or after issue, and you may subsequently discontinue it.
Under Automatic Rebalancing, we transfer funds among the Separate Account
Divisions to maintain the percentage allocation you have selected for each
Division. At your election, we will make these transfers on a quarterly, semi-
annual or annual basis, measured from the Contract Anniversary date. A Contract
Anniversary date that falls on the 29th, 30th, or 31st of the month will result
in Automatic Rebalancing starting with 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 toward the 12 free
transfers each Contract Year and will not incur a $25 charge. You cannot have
Automatic Rebalancing in effect at the same time as you have an automatic
transfer plan, described above, in effect.
SURRENDERS
At any time before the Annuity Commencement Date and while the Annuitant is
still living, the Owner may make a full surrender of a Contract.
We will pay you the following upon full surrender:
. your Account Value at the end of the Valuation Period in which we receive a
Written surrender request,
. minus any applicable Surrender Charge,
. minus any applicable premium tax.
Our current practice is to require that you return the Contract to Our Home
Office 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 under the Contract will
terminate. The Owner will, however have a right to reinvest the proceeds of the
Contract. (See "One-Time Reinstatement Privilege.")
All collateral assignees of record must consent to any full surrender.
PARTIAL WITHDRAWALS
Your Written request for a partial withdrawal should specify the Divisions of
the Separate Account, or the Guarantee Periods of the Fixed Account, from which
you wish to make the partial withdrawal. We will take the withdrawal pro rata
from the Divisions and Guarantee Periods, if (1) you do not tell us how to make
the withdrawal, or (2) we cannot make the withdrawal as you requested.
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Partial withdrawal requests must be for at least $100 or, if less, all of your
Account Value. If your remaining Account Value in a Division or Guarantee
Period would be less than $500 as a result of the withdrawal (except for the
Money Market Division), we reserve the right to transfer the remaining balance
to the Money Market Division. We will do this without charge.
We will always pay you the amount of your partial withdrawal request unless it
exceeds the surrender value of your Contract. In that case, we pay the
surrender value of your Contract. The value of your Accumulation Units and
Fixed Account interests that we redeem will equal the amount of the withdrawal
request, plus any applicable Surrender Charge and premium tax. You can also
tell us to take Surrender Charges and income tax from the amount you want
withdrawn.
We also make available a systematic withdrawal plan. Under this plan, you may
make automatic partial withdrawals in amounts and at periodic intervals that you
specify. The terms and conditions that apply to other partial withdrawals will
also apply to this plan. You may obtain additional information about how to
establish a systematic withdrawal plan from your sales representative or from us
at the addresses and telephone numbers on the first page of this Prospectus. We
reserve the right to modify or terminate the systematic withdrawal plan at any
time.
The Code imposes a penalty tax on certain premature surrenders or withdrawals.
See the "Federal Income Tax Matters" section for a discussion of this and other
tax implications of total surrenders and systematic and other partial
withdrawals. The Section also discusses tax withholding requirements.
All collateral assignees of record must consent to any partial withdrawal.
ANNUITY PERIOD AND ANNUITY PAYMENT OPTIONS
ANNUITY COMMENCEMENT DATE
The Annuity Commencement Date may be any day of any month between the
Annuitant's 50th and 100th birthday. (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.) You may select the Annuity Commencement Date in the
Contract application. You may also change a previously selected date any time
before that date by submitting a Written request, subject to our approval.
See "Federal Income Tax Matters" for a discussion of the penalties that may
result from distributions before the Annuitant's reaching age 59 1/2 under any
Contract or after April 1 of the year following the calendar year in which the
Annuitant reaches age 70 1/2 under certain 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, we will apply your Account
Value in different proportions, if you give us Written instructions at least 30
days before the Annuity Commencement Date.
We deduct any applicable state and local premium taxes from the amount of
Account Value that we apply to an Annuity Payment Option. In some cases, we may
deduct a Surrender Charge from the
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amount we apply. (See "Surrender Charge.") Subject to any such adjustments, we
apply your Variable and Fixed Account Values to an Annuity Payment Option, as
discussed below, as of the end of the Valuation Period that contains the 10th
day before the Annuity Commencement Date.
FIXED AND VARIABLE ANNUITY PAYMENTS
We will determine your first monthly Fixed or Variable Annuity Payment using the
annuity tables in the Contract and the amount of your Account Value that is
applied to provide the Fixed or Variable Annuity Payments.
We determine the amount of each monthly Fixed Annuity Payment thereafter based
on the terms of the Annuity Payment Option selected.
We determine the amount of each monthly Variable Annuity Payment thereafter as
follows:
. We convert the Account Value that we apply to provide Variable Annuity
Payments to a number of Annuity Units. We do this by dividing the amount of
the first Variable Annuity Payment by the value of an Annuity Unit of a
Division as of the end of the Valuation Period that includes the 10th day
before the Annuity Commencement Date. This number of Annuity Units remains
constant for any Annuitant.
. We determine the amount of each subsequent Variable Annuity Payment by
multiplying the number of Annuity Units by the value of an Annuity Unit as of
the end of the Valuation Period that contains the 10th day before the date of
each payment.
. If we base the Variable Annuity Payments on more than one Division, we perform
these calculations 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.
The Contract's annuity tables use a 3.5% assumed interest rate. A Variable
Annuity Payment based on a Division will be greater than the previous month, if
the Division's investment return for the month is at an annual rate greater than
3.5%. Conversely, a Variable Annuity Payment will be less than the previous
month, if the Division's investment return is at an annual rate less than 3.5%.
ANNUITY PAYMENT OPTIONS
Sixty to ninety days before the Scheduled Annuity Commencement Date, we will (1)
notify you that the Contract is scheduled to mature, and (2) request that you
select an Annuity Payment Option.
If you have not selected an Annuity Payment Option ten days before the Annuity
Commencement Date, we will proceed as follows--
. We will extend the Annuity Commencement Date to the Annuitant's 100th
birthday, if the scheduled Annuity Commencement Date is any date before the
Annuitant's 100th birthday; or
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. We will pay the Account Value, less any applicable charges and premium taxes,
in one sum to you, if the scheduled Annuity Commencement Date is the
Annuitant's 100th birthday.
The procedure just described is different in Pennsylvania because the Annuity
Commencement Date cannot exceed age 90.
In Texas, we will proceed differently if you have not selected an Annuity
Payment Option within 10 days before the Annuity Commencement Date. We will pay
you as if you had elected to receive 12 payments under Annuity Payment Option 2.
(See "Option 2.")
The Code imposes minimum distribution requirements on the Annuity Payment Option
you choose in connection with Qualified Contracts. (See "Federal Income Tax
Matters.") We are not responsible for monitoring or advising Owners whether
they are meeting the minimum distribution requirements, unless we have received
a specific Written request to do so.
ELECTION OF ANNUITY PAYMENT OPTION
You may elect an Annuity Payment Option only if the initial annuity payment
meets the following minimum requirements--
. where you elect only Fixed or Variable Annuity Payments, the initial payment
must be at least $100; or
. where you elect a combination of Variable and Fixed Annuity Payments, the
initial payment must be at least $50 on each basis.
If the initial annuity payment falls below these amounts, we will reduce the
frequency of annuity payments. If the initial payment still falls below these
amounts, we will make a single payment to the Annuitant or other properly
designated payee equal to your Account Value. We will deduct any applicable
Surrender Charge and premium tax.
You may elect the annuity option that will apply for payments to a Beneficiary,
if you or the Annuitant dies. If you have not made this election, the
Beneficiary may do so within 60 days after your or the Annuitant's death. (See
"Death Proceeds.") Thereafter, the Beneficiary will have all the remaining
rights and powers under the Contract and be subject to all of its terms and
conditions. We will make the first annuity payment at the beginning of the
second month following the month in which we approve the settlement request. We
will credit Annuity Units based on Annuity Unit Values at the end of the
Valuation Period that contains the 10th day before the beginning of that second
month.
When an Annuity Payment Option becomes effective, you must deliver the Contract
to our Home Office, in exchange for a payment contract providing for the option
elected.
We provide information about the relationship between the Annuitant's gender and
the amount of annuity payments, including any requirements for gender-neutral
annuity rates and in connection with certain employee benefit plans under
"Gender of Annuitant" in the Statement. (See "Contents of Statement of
Additional Information.")
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AVAILABLE ANNUITY PAYMENT OPTIONS
Each Annuity Payment Option, except Option 5, is available on both a fixed and
variable basis. Option 5 is available on a fixed basis only.
OPTION 1 - LIFE ANNUITY - We make annuity payments monthly during the lifetime
of the Annuitant. These payments stop with the last payment due before the
death of the Annuitant. We do not guarantee a minimum number of payments under
this arrangement. For example, the Annuitant or other payee might receive only
one annuity payment, if the Annuitant dies before the second annuity payment.
OPTION 2 - LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN - We make
annuity payments monthly during the lifetime of an Annuitant. In addition, we
guarantee that the Beneficiary will receive monthly payments for the remainder
of the period certain, if the Annuitant dies during that period.
OPTION 3 - JOINT AND LAST SURVIVOR LIFE ANNUITY - We make annuity payments
monthly during the lifetime of the Annuitant and another payee and during the
lifetime of the survivor of the two. We stop making payments with the last
payment before the death of the survivor. We do not guarantee a minimum number
of payments under this arrangement. For example, the Annuitant or other payee
might receive only one annuity payment if both die before the second annuity
payment. The election of this option is ineffective if either one dies before
the Annuity Commencement Date. In that case, the survivor becomes the sole
Annuitant, and we do not pay death proceeds because of the death of the other
Annuitant.
OPTION 4 - PAYMENTS FOR A DESIGNATED PERIOD - We make annuity payments monthly
to an Annuitant or other properly-designated payee, or at his or her death, to
the Beneficiary, for a selected number of years ranging from five to 40. If
this option is selected on a variable basis, the designated period may not
exceed the life expectancy of the Annuitant or other properly-designated payee.
A payee who receives Variable (but not Fixed) Annuity Payments under Option 4
can elect at any time to withdraw all or a portion of the value of the remaining
Variable Annuity Payments. You (if you are the payee) will receive one payment
for the withdrawal. We calculate the value of any remaining Variable Annuity
Payments under Option 4 by assuming that each payment is equal and by
discounting each payment to the present at an annual rate of 3.5% (the "assumed
amount"). We calculate the "assumed amount" of each remaining payment as of the
end of the Valuation Period in which we receive your Written request for a
withdrawal.
Under Option 4, each time you withdraw a portion of the value of your Variable
Annuity Payments, the remaining Variable Annuity Payments will all be reduced
proportionately. If you elect to withdraw all of the value of your Variable
Annuity Payments, such payments cease. The Contract terminates at that time
unless we still owe you Fixed Annuity Payments.
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OPTION 5 - PAYMENTS OF A SPECIFIC DOLLAR AMOUNT - We pay the amount due in equal
monthly installments of a designated dollar amount until the remaining balance
is less than the amount of one installment. The amount of each installment may
not be less than $125 or more than $200 each year per $1,000 of the original
amount due. If the person receiving these payments dies, we continue to make
the remaining payments 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, we decrease the balance at the end of the previous month by the
amount of any installment paid during the month. We then apply, to the
remainder, interest at a rate not less than 3.5% compounded annually. If the
remaining balance at any time is less than the amount of one installment, we
will pay the balance as the final payment under the option.
We reduce Variable Annuity Payments as a result of a charge to the Separate
Account that is partially for mortality risks. (See "Charge to the Separate
Account.")
The Code may treat the election of Option 4 (including the election to withdraw
all or a portion of the remaining payments) or Option 5 in the same manner as a
surrender of the total Account Value. For tax consequences of such treatment,
see "Federal Income Tax Matters." In addition, the Code may not give tax-
deferred treatment to subsequent earnings. You should ask your own tax adviser
about these two Options before you select either of them.
ALTERNATIVE AMOUNT UNDER FIXED LIFE ANNUITY OPTIONS - In the case of Fixed
Annuity Payments under one of the first three Annuity Payment Options described
above, we make a special election available. In that case, the Owner (or the
Beneficiary, if the Owner has not elected a payment option) may elect monthly
payments based on single payment immediate fixed annuity rates we offer at that
time. This provision allows the Annuitant or other properly-designated payee to
receive the fixed annuity purchase rate in effect for new single payment
immediate annuity Contracts, if it is more favorable.
In place of monthly payments, you may elect payments on a quarterly, semi-annual
or annual basis. In that case, we determine the amount of each annuity payment
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 the
Separate Account or from the Divisions to a Fixed Annuity Payment Option. We
will assess no charge for the transfer. We do not permit transfers from a Fixed
to a Variable Annuity Payment Option. If a transfer causes the value 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. We
make transfers effective 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.
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DEATH PROCEEDS
DEATH PROCEEDS BEFORE THE ANNUITY COMMENCEMENT DATE
The death proceeds described below are payable to the Beneficiary under the
Contract if any of the following events occurs before the Annuity Commencement
Date:
. the Annuitant dies, and no Contingent Annuitant has been named under a Non-
Qualified Contract;
. the Annuitant dies, and we also receive proof of death of any named Contingent
Annuitant; or
. the Owner (including the first to die in the case of joint Owners) of a Non-
Qualified Contract dies, regardless of whether the deceased Owner was also the
Annuitant. (However, if the Beneficiary is the Owner's surviving spouse, or
the Owner's surviving spouse is a joint Owner, the surviving spouse may elect
to continue the Contract as described later in this Section).
There is a standard manner for us to pay the death proceeds when a joint Owner
dies: we treat the surviving joint Owner as the Beneficiary and we pay the
death proceeds to the surviving joint Owner. Joint Owners may give us written
instructions to pay death proceeds in a different manner.
The death proceeds, before deduction of any applicable premium taxes and other
applicable tax, will equal the greatest of -
. the sum of all net purchase payments made reduced upon a partial withdrawal in
the same proportion as the reduction in Account Value;
. 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
. the "highest anniversary value" before the date of death, as defined below.
The highest anniversary value before the date of death will be determined
as follows:
(a) First, we will calculate the Account Values at the end of each
fifth Contract Anniversary that occurs before the deceased's 81st
birthday (we will thereafter use only the highest of the fifth
Contract Anniversary Account Values that occurred before the
deceased's 81st birthday);
(b) Second, we will increase each of the Account Values by the amount
of net purchase payments the Owner has made since the end of such
Contract Anniversaries; and
(c) Third, we will reduce the result upon a partial withdrawal in the
same proportion as the reduction in Account Value.
