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AMERICAN NATIONAL
VARIABLE
ANNUITY II
PROSPECTUS
FOR
VARIABLE ANNUITY CONTRACTS II
ISSUED BY
AMERICAN NATIONAL INSURANCE COMPANY
AMERICAN NATIONAL INSURANCE COMPANY
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THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE.
NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON.
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VARIABLE ANNUITY CONTRACTS II
ISSUED BY
AMERICAN NATIONAL INSURANCE COMPANY
ONE MOODY PLAZA
GALVESTON, TEXAS 77550-7999
(409) 763-4661
This Prospectus describes the individual deferred Variable Annuity Contracts
II (the "Contracts") offered by American National Insurance Company ("American
National"). The Contracts are designed to provide an investment vehicle for the
accumulation of capital on a tax-deferred basis for retirement or other long-
term purposes. The Contracts provide for annuity payments commencing at some
later date specified by the Contractowner.
Unlike traditional guaranteed annuities, the Contracts provide for
Accumulation Values and annuity payment amounts which are based on and vary with
the investment performance of Subaccounts of the American National Variable
Annuity Separate Account (the "Separate Account") and/or the American National
Fixed Account. The assets of the Subaccounts are invested in the portfolios of
American National Investments Accounts, Inc.(the "American National Fund"),
Fidelity Variable Insurance Products Fund II, Fidelity Variable Insurance
Products Fund III (the "Fidelity Funds"), MFS Variable Insurance Trust (the "MFS
Fund"), T. Rowe Price International Series, Inc., T. Rowe Price Equity Series,
Inc., T. Rowe Price Fixed Income Series, Inc. (the "T. Rowe Price Funds"), Van
Eck Worldwide Insurance Trust (the "Van Eck Fund"), Federated Insurance Series
(the "Federated Fund") and Lazard Retirement Series, Inc (the "Lazard Fund").
The portfolios that are available for investment will sometimes be referred to,
individually, as an "Eligible Portfolio" and, collectively, as the "Eligible
Portfolios".
The Separate Account is registered with the Securities and Exchange Commission
(the "SEC") under the Investment Company Act of 1940 (the "1940 Act") as a unit
investment trust, which is a type of investment company. The Separate Account
currently has twenty-six separate Subaccounts: American National Growth,
American National Balanced, American National Managed, American National Money
Market (the "Amer. Nat'l Portfolios"), Fidelity Asset Manager, Fidelity Index
500, Fidelity Growth Opportunities, Fidelity Contrafund, Fidelity Asset Manager
Growth (the "Fidelity Portfolios"), T. Rowe Price Equity Income, T. Rowe Price
International Stock, T. Rowe Price Mid-Cap Growth, T. Rowe Price Limited-Term
Bond (the "T. Rowe Price Portfolios"), MFS Value Series, MFS Emerging Growth
Series, MFS Research Series, MFS Growth With Income Series (the "MFS
Portfolios"), Van Eck Worldwide Hard Assets, Van Eck Worldwide Emerging
Markets (the "Van Eck Portfolios"), Federated Utility Fund II, Federated Growth
Strategies Fund II, Federated Fund for U.S. Government Securities II, Federated
High Income Bond Fund II, Federated Equity Income Fund II (the "Federated
Portfolios"), Lazard Retirement Emerging Markets, and Lazard Retirement Small
Cap (the "Lazard Portfolios"). The assets of such Subaccounts are invested in
shares of a corresponding Eligible Portfolio. The accompanying prospectuses
describe the investment objectives, policies and the risks of each of the
Eligible Portfolios.
The Fixed Account is funded by the general assets of American National.
Although the contracts are designed primarily to offer benefits based on
investment performance, all or a portion of the annuity payments can be in the
form of a traditional guaranteed annuity.
The Contractowner has the right to examine a Contract and return it to
American National during what is generally known as the "free look" period.
American National will then refund the greater of all Purchase Payments made by
the Contractowner or the Accumulation Value plus the amount of any charges for
state premium taxes, mortality and expense risk and advisory fees. The "free
look" period is established by state law and generally runs ten days after the
Contractowner receives the Contract.
This Prospectus sets forth the information that a prospective investor should
know before investing. A Statement of Additional Information about the Contract
is free and may be obtained by writing American National at the address above.
The Statement of Additional Information which has the same date as this
Prospectus, has been filed with the Securities and Exchange Commission. The
Table of Contents of such Statement of Additional Information is set forth in
this Prospectus on page 30.
This Prospectus must be accompanied by a
Current Prospectus for each Eligible Portfolio.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
An interest in the Contract is not a deposit or obligation of, or guaranteed or
endorsed by any bank, nor is the Contract federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
The Contract involves investment risk, including possible loss of principal.
Please Read This Prospectus Carefully And Retain It For Future Reference.