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The highest anniversary value will be an amount equal to the highest of
such values. Net purchase payments are purchase payments less applicable
taxes deducted at the time the purchase payment is made.
The death proceeds become payable to the Beneficiary when we receive--
. proof of the Owner's or Annuitant's death, and
. a Written request from the Beneficiary specifying the manner of payment.
If the Owner has not already done so, the Beneficiary may, within 60 days after
the date the death proceeds become payable, elect to receive the death proceeds
as (1) a single sum or (2) in the form of one of the Annuity Payment Options
provided in the Contract. (See "Annuity Payment Options.") If we do not
receive a request specifying the manner of payment, we will make a single sum
payment, based on values we determine at that time.
If the Owner (including the first to die if there are joint Owners) under a Non-
Qualified Contract dies before the Annuity Commencement Date, we will distribute
all amounts payable under the Contract in accordance with the following rules:
. We will distribute all amounts--
(a) within five years of the date of death, or
(b) if the Beneficiary elects, as annuity payments, beginning within one year
of the date of death and continuing over a period not extending beyond the
life or 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. If the original Owner was the
Annuitant, the surviving spouse may also elect to become the new Annuitant.
This election is also available to the surviving spouse who is a joint Owner,
even if the surviving spouse is not the Beneficiary. In this case, we will
treat the surviving spouse as the Beneficiary, and we will not recognize any
other designation of Beneficiary.
. If the Owner is not a natural person, these distribution requirements apply at
the death of the primary Annuitant, within the meaning of the Code. Under a
parallel section of the Code, similar requirements apply to retirement plans
for which we issue Qualified Contracts.
Failure to satisfy the requirements described in this Section may result in
serious adverse tax consequences.
DEATH PROCEEDS AFTER THE ANNUITY COMMENCEMENT DATE
If the Annuitant dies on or after the Annuity Commencement Date, the amounts
payable to the Beneficiary or other properly designated payee are any continuing
payments under the Annuity Payment Option in effect. (See "Annuity Payment
Options.") In such case, the payee will:
. have all the remaining rights and powers under a Contract, and
. be subject to all the terms and conditions of the Contract.
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Also, if the Annuitant dies on or after the Annuity Commencement Date, no
previously named Contingent Annuitant can become the Annuitant.
If the payee under a Non-Qualified Contract dies after the Annuity Commencement
Date, we will distribute any remaining amounts payable under the terms of the
Annuity Payment Option at least as rapidly as under the method of distribution
in effect when the payee dies. If the payee is not a natural person, this
requirement applies upon the death of the primary Annuitant, within the meaning
of the Code.
Under a parallel section of the Code, similar requirements apply to retirement
plans for which we issue Qualified Contracts.
Failure to satisfy requirements described in this Section may result in serious
adverse tax consequences.
PROOF OF DEATH
We accept the following as proof of any person's death:
. a certified death certificate;
. 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 our
obligations are complete.
CHARGES UNDER THE CONTRACTS
PREMIUM TAXES
When applicable, we will deduct premium taxes imposed by certain states. We may
deduct such amounts either at the time the tax is imposed or later. We may
deduct the amount as follows:
. from purchase payment(s) when received;
. from the Owner's Account Value at the time annuity payments begin;
. from the amount of any partial withdrawal; or
. from proceeds payable upon termination of the Contract for any other reason,
including death of the Owner or Annuitant, or surrender of the Contract.
If premium tax is paid, AGL may reimburse itself for the tax when making the
deduction under the second, third, and fourth items on the list immediately
above, by multiplying the sum of Purchase Payments being withdrawn by the
applicable premium tax percentage.
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Applicable premium tax rates depend upon the Owner's then-current place of
residence. Applicable rates currently range from 0% to 3.5%. The rates 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 in distributing the
Contracts. We believe, however, that the amount of our expenses will exceed the
amount of revenues generated by the Surrender Charge. We will pay for extra
expenses 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
you withdraw during the first seven years after we receive that purchase
payment. The percentage declines depending on how many years have passed since
we originally credited the withdrawn purchase payment to your Account Value, as
follows:
Surrender Charge as a
Year of Purchase Percentage of Purchase
Payment Withdrawal Payment Withdrawn
------------------ --------------------
1st 7%
2nd 7%
3rd 5%
4th 5%
5th 4%
6th 2%
Thereafter 0%
In computing the Surrender Charge, we deem withdrawals from your Account Value
to consist first of purchase payments, in order of contribution, followed by any
amounts in excess of purchase payments. The Surrender Charge will apply to the
following transactions, which we consider to be withdrawals:
. total surrender;
. partial withdrawal;
. commencement of an Annuity Payment Option; and
. termination due to insufficient Account Value.
The Surrender Charge will not apply to withdrawals in the following
circumstances:
. the amount of withdrawals that exceeds the cumulative amount of your purchase
payments;
. death of the Annuitant, at any age, after the Annuity Commencement Date;
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. death of the Annuitant, at any age, before the Annuity Commencement Date,
provided no Contingent Annuitant survives;
. death of the Owner, including the first to die in the case of joint Owners of
a Non-Qualified Contract, unless the Contract continues under the special
rule for a surviving spouse;
. annuitization over at least ten years, or life contingent annuitization where
the life expectancy is at least ten years;
. within the 30-day window under the One-Time Reinstatement Privilege;
. the Annuitant is confined to a long-term care facility or is subject to a
terminal illness (see "Long-Term Care and Terminal Illness");
. an amount equal to 20% of your Account Value, in each Contract Year after the
first Contract Year, calculated as of the end of the Valuation Period in
which you make Written request for the first withdrawal in a Contract year
(If the amount of your first withdrawal in a Contract Year is less than the
20% free withdrawal amount, you may make additional withdrawals up to that
amount in that Contract Year without the imposition of a Surrender Charge. We
add all withdrawals and charge you a Surrender Charge only on amounts that
exceed the 20% free withdrawal. See the discussion under "Surrender Charge"
for an explanation of how we calculate Surrender Charge. After the first
Contract Year, you may make non-automatic and automatic withdrawals in the
same Contract Year subject to the 20% limitation. For purchase payments under
a systematic withdrawal plan, Purchase Payments credited for 30 days or more
are eligible for the 20% free withdrawal); and
. any amounts withdrawn that are in excess of the amount permitted by the 20%
free withdrawal privilege, described above, if you are withdrawing the
amounts to obtain or retain favorable tax treatment. (For example, under
certain circumstances the income and estate tax benefits of a charitable
remainder trust may be available only if you withdraw assets from a Contract
funding the trust more rapidly than the 20% free withdrawal privilege
permits. This exception is subject to our approval.)
Upon selection of an Annuity Payment Option that does not qualify for a
Surrender Charge exception above, we use the amount payable to the Owner upon
full surrender of a Contract (see "Surrenders") to pay for the Annuity Payment
Option.
We do not consider a free withdrawal under any of the foregoing Surrender Charge
exceptions to be a withdrawal of purchase payments, except for purposes of
computing the 20% free withdrawal described in the preceding paragraph. The
Code may impose a penalty on distributions if the recipient is under age 59 1/2.
(See "Penalty Tax on Premature Distributions.")
TRANSFER CHARGES
We describe the charges to pay the expense of making transfers under "Transfer,
Automatic Rebalancing, Surrender and Partial Withdrawal of Owner Account Value -
Transfers" and "Annuity Period and Annuity Payment Options - Transfers." These
charges are not designed to yield a profit.
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CHARGE TO THE SEPARATE ACCOUNT
We deduct from Separate Account assets a daily charge at an annualized rate of
1.35% of the average daily net asset value of the Separate Account attributable
to the Contracts. This charge (1) offsets administrative expenses and (2)
compensates us for assuming mortality and expense risks under the Contracts.
The 1.35% charge divides into .15% for administrative expenses and 1.20% for the
assumption of mortality and expense risks.
We do not expect to earn a profit on that portion of the charge that is for
administrative expenses. However, we do expect to derive a profit from the
portion that is for the assumption of mortality and expense risks. There is no
necessary relationship between the amount of administrative charges deducted for
a given Contract and the amount of expenses actually attributable to that
Contract.
In assuming the mortality risk, we incur the risks that
. our actuarial estimate of mortality rates may prove erroneous,
. Annuitants will live longer than expected, and
. more Owners or Annuitants than expected will die at a time when the death
benefit we guarantee is higher than the net surrender value of their
interests in the Contracts.
In assuming the expense risk, we incur the risk that the revenues from the
expense charges under the Contracts (charges that we guarantee will not
increase) will not cover our expense of administering the Contracts.
MISCELLANEOUS
Each Series pays charges and expenses out of its assets. The prospectus for
each Series describes the charges and expenses.
We reserve the right to impose charges or establish reserves for any federal or
local taxes that we incur today or may incur in the future and that we deem
attributable to the Contracts.
SYSTEMATIC WITHDRAWAL PLAN
You may make automatic partial withdrawals, at periodic intervals, through a
systematic withdrawal program. Minimum payments are $100. You may choose from
payment schedules of monthly, quarterly, semi-annual, or annual payments. You
may start, stop, increase, or decrease payments. You may elect to (1) start
withdrawals as early as 30 days after the issue date of the Contract and (2)
take withdrawals from the Fixed Account or any Division. 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, you may elect to reinvest all of the
proceeds that you liquidated from the Contract within the previous 30 days. In
this case, we will credit the Surrender Charge back
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to the Contract. We will reinvest the proceeds at the value we next compute
following the date of receipt of the proceeds. Unless you request otherwise, we
will allocate the proceeds among the Divisions and Guarantee Periods in the same
proportions as before surrender. We will compute any subsequent Surrender Charge
as if we had issued the Contract at the date of reinstatement for a purchase
payment in the amount of the net surrender proceeds. 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 for employer sponsored plans. Any such reductions
will reflect differences in costs or services and will not be unfairly
discriminatory as to any person. Differences in costs and services result from
factors such 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.
LONG-TERM CARE AND TERMINAL ILLNESS
The rider we describe below is not available in all states. You should ask your
sales representative or our Home Office to tell you if it applies to you. There
is no separate charge for this rider.
LONG-TERM CARE
We describe long-term care in 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 continuously for 30 days or more (or within
30 days after discharge) in a hospital or state-licensed in-patient nursing
facility. You must give us Written proof of such confinement.
TERMINAL ILLNESS
The same rider provides that no Surrender Charge will apply to a partial
withdrawal or total surrender if you give us a physician's Written certification
that the Annuitant is terminally ill and not expected to live more than twelve
months. We must waive or exercise 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, which means they are not
entitled to share in any dividends, profits or surplus of AGL.
OWNERS, ANNUITANTS, AND BENEFICIARIES; ASSIGNMENTS
You, as the Owner of a Contract, will be the same as the Annuitant, unless you
choose a different Annuitant when you purchase a Contract. In the case of joint
ownership, both Owners must join in the
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exercise of any rights or privileges under the Contract. You choose the
Annuitant and any Contingent Annuitant in the application for a Contract and may
not change that choice.
You choose the Beneficiary and any Contingent Beneficiary when you purchase a
Contract. You may change a Beneficiary or Contingent Beneficiary before the
Annuity Commencement Date, while the Annuitant is still alive. The payee may
make this change after the Annuity Commencement Date.
We will make any designation of a new Beneficiary or Contingent Beneficiary
effective as of the date it is signed. However, the change in designation will
not affect any payments we make or action we take before we receive the Written
request. We also need the Written consent of any irrevocably named Beneficiary
or Contingent Beneficiary before we make a change. Under certain retirement
programs, the law may require spousal consent to name or 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 the Beneficiary or Contingent Beneficiary is not living at the time we are to
make any payment, you, as the Owner, will be the Beneficiary. If you are not
then living, your estate will be the Beneficiary.
In the case of joint ownership, we will treat the surviving joint Owner as the
Beneficiary upon the death of a joint Owner. We will not recognize any other
designation of Beneficiary, unless joint Owners provide written instructions to
pay death proceeds in a different manner.
Owners and other payees may assign their rights under Qualified Contracts only
in certain narrow circumstances referred to in the Contracts. 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.
Owners must make a change in ownership rights in Writing and send a copy to our
Home Office. We will make the change effective on the date it was made.
However, 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 anyone receiving payments following the Annuity
Commencement Date), any reports and communications required by applicable law.
We will mail to the last known address of record. You should give us prompt
written notice of any address change.
RIGHTS RESERVED BY US
Upon notice to the Owner, we may modify a Contract to the extent necessary to:
. reflect a change in the Separate Account or any Division;
. create new separate accounts;
. operate the Separate Account in any form permitted under the 1940 Act or
in any other form permitted by law;
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. transfer any assets in any Division to another Division, or to one or more
separate accounts, or to the Fixed Account;
. add, combine or remove Divisions in the Separate Account, or combine the
Separate Account with another separate account;
. add, restrict or remove Guarantee Periods of the Fixed Account;
. make any new Division available to you on a basis we determine;
. substitute, for the shares held in any Division, the shares of another Series
or the shares of another investment company or any other investment permitted
by law;
. make any changes required by the Code or by any other law, regulation or
interpretation to continue treatment of the Contract as an annuity;
. commence deducting premium taxes or adjust the amount of premium taxes
deducted in accordance with state law that applies; or
. make any changes required to comply with the rules of any Series.
When required by law, we will obtain (1) your approval of changes and (2) the
approval of any appropriate regulatory authority.
PAYMENT AND DEFERMENT
We will normally pay amounts surrendered or withdrawn from a Contract within
seven calendar days after the end of the Valuation Period in which we receive
the Written surrender or withdrawal request at our Home Office. A Beneficiary
may request the manner of payment of death proceeds within 60 days after the
death proceeds become payable. If we do not receive a Written request
specifying the manner of payment, we will pay the death benefit as a single sum,
normally within seven calendar days after the end of the Valuation Period that
contains the last day of the 60-day period. We reserve the right, however, to
defer payments or transfers out of the Fixed Account for up to six months.
Also, we reserve the right to defer payment of that portion 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, annuity
payment, or death proceeds out of the Variable Account Value if:
. the New York Stock Exchange is closed other than customary weekend and
holiday closings, or trading on the New York Stock Exchange is restricted as
determined by the SEC;
. the SEC determines that an emergency exists, as a result of which
disposal of securities held in a Division is not reasonably practicable or it
is not reasonably practicable to fairly determine the Variable Account Value;
or
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<PAGE>
. the SEC by order permits the delay for the protection of Owners.
We may also postpone transfers and allocations of Account Value among the
Divisions and the Fixed Account under these circumstances.
FEDERAL INCOME TAX MATTERS
GENERAL
We cannot comment on all of the federal income tax consequences associated with
the Contracts. Federal income tax law is complex. Its application to a
particular person may vary according to facts peculiar to the person.
Consequently, we do not intend for you to take this discussion as tax advice.
You should consult with a competent tax adviser before purchasing a Contract.
We base this discussion on our understanding of the law, regulations and
interpretations existing on the date of this Prospectus. Congress, in the past,
has enacted legislation changing the tax treatment of annuities in both the
Qualified and the Non-Qualified markets and may do so again in the future. The
Treasury Department may issue new or amended regulations or other
interpretations of existing tax law. The courts may also interpret the tax law
in ways that affect the tax treatment of annuities. Any such change could have
a retroactive effect. We suggest that you consult your legal or tax adviser on
these issues.
The discussion does not address federal estate and gift tax, or social security
tax, or any state or local 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 "Non-Qualified" may not deduct from their gross income the
amount of purchase payments made.
Tax Deferral Before Annuity Commencement Date. Owners who are natural persons
are not taxed currently on (1) increases in their Account Value resulting from
interest earned in the Fixed Account, or (2) the investment experience of the
Separate Account so long as the Separate Account complies with certain
diversification requirements. These requirements mean that the Separate Account
must invest in Series that are "adequately diversified" in accordance with
Treasury Department regulations. We do not control the Series, but we have
received commitments from the investment advisers to the Series to use their
best efforts to operate the Series in compliance with these diversification
requirements. A Contract investing in a Series that failed to meet the
diversification requirements would subject Owners to current taxation of income
in the Contract for the period of such diversification failure (and any
subsequent period). Income means the excess of the Account Value over the
Owner's investment in the Contract (discussed below).
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Control over allocation of values among different investment alternatives may
cause Owners or persons receiving annuity payments to be treated as the owners
of the Separate Account's assets for tax purposes. However, current regulations
do not provide guidance as to how to avoid this result. We reserve the right to
amend the Contracts in any way necessary to avoid this result. The Treasury
Department has stated that it may establish standards through regulations or
rulings. These standards may apply only prospectively, although they could
apply retroactively if the Treasury Department considers the standards not to
reflect a new position.
Owners that are not natural persons -- that is, Owners such as corporations --
are taxed currently on annual increases in their Account Value, unless an
exception applies. Exceptions apply for, among other things, Owners that are
not natural persons but that hold a Contract as an agent for a natural person.
Taxation of Annuity Payments. Part of each annuity payment received after the
Annuity Commencement Date is excludible from gross income.
In the case of Fixed Annuity Payments, the excludible portion is found 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 excludible portion is the
investment in the Contract divided by 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 stop on account of the death of
the Annuitant before the investment in the Contract has been fully paid out, the
payee is allowed a deduction for the unpaid 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 receive 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 you surrender a Contract
in its entirety, the amount of your investment in the Contract is excludible
from income, and any amount you receive in excess of your investment in the
Contract is includible in income. All annuity Contracts or Contracts we issue
to the same Owner during any calendar year are aggregated for purposes of
determining the amount of any distribution that is includible in gross income.
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Penalty Tax on Premature Distributions. In the case of such a distribution,
there may be imposed a federal tax penalty equal to 10% of the amount treated as
taxable income. The penalty tax will not apply, however, to distributions:
. made on or after the recipient reaches age 59 1/2,
. made on account of the recipient's becoming disabled,
. that are made after the death of the Owner before the Annuity Commencement
Date or of 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), or
. that are part of a series of substantially equal periodic payments made at
least annually over the life (or life expectancy) of the Annuitant or the
joint life (or joint life expectancies) of the Annuitant and the Beneficiary,
provided such payments are made for a minimum of 5 years and the distribution
method is not changed before the recipient reaches age 59 1/2 (except in the
case of death or disability).
Premature distributions may result 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 the third clause listed above applies.
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 under 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 $31,000 may fully deduct their IRA purchase payments. Those who have
adjusted gross income in excess of $41,000 will not be able to deduct purchase
payments. For those with adjusted gross income in the range between $31,000 and
$41,000, the deduction decreases to zero, based on the amount of income.
Beginning in 2000, that income range will increase, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 and
thereafter
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$32,000 $33,000 $34,000 $40,000 $45,000 $50,000
to to to to to to
$42,000 $43,000 $44,000 $50,000 $55,000 $60,000
- ------------------------------------------------------------------------
</TABLE>
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<PAGE>
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 $51,000 and $61,000, and in the case of married
individuals filing separately, with adjusted gross income between $0 and
$10,000. (A husband and wife who file separate returns and live apart at all
times during the taxable year are not treated as married individuals.)
Beginning in 2000, 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:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 2005 2006 2007 and
thereafter
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$52,000 $53,000 $54,000 $60,000 $65,000 $70,000 $75,000 $ 80,000
to to to to to to to to
$62,000 $63,000 $64,000 $70,000 $75,000 $80,000 $85,000 $100,000
- -------------------------------------------------------------------------------
</TABLE>
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 the individual, the adjusted gross 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
(1) a tax-qualified plan to an IRA or (2) from one IRA to another IRA if, the
transfer meets certain conditions. All taxable distributions ("eligible
rollover distributions") from tax qualified plans are eligible to be rolled over
with the exception of:
. annuities paid over a life or life expectancy,
. installments for a period of ten years or more, and
. required minimum distributions under section 401(a)(9) of the Code.
Rollovers may be accomplished in two ways. First, we may pay an eligible
rollover distribution directly to an IRA (a "direct rollover"). Second, we may
pay the distribution directly to the Annuitant and then, within 60 days of
receipt, the Annuitant may roll the amount over to an IRA. However, any amount
that was not distributed as a direct rollover will be subject to 20% income tax
withholding.
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 recipients' income. If nondeductible
purchase payments have been made, a pro rata portion of such distributions may
not be includible in income. A 10% penalty tax is imposed on the amount
includible in gross income from distributions that occur before the Annuitant
reaches age 59 1/2 and that are not made on account of death or disability, with
certain exceptions. These exceptions include:
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. distributions that are part of a series of substantially equal periodic
payments made at least annually over the life (or life expectancy) of the
Annuitant or the joint lives (or joint life expectancies) of the
Annuitant and the Beneficiary; provided such payments are made for a
minimum of 5 years and the distribution method is not changed before the
recipient reaches age 59 1/2 (except in the case of death or disability);
. distributions for medical expenses in excess of 7.5% of the Annuitant's
adjusted gross income and withdrawals for medical insurance (without
regard to the 7.5% AGI floor) if the individual has received unemployment
compensation under federal or state law for at least 12 consecutive weeks
under certain conditions;
. distributions for qualified first-time home purchases for the individual,
a spouse, children, grandchildren, or ancestor of the individual or the
individual's spouse, subject to a $10,000 lifetime maximum; and
. distributions for higher education expenses for the individual, a spouse,
children, or grandchildren.
Distributions of minimum amounts required by the Code must commence by April 1
of the calendar year following the calendar year in which the Annuitant reaches
age 70 1/2 or retires (whichever is later). 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 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 permitted contribution is phased out for adjusted gross income
between $95,000 and $110,000 in the case of single taxpayers, between $150,000
and $160,000 in the case of married taxpayers filing joint returns, and between
$0 and $10,000 in the case of married taxpayers filing separately. An overall
$2,000 annual limitation continues to apply to all of a taxpayer's IRA
contributions, including Roth 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. 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 (1) the individual has held the Roth IRA for at least
five years and (2) the distribution is made either after the individual reaches
age 59 1/2, on the individual's death or disability, or as qualified first-time
home purchase. Qualified Distributions for a qualified first-time home
purchase, are subject to a $10,000 lifetime maximum for the individual, a
spouse, child, grandchild, or ancestor of such individual or the individual's
spouse.
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SIMPLIFIED EMPLOYEE PENSION PLANS
Eligible 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,
provided that total employer contributions do not exceed the lesser of 15% of an
employee's compensation or $30,000.
SIMPLE RETIREMENT ACCOUNTS
Eligible employers may establish an IRA plan known as a simple retirement
account ("SRA"), if they meet certain requirements. Under an SRA, the employer
contributes elective employee compensation deferrals up to a maximum of $6,000 a
year to the employee's SRA. The employer must, in general, make a fully vested
matching contribution for employee deferrals up to a maximum of 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. The
purchase payments are also excluded from the current income of the employee.
Distributions Before the Annuity Commencement Date. Purchase payments
includible in an employee's taxable income (less any amounts previously received
that were not includible in the employee's taxable income) represent the
employee's "investment in the Contract." Amounts received before 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. 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, 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, for tax years beginning before December 31, 1999, 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 reaches age 59 1/2 and that are not
made on account of death or disability, with certain exceptions. These
exceptions include distributions that are:
. part of a series of substantially equal periodic payments made at
least annually 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,
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<PAGE>
provided such payments are made for at least 5 years and the distribution
method is not changed before the recipient reaches age 59 1/2 (except in
the case of death or disability);
. made after the employee's separation from service on account of early
retirement after attaining age 55;
. made to pay for qualified higher education or first-time home buyer
expenses;
. made to an alternate payee pursuant to a qualified domestic relations
order, if the alternate payee is the spouse or former spouse of the
employee; or
. distributions for medical expenses in excess of 7.5% of the Annuitant's
adjusted gross income and withdrawals for medical insurance (without
regard to the 7.5% AGI floor) if the individual has received unemployment
compensation under federal or state law for at least 12 consecutive weeks
under certain conditions;
Annuity Payments. A portion of annuity payments received under Contracts for
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 "Non-Qualified Contracts -
Taxation of Annuity Payments." The difference is that, here, the number of
expected payments is determined under a provision in the Code. Distributions of
minimum amounts required by the Code generally must commence by April 1 of the
calendar year following the calendar year in which the employee reaches age
70 1/2 (or retires, if later). Failure to comply with the minimum distribution
rules will result in 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.
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. To avoid current
taxation, these benefits must be subject to a substantial risk of forfeiture.
These types of programs allow individuals to defer (1) receipt of up to 100% of
compensation that would otherwise be includible in income and (2) payment of
federal income taxes on the amounts.
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.
Purchase payments are not currently deductible by the employer until benefits
are included in the taxable income of the employee.
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<PAGE>
Taxation of Distributions. Amounts that an individual receives 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.
In some cases, if you own more than one Qualified annuity Contract, the
Contracts may be considered together to determine whether the federal tax law
requirement for minimum distributions after age 70 1/2, or retirement in
appropriate circumstances, has been satisfied. You may rely on distributions
from another annuity contract or Contract to satisfy the minimum distribution
requirement under a Qualified Contract we issued. However, 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 THE SEPARATE ACCOUNT
AGL is taxed as a life insurance company under the Code. The operations of the
Separate Account 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 the Separate Account (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 maintenance of the Separate Account or the Contracts.
Certain Series may elect 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
that the Series will also pass through. These credits may provide a benefit to
AGL.
DISTRIBUTION ARRANGEMENTS
Individuals who sell the Contracts will be licensed by State insurance
authorities as agents of AGL. The individuals will also be registered
representatives of (1) American General Securities Incorporated ("AGSI"), the
principal underwriter of the Contracts, or (2) other broker-dealer firms.
However, some individuals may be representatives of firms that are exempt from
broker-dealer regulation. AGSI is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc.
AGSI is a wholly owned subsidiary of AGL. AGSI's principal business address is
2727 Allen Parkway, Houston, Texas 77019-2191.
AGL offers the Contracts on a continuous basis. AGSI has entered into certain
revenue and cost-sharing arrangements in connection with marketing the
Contracts.
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<PAGE>
AGL compensates AGSI and other broker-dealers that sell the Contracts according
to one or more compensation schedules. The schedules provide for commissions of
up to 7.0% of purchase payments that Owners make and up to 1% of purchase
payments as annual trail commissions.
AGL also has agreed to pay AGSI for its promotional activities, such as
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 and related marketing support, and related special
promotional campaigns. From time to time, AGSI may engage in special
promotions where AGSI pays additional compensation to one or more of the broker-
dealers that sell the Contracts. None of these distribution expenses results in
any additional charges under the Contracts that are not described under "Charges
under the Contracts."
SERVICES AGREEMENTS
American General Life Companies ("AGLC") is party to a general services
agreement with AGL. AGLC, an affiliate of AGL, is a corporation incorporated in
Delaware on November 24, 1997. Its address is 2727-A Allen Parkway, Houston,
Texas 77019-2191. Under this agreement, AGLC 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.
AGL has entered into administrative services agreements with the advisers or
fund administrators for the mutual funds that offer shares to the Divisions.
AGL receives fees for the administrative services it performs. These fees do not
result in any additional charges under the Contracts that are not described
under "Charges under the Contracts."
LEGAL MATTERS
We are not involved in any legal matter about the Separate Account that would be
considered material to the interests of Owners. Pauletta P. Cohn, Associate
General Counsel of AGLC has passed upon the legality of the Contracts described
in this Prospectus. Mayer, Brown & Platt, Washington, D.C., has advised AGL on
certain federal securities law matters.
YEAR 2000 CONSIDERATIONS
Internal Systems. AGL's ultimate parent, American General Corporation
("AGC"), has numerous technology systems that are managed on a decentralized
basis. AGC's Year 2000 readiness efforts are being undertaken by its key
business units with centralized oversight. Each business unit, including AGL,
has developed and is implementing a plan to minimize the risk of a significant
negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of our information technology and non-
information technology systems; (2) assess which items in the inventory may
expose us to business interruptions due to Year 2000 issues; (3) reprogram or
replace systems that are not Year 2000 ready; (4) test systems to prove that
they will function into
49
<PAGE>
the next century as they do currently; and (5) return the systems to operations.
As of December 31, 1998, substantially all of our critical systems are Year 2000
ready and have been returned to operations. However, activities (3) through (5)
for certain systems are ongoing, with vendor upgrades expected to be received
during the first half of 1999.
Third Party Relationships. We have relationships with various third
parties who must also be Year 2000 ready. These third parties provide (or
receive) resources and services to (or from) AGL and include organizations with
which we exchange information. Third parties include vendors of hardware,
software, and information services; providers of infrastructure services such as
voice and data communications and utilities for office facilities; investors;
customers; distribution channels; and joint venture partners. Third parties
differ from internal systems in that we exercise less, or no, control over Year
2000 readiness. We developed a plan to assess and attempt to reduce the risks
associated with the potential failure of third parties to achieve Year 2000
readiness. The plan includes the following activities: (1) identify and
classify third party dependencies; (2) research, analyze, and document Year 2000
readiness for critical third parties; and (3) test critical hardware and
software products and electronic interfaces. As of December 31, 1998, AGC has
identified and assessed approximately 700 critical third party dependencies,
including those relating to AGL. A more detailed evaluation will be completed
during first quarter 1999 as part of our contingency planning efforts. Due to
the various stages of third parties' Year 2000 readiness, our testing activities
will extend through 1999.