September 5, 1997
(as revised October 15, 1997)
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TABLE OF CONTENTS
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Glossary of Terms.................................... 4 Contract Application and Purchase Payments.......... 16
Summary of the Contracts............................. 6 Allocation of Purchase Payments..................... 17
Purpose of the Contracts............................ 6 Crediting of Accumulation Units..................... 17
Investment Options.................................. 6 Determining the Accumulation Unit Values............ 17
Purchasing a Variable Annuity Contract.............. 6 Transfers Prior to Annuity Date..................... 17
Allocations and Transfers........................... 6 Dollar Cost Averaging............................... 17
How the Death Benefit Varies........................ 6 Asset Allocation Program............................ 18
Surrenders from the Contract prior to Annuity Date.. 6 Contractowner Inquiries.............................. 18
How Annuity Payments are Determined................. 6 Charges and Deductions During
Your Right to Cancel the Variable Annuity 6 the Accumulation Period............................. 19
Contract--"The Free Look Period"................... 6 Surrender Charge.................................... 19
Other Charges....................................... 19
Summary of Expenses.................................. 7 (a) Administrative Charges......................... 19
(b) State Premium Taxes............................ 19
Expenses During the Accumulation Period............. 7 (c) Mortality and Expense Risk Fee................. 19
Expenses During the Annuity Period.................. 10 (d) Charges for Taxes.............................. 19
(e) Exchange Fee................................... 19
American National Insurance Company Deduction of Fees................................... 19
and the Separate Account............................ 11 Exceptions to Charges............................... 19
Distributions Under the Contract
American National Insurance Company................. 11 Accumulation Period................................. 20
The Separate Account................................ 11 Full and Partial Surrenders......................... 20
The American National Fund.......................... 11 Systematic Withdrawals.............................. 20
The Fidelity Funds.................................. 12 Waiver of Surrender Charges......................... 20
T. Rowe Price Series................................ 13 (a) Nursing Home Waiver............................ 20
MFS Variable Insurance Trust........................ 13 (b) Disability Waiver.............................. 21
Van Eck Worldwide Insurance Trust................... 14 (c) Involuntary Unemployment Waiver................ 21
Federated Insurance Series.......................... 14 (d) Terminal Illness Waiver........................ 21
Lazard Retirement Series, Inc....................... 14 Death Benefit During Accumulation Period............ 21
Addition, Deletion or Substitution of Investments... 15 Annuity Period....................................... 22
Election of Annuity Date and Form of Annuity........ 22
Resolving Material Conflicts......................... 15
Fixed Account........................................ 16
Contracts............................................ 16
Purpose of the Contracts............................ 16
Type of Contracts................................... 16
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Allocation of Benefits.............................. 22 Possible Charge for American National's Taxes....... 26
Annuity Options..................................... 22 Other Tax Consequences.............................. 27
Value of Variable Annuity Payments: Performance.......................................... 27
Assumed Investment Rates........................... 23 Distributor of the Contracts......................... 27
Annuity Provisions................................. 23 Safekeeping of the Separate Account's Assets......... 28
Federal Tax Considerations........................... 23 Voting Rights........................................ 28
Introduction........................................ 23 State Regulation of American National................ 29
Tax Status of the Contract.......................... 24 Legal Matters........................................ 29
Taxation of Annuities............................... 24 Legal Proceedings.................................... 29
Transfers, Assignments or Exchanges Experts.............................................. 29
of a Contract...................................... 26 Additional Information............................... 29
Withholding......................................... 26 Financial Statements................................. 29
Multiple Contracts.................................. 26 Table of Contents of
Qualified Plans..................................... 26 Statement of Additional Information................. 30
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GLOSSARY OF TERMS
The following definitions may be useful in reading this Prospectus. Certain
additional terms are defined in the text.
ACCUMULATION PERIOD - The period from the date Accumulation Units are first
purchased under a Contract to the earliest of the Annuity Date, the date the
Contract is surrendered for its then current value or the date due proof of the
Annuitant's death is received at American National's Home Office.
ACCUMULATION UNIT - A standard of measurement used with respect to each
Subaccount to calculate the value of a Contract during the Accumulation Period.
The value of an Accumulation Unit fluctuates with the value of the shares of the
corresponding Eligible Portfolio owned by each Subaccount less any applicable
deductions (see "Charges and Deductions," page 19).
ACCUMULATION UNIT VALUE - The value of an Accumulation Unit.
ACCUMULATION VALUE - The Accumulation Value of a Contract is the sum of: (i)
the total Accumulation Units in Subaccounts attributable to the Contract times
the respective Accumulation Unit Value of such Subaccounts, and (ii) the
Contractowner's value in the Fixed Account.
ANNUITANT - The person upon whose life expectancy the Contract is written. The
Annuitant may also be the Contractowner.
ANNUITY DATE - The date on which the Accumulation Period changes to the
Annuity Period. The Annuity Date must be at least five years after the Date of
Issue.
ANNUITY PERIOD - The period of time during which annuity payments are being
made.
ANNUITY UNIT - A standard of measurement used with respect to each Subaccount
to calculate the dollar amount of variable annuity payments during the Annuity
Period. The value of an Annuity Unit fluctuates with the value of shares of the
corresponding Eligible Portfolio owned by each Subaccount less any applicable
deductions. (See "Charges and Deductions," page 19).
CONTRACT - A Variable Annuity Contract issued pursuant to this Prospectus
which sets forth the obligations and contractual promises which American
National makes to the Contractowner.
CONTRACTOWNER - The person or entity entitled to exercise rights of ownership
in a Contract prior to the Annuity Date or termination of the Contract. The
Contractowner and the Annuitant need not be the same.
CONTRACT YEAR - The period from the date the first Purchase Payment is
credited to the Contract until the immediately preceding day of the succeeding
year. (February 29 will be treated as February 28 for the purpose of this
definition).
DATE OF ISSUE - The date as of which a Contract is issued and the initial Net
Purchase Payment is credited to the Contract.
DEFERRED ANNUITY CONTRACT - A Contract in which annuity payments commence at
some future date specified by the Contractowner.
ELIGIBLE PORTFOLIO - A Portfolio which corresponds to and in which a
Subaccount can be invested.
FIXED ACCOUNT - An account that is a part of American National's General
Account to which all or a portion of Net Purchase Payments and transfers may be
allocated for accumulation at fixed rates of interest.
GENERAL ACCOUNT - The General Account of American National which includes all
of American National's assets except those assets segregated into its separate
accounts.
GUARANTEED ANNUITY - An annuity under which the amount of each annuity payment
is guaranteed by American National during the Annuity Period.
HOME OFFICE - American National's Home Office is located at One Moody Plaza,
Galveston, Texas 77550-7999.