Contingency Plans. AGL and its affiliates have commenced contingency
planning to reduce the risk of Year 2000-related business failures. The
contingency plans, which address both internal systems and third party
relationships, include the following activities: (1) evaluate the consequences
of failure of business processes with significant exposure to Year 2000 risk;
(2) determine the probability of a Year 2000-related failure for those processes
that have a high consequence of failure; (3) develop an action plan to complete
contingency plans for those processes that rank high in consequence and
probability of failure; and (4) complete the applicable action plans. We are
currently developing contingency plans and expect to substantially complete all
contingency planning activities during the second quarter of 1999.
Risks and Uncertainties. Based on our plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, we believe that we will experience at most isolated and
minor disruptions of business processes following the turn of the century. Such
disruptions are not expected to have a material effect on AGL's future results
of operations, liquidity, or financial condition. However, due to the size and
complexity of this project, risks and uncertainties exist, and we cannot predict
a most reasonably likely worst case scenario. If conversion of our internal
systems is not completed on a timely basis (due to non-performance by
significant third-party vendors, lack of qualified personnel to perform the Year
2000 work, or other unforeseen circumstances in completing our plans), or if
critical third parties fail to achieve Year 2000 readiness on a timely basis,
the Year 2000 issues could have a material adverse impact on our operations
following the turn of the century.
Costs. Through December 31, 1998, AGL has incurred, and anticipates that
it will continue to incur, costs for internal staff, third-party vendors, and
other expenses to achieve Year 2000 readiness. The cost of activities related
to Year 2000 readiness has not had a material adverse effect on our results of
operations or financial condition. In addition, we have elected to accelerate
the planned replacement
50
<PAGE>
of certain systems as part of the Year 2000 plans. Costs of the replacement
systems are not passed to Divisions of the Separate Account.
OTHER INFORMATION ON FILE
We have filed a Registration Statement with the Securities and Exchange
Commission under the Securities Act of 1933 for the Contracts discussed in this
Prospectus. We have not included all of the information in the Registration
Statement and its exhibits. Statements contained in this Prospectus concerning
the Contracts and other legal instruments are intended to be summaries. For a
complete statement of terms, you should refer to the documents that we filed
with the Securities and Exchange Commission.
We will send you a Statement on request without charge. Its contents are as
follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
General Information.................................................... 3
Regulation and Reserves................................................ 3
Independent Auditors................................................... 4
Services............................................................... 4
Principal Underwriter.................................................. 4
Annuity Payments....................................................... 5
Gender of Annuitant............................................... 5
Misstatement of Age or Gender and Other Errors.................... 5
Change of Investment Adviser or Investment Policy...................... 5
Performance Data for the Divisions..................................... 5
Average Annual Total Return Calculations.......................... 5
Total Return Calculations (without Surrender Charge).............. 6
Cumulative Total Return Calculations (without Surrender Charge) 6
Hypothetical Performance.......................................... 7
Yield Calculations................................................ 9
Money Market Division Yield and Effective
Yield Calculations.............................................. 10
Performance Comparisons........................................... 11
Effect of Tax-Deferred Accumulation.................................... 11
Financial Statements................................................... 13
Index to Financial Statements.......................................... 13
</TABLE>
51
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT D
PLATINUM INVESTOR(SM) VARIABLE ANNUITY
FLEXIBLE PAYMENT VARIABLE AND FIXED INDIVIDUAL DEFERRED ANNUITY CONTRACTS
OFFERED BY
AMERICAN GENERAL LIFE INSURANCE COMPANY
ANNUITY ADMINISTRATION DEPARTMENT
P.O. BOX 1401, HOUSTON, TEXAS 77251-1401
1-800-360-4268; (713) 831-3505
STATEMENT OF ADDITIONAL INFORMATION
Dated May 3, 1999
This Statement of Additional Information ("Statement") is not a prospectus. You
should read it with the Prospectus for American General Life Insurance Company
Separate Account D (the "Separate Account") dated May 3, 1999, concerning
flexible payment variable and fixed individual deferred annuity Platinum
Investor(SM) Variable Annuity Contracts. The Separate Account invests in certain
Series of AIM Variable Insurance Funds, Inc.; American General Series Portfolio
Company; Dreyfus Variable Investment Fund; The Dreyfus Socially Responsible
Growth Fund, Inc.; MFS Variable Insurance Trust; Morgan Stanley Universal Funds,
Inc.; SAFECO Resource Series Trust; Templeton Variable Products Series Fund as
well as Van Kampen Life Investment Trust. You can obtain a copy of the
Prospectus for the Contracts, and any Prospectus supplements, 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 on a variable basis through the Separate Account.
Terms used in this Statement have the same meanings as are defined in the
Prospectus under the heading "Definitions."
TABLE OF CONTENTS
General Information................................................... 3
Regulation and Reserves............................................... 3
Independent Auditors.................................................. 4
Services.............................................................. 4
Principal Underwriter................................................. 4
Annuity Payments...................................................... 5
Gender of Annuitant.............................................. 5
Misstatement of Age or Gender and Other Errors................... 5
Change of Investment Adviser or Investment Policy..................... 5
Performance Data for the Divisions.................................... 5
1
<PAGE>
Average Annual Total Return Calculations......................... 5
Total Return Calculations (without Surrender Charge)............. 6
Cumulative Total Return Calculations (without Surrender Charge).. 6
Hypothetical Performance......................................... 7
Yield Calculations............................................... 9
Money Market Division Yield and Effective
Yield Calculations........................................... 10
Performance Comparisons.......................................... 11
Effect of Tax-Deferred Accumulation................................... 11
Financial Statements.................................................. 13
Index to Financial Statements......................................... 13
2
<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. AGL redomesticated as a Texas insurer effective December
31, 1991 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"). It is 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 where 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 most insurance guaranty fund laws, a state can assess insurers doing
business in the state for covered insurance contract losses incurred by
insolvent companies. State laws set limits for these assessments. However, AGL
cannot reasonably estimate the amount of any future assessments of AGL under
these laws. Most states have the authority to excuse or defer an assessment, if
it would threaten an insurer's own financial strength. Notwithstanding the
foregoing, the Account Value held in the Separate Account may not be covered by
insurance guaranty fund laws. The Account Value held in the Fixed Account is
covered by the insurance guaranty fund laws.
The federal government generally has not directly regulated the business of
insurance. However, 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.
3
<PAGE>
Also, both the executive and legislative branches of the federal government are
considering various insurance regulatory matters. This could ultimately result
in direct federal regulation of some aspects of the insurance business. AGL
cannot predict whether this will occur or, if it does, what the effect on AGL
would be.
State insurance law requires AGL to carry reserves on its books, as liabilities,
to meet its obligations under outstanding insurance contracts. AGL bases these
reserves on assumptions about future claims experience and investment returns,
among other things.
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. This might happen, for example, due to a
spread of acquired immune deficiency syndrome or other infectious diseases or
catastrophes, or significant unexpected losses on its investments.
INDEPENDENT AUDITORS
The 1998 consolidated financial statements of AGL included in this Statement
were audited by Ernst & Young LLP independent auditors as set forth in their
report. We include these financial statements in this Statement in reliance
upon the report of Ernst & Young LLP that appears later on in this Statement.
Ernst & Young LLP gives its report upon their authority as experts in accounting
and auditing. Ernst & Young LLP is located at One Houston Center, 1221 McKinney
Street, Suite 2400, Houston, TX 77010.
SERVICES
AGL and American General Life Companies ("AGLC") are parties to a services
agreement. Most of the affiliated companies within the American General
Corporation holding company system, including certain life insurance companies,
are also parties to the agreement. AGLC is a corporation incorporated in
Delaware on November 24, 1997, with its home office located at 2727-A Allen
Parkway, Houston, Texas 77019. AGLC provides shared services to AGL and certain
other life insurance companies at cost. These services include data processing,
systems, customer services, product development, actuarial, auditing,
accounting, and legal. AGL did not pay any fees to AGLC in 1997, because AGLC
performed no services under the agreement. AGL paid AGLC $70,431,229 in 1998.
PRINCIPAL UNDERWRITER
American General Securities Incorporated ("AGSI") is the principal underwriter
for the Contracts. AGSI also serves as principal underwriter to AGL's Separate
Account A and Separate Account VL-R, and to Separate Account E of American
General Life Insurance Company of New York. All of these other separate accounts
are unit investment trusts registered under the Investment Company Act of 1940.
AGSI, a Texas corporation, is a wholly-owned subsidiary of AGL and a member of
the National Association of Securities Dealers, Inc.
4
<PAGE>
As principal underwriter for the Separate Account, AGSI has not received any
compensation from AGL for any of the past three years.
AGL offers the securities under the Contracts on a continuous basis.
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, Montana, and certain other jurisdictions, do not permit differences in
annuity payment rates between males and females.
In addition, employers should be aware that, under most employer-sponsored
plans, the law prohibits contracts that make distinctions based on gender.
Under these plans, AGL will make available Contracts with no such differences.
MISSTATEMENT OF AGE OR GENDER AND OTHER ERRORS
If the age or gender of an Annuitant has been misstated to us, any amount
payable will be the amount that the purchase payments paid would have purchased
at the correct age and gender. If we made any overpayments because of incorrect
information about age or gender or any error or miscalculation, we will deduct
the overpayment from the next payment or payments due. We will add any
underpayments to the next payment. We will credit or charge the amount of any
adjustment with interest at the assumed interest rate used in the Contract's
annuity tables.
CHANGE OF INVESTMENT ADVISER OR INVESTMENT POLICY
Unless otherwise permitted by law or regulation, no Series may change the
investment adviser to any Series or any investment policy without the consent of
the shareholders. If required, we will file approval of or change of any
investment objective with the insurance department of each state where a
Contract has been delivered. We will notify you (or, after annuity payments
start, the payee) of any material investment policy change that we have
approved. We will also notify you of any investment policy change before its
implementation by the Separate Account, if the change requires your comment or
vote.
PERFORMANCE DATA FOR THE DIVISIONS
AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
Each Division may advertise its average annual total return. We calculate each
Division's average annual total return quotation under the following standard
method that the SEC prescribes:
5
<PAGE>
. We take a hypothetical $1,000 investment in the Division's Accumulation
Units on the first day of the period at the maximum offering price. This
figure is the Accumulation Unit Value per unit ("initial investment").
. We calculate the ending redeemable value ("redeemable value") of that
investment at the end of the period. The redeemable value reflects the
effect of (1) any applicable Surrender Charge at the end of the period and
(2) all other recurring charges and fees applicable under the Contract to
all Owner accounts. Other charges and fees include the Mortality and Expense
Risk Charge and the Administrative Expense Charge. We do not reflect any
premium taxes in the calculation.
. We divide the redeemable value by the initial investment.
. We take this quotient to the Nth root (N representing the number of years in
the period), subtract 1 from the result, and express the result as a
percentage.
TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER CHARGE)
Each Division may also advertise non-standardized total return. We calculate
non-standardized total return in the same manner and for the same time periods
as standardized average annual total return, which we describe immediately
above. However, in making the redeemable value calculation, we do not deduct
any applicable Surrender Charge that we may impose at the end of the period.
This is because we assume that the Contract will continue through the end of
each period. Deducting these charges would reduce the resulting performance
results.
CUMULATIVE TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER CHARGE)
Each Division may also advertise non-standardized 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. This figure
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 premium taxes or any
applicable Surrender Charge. Cumulative total return quotations reflect changes
in Accumulation Unit Value. We calculate these quotations by finding the
cumulative rates of return of the hypothetical initial investment over various
periods, according to the following formula, and then expressing those rates as
a percentage:
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value at the end of the applicable period of a
hypothetical $1,000 investment made at the beginning of the applicable
period.
6
<PAGE>
HYPOTHETICAL PERFORMANCE
Each Division may advertise hypothetical performance, based on the calculations
described above, where all or a portion of the actual historical performance of
the corresponding Series in which the Division invests pre-dates the effective
date of the Division.
The tables below provide hypothetical performance information for the available
Divisions of the Separate Account based on the actual historical performance of
the corresponding Series in which each of these Divisions invests. This
information reflects all actual charges and deductions of these Series and the
Separate Account that hypothetically would have been made if the Separate
Account invested assets under the Contracts in these Series for the periods
indicated.
All of the actual historical performance of the corresponding Series, as of the
date of this Statement, predates the effective date of the Division investing in
that Series. The tables below will be revised, in future Statements, to show
actual annual historical performance that occurs after the effective date of a
Division.
Hypothetical Historical Average Annual Total Returns
(Through December 31, 1998)
SINCE
SERIES
INVESTMENT DIVISION 1 YEAR 5 YEARS INCEPTION/1/
- ------------------- ------ ------- ------------
AIM V.I. International Equity Fund 8.34% 9.39% 11.67%
AIM V.I. Value Fund 25.03% 19.75% 20.13%
AGSPC International Equities Fund 11.54% 7.22% 3.77%
AGSPC MidCap Index Fund 11.45% 16.52% 18.80%
AGSPC Money Market Fund (1.85%) 2.97% 3.87%
AGSPC Stock Index Fund 21.16% 21.81% 16.89%
Dreyfus Quality Bond Portfolio (1.54%) 4.48% 7.59%
Dreyfus Small Cap Portfolio (10.35%) 10.86% 34.87%
Dreyfus Socially Responsible Growth Fund* 22.11% 20.52% 21.24%
MFS Emerging Growth Series 26.82% N/A 24.15%
Morgan Stanley Equity Growth Portfolio 12.14% N/A 22.06%
Morgan Stanley High Yield Portfolio (2.23%) N/A 4.99%
SAFECO Equity Portfolio 17.64% 20.28% 17.55%
SAFECO Growth Portfolio (5.14%) 23.19% 25.21%
Templeton Asset Allocation Fund-Class 2 (1.18%) N/A 4.51%
Templeton International Fund-Class 2 1.68% N/A 6.33%
Van Kampen Strategic Stock Portfolio 9.35% N/A 10.25%
- ----------------
*The full name of this Series is The Dreyfus Socially Responsible Growth Fund,
Inc.
7
<PAGE>
Hypothetical Historical Total Returns
without the deduction of any applicable Surrender Charge
(Through December 31, 1998)
SINCE
SERIES
INVESTMENT DIVISION 1 YEAR 5 YEARS INCEPTION/1/
- ------------------- ------ ------- ------------
AIM V.I. International Equity Fund 13.94% 9.83% 11.84%
AIM V.I. Value Fund 30.63% 20.06% 20.25%
AGSPC International Equities Fund 17.14% 7.70% 3.77%
AGSPC MidCap Index Fund2 17.05% 16.86% 18.80%
AGSPC Money Market Fund 3.75% 3.53% 3.87%
AGSPC Stock Index Fund 26.76% 22.10% 16.89%
Dreyfus Quality Bond Portfolio 4.06% 5.01% 7.59%
Dreyfus Small Cap Portfolio (4.75%) 11.28% 34.87%
Dreyfus Socially Responsible Growth Fund 27.71% 20.82% 21.37%
MFS Emerging Growth Series 32.42% N/A 24.83%
Morgan Stanley Equity Growth Portfolio 17.74% N/A 24.34%
Morgan Stanley High Yield Portfolio 3.37% N/A 7.63%
SAFECO Equity Portfolio 23.24% 20.59% 17.55%
SAFECO Growth Portfolio 0.46% 23.46% 25.30%
Templeton Asset Allocation Fund-Class 2 4.42% N/A 7.74%
Templeton International Fund-Class 2 7.28% N/A 9.52%
Van Kampen Strategic Stock Portfolio 14.95% N/A 14.99%
Hypothetical Historical Cumulative Total Returns
without the deduction of any applicable Surrender Charge
(Through December 31, 1998)
SINCE
SERIES
INVESTMENT DIVISION 1 YEAR 5 YEARS INCEPTION/1/
- ------------------- -------- -------- -------------
AIM V.I. International Equity Fund 13.94% 59.85% 88.38%
AIM V.I. Value Fund 30.63% 149.59% 184.04%
AGSPC International Equities Fund 17.14% 44.91% 40.88%
AGSPC MidCap Index Fund2 17.05% 118.04% 248.96%
AGSPC Money Market Fund 3.75% 18.95% 46.26%
AGSPC Stock Index Fund 26.76% 171.53% 376.58%
Dreyfus Quality Bond Portfolio 4.06% 27.68% 84.07%
Dreyfus Small Cap Portfolio (4.75%) 70.71% 1,111.88%
Dreyfus Socially Responsible Growth Fund 27.71% 157.57% 175.66%
MFS Emerging Growth Series 32.42% N/A 114.51%
Morgan Stanley Equity Growth Portfolio 17.74% N/A 54.42%
Morgan Stanley High Yield Portfolio 3.37% N/A 15.79%
SAFECO Equity Portfolio 23.24% 155.12% 404.12%
SAFECO Growth Portfolio 0.46% 187.04% 285.59%
Templeton Asset Allocation Fund-Class 2 4.42% N/A 13.24%
Templeton International Fund-Class 2 7.28% N/A 16.39%
Van Kampen Strategic Stock Portfolio 14.95% N/A 17.57%
8
<PAGE>
Hypothetical Historical Growth of a $1,000 Investment in the Divisions
(Through December 31, 1998)
SINCE
SERIES
INVESTMENT DIVISION 1 YEAR 5 YEARS INCEPTION/1/
- ------------------- ------ ------- ------------
AIM V.I. International Equity Fund $1,139 $1,599 $ 1,884
AIM V.I. Value Fund $1,306 $2,496 $ 2,841
AGSPC International Equities Fund $1,171 $1,449 $ 1,409
AGSPC MidCap Index Fund/2/ $1,171 $2,180 $ 3,490
AGSPC Money Market Fund $1,038 $1,190 $ 1,463
AGSPC Stock Index Fund $1,268 $2,715 $ 4,766
Dreyfus Quality Bond Portfolio $1,041 $1,277 $ 1,841
Dreyfus Small Cap Portfolio $ 953 $1,707 $12,119
Dreyfus Socially Responsible Growth Fund $1,277 $2,576 $ 2,757
MFS Emerging Growth Series $1,324 N/A $ 2,145
Morgan Stanley Equity Growth Portfolio $1,177 N/A $ 1,544
Morgan Stanley High Yield Portfolio $1,034 N/A $ 1,158
SAFECO Equity Portfolio $1,232 $2,551 $ 5,041
SAFECO Growth Portfolio $1,005 $2,870 $ 3,856
Templeton Asset Allocation Fund-Class 2 $1,044 N/A $ 1,132
Templeton International Fund-Class 2 $1,073 N/A $ 1,164
Van Kampen Strategic Stock Portfolio $1,150 N/A $ 1,176
- ----------------
/1/ The return information in this column is calculated from the start of
operations (inception date) for the Series underlying the Division, or ten
years, if the Series has been in operation for more than ten years. If "N/A"
appears in the column for Five Years, the Series is less than five years
old.
The inception dates for each Series which are less than ten years old, are
as follows: Dreyfus Quality Bond and Small Cap Portfolios - August 31, 1990;
Dreyfus Socially Responsible Growth Fund - October 7, 1993; MFS Emerging
Growth Series - July 24, 1995; Morgan Stanley Equity Growth and High Yield
Portfolio -January 2, 1997; Templeton Asset Allocation and International
Portfolios - May 1, 1997; Van Kampen Strategic Stock Portfolio - November 3,
1997.
/2/ On October 1, 1991, the Fund underlying the AGSPC MidCap Index Division
changed its name from Capital Accumulation Fund to MidCap Index Fund, and at
the same time amended its investment objectives, investment program and
investment restrictions. Proforma figures for this Division reflect
performance of the MidCap Index Fund since October 1, 1991.
YIELD CALCULATIONS
We calculate the yields for the Dreyfus Quality Bond Portfolio Division and the
Morgan Stanley Dean Witter High Yield Portfolio Division by a standard method
that the SEC prescribes. The hypothetical yields for the Dreyfus Quality Bond
Portfolio Division and the Morgan Stanley Dean Witter High Yield Portfolio
Division based upon the one-month period ended December 31, 1998 were 5.98% and
5.47%, respectively. We calculate the yield quotation by dividing
. the net investment income per Accumulation Unit earned during the specified
one month or 30-day period by the Accumulation Unit values on the last day of
the period, according to the following formula that assumes a semi-annual
reinvestment of income:
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<PAGE>
YIELD = 2[((a-b)/cd + 1)/6/ - 1]
a = net dividends and interest earned during the period by the Series
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 that apply to each Division. These fees and charges include the
Mortality and Expense Risk Charge and the Administrative Expense Charge. They
do not reflect the deduction of Surrender Charges or premium taxes.
All of the actual historical performance of the corresponding Series, as of the
date of this Statement, predates the effective date of the Division investing in
that Series. The hypothetical historical yield for the Money Market Division
will be revised, in future Statements, to show actual annual historical
performance that occurs after the effective date of a Division.
MONEY MARKET DIVISION YIELD AND EFFECTIVE YIELD CALCULATIONS
We calculate the Money Market Division's yield by a standard method that the SEC
prescribes. Under that method, we base the current yield quotation on a seven
day period and calculate that yield as follows:
. We take the net change in the Accumulation Unit value during the period.
. We divide that net change by the Accumulation Unit value at the beginning of
the period to obtain the base period return.
. We multiply the base period return by the fraction 365/7 to obtain the
current yield figure.
. We carry the current yield figure to the nearest one-hundredth of one
percent.
We do not include realized capital gains or losses and unrealized appreciation
or depreciation of the Division's Portfolio in the calculation. The Money
Market Division's hypothetical historical yield for the seven day period ended
December 31, 1998 was 1.77%
We determine the Money Market Division's effective yield 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
return +1)/365/7/-1. The Money Market Division's hypothetical historical
effective yield for the seven day period ended December 31, 1998 was 1.78%.
Yield and effective yield do not reflect the deduction of Surrender Charges or
premium taxes that we may impose when you redeem Accumulation Units.
10
<PAGE>
PERFORMANCE COMPARISONS
In our advertising and sales literature, we may compare the performance of each
or all of the available Divisions of the Separate Account to the performance of
(1) other variable annuities in general or (2) particular types of variable
annuities that invest in mutual funds, or series of mutual funds, with
investment objectives similar to each of the Divisions of the Separate Account.
Lipper Analytical Services, Inc. ("Lipper") and the Variable Annuity Research
and Data Service ("VARDS(R)") are independent services that 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 insurance 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.
Total return assumes the reinvestment of dividends and distributions, but does
not take into consideration sales charges, redemption fees or certain expense
deductions at the separate account level. In addition, VARDS(R) prepares risk-
adjusted rankings, which consider the effects of market risk on total return
performance.
In addition, we may compare each Division's performance in advertisements and
sales literature to the following benchmarks:
. 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 U.S. equity market;
. the Dow Jones Industrial Average, an unmanaged unweighted average of 30 blue
chip industrial corporations listed on the New York Stock Exchange and
generally considered representative of the U.S. stock market;
. 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 spending groups and generally is considered to be a
measure of inflation;
. the Lehman Brothers Government and Domestic Strategic Income Index, the
Salomon Brothers High Grade Domestic Strategic Income 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
. the Morgan Stanley Capital International Europe Australia Far East Index, an
unmanaged index that is considered to be generally representative of major
non-U.S. stock markets.
EFFECT OF TAX-DEFERRED ACCUMULATION
The Contracts qualify for tax-deferred treatment on earnings. This tax-deferred
treatment increases the amount available for accumulation by deferring taxes on
any earnings until the earnings are
11
<PAGE>
withdrawn. The longer the taxes are deferred, the more the potential you have
for the assets under your Contract to grow over the term of the Contracts.
The hypothetical tables set out below illustrate this potential. The tables
compare accumulations based on a single initial purchase payment of $100,000
compounded annually under:
. a Contract, whose earnings are not taxed until withdrawn in connection with
a full surrender, partial withdrawal, or annuitization, or termination due
to insufficient Account Value ("withdrawal of earnings") and
. an investment whose earnings are taxed on a current basis ("Taxable
Investment"), based on an assumed tax rate of 28%, and the assumed earning
rates specified.
5 Years 10 Years 20 Years
------- -------- --------
(7.50% earnings rate)
Contract $143,563 $206,103 $424,785
Contract (after Taxes) $131,365 $176,394 $333,845
Taxable Investment $130,078 $169,202 $286,294
5 Years 10 Years 20 Years
-------- -------- --------
(10.00% earnings rate)
Contract $161,051 $259,374 $672,750
Contract (after Taxes) $143,957 $214,749 $512,380
Taxable Investment $141,571 $200,423 $401,694
The hypothetical tables do not reflect any fees or charges under a Contract or
Taxable Investment. However, the Contracts impose:
. a Mortality and Expense Risk Charge of 1.20%;
. a Surrender Charge (applicable to withdrawal of earnings for the first seven
Contract years) up to a maximum of 7%;
. an Administrative Expense Charge of 0.15%.
A Taxable Investment could incur comparable fees or charges. Fees and charges
would reduce the return from a Contract or Taxable Investment.
Under the Contracts, a withdrawal of earnings is subject to tax, and may be
subject to an additional 10% tax penalty before age 59 1/2.
These tables are only illustrations of the effect of tax-deferred accumulations
and are not a guarantee of future performance.
12
<PAGE>
FINANCIAL STATEMENTS
Separate Account D has a total of 69 Divisions as of the date of this Statement.
Of the 17 Divisions of Separate Account D available under the Contracts, only 6
of these Divisions were available under other AGL contracts, and the remaining
11 Divisions had no operations as of December 31, 1998. The Financial
Statements of Separate Account D are not included in the Statement because none
of the 17 Divisions were available under the Contracts as of December 31, 1998.
You should consider the financial statements of AGL that we include in this
Statement primarily as bearing on the ability of AGL to meet its obligations
under the Contracts.
INDEX TO
FINANCIAL STATEMENTS
Page No.