MINIMUM GUARANTEED DEATH BENEFIT - For all dates up to and including the first
Six-Year Anniversary Date, the Minimum Guaranteed Death Benefit will equal
Purchase Payments less Partial Surrender Reductions made on or before such date.
For all subsequent Six-Year Anniversary Dates, the Minimum Guaranteed Death
Benefit will equal the greater of: (i) the Accumulation Value on such Six-Year
Anniversary Date, or (ii) the Minimum Guaranteed Death Benefit for the
immediately preceding Six-Year Anniversary Date, plus Purchase Payments and less
Partial Surrender Reductions made since such immediately preceding Six-Year
Anniversary Date. For all other dates, the Minimum Guaranteed Death Benefit will
equal the Minimum Guaranteed Death Benefit for the immediately preceding Six-
Year Anniversary Date plus Purchase Payments and less Partial Surrender
Reductions made since such immediately preceding Six-Year Anniversary Date.
MORTALITY AND EXPENSE RISK FEE - The amount payable to American National for
accepting mortality and expense risks.
NET PURCHASE PAYMENT - The Purchase Payment less any government entity premium
tax charge.
NON-QUALIFIED CONTRACT - A Contract issued in connection with a retirement
plan that does not receive favorable tax treatment under the Internal Revenue
Code.
PARTIAL SURRENDER REDUCTION - An amount equal to (i) the amount of a
surrender, multiplied by (ii) the Minimum Guaranteed Death Benefit on the date
immediately prior to a surrender, divided by (iii) the Accumulation Value on the
date immediately prior to the surrender.
PORTFOLIO - A separate series of capital securities designed to meet specified
investment objectives. Currently there are twenty-six portfolios, all of which
are Eligible Portfolios.
PURCHASE PAYMENT - A payment made into a Contract during the Accumulation
Period.
QUALIFIED CONTRACT - A Contract issued in connection with a Plan that receives
favorable tax treatment under the Internal Revenue Code of 1986.
4
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SIX-YEAR ANNIVERSARY DATE - The last day of each Contract Year prior to the
Annuitant's 75th birthday which is evenly divisible by six.
SUBACCOUNT - A subdivision of the Separate Account. Each Subaccount invests
exclusively in the shares of a corresponding Eligible Portfolio.
VALUATION DATE - A valuation date is each day on which the New York Stock
Exchange ("NYSE") and American National are open for trading. American National
will be closed on each national holiday on which the NYSE is closed, and will
also be closed on Wednesday, December 24, 1997 and Friday, December 26, 1997.
VALUATION PERIOD - The period commencing at the close of regular trading on
the NYSE on one Valuation Date and ending at the close of regular trading on the
NYSE on the next succeeding Valuation Date.
VARIABLE ANNUITY - An annuity providing payments which vary in dollar amount
depending on the investment results of the Portfolios selected.
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SUMMARY OF THE CONTRACTS
PURPOSE OF THE CONTRACTS
The Contract is a flexible premium deferred fixed and variable annuity
contract offered by American National Insurance Company. The Contract is
designed to aid in long-term financial planning and provides for accumulation of
capital on a tax deferred basis for retirement or other long-term purposes. The
Contract may be sold to or in connection with retirement plans, including plans
that qualify for special federal tax treatment under the Internal Revenue Code.
The Contractowner may allocate Net Purchase Payments to one or more of the
Subaccounts of the Separate Account. Each Subaccount, in turn, invests in a
corresponding Eligible Portfolio. Each Eligible Portfolio has its own investment
objective. There is no assurance that a Subaccount will obtain its investment
objective. Because a Variable Annuity's value is based on the investment
performance of Eligible Portfolios and is not guaranteed, a Variable Annuity
Contract entails more investment risk than a traditional Guaranteed Annuity.
There is also American National's Fixed Account option for Contractowners who
prefer more conservative investments. (See Fixed Account, page 16.)
INVESTMENT OPTIONS
Net Purchase Payments may be invested in the Subaccounts and/or in American
National's Fixed Account. The twenty-six Subaccounts are: the American National
Growth, the American National Balanced, the American National Managed, the
American National Money Market, the Fidelity Asset Manager, the Fidelity Index
500, the Fidelity Growth Opportunities, the Fidelity Contrafund, the Fidelity
Asset Manager Growth, the T. Rowe Price Equity Income, the T. Rowe Price
International, the T. Rowe Price Mid-Cap Growth, the T. Rowe Price Limited-Term
Bond, the MFS Value Series, the MFS Emerging Growth Series, the MFS Research
Series, the MFS Growth With Income Series, the Van Eck Worldwide Hard Assets,
the Van Eck Worldwide Emerging Markets, the Federated Utility Fund II, the
Federated Growth Strategies Fund II, the Federated Fund for U.S. Government
Securities II, the Federated High Income Bond Fund II, Federated Equity Income
Fund II, Lazard Retirement Emerging Markets, and the Lazard Retirement Small
Cap. Each of the Subaccounts invests exclusively in the shares of a
corresponding Eligible Portfolio. Each such Subaccount and corresponding
Eligible Portfolio has its own investment objective. Some of the Portfolios have
similar investment objectives. The prospectuses for each of the Portfolios
should be read carefully before investing. (See the "Funds" beginning on page
11.)
PURCHASING A VARIABLE ANNUITY CONTRACT
Individuals wishing to purchase a Variable Annuity Contract must complete an
application and pay the minimum initial Purchase Payment to American National's
Home Office. For information on the minimum and maximum amounts of Purchase
Payments, see "Contract Application and Purchase Payments," page 16.
ALLOCATION AND TRANSFERS
Net Purchase Payments will be initially allocated to each Subaccount and/or
the Fixed Account as instructed in the application. Thereafter, the allocation
may be changed by the Contractowner. All allocations must be at least 1% of the
Net Purchase Payment. The minimum initial deposit in any subaccount and/or the
Fixed Account is $500.