--------
AGL Consolidated Financial Statements
Report of Ernst & Young LLP,
Independent Auditors............................. F-1
Consolidated Balance Sheets....................... F-2
Consolidated Statements of Income................. F-3
Consolidated Statements of Comprehensive Income... F-4
Consolidated Statements of Shareholder's Equity... F-5
Consolidated Statements of Cash Flows............. F-6
Notes to Consolidated Financial Statements........ F-7
13
<PAGE>
[ERNST & YOUNG LLP LETTERHEAD] . One Houston Center . Phone: 713 750 1500
Suite 2400 Fax: 713 750 1501
1221 McKinney
Houston, Texas 77010-2007
Report of Independent Auditors
Board of Directors and Stockholder
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, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholder's
equity, and cash flows for each of the three years in the period ended
December 31, 1998. 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 disclosure 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/S/ ERNST & YOUNG LLP
---------------------
February 16, 1999
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-1
<PAGE>
American General Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------------------
<S> <C> <C>
(In Thousands)
ASSETS
Investments:
Fixed maturity securities, at fair value (amortized cost-
$27,425,605 in 1998 and $26,131,207 in 1997) $28,906,261 $27,386,715
Equity securities, at fair value (cost - $193,368 in 1998
and $19,208 in 1997) 211,684 21,114
Mortgage loans on real estate 1,557,268 1,659,921
Policy loans 1,170,686 1,093,694
Investment real estate 119,520 129,364
Other long-term investments 86,194 55,118
Short-term investments 222,949 100,061
---------------------------------
Total investments 32,274,562 30,445,987
Cash 117,675 99,284
Investment in Parent Company (cost - $8,597 in 1998
and 1997) 54,570 37,823
Indebtedness from affiliates 161,096 96,519
Accrued investment income 459,961 433,111
Accounts receivable 196,596 208,209
Deferred policy acquisition costs 1,087,718 835,031
Property and equipment 66,197 33,827
Other assets 206,318 132,659
Assets held in separate accounts 15,616,020 11,242,270
---------------------------------
Total assets $50,240,713 $43,564,720
=================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $29,353,022 $27,849,893
Other policy claims and benefits payable 54,278 42,677
Other policyholders' funds 398,587 398,314
Federal income taxes 677,315 543,379
Indebtedness to affiliates 18,173 4,712
Other liabilities 554,783 421,861
Liabilities related to separate accounts 15,616,020 11,242,270
---------------------------------
Total liabilities 46,672,178 40,503,106
Shareholder's 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 1,368,089 1,184,743
Accumulated other comprehensive income 679,107 427,526
Retained earnings 1,514,489 1,442,495
---------------------------------
Total shareholder's equity 3,568,535 3,061,614
---------------------------------
Total liabilities and shareholder's equity $50,240,713 $43,564,720
=================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
American General Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Revenues:
Premiums and other considerations $ 470,238 $ 428,721 $ 382,923
Net investment income 2,316,933 2,198,623 2,095,072
Net realized investment gains (losses) (33,785) 29,865 28,502
Other 69,602 53,370 41,968
----------------------------------------------------------
Total revenues 2,822,988 2,710,579 2,548,465
Benefits and expenses:
Benefits 1,788,417 1,757,504 1,689,011
Operating costs and expenses 467,067 379,012 347,369
Interest expense 15 782 830
Litigation settlement 97,096 - -
----------------------------------------------------------
Total benefits and expenses 2,352,595 2,137,298 2,037,210
----------------------------------------------------------
Income before income tax expense 470,393 573,281 511,255
Income tax expense 153,719 198,724 176,660
----------------------------------------------------------
Net income $ 316,674 $ 374,557 $ 334,595
==========================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
American General Life Insurance Company
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Net income $316,674 $374,557 $ 334,595
Other comprehensive income:
Gross change in unrealized gains (losses)
on securities (pretax: $341,000;
$318,700; ($404,900)) 222,245 207,124 (263,181)
Less: gains (losses) realized in net income (29,336) (1,251) 11,262
--------------------------------------------------------
Change in net unrealized gains (losses) on
securities (pretax: $387,000; $320,600;
($422,200) 251,581 208,375 (274,443)
-------------------------------------------------------
Comprehensive income $568,255 $582,932 $ 60,152
========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
American General Life Insurance Company
Consolidated Statements of Shareholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
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 850 850 850
Change during year - - -
----------------------------------------------------------
Balance at end of year 850 850 850
Additional paid-in capital:
Balance at beginning of year 1,184,743 933,342 858,075
Capital contribution from Parent
Company 182,284 250,000 75,000
Other changes during year 1,062 1,401 267
----------------------------------------------------------
Balance at end of year 1,368,089 1,184,743 933,342
Accumulated other comprehensive income:
Balance at beginning of year 427,526 219,151 493,594
Change in unrealized gains (losses) on
securities 251,581 208,375 (274,443)
----------------------------------------------------------
Balance at end of year 679,107 427,526 219,151
Retained earnings:
Balance at beginning of year 1,442,495 1,469,618 1,324,703
Net income 316,674 374,557 334,595
Dividends paid (244,680) (401,680) (189,680)
----------------------------------------------------------
Balance at end of year 1,514,489 1,442,495 1,469,618
----------------------------------------------------------
Total shareholder's equity $3,568,535 $3,061,614 $2,628,961
==========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
American General Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
OPERATING ACTIVITIES
Net income $ 316,674 $ 374,557 $ 334,595
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts receivable 11,613 (37,752) 3,846
Change in future policy benefits and other policy
claims (866,428) (1,143,736) (543,193)
Amortization of policy acquisition costs 125,062 115,467 102,189
Policy acquisition costs deferred (244,196) (219,339) (188,001)
Change in other policyholders' funds 273 21,639 (69,126)
Provision for deferred income tax expense 15,872 13,264 12,388
Depreciation 19,418 16,893 16,993
Amortization (26,775) (28,276) (30,758)
Change in indebtedness to/from affiliates (51,116) (8,695) 4,432
Change in amounts payable to brokers (894) 31,769 (25,260)
Net (gain) loss on sale of investments 37,016 (29,865) (28,502)
Other, net 57,307 30,409 32,111
--------------------------------------------------------------------
Net cash used in operating activities (606,174) (863,665) (378,286)
INVESTING ACTIVITIES
Purchases of investments and loans made (28,231,615) (29,638,861) (27,245,453)
Sales or maturities of investments and receipts from
repayment of loans 26,656,897 28,300,238 25,889,422
Sales and purchases of property, equipment, and
software, net (105,907) (9,230) (8,057)
--------------------------------------------------------------------
Net cash used in investing activities (1,680,625) (1,347,853) (1,364,088)
FINANCING ACTIVITIES
Policyholder account deposits 4,688,831 4,187,191 3,593,380
Policyholder account withdrawals (2,322,307) (1,759,660) (1,746,987)
Dividends paid (244,680) (401,680) (189,680)
Capital contribution from Parent 182,284 250,000 75,000
Other 1,062 1,401 267
--------------------------------------------------------------------
Net cash provided by financing activities 2,305,190 2,277,252 1,731,980
--------------------------------------------------------------------
Increase (decrease) in cash 18,391 65,734 (10,394)
Cash at beginning of year 99,284 33,550 43,944
--------------------------------------------------------------------
Cash at end of year $ 117,675 $ 99,284 $ 33,550
====================================================================
</TABLE>
Interest paid amounted to approximately $420,000, $1,004,000, and $1,080,000 in
1998, 1997, and 1996, respectively.
See accompanying notes.
F-6
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1998
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"). During
1998, the Company formed a new wholly owned subsidiary, American General Life
Companies (AGLC), to provide management services to certain life insurance
subsidiaries of the Parent Company.
The Company offers a complete portfolio of the standard forms of universal life,
variable 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 wholly owned
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 subsidiaries. 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.
F-7
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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,
1998.
Statutory financial statements differ from GAAP. Significant differences were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Net income:
Statutory net income (1998 balance is
unaudited) $ 259,903 $ 327,813 $ 284,070
Deferred policy acquisition costs and cost
of insurance purchased 116,597 103,872 85,812
Deferred income taxes (53,358) (13,264) (12,388)
Adjustments to policy reserves 52,445 (30,162) (19,954)
Goodwill amortization (2,033) (2,067) (2,169)
Net realized gain on investments 41,488 20,139 14,140
Litigation settlement (63,112) -- --
Other, net (35,256) (31,774) (14,916)
-------------------------------------------------------
GAAP net income $ 316,674 $ 374,557 $ 334,595
=======================================================
Shareholders' equity:
Statutory capital and surplus (1998 balance
is unaudited) $1,670,412 $1,636,327 $1,441,768
Deferred policy acquisition costs 1,109,831 835,031 1,042,783
Deferred income taxes (698,350) (535,703) (410,007)
Adjustments to policy reserves (274,532) (319,680) (297,434)
Acquisition-related goodwill 54,754 51,424 55,626
Asset valuation reserve ("AVR") 310,564 255,975 291,205
Interest maintenance reserve ("IMR") 27,323 9,596 63
Investment valuation differences 1,487,658 1,272,339 643,289
Surplus from separate accounts (174,447) (150,928) (106,026)
Other, net 55,322 7,233 (32,306)
-------------------------------------------------------
Total GAAP shareholders' equity $3,568,535 $3,061,614 $2,628,961
=======================================================
</TABLE>
F-8
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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 tax assets and liabilities
are established for temporary differences between the financial reporting basis
and the tax basis of assets and liabilities, at the enacted tax rates expected
to be in effect when the temporary differences reverse; (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.
F-9
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
All fixed maturity and equity securities were classified as available-for-sale
and recorded at fair value at December 31, 1998, 1997, and 1996. After adjusting
related balance sheet accounts as if the unrealized gains (losses) had been
realized, the net adjustment is recorded in accumulated other comprehensive
income 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.
During 1998, the Company maintained a trading portfolio of certain fixed
maturity securities. Trading securities are recorded at fair value. Unrealized
gains (losses), as well as realized gains (losses), are included in net
investment income. The Company held no trading securities at December 31, 1998,
and trading securities did not have a material effect on net investment income
in 1998.
MORTGAGE LOANS
Mortgage loans are reported at amortized cost, net of an allowance for losses.
The allowance for losses covers all non-performing loans and loans for which
management has a concern based on its assessment of risk factors, such as
potential non-payment or non-monetary default. The allowance is based on a loan-
specific review and a formula that reflects past results and current trends.
Loans for which the Company determines that collection of all amounts due under
the contractual terms is not probable are considered to be impaired. The Company
generally looks to the underlying collateral for repayment of impaired loans.
Therefore, impaired loans are considered to be collateral dependent and are
reported at the lower of amortized cost or fair value of the underlying
collateral, less estimated cost to sell.
POLICY LOANS
Policy loans are reported at unpaid principal balance.
F-10
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.4 INVESTMENTS (CONTINUED)
INVESTMENT REAL ESTATE
Investment real estate is classified as held for investment or available for
sale, based on management's intent. Real estate held for investment is carried
at cost, less accumulated depreciation and impairment write-downs. Real estate
available for sale is carried at the lower of cost (less accumulated
depreciation, if applicable) or fair value less cost to sell.
INVESTMENT INCOME
Interest on fixed maturity securities and performing and restructured mortgage
loans is recorded as income when earned and is adjusted for any amortization of
premium or discount. Interest on delinquent mortgage loans is recorded as income
when received. Dividends are recorded as income on ex-dividend dates.
REALIZED INVESTMENT GAINS
Realized investment gains (losses) are recognized using the specific-
identification method.
1.5 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain contracts,
principally annuities; for which the investment risk lies solely with the
contract holder. Therefore, 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, comprehensive
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.
F-11
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.6 DEFERRED POLICY ACQUISITION COSTS ("DPAC") AND COST OF INSURANCE PURCHASED
("CIP")
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
CIP represents the cost assigned to insurance contracts in force that are
acquired through the purchase of a block of business. At December 31, 1998, CIP
of $22.1 million was reported within other assets.
DPAC and CIP associated with interest-sensitive life contracts, insurance
investment contracts, and participating life insurance contracts is charged to
expense in relation to the estimated gross profits of those contracts. DPAC and
CIP associated with all other insurance contracts is charged to expense over the
premium-paying period or as the premiums are earned over the life of the
contract.
DPAC and CIP are adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the balance
sheet date. The impact of this adjustment is included in accumulated other
comprehensive income within shareholder's equity.
The Company reviews the carrying amount of DPAC and CIP on at least an annual
basis. Management considers estimated future gross profits or future premiums,
expected mortality, interest earned and credited rates, persistency, and
expenses in determining whether the carrying amount is recoverable.
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. 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 a constant relationship to insurance in force. For all other
contracts, premiums are recognized when due.
F-12
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 by management for indicators of impairment in value. If facts
and circumstances suggest that goodwill is impaired, other than temporarily, the
Company assesses the fair value of the underlying assets and reduces goodwill
accordingly.
1.9 POLICY AND CONTRACT CLAIMS RESERVES
Substantially all of the Company's insurance and annuity liabilities relate to
long-duration contracts. The contracts normally cannot be changed or canceled by
the Company during the contract period.
For interest-sensitive life and insurance investment contracts, reserves equal
the sum of the policy account balance and deferred revenue charges. Reserves for
other contracts are based on estimates of the cost of future policy benefits.
Reserves are determined using the net level premium method. Interest assumptions
used to compute reserves ranged from 2.5% to 13.5% at December 31, 1998.
1.10 REINSURANCE
The Company limits its exposure to loss on any single insured to $2.5 million by
ceding additional risks through reinsurance contracts with other insurers. The
Company diversifies its risk of reinsurance loss by using a number of reinsurers
that have strong claims-paying ability ratings. If the 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.
A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $63 million, $25 million, and $24 million during
1998, 1997, and 1996, respectively. The cost of reinsurance is recognized over
the life of the reinsured policies using assumptions consistent with those used
to account for the underlying policies.
F-13
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.10 REINSURANCE
Benefits paid and future policy benefits related to ceded insurance 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.
1.11 PARTICIPATING POLICY CONTRACTS
Participating life insurance accounted for approximately 2% of life insurance in
force at December 31, 1998 and 1997.
The portion of earnings allocated to participating policyholders that cannot be
expected to inure to shareholders is excluded from net income and shareholder's
equity. Dividends to be paid on participating life insurance contracts are
determined annually based on estimates of the contracts' earnings. Policyholder
dividends were $4.9 million in 1998.
1.12 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.
Deferred tax assets and liabilities are established for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities, at the enacted tax rates expected to be in effect when the
temporary differences reverse. The effect of a tax rate change is recognized in
income in the period of enactment. State income taxes are included in income tax
expense.
F-14
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.12 INCOME TAXES (CONTINUED)
A valuation allowance for deferred tax assets is provided if it is more likely
than not that some portion of the deferred tax asset will not be realized. An
increase or decrease in a valuation allowance that results from a change in
circumstances that causes a change in judgment about the realizability of the
related deferred tax asset is included in income. Changes related to
fluctuations in fair value of available-for-sale securities are included in the
consolidated statements of comprehensive income and accumulated other
comprehensive income in shareholder's equity.
1.13 ACCOUNTING CHANGES
During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) 130, Reporting Comprehensive Income, which establishes standards for
reporting and displaying comprehensive income and its components in the
financial statements. The Company elected to report comprehensive income and its
components in a separate statement of comprehensive income. Adoption of this
statement did not change recognition or measurement of net income and,
therefore, did not impact the Company's consolidated results of operations or
financial position.
Effective December 31, 1998, the Company adopted SFAS 131, Disclosures about
Segments of an Enterprise and Related Information, which changes the way
companies report segment information. With the adoption of SFAS 131, the Company
reports division earnings exclusive of goodwill amortization, net realized
investment gains, and nonrecurring items. This methodology is consistent with
the manner in which management reviews division results. Adoption of this
statement did not impact the Company's consolidated results of operations or
financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, which requires all
derivative instruments to be recognized at fair value as either assets or
liabilities in the balance sheet. Changes in the fair value of a derivative
instrument are to be reported as earnings or other comprehensive income,
depending upon the intended use of the derivative instrument. This statement is
effective for years beginning after June 15, 1999. Adoption of SFAS 133 is not
expected to have a material impact on the Company's consolidated results of
operations or financial position.
F-15
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS
2.1 INVESTMENT INCOME
Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Investment income:
Fixed maturities $2,101,730 $1,966,528 $1,846,549
Equity securities 1,813 1,067 1,842
Mortgage loans on real estate 148,447 157,035 175,833
Investment real estate 23,139 22,157 22,752
Policy loans 66,573 62,939 58,211
Other long-term investments 3,837 3,135 2,328
Short-term investments 15,492 8,626 9,280
Investment income from affiliates 10,536 11,094 11,502
----------------------------------------------------------
Gross investment income 2,371,567 2,232,581 2,128,297
Investment expenses 54,634 33,958 33,225
----------------------------------------------------------
Net investment income $2,316,933 $2,198,623 $2,095,072
==========================================================
</TABLE>
The carrying value of investments that produced no investment income during 1998
was less than 0.2% 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.
F-16
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.2 NET REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) by type of investment were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 20,109 $ 42,966 $ 46,498
Gross losses (62,657) (34,456) (47,293)
--------------------------------------------------------
Total fixed maturities (42,548) 8,510 (795)
Equity securities 645 1,971 18,304
Other investments 8,118 19,384 10,993
--------------------------------------------------------
Net realized investment gains (losses)
before tax (33,785) 29,865 28,502
Income tax expense (benefit) (11,826) 10,452 9,976
--------------------------------------------------------
Net realized investment gains (losses)
after tax $(21,959) $ 19,413 $ 18,526
========================================================
</TABLE>
F-17
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Fixed maturity securities:
Corporate securities:
Investment-grade $18,800,553 $1,129,504 $(26,353) $19,903,703
Below investment-grade 1,409,198 33,910 (45,789) 1,397,320
Mortgage-backed securities* 6,359,242 294,331 (870) 6,652,703
U.S. government obligations 417,822 69,321 (178) 486,965
Foreign governments 331,699 24,625 (2,437) 353,887
State and political subdivisions 86,778 4,796 (187) 91,387
Redeemable preferred stocks 20,313 - (17) 20,296
------------------------------------------------------------------------------
Total fixed maturity securities $27,425,605 $1,556,487 $(75,831) $28,906,261
==============================================================================
Equity securities $ 193,368 $ 19,426 $ (1,110) $ 211,684
==============================================================================
Investment in Parent Company $ 8,597 $ 45,973 $ - $ 54,570
==============================================================================
</TABLE>
* Primarily include pass-through securities guaranteed by and mortgage
obligations ("CMOs") collateralized by the U.S. government and government
agencies.
F-18
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST 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>
* Primarily include pass-through securities guaranteed by and mortgage
obligations ("CMOs") collateralized by the U.S. government and government
agencies.
F-19
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Net unrealized gains (losses) on securities included in accumulated
comprehensive income in shareholders' equity at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------
(In Thousands)
<S> <C> <C>
Gross unrealized gains $1,621,886 $1,316,330
Gross unrealized losses (76,941) (29,690)
DPAC and other fair value adjustments (488,120) (621,867)
Deferred federal income taxes (377,718) (237,247)
--------------------------------------------
Net unrealized gains on securities $ 679,107 $ 427,526
============================================
</TABLE>
The contractual maturities of fixed maturity securities at December 31, 1998
were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
-----------------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities,
excluding mortgage-
backed securities:
Due in one year or less $ 531,496 $ 536,264 $ 205,719 $ 207,364
Due after one year
through five years 5,550,665 5,812,581 5,008,933 5,216,174
Due after five years
through ten years 9,229,980 9,747,761 9,163,681 9,604,447
Due after ten years 5,754,220 6,156,950 5,138,169 5,470,143
Mortgage-backed securities 6,359,244 6,652,705 6,614,705 6,888,587
-----------------------------------------------------------------------------
Total fixed maturity securities $27,425,605 $28,906,261 $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 $5.4 billion,
$14.8 billion, and $16.2 billion during 1998, 1997, and 1996, respectively.
F-20
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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, 1998 and 1997:
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
DECEMBER 31, 1998
Geographic distribution:
South Atlantic $ 429 27.6% 0.2%
Pacific 320 20.6 10.4
Mid-Atlantic 326 20.9 4.1
East North Central 178 11.4 -
Mountain 95 6.1 -
West South Central 118 7.5 -
East South Central 46 3.0 -
West North Central 33 2.1 -
New England 25 1.6 -
Allowance for losses (13) (0.8) -
-------------------------------------
Total $ 1,557 100.00% 3.1%
=====================================
Property type:
Office $ 593 38.1% 7.0%
Retail 423 27.1 0.2
Industrial 292 18.8 -
Apartments 178 11.4 2.9
Hotel/motel 38 2.4 -
Other 46 3.0 -
Allowance for losses (13) (0.8) -
-------------------------------------
Total $ 1,557 100% 3.1%
=====================================
</TABLE>
F-21
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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, 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>
F-22
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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
1998 1997
-----------------------------------------
(In Millions)
<S> <C> <C>
Impaired loans:
With allowance* $ 13 $ 35
Without allowance - -
-----------------------------------------
Total impaired loans $ 13 $ 35
=========================================
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of $1.8
million and $10 million, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Average investment $ 24 $ 48 $ 72
Interest income earned $ - $ 3 $ 6
Interest income - cash basis $ - $ - $ 6
</TABLE>
F-23
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.5 INVESTMENT SUMMARY
Investments of the Company were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------------
CARRYING CARRYING
COST FAIR VALUE AMOUNT COST FAIR VALUE AMOUNT
--------------------------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
United States government
and government agencies
and authorities $ 417,822 $ 486,965 $ 486,965 $ 289,406 $ 335,861 $ 335,861
States, municipalities,
and political subdivisions 86,778 91,387 91,387 44,505 46,191 46,191
Foreign governments 331,699 353,887 353,887 318,212 332,754 332,754
Public utilities 1,777,172 1,895,326 1,895,326 1,848,546 1,952,724 1,952,724
Mortgage-backed securities 6,359,242 6,652,703 6,652,703 6,614,704 6,888,587 6,888,587
All other corporate bonds 18,432,579 19,405,697 19,405,697 17,015,834 17,830,598 17,830,598
Redeemable preferred stocks 20,313 20,296 20,296 - - -
--------------------------------------------------------------------------------------------------------
Total fixed maturities 27,425,605 28,906,261 28,906,261 26,131,207 27,386,715 27,386,715
Equity securities:
Common stocks:
Banks, trust, and insurance
companies - - - - - -
Industrial, miscellaneous,
and other 176,321 211,684 211,684 5,604 5,785 5,785
Nonredeemable preferred
stocks 17,047 - - 13,604 15,329 15,329
--------------------------------------------------------------------------------------------------------
Total equity securities 193,368 211,684 211,684 19,208 21,114 21,114
Mortgage loans on real
estate* 1,557,268 - 1,557,268 1,659,921 - 1,659,921
Investment real estate 119,520 - 119,520 129,364 - 129,364
Policy loans 1,170,686 - 1,170,686 1,093,694 - 1,093,694
Other long-term investments 86,194 - 86,194 55,118 - 55,118
Short-term investments 222,949 - 222,949 100,061 - 100,061
--------------------------------------------------------------------------------------------------------
Total investments $30,775,590 $ - $32,274,562 $29,188,573 $ - $30,445,987
========================================================================================================
</TABLE>
* Amount is net of allowance for losses of $13 million and $23 million at
December 31, 1996 and 1997, respectively.
F-24
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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>
1998 1997 1996
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at January 1 $ 835,031 $1,042,783 $ 605,501
Capitalization 244,196 219,339 188,001
Amortization (125,062) (115,467) (102,189)
Effect of unrealized gains (losses) on
securities 133,553 (311,624) 351,470
----------------------------------------------------------
Balance at December 31 $1,087,718 $ 835,031 $1,042,783
==========================================================
</TABLE>
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
(In Thousands)
<S> <C> <C>
Goodwill $ 54,754 $ 51,424
American General Corporation CBO (Collateralized Bond
Obligation) 98-1 Ltd. 9,740 -
Cost of insurance purchased ("CIP") 22,113 -
Other 119,711 81,235
------------------------------------
Total other assets $206,318 $132,659
====================================
</TABLE>
F-25
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. OTHER ASSETS (CONTINUED)
A rollforward of CIP for the year ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
1998
--------------------
(In Thousands)
<S> <C>
Balance at January 1 $ --
Acquisition of business 23,915
Accretion of interest at 5.88% 733
Amortization (2,535)
--------------------
Balance at December 31 $ 22,113
====================
</TABLE>
5. FEDERAL INCOME TAXES
5.1 TAX LIABILITIES
Income tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------------
(In Thousands)
<S> <C> <C>
Current tax (receivable) payable $ (21,035) $ 7,676
Deferred tax liabilities, applicable to:
Net income 320,632 298,456
Net unrealized investment gains 377,718 237,247
-----------------------------------------
Total deferred tax liabilities 698,350 535,703
-----------------------------------------
Total current and deferred tax liabilities $ 677,315 $ 543,379
=========================================
</TABLE>
F-26
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.1 TAX LIABILITIES (CONTINUED)
Components of deferred tax liabilities and assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities applicable to:
Deferred policy acquisition costs $ 307,025 $ 226,653
Basis differential of investments 590,661 486,194
Other 150,189 139,298
------------------------------------------
Total deferred tax liabilities 1,047,875 852,145
Deferred tax assets applicable to:
Policy reserves (212,459) (232,539)
Other (137,066) (83,903)
------------------------------------------
Total deferred tax assets before valuation
allowance (349,525) (316,442)
Valuation allowance - -
------------------------------------------
Total deferred tax assets, net of valuation
allowance (349,525) (316,442)
------------------------------------------
Net deferred tax liabilities $ 698,350 $ 535,703
==========================================
</TABLE>
A portion of life insurance income earned prior to 1984 is not taxable unless it
exceeds certain statutory limitations, is distributed as dividends, or unless
the income tax deferred status of such amount is modified by future tax
legislation. Such income, accumulated in policyholders' surplus accounts,
totaled $87.1 million at December 31, 1998. At current corporate rates, the
maximum amount of tax on such income is approximately $30.5 million. Deferred
income taxes on these accumulations are not required because no distributions
are expected.
F-27
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.2 TAX EXPENSE
Components of income tax expense for the years were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current expense $134,344 $185,460 $164,272
Deferred expense (benefit):
Deferred policy acquisition cost 33,230 27,644 21,628
Policy reserves 2,189 (27,496) (27,460)
Basis differential of investments 11,969 3,769 4,129
Litigation settlement (33,983) -- --
Year 2000 (9,653) -- --
Other, net 15,623 9,347 14,091
--------------------------------------------------------
Total deferred expense 19,375 13,264 12,388
--------------------------------------------------------
Income tax expense $153,719 $198,724 $176,660
========================================================
</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>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Income tax at statutory percentage of GAAP
pretax income $164,638 $200,649 $178,939
Tax-exempt investment income (11,278) (9,493) (9,347)
Goodwill 712 723 759
Other (353) 6,845 6,309
--------------------------------------------------------
Income tax expense $153,719 $198,724 $176,660
========================================================
</TABLE>
F-28
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.3 TAXES PAID
Income taxes paid amounted to approximately $159 million, $168 million, and $182
million in 1998, 1997, and 1996, 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 ("IRS") has completed
examinations of the Parent Company's tax returns through 1988. The IRS 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 Parent
Company believes that the ultimate liability, including interest, will not
materially exceed amounts recorded in the consolidated financial statements.
6. TRANSACTIONS WITH AFFILIATES
Affiliated notes and accounts receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------------------------------------
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 $ 3,345 $ 4,725 $ 3,288
American General Corporation,
Promissory notes, due 2004 14,679 14,679 17,125 17,125
American General Corporation,
Restricted Subordinated
Note, 13-1/2%, due 2002 29,435 29,435 31,494 31,494
------------------------------------------------------------------------
Total notes receivable from
affiliates 48,839 47,459 53,344 51,907
Accounts receivable from
affiliates - 113,637 - 44,612
------------------------------------------------------------------------
Indebtedness from affiliates $48,839 $161,096 $53,344 $96,519
========================================================================
</TABLE>
F-29
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Various American General companies provide services to the Company, principally
mortgage servicing and investment management services, provided by American
General Investment Management Corporation on a fee basis. The Company paid
approximately $46,921,000, $33,916,000, and $22,083,000 for such services in
1998, 1997, and 1996, respectively. Accounts payable for such services at
December 31, 1998 and 1997 were not material. The Company rents facilities and
provides services on an allocated cost basis to various American General
companies. Beginning in 1998, amounts received by the Company from affiliates
include amounts received by its wholly-owned, non-life insurance subsidiary,
American General Life Companies (AGLC). AGLC provides shared services, including
technology and Year 2000-readiness, to a number of American General
Corporation's life insurance subsidiaries. The Company received approximately
$66,550,000, $6,455,000, and $1,255,000 for such services and rent in 1998,
1997, and 1996, respectively. Accounts receivable for rent and services at
December 31, 1998 and 1997 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, Inc., 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.
F-30
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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>
1998 1997 1996
-------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net income as reported $316,674 $374,557 $334,595
Net income pro forma $315,078 $373,328 $334,029
</TABLE>
The average fair values of the options granted during 1998, 1997, and 1996 were
$15.38, $10.33, and $7.07, 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>
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.5% 3.0% 4.0%
Expected volatility 23.0% 22.0% 22.3%
Risk-free interest rate 5.76% 6.4% 6.2%
Expected life 6 YEARS 6 years 6 years
</TABLE>
8. BENEFIT PLANS
8.1 PENSION PLANS
The Company has non-contributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's compensation and
length of credited service.
Equity and fixed maturity securities were 56% and 30%, respectively, of the
plans' assets at the plans' most recent balance sheet dates. Additionally, 1% of
plan assets were invested in general investment accounts of the Parent Company's
subsidiaries through deposit administration insurance contracts.
F-31
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The benefit plans have purchased annuity contracts from American General
Corporation's subsidiaries to provide benefits for certain retirees. These
contracts are expected to provide future annual benefits to certain retirees of
American General Corporation and its subsidiaries of approximately $52 million.
The components of pension expense and underlying assumptions were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost (benefits earned) $ 3,693 $ 1,891 $ 1,826
Interest cost 6,289 2,929 2,660
Expected return on plan assets (9,322) (5,469) (5,027)
Amortization (557) 195 4
--------------------------------------------------------
Pension (income) expense $ 103 $ (454) $ (537)
========================================================
Discount rate on benefit obligation 7.00% 7.25% 7.50%
Rate of increase in compensation levels 4.25% 4.00% 4.00%
Expected long-term rate of return on plan
assets 10.25% 10.00% 10.00%
</TABLE>
The Company's funding policy is to contribute annually no more than the maximum
deductible for federal income tax purposes. The funded status of the plans and
the prepaid pension expense included in other assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
(In Thousands)
<S> <C> <C>
Projected benefit obligation (PBO) $ 96,554 $ 43,393
Plan assets at fair value 120,898 80,102
Plan assets at fair value in excess of PBO 24,344 36,709
Other unrecognized items, net (10,176) (23,470)
-----------------------------------
Prepaid pension expense $ 14,168 $ 13,239
===================================
</TABLE>
F-32
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The change in PBO was as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
(In Thousands)
<S> <C> <C>
PBO at January 1 $43,393 $37,389
Service and interest costs 9,982 4,820
Benefits paid (1,954) (673)
Actuarial loss 17,089 1,810
Amendments, transfers, and acquisitions 28,044 47
---------------------------------
PBO at December 31 $96,554 $43,393
=================================
</TABLE>
The change in the fair value of plan assets was as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
(In Thousands)
<S> <C> <C>
Fair value of plan assets at January 1 $ 80,102 $65,158
Actual return on plan assets 12,269 14,990
Benefits paid (1,954) (673)
Acquisitions and other 30,481 627
----------------------------------
Fair value of plan assets at December 31 $120,898 $80,102
==================================
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has life, medical, supplemental major medical, and dental plans for
certain retired employees and agents. Most plans are contributory, which 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.