During the Accumulation Period, transfers can be made between Subaccounts and
American National's Fixed Account. American National allows twelve free
transfers per Contract Year. Any additional transfer will be subject to a $10.00
exchange fee. Transfers out of the Fixed Account are limited as described in the
section "Transfers Prior to Annuity Date" on page 17. Unused transfers do not
carry over from a Contract Year to the next Contract Year.
Transfers and allocation changes can be made by either writing to American
National's Home Office or by telephone instructions. A Telephone Transfer
Authorization Form must be on file at American National's Home Office before
telephone instructions will be allowed.
HOW THE DEATH BENEFIT VARIES
In the event of the Annuitant's death prior to the Annuity Date, the death
benefit for the Contracts will equal the greater of: (i) Accumulation Value on
the date that due proof of death is received by American National at its Home
Office, or (ii) the Minimum Guaranteed Death Benefit calculated as of the date
that due proof of death is received by American National at its Home Office.
During the Annuity Period, death benefits, if any, depend upon the annuity
option selected. (See Annuity Options at page 22).
SURRENDERS FROM THE CONTRACT PRIOR TO ANNUITY DATE
Prior to the Annuity Date, all or part of a Variable Annuity's Accumulation
Value may be surrendered upon the Contractowner's written request. A surrender
may be subject to a Surrender Charge, an IRS penalty tax for early withdrawal
and potentially an income tax. Surrenders from Contracts qualified under Section
403(b) of the Code may be restricted. (See "Taxation of Qualified Plans" under
"Federal Tax Considerations" at page 26). The sum of surrender charges will
never be more than 8.5% of total Purchase Payments paid.
HOW ANNUITY PAYMENTS ARE DETERMINED
There are a number of ways to receive annuity payments. They include monthly
payments for a specified number of years, payments for life guaranteed for 10 or
20 years, or payments made jointly. (See "Annuity Options", page 22) Payments
may also be received on a fixed basis and/or on a variable basis. Variable
Annuity payments will increase or decrease according to the investment
experience of the Eligible Portfolios and the declared rate paid by American
National on the Fixed Account.
YOUR RIGHT TO CANCEL THE VARIABLE ANNUITY CONTRACT - THE "FREE LOOK" PERIOD
State law requires that Contractowners be given a "free look" period,
generally running ten days after the Contractowner receives the Contract, within
which a Contractowner may return the Contract to American National's Home
Office. In such cases, American National will then refund the greater of all
Purchase Payments made by the Contractowner or the Accumulation Value plus the
amount of any charges for state premium taxes, mortality and expense risk and
administrative asset fee. (See "Contract Application and Purchase Payments,"
page 16).
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SUMMARY OF EXPENSES
EXPENSES DURING THE ACCUMULATION PERIOD
The purpose of the following table is to illustrate the costs and expenses
that are borne, directly and indirectly, by Contractowners during the
Accumulation Period. The information set forth should be considered together
with the narrative provided under the heading "Charges and Deductions" in this
Prospectus. In addition to the expenses listed below, premium taxes may also be
applicable. For information concerning the fees and expenses assessed during the
Annuity Period, see "Expenses During the Annuity Period", page 10.
CONTRACTOWNER TRANSACTION EXPENSES
SALES LOAD AS A PERCENTAGE OF PURCHASE PAYMENTS 0%
DEFERRED SALES LOAD ("SURRENDER CHARGE")
An amount of Accumulation Value equal to the greater of (i) 10% of
Accumulation Value in a Contract Year, or (ii) Accumulation Value on the date of
receipt of the request less total Purchase Payments made, may be withdrawn
without Surrender Charge. The 10% annual free withdrawal amount is determined as
follows. Each time a withdrawal is made, the amount of the withdrawal is
divided by the Accumulation Value at the time of the withdrawal. The resulting
percentage then applies toward the 10% annual free withdrawal amount.
On surrenders of that portion of Accumulation Value in excess of the above
described free surrender amount, a Surrender Charge is imposed based upon the
number of Contract Years since the Contract Year in which the Purchase Payments
withdrawn were paid, on a first paid, first withdrawn basis. The Surrender
Charge is deducted from the remaining Accumulation Value, or, if the remaining
Accumulation Value is insufficient to cover the Surrender Charge, part or all of
the Surrender Charge will be deducted from the withdrawal amount. Such Surrender
Charge will be a percentage of each Purchase Payment or portion thereof
withdrawn as illustrated in the following table:
APPLICABLE SURRENDER CHARGE
AS A PERCENTAGE
CONTRACT YEARS SINCE OF EACH PURCHASE
PURCHASE PAYMENT PAYMENT OR PORTION
MADE THEREOF WITHDRAWN
1 7.0
2 7.0
3 6.0
4 5.0
5 4.0
6 3.0
7 2.0
8 and thereafter 0.0
EXCHANGE FEE $ 10
(THERE IS NO EXCHANGE FEE FOR
THE FIRST 12 TRANSFERS IN EACH CONTRACT YEAR)
ANNUAL CONTRACT FEE $ 35
SEPARATE ACCOUNT ANNUAL EXPENSES
As a percentage of average net assets:
Mortality Risk Fees 0.80%
Expense Risk Fees 0.35%
Administrative Asset Fee 0.10%
Total Separate Account
Annual Expenses* 1.25%
* Does not include $35 Annual Contract Fee
PORTFOLIO COMPANY ANNUAL EXPENSES
AMERICAN NATIONAL GROWTH PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees after
reimbursement * ** 0.37%
Other Expenses 0.50%
Total Portfolio
Annual Expenses 0.87%
* Without reimbursement, management fees would have been 0.75% and the total
portfolio annual expense would have been 1.25%.
AMERICAN NATIONAL BALANCED PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees after
reimbursement * ** 0.17%
Other Expenses 0.73%
Total Portfolio
Annual Expenses 0.90%
* Without reimbursement, management fees would have been 0.75% and the total
portfolio annual expense would have been 1.48%.
AMERICAN NATIONAL MANAGED PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees after
reimbursement * ** 0.54%
Other Expenses 0.39%
Total Managed Portfolio
Annual Expenses 0.93%
* Without reimbursement, management fees would have been 0.75% and the total
portfolio annual expense would have been 1.14%.
AMERICAN NATIONAL MONEY MARKET PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees after
reimbursement * ** 0.40%
Other Expenses 0.47%
Total Money Market Portfolio
Annual Expenses 0.87%
* Without reimbursement, management fees would have been 0.75% and the total
portfolio annual expense would have been 1.22%.
** Under its Administrative Service Agreement with the Fund, Securities
Management and Research, Inc. ("SM&R"), the Fund's Investment
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Adviser and Manager, has agreed to pay (or to reimburse each Portfolio for) each
Portfolio's expenses (including the advisory fee and administrative service fee
paid to SM&R, but exclusive of interest, commissions and other expenses
incidental to portfolio transactions) in excess of 1.50% per year of such
Portfolio's average daily net assets. In addition, SM&R has entered into a
separate undertaking with the Fund effective May 1, 1994 until April 30, 1998,
pursuant to which SM&R has agreed to reimburse the Money Market Portfolio and
the Growth Portfolio for expenses in excess of .87%; the Balanced Portfolio for
expenses in excess of .90%; and the Managed Portfolio for expenses in excess of
.93%, of each of such Portfolios' average daily net assets during such period.
SM&R is under no obligation to renew this undertaking for any Portfolio at the
end of such period.
FIDELITY ASSET MANAGER PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.64%
Other Expenses 0.10%
Total Portfolio
Annual Expenses** 0.74%
FIDELITY INDEX 500 PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.14%
Other Expenses 0.14%
Total Portfolio
Annual Expenses* 0.28%
* The portfolio's expenses were voluntarily reduced by the portfolio's
investment advisor. Absent reimbursement, management fee, other expenses and
total expenses would have been 0.28%, 0.15% and 0.43%, respectively.
FIDELITY CONTRAFUND PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.61%
Other Expenses 0.13%
Total Portfolio
Annual Expenses** 0.74%
FIDELITY ASSET MANAGER: GROWTH PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.65%
Other Expenses 0.22%
Total Portfolio
Annual Expenses** 0.87%
FIDELITY GROWTH OPPORTUNITIES PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.61%
Other Expenses 0.16%
Total Portfolio Annual Expenses** 0.77%
** A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented in
the table would have been .73% for Asset Manager Portfolio, .71% for Contrafund
Portfolio, .85% for Asset Manager: Growth Portfolio and .76% for Growth
Opportunities Portfolio.
T. ROWE PRICE EQUITY INCOME PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees* 0.00%
Other Expenses 1.05%
Total Portfolio Annual Expenses 1.05%
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees* 0.00%
Other Expenses 0.70%
Total Portfolio Annual Expenses 0.70%
T. ROWE PRICE MID-CAP GROWTH PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees* 0.00%
Other Expenses 0.85%
Total Portfolio Annual Expenses 0.85%
T. ROWE PRICE LIMITED - TERM BOND PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees* 0.00%
Other Expenses 0.85%
Total Portfolio Annual Expenses 0.85%
* T. Rowe Price Funds do not itemize management fees and other expenses.
MFS VALUE SERIES PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
Other Expenses (after fee reduction) 0.25%
Total Portfolio Annual Expenses* 1.00%
* The portfolio's expenses were voluntarily reduced by the portfolio's
investment advisor. Absent reimbursement, management fee, other expenses and
total expenses would have been 0.75%, 1.00%, and 1.75%, respectively.
MFS EMERGING GROWTH SERIES PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
Other Expenses (after fee reduction) 0.25%
Total Portfolio Annual Expenses* 1.00%
* The portfolio's expenses were voluntarily reduced by the portfolio's
investment advisor. Absent reimbursement, management fee, other expenses and
total expenses would have been 0.75%, 2.16%, and 2.91%, respectively.
MFS RESEARCH SERIES PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
Other Expenses (after fee reduction) 0.25%
Total Portfolio Annual Expenses* 1.00%
* The portfolio's expenses were voluntarily reduced by the portfolio's
investment advisor. Absent reimbursement, management fee, other expenses and
total expenses would have been 0.75%, 3.15%, and 3.90%, respectively.
MFS GROWTH WITH INCOME SERIES PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
Other Expenses (after fee reduction) 0.25%
Total Portfolio Annual Expenses* 1.00%
* The portfolio's expenses were voluntarily reduced by the portfolio's
investment advisor. Absent reimbursement, management fee, other expenses and
total expenses would have been 0.75%, 20.69%, and 21.44%, respectively.