F-33
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The life plans are insured through December 31, 1999. A portion of the retiree
medical and dental plans is funded through a voluntary employees' beneficiary
association (VEBA); 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.
Postretirement benefit expense in 1998, 1997, and 1996 was $60,000, $601,000,
and $844,000, respectively. The accrued liability for postretirement benefits
was $19.2 million and $3.8 million at December 31, 1998 and 1997, respectively.
These liabilities were discounted at the same rates used for the pension plans.
9. DERIVATIVE FINANCIAL INSTRUMENTS
9.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company's use of derivative financial instruments is generally limited to
reducing its exposure to interest rate and currency exchange risk by utilizing
interest rate and currency swap agreements, and options to enter into interest
rate swap agreements (called swaptions). The Company accounts for these
derivative and financial instruments as hedges. Hedge accounting requires a high
correlation between changes in fair values or cash flows of the derivative
financial instrument and the specific item 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 declining interest rates on anticipated security purchases. Interest
rate swap agreements are also used to convert a portion of floating-rate
borrowings to a fixed rate and to hedge against the risk of rising interest
rates on anticipated debt issuances.
Currency swap agreements are used to convert cash flows from specific investment
securities denominated in foreign currencies into U.S. dollars at specific
exchange rates, and to hedge against currency rate fluctuation on anticipated
security purchases.
F-34
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED)
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 the hedge investments are 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 other accumulated comprehensive income in shareholders' equity,
consistent with the treatment of the related investment security. The fair
values of swap agreements hedging debt are not recognized in the consolidated
balance sheet.
For swap agreements hedging anticipated investment purchases or debt issuances,
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 or debt. If the underlying
investment or debt is extinguished or sold, any related gain or loss on swap
agreements is recognized in income.
F-35
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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>
1998 1997
-----------------------------------
(Dollars in Millions)
<S> <C> <C>
Interest rate swap agreements to pay fixed rate:
Notional amount $ - $ 15
Average receive rate - 6.74%
Average pay rate - 6.48%
Interest rate swap agreements to receive fixed rate:
Notional amount $ 369 $ 144
Average receive rate 6.06% 6.89%
Average pay rate 5.48% 6.37%
Currency swap agreements (receive U.S. dollars/pay
Canadian dollars):
Notional amount (in U.S. dollars) $ 124 $ 139
Average exchange rate 1.50 1.50
</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.
F-36
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
9.3 CALL SWAPTIONS (CONTINUED)
Swaptions at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
(Dollars in Billions)
<S> <C> <C>
Call swaptions:
Notional amount $1.76 $1.35
Average strike rate 3.97% 4.81%
Put swaptions:
Notional amount $1.05 $ -
Average strike rate 8.33% -
</TABLE>
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 or 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.
F-37
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and fair values for certain of the Company's financial
instruments at December 31 are presented below. 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 the Company's assets and liabilities,
and (2) the reporting of investments at fair value without a corresponding
evaluation of related policyholders liabilities can be misinterpreted.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
--------------------------------------------------------------------------------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities * $29,118 $29,118 $27,408 $27,408
Mortgage loans on real
estate $ 1,608 $ 1,557 $ 1,702 $ 1,660
Policy loans $ 1,252 $ 1,171 $ 1,127 $ 1,094
Investment in parent
company $ 55 $ 55 $ 38 $ 38
Indebtedness from
affiliates $ 161 $ 161 $ 97 $ 97
Liabilities:
Insurance investment
contracts $25,852 $25,675 $24,011 $24,497
</TABLE>
* Includes derivative financial instruments with negative fair values of $1.0
million and $4.2 million and positive fair values of $24.3 million and $7.2
million at December 31, 1998 and 1997, respectively.
F-38
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value 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.
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
Fair value of insurance investment contracts was estimated using cash flows
discounted at market interest rates.
F-39
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 $244 million, $401 million, and
$189 million in dividends on common stock to AGC Life Insurance Company in 1998,
1997, and 1996, respectively. The Company also paid $680 thousand per year in
dividends on preferred stock to an affiliate, The Franklin Life Insurance
Company, in 1998, 1997, and 1996.
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, 1998,
approximately $3.3 billion of consolidated shareholder's equity represents net
assets of the Company which cannot be transferred, in the form of dividends,
loans, or advances to the Parent Company. Approximately $2.5 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.
F-40
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED)
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 have resulted in substantial settlements. On
December 16, 1998, American General Corporation announced that certain of its
life insurance subsidiaries had entered into agreements to resolve all pending
market conduct class action lawsuits. The settlements are not final until
approved by the courts and any appeals are resolved. If court approvals are
obtained and appeals are not taken, it is expected the settlements will be final
in third quarter 1999.
In conjunction with the proposed settlements, the Company recorded a charge of
$97.1 million ($63.1 million after-tax) in the fourth quarter of 1998. The
charge covers the cost of policyholder benefits and other anticipated expenses
resulting from the proposed settlements, as well as other administrative and
legal costs.
On December 31, 1998, the Company entered into an agreement with the Parent
Company whereby the Company assigned, and the Parent Company assumed, $80.1
million of the liabilities of the Company related to the proposed resolution.
The liabilities of American General Life Insurance Company of New York, which
totaled $17.0 million, were not assumed by the Parent Company. As consideration
for the assumption of the liabilities, the Company paid the Parent Company an
amount equal to the liabilities recorded with respect to the proposed resolution
of the litigation. The assignment of the liabilities was not a novation, and
accordingly, the Company retains a contingent liability related to the
litigation. The litigation liabilities were reduced by payments of $2.7 million,
and the remaining balance of $94.4 million was included in other liabilities on
the Company's balance sheet at December 31, 1998.
The Company is 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 and Mississippi, that permit damage awards
disproportionate to the actual economic damages 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 consolidated 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 and Mississippi continues to create the potential for
an unpredictable judgment in any given suit.
F-41
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED)
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, 1998 and 1997, the Company has accrued $6.0 million and
$7.6 million, respectively, for guaranty fund assessments, net of $3.7 million
and $4.3 million, respectively, of premium tax deductions. The Company has
recorded receivables of $6.2 million and $9.7 million at December 31, 1998 and
1997, respectively, for expected recoveries against the payment of future
premium taxes. Expenses incurred for guaranty fund assessments were $3.6
million, $2.1 million, and $6.0 million in 1998, 1997, and 1996, respectively.
F-42
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. REINSURANCE
Reinsurance transactions for the years ended December 31, 1998, 1997, and 1996
were as follows:
<TABLE>
<CAPTION>
CEDED TO ASSUMED PERCENTAGE OF
GROSS OTHER FROM OTHER AMOUNT
AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET
----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Life insurance in force $46,057,031 $13,288,183 $629,791 $33,398,639 1.89%
====================================================================
Premiums:
Life insurance and annuities $ 90,298 $ 42,235 $ 117 $ 48,180 0.24%
Accident and health insurance 1,134 87 - 1,047 0.00%
--------------------------------------------------------------------
Total premiums $ 91,432 $ 42,322 $ 117 $ 49,227 0.24%
====================================================================
DECEMBER 31, 1997
Life insurance in force $45,963,710 $10,926,255 $ 4,997 $35,042,452 0.01%
====================================================================
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%
====================================================================
DECEMBER 31, 1996
Life insurance in force $44,535,841 $ 8,625,465 $ 5,081 $35,915,457 0.01%
====================================================================
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%
====================================================================
</TABLE>
Reinsurance recoverable on paid losses was approximately $7.7 million, $2.3
million, and $6.9 million at December 31, 1998, 1997, and 1996, respectively.
Reinsurance recoverable on unpaid losses was approximately $2.5 million, $3.2
million, and $4.3 million at December 31, 1998, 1997, and 1996, respectively.
F-43
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED)
INTERNAL SYSTEMS
The Company's ultimate parent, American General Corporation, ("AGC") has
numerous technology systems that are managed on a decentralized basis. AGC's
Year 2000 readiness efforts are therefore being undertaken by its key business
units with centralized oversight. Each business unit, including the Company, has
developed and is implementing a plan to minimize the risk of a significant
negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of the Company's information technology and
non-information technology systems; (2) assess which items in the inventory may
expose the Company to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, substantially all
of the Company's critical systems are Year 2000 ready and have been returned to
operations. However, activities (3) through (5) for certain systems are ongoing,
with vendor upgrades expected to be received during the first half of 1999.
THIRD PARTY RELATIONSHIPS
The Company has relationships with various third parties who must also be Year
2000 ready. These third parties provide, or receive resources and services to
(or from) the Company and include organizations with which the Company exchanges
information. Third parties include vendors of hardware, software, and
information services; providers of infrastructure services such as voice and
data communications and utilities for office facilities; investors, customers;
distribution channels; and joint venture partners. Third parties differ from
internal systems in that the Company exercises less, or no, control over Year
2000 readiness. The Company has developed a plan to assess and attempt to
mitigate the risks associated with the potential failure of third parties to
achieve Year 2000 readiness. The plan includes the following activities (1)
identify and classify third party dependencies; (2) research, analyze, and
document Year 2000 readiness for critical third parties; and (3) test critical
hardware and software products and electronic interfaces. As of December 31,
1998, AGC has identified and assessed more approximately 700 critical third
party dependencies, including those related to the Company. A more detailed
evaluation will be completed during the first quarter 1999 as part of the
Company's contingency planning efforts. Due to the various stages of third
parties' Year 2000 readiness, the Company's testing activities will extend
through 1999.
F-44
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED) (CONTINUED)
CONTINGENCY PLANS
The Company has commenced contingency planning to reduce the risk of Year 2000-
related business failures. The contingency plans, which address both internal
systems and third party relationships, include the following activities: (1)
evaluate the consequences of failure of business processes with significant
exposure to Year 2000 risk; (2) determine the probability of a Year 2000 related
failure for those processes that have a high consequence of failure; (3) develop
an action plan to complete contingency plans for those processes that rank high
in consequence and probability of failure; and (4) complete the applicable
actions plans. The Company is currently developing action plans and expects to
substantially complete all contingency planning activities by April 30, 1999.
RISKS AND UNCERTAINTIES
Based on its plans to make internal systems ready for Year 2000, to deal with
third party relationships, and to develop contingency action, the Company
believes that it will experience at most isolated and minor disruptions of
business processes following the turn of the century. Such disruptions are not
expected to have a material effect on the Company's future results of
operations, liquidity, or financial condition. However, due to the magnitude and
complexity of this project, risks and uncertainties exist and the Company is not
able to predict a most reasonably likely worst case scenario. If conversion of
the Company's internal systems is not completed on a timely basis (due to non-
performance by significant third party vendors, lack of qualified personnel to
perform the Year 2000 work, or other unforeseen circumstances in completing the
Company's plans), or if critical third parties fail to achieve Year 2000
readiness on a timely basis, the Year 2000 issue could have a material adverse
impact on the Company's operation following the turn of the century.
COSTS
Through December 31, 1998, the Company has incurred, and anticipates that it
will continue to incur, costs for internal staff, third-party vendors, and other
expenses to achieve Year 2000 readiness. The cost of activities related to Year
2000 readiness has not had a material adverse effect on the Company's results of
operations or financial condition. In addition, the Company has elected to
accelerate the planned replacement of certain systems as part of the Year 2000
plans. Costs of the replacement systems are being capitalized and amortized over
their useful lives, in accordance with the Company's normal accounting policies.
F-45
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. DIVISION OPERATIONS
15.1 NATURE OF OPERATIONS
The Company manages its business operation through two divisions, which are
based on products and services offered.
RETIREMENT SERVICES
The Retirement Services Division provides tax-deferred retirement annuities and
employer-sponsored retirement plans to employees of educational, health care,
public sector, and other not-for-profit organizations marketed nationwide
through exclusive sales representatives.
LIFE INSURANCE
The Life Insurance division provides traditional, interest-sensitive, and
variable life insurance and annuities to a broad spectrum of customers through
multiple distribution channels focused on specific market segments.
15.2 DIVISION RESULTS
Results of each division exclude goodwill amortization, net realized investment
gains, and non-recurring items.
Division earnings information was as follows:
<TABLE>
<CAPTION>
REVENUES INCOME BEFORE TAXES EARNINGS
------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retirement Services $1,987 $1,859 $1,745 $ 469 $398 $343 $315 $261 $226
Life Insurance 870 822 774 162 147 141 107 97 92
------------------------------------------------------------------------------------------------------------
Total divisions 2,857 2,681 2,519 631 545 484 422 358 318
Goodwill
amortization - - - (2) (2) (2) (2) (2) (2)
RG (L) (34) 30 29 (34) 30 29 (22) 19 19
Nonrecurring items - - - (125)(a) - - (81)(a) - -
------------------------------------------------------------------------------------------------------------
Total consolidated $2,823 $2,711 $2,548 $ 470 $573 $511 $317 $375 $335
============================================================================================================
</TABLE>
(a) Includes $97 million pretax ($63 million after-tax) in litigation
settlements and $28 million pretax ($18 million after-tax) in Year 2000
costs.
F-46
<PAGE>
American General Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. DIVISION OPERATIONS (CONTINUED)
15.2 DIVISION RESULTS (CONTINUED)
Division balance sheet information was as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
-------------------------------------------------------------------
DECEMBER 31
-------------------------------------------------------------------
IN MILLIONS 1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retirement Services $41,347 $35,195 $38,841 $33,136
Life Insurance 8,894 8,370 7,831 7,367
-------------------------------------------------------------------
Total consolidated $50,241 $43,565 $46,672 $40,503
===================================================================
</TABLE>
F-47