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VAN ECK WORLDWIDE HARD ASSETS PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 1.00%
Other Expenses 0.25%
Total Portfolio Annual Expenses 1.25%
VAN ECK WORLDWIDE EMERGING MARKETS PORTFOLIO ANNUAL EXPENSES
(as a percentage of average net assets)
Management Fees 1.00%
Other Expenses 0.25%
Total Portfolio Annual Expenses 1.25%
FEDERATED UTILITY FUND II PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
Other Expenses 0.15%
Total Portfolio Annual Expenses 0.90%
FEDERATED GROWTH STRATEGIES FUND II PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
Other Expenses 0.15%
Total Portfolio Annual Expenses 0.90%
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.60%
Other Expenses 0.15%
Total Portfolio Annual Expenses 0.75%
FEDERATED HIGH INCOME BOND FUND II PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.60%
Other Expenses 0.15%
Total Portfolio Annual Expenses 0.75%
FEDERATED EQUITY INCOME FUND II PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
Other Expenses 0.15%
Total Portfolio Annual Expenses 0.90%
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 1.00%
12b-1 Fees* 0.25%
Other Expenses** 0.55%
Total Portfolio Annual Expenses 1.80%
LAZARD RETIREMENT SMALL CAP PORTFOLIO ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
12b-1 Fees* 0.25%
Other Expenses** 0.50%
Total Portfolio Annual Expenses 1.50%
* Shares of the Lazard Retirement portfolios are subject to a Distribution and
Servicing Plan, which is a so-called "12b-1 plan" adopted pursuant to Rule 12b-1
under the 1940 Act. Under the Distribution and Servicing Plan, each portfolio
pays Lazard Freres & Co. LLC ("Lazard Freres"), the distributor for the
portfolio's shares, for advertising, marketing, and distributing the portfolio's
shares and for the provision of certain services to contract owners with amounts
invested in the portfolios at an annual rate of .25 of 1% of the portfolio's
average daily net assets. Lazard Freres may, in turn, make payments to insurance
companies such as American National (or affiliates of such insurance companies)
that use the portfolios to fund variable annuity and variable life insurance
contracts, for providing services to contract owners or to certain financial
institutions, securities dealers, and other industry professionals for providing
services to participants in qualified pension and retirement plans that invest
in the portfolios. The fees payable by each portfolio to Lazard Freres under the
Distribution and Servicing Plan for its services and for payments to insurance
companies and other third parties are payable without regard to actual expenses
incurred. For a more complete description of the Distribution and Servicing
Plan, see the prospectus for the Lazard Retirement Series, Inc.
** Other Expenses are based on estimated amounts for the current fiscal year.
EXAMPLE: DEFERRED CONTRACT
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets (regardless of whether the surrender proceeds are paid to the
Contract owner, applied under the Systematic Withdrawal Program, or applied
under an annuity option):
FUND 1 3
YEAR YEARS
American National Growth Portfolio $ 86 $ 125
American National Balanced Portfolio $ 87 $ 126
American National Managed Portfolio $ 87 $ 127
American National Money Market Portfolio $ 86 $ 125
Fidelity Asset Manager Portfolio $ 85 $ 121
Fidelity Index 500 Portfolio $ 81 $ 108
Fidelity Contrafund Portfolio $ 85 $ 121
Fidelity Asset Manager: Growth Portfolio $ 85 $ 121
Fidelity Growth Opportunities Portfolio $ 85 $ 122
T. Rowe Price Equity Income Portfolio $ 88 $ 130
T. Rowe Price International Stock Portfolio $ 85 $ 120
T. Rowe Price Mid-Cap Growth Portfolio $ 86 $ 125
T. Rowe Price Limited - Term Bond Portfolio $ 86 $ 125
MFS Value Series Portfolio $ 88 $ 129
MFS Emerging Growth Series Portfolio $ 88 $ 129
MFS Research Series Portfolio $ 88 $ 129
MFS Growth With Income Series Portfolio $ 88 $ 129
Van Eck Worldwide Hard Assets Portfolio $ 90 $ 136
Van Eck World Wide Emerging Growth Portfolio $ 90 $ 136
Federated Utility Fund II Portfolio $ 87 $ 126
Federated Growth Strategies Fund II Portfolio $ 87 $ 126
Federated Fund for U.S. Government Securities II Portfolio $ 85 $ 122
Federated High Income Bond Fund II Portfolio $ 85 $ 122
Federated Equity Income Fund II Portfolio $ 87 $ 126
Lazard Retirement Emerging Markets Portfolio $ 95 $ 151
Lazard Retirement Small Cap Portfolio $ 92 $ 143
If you do not surrender your Contract, you would pay the following expenses on
a $1,000 investment, assuming 5% annual return on assets:
FUND 1 3
YEAR YEARS
American National Growth Portfolio $ 22 $ 66
American National Balanced Portfolio $ 22 $ 67
American National Managed Portfolio $ 22 $ 68
American National Money Market Portfolio $ 22 $ 66
Fidelity Asset Manager Portfolio $ 20 $ 62
Fidelity Index 500 Portfolio $ 16 $ 48
Fidelity Contrafund Portfolio $ 20 $ 62
Fidelity Asset Manager: Growth Portfolio $ 20 $ 62
Fidelity Growth Opportunities Portfolio $ 21 $ 63
T. Rowe Price Equity Income Portfolio $ 23 $ 72
T. Rowe Price International Stock Portfolio $ 20 $ 61
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T. Rowe Price Mid-Cap Growth Portfolio $ 21 $ 66
T. Rowe Price Limited - Term Bond Portfolio $ 23 $ 70
MFS Value Series Portfolio $ 23 $ 70
MFS Emerging Growth Series Portfolio $ 23 $ 70
MFS Research Series Portfolio $ 23 $ 70
MFS Growth With Income Series Portfolio $ 23 $ 70
Van Eck Worldwide Hard Assets Portfolio $ 25 $ 78
Van Eck World Wide Emerging Growth Portfolio $ 25 $ 78
Federated Utility Fund II Portfolio $ 22 $ 67
Federated Growth Strategies Fund II Portfolio $ 22 $ 67
Federated Fund for U.S. Government Securities II Portfolio $ 20 $ 63
Federated High Income Bond Portfolio $ 20 $ 63
Federated Equity Income Fund II Portfolio $ 22 $ 67
Lazard Retirement Emerging Markets Portfolio $ 31 $ 94
Lazard Retirement Small Cap Portfolio $ 28 $ 85
The examples should not be considered to be a representation of past
or future expenses, and the examples do not include the deduction of state
premium taxes which may be assessed by a number of states.
The purpose of the preceding table is to assist Contractowners in
understanding the various costs and expenses that a Contractowner will bear
directly or indirectly and, thus, the table reflects expenses of both the
Separate Account and the Eligible Portfolios. Actual expenses may be greater or
lesser than those shown. The example assumes a 5% annual rate of return pursuant
to the requirements of the SEC. This hypothetical rate of return is not intended
to be representative of past or future performance of an Eligible Portfolio. The
annual contract fees are deducted pro rata from each Subaccount and are based on
the assumption that the average Contract size is $10,000 and that the annual
contract fee is therefore 0.35%. For a more complete description of the various
costs and expenses of the American National Fund, the Fidelity Funds, the MFS
Variable Insurance Trust, the T. Rowe Price International Series, Inc., the T.
Rowe Price Equity Series, Inc., the T. Rowe Price Fixed Income Series, the Van
Eck Worldwide Insurance Trust, the Federated Insurance Series and the Lazard
Retirement Series, Inc., see their Prospectuses.
EXPENSES DURING THE ANNUITY PERIOD
The Separate Account will be assessed a mortality and expense risk fee at an
annual rate of 1.15% during the Annuity Period. The Separate Account will also
be charged during the Annuity Period with the expenses of the Eligible
Portfolios in which the Contractowner has invested. No other fees or expenses
are charged against the Contracts during the Annuity Period.
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AMERICAN NATIONAL INSURANCE COMPANY
AND THE SEPARATE ACCOUNT
AMERICAN NATIONAL INSURANCE COMPANY
American National is a stock life insurance company chartered in 1905 in the
State of Texas. It is licensed to do life insurance business in 49 states, the
District of Columbia, Puerto Rico, Guam, and American Samoa. American National's
home office is located at the American National Insurance Building, One Moody
Plaza, Galveston, Texas 77550-7999. The Moody Foundation (the "Foundation"), a
charitable foundation established for charitable and educational purposes, owns
approximately 23.7% of American National's common stock and the Libbie S. Moody
Trust, a private trust, owns approximately 37.6% of such shares. Robert L. Moody
("RLM"), Chairman of the Board and a Director of American National, RLM's son,
Ross R. Moody, and Frances Moody Newman, RLM's mother, are trustees of the
Foundation.
The Moody National Bank of Galveston (the "Bank") is trustee of the Libbie S.
Moody Trust. RLM is Chairman of the Board and Chief Executive Officer of the
Bank and of Moody Bank Holding Company, Inc. ("MBHC"), the Bank's controlling
stockholder. RLM is also Chairman of the Board and President of Moody
Bancshares, Inc. ("Bancshares"), MBHC's sole shareholder. The Three R Trusts,
trusts established by RLM for the benefit of his children, own 100% of
Bancshares' Class B stock (which elects a majority of Bancshares' directors) and
47.5% of its Class A Stock. The trustee of the Three R Trusts is Irwin M. Herz,
Jr., a partner in Greer, Herz & Adams, L.L.P., 18th Floor, One Moody Plaza,
Galveston, Texas, General Counsel to American National, the Bank, Bancshares,
MBHC, the American National Fund and Securities Management and Research, Inc.
(SM&R).
American National's total assets on December 31, 1996 were $ 6,529,775,092 on
a statutory basis.
American National writes life, health and accident insurance and annuities.
THE SEPARATE ACCOUNT
The Separate Account was established by American National on July 30, 1991
pursuant to the insurance laws of the State of Texas. American National is the
depositor of the Separate Account. Under Texas law, the assets of the Separate
Account are held exclusively for the benefit of Contractowners and persons
entitled to payments under the Contracts, as well as for the benefit of other
variable annuity contract owners and persons entitled to payments under these
contracts. The Separate Account is used to support variable annuity contracts,
issued by American National. American National is the legal holder of the assets
in the Separate Account and will at all times maintain assets in the Separate
Account with a total market value at least equal to the reserve and other
contract liabilities for the Separate Account. The assets of the Separate
Account attributable to the Contracts are not chargeable with liabilities
arising out of any other business which American National may conduct. Income,
as well as both realized and unrealized gains or losses from the assets of the
Separate Account, is credited to or charged against the Separate Account without
regard to income, gains or losses arising out of other business that American
National conducts. Nevertheless, these assets shall be available to cover the
liabilities of American National's General Account, but only to the extent that
the Separate Account's assets exceed its liabilities arising under the Contracts
and other variable annuity contracts participating in the Separate Account. In
addition to these assets, the Separate Account assets may include accumulations
of the charges American National makes against Contracts and other variable
annuity contracts participating in the Separate Account. From time to time, any
such assets due American National may be transferred in cash to American
National's General Account. Obligations under the Contracts are obligations of
American National.
The Separate Account is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940 ("1940 Act") as a unit
investment trust, which is a type of investment company. Such registration does
not involve any SEC supervision of the management or investment policies or
practices of the Separate Account. For state law purposes, the Separate Account
is treated as a division of American National. There are currently twenty-six
Subaccounts within the Separate Account available to Contractowners and each
invests only in a corresponding Eligible Portfolio.
THE AMERICAN NATIONAL FUND
Four of the Subaccounts of the Separate Account invest in the shares of a
corresponding portfolio of the American National Fund. The American National
Fund is registered with the SEC under the 1940 Act as an open-end diversified,
series management investment company.
The Separate Account will purchase and redeem shares from the American
National Fund at net asset value.
The investment objectives and policies of each portfolio of the American
National Fund are summarized below. There is no assurance that any of the
portfolios will achieve their stated objectives. More detailed information,
including a description of investment objectives, policies, restrictions,
expenses and risks, is in the prospectus for the American National Fund, which
must accompany this Prospectus and which should be read carefully together with
this Prospectus and retained.
The American National Fund currently has a Growth Portfolio, a Balanced
Portfolio, a Managed Portfolio and a Money Market Portfolio.
AMERICAN NATIONAL GROWTH PORTFOLIO ... seeks to achieve capital appreciation,
normally through the purchase of common stocks (although such Portfolio
investments are not restricted to any one type of security). Capital
appreciation may also be sought in other types of securities, including bonds
and preferred stocks.
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AMERICAN NATIONAL BALANCED PORTFOLIO ... seeks to provide conservation of
principal, reasonable current income and long-term capital appreciation by
investing in a balanced portfolio of fixed-income securities such as bonds,
preferred stock and short-term obligations combined with common stocks and
securities convertible into common stocks.
AMERICAN NATIONAL MANAGED PORTFOLIO ... seeks to achieve growth of capital
and/or current income by investing in a diversified portfolio consisting of, at
the American National Fund's investment adviser's discretion, money market
instruments, debt securities, stock or a combination thereof. It is anticipated
that over longer periods a larger portion of the Managed Portfolio will consist
of equity securities.
AMERICAN NATIONAL MONEY MARKET PORTFOLIO ... seeks to obtain as high a level
of current income as is consistent with preserving capital and providing
liquidity. The Money Market Portfolio will invest only in money market
instruments of high quality determined by the American National Fund's
investment advisor.
SM&R is the investment adviser and manager of the American National Fund. It
also provides investment advisory and portfolio management services to American
National and other clients. It maintains a staff of experienced investment
personnel and related support facilities. Detailed information about the
American National Fund Management Fees is contained in the American National
Fund Prospectus. Such fees exceed the industry average for advisory and
administrative fees.
THE FIDELITY FUNDS
Pursuant to a Participation Agreement between American National, Fidelity
Distributors Corporation and the Fidelity Funds, five of the Subaccounts of the
Separate Account invest in the shares of five corresponding portfolios of the
Fidelity Funds. The Fidelity Funds are registered with the SEC under the 1940
Act as open-end diversified, series management investment companies organized as
Massachusetts business trusts.
Fidelity Management & Research Company ("FMR"), the Fidelity Funds' investment
adviser, was founded in 1946. FMR provides a number of mutual funds and other
clients with investment research and portfolio management services. It maintains
a large staff of experienced investment personnel and a full compliment of
related support facilities. Fidelity Management & Research (U.K.) Inc. ("FMR
U.K.") and Fidelity Management and Research (Far East) Inc. ("FMR Far East")
are wholly owned subsidiaries of FMR that provide research with respect to
foreign securities. FMR U.K. and FMR Far East maintain their principal business
offices in London and Tokyo, respectively. As of December 31, 1996, FMR advised
funds having more than 29 million shareholder accounts with a total value of
more than $432 billion. Fidelity Distributors Corporation distributes shares for
the Fidelity funds. FMR Corp. is the holding company for the Fidelity companies.
Through ownership of voting common stock, Edward C. Johnson 3d, President and a
Trustee of the Fidelity Funds, and various trusts for the benefit of Johnson
family members form a controlling group with respect to FMR Corp.
The Management, Distribution and Service Fees for the Fidelity Funds are
explained in the Fidelity Funds' Prospectuses.
The Separate Account will purchase and redeem shares from the Fidelity Funds
at net asset value.
The investment objectives and policies of each portfolio of the Fidelity Funds
are summarized below. There is no assurance that any of the portfolios will
achieve their stated objectives. More detailed information, including a
description of investment objectives, policies, restrictions, expenses and
risks, is in the prospectus for each of the Fidelity Funds which must accompany
this Prospectus and which should be read carefully together with this Prospectus
and retained.
FIDELITY ASSET MANAGER PORTFOLIO ... seeks high total return with reduced risk
over the long-term by allocating its assets among stocks, bonds and short-term
fixed-income instruments.
FIDELITY INDEX 500 PORTFOLIO ... seeks to provide investment results that
correspond to the total return (i.e., the combination of capital charges and
income) of common stocks publicly traded in the United States. In seeking this
objective, the Fidelity Index 500 Portfolio attempts to duplicate the
composition and total return of the Standard & Poor's 500 Composite Stock Price
Index while keeping transaction costs and other expenses low. The Fidelity Index
500 Portfolio is designed as a long-term investment option.
FIDELITY CONTRAFUND PORTFOLIO ... seeks capital appreciation by investing in
companies FMR believes to be undervalued due to an overly pessimistic appraisal
by the public. In pursuit of the fund's goal, FMR looks for companies with the
following characteristics: (i) unpopular, but improvements seem possible due to
developments such as a change in management, a new product line, or an improved
balance sheet, (ii) recently popular, but temporarily out of favor due to short-
term or one-time factors, or (iii) undervalued compared to other companies in
the same industry.
FIDELITY ASSET MANAGER: GROWTH PORTFOLIO ... seeks to maximize total return
over the long term by allocating its assets among stocks, bonds, and short-term
instruments. Allocating among different types of investments allows the fund to
take advantage of opportunities wherever they may occur, but also subjects the
fund to the risks of a given investment type.
FIDELITY GROWTH OPPORTUNITIES PORTFOLIO ... seeks to ride out stock market
functions in pursuit of potentially high long-term returns. The fund is designed
for investors who want to be invested in the stock market for its long term
growth potential. The fund invests for growth and does not pursue income.
T. ROWE PRICE SERIES
Pursuant to a Participation Agreement between American National, T. Rowe Price
Associate's, Inc. and Robert Fleming Holdings Limited, four of the Subaccounts
of the Separate Account
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invest in the shares of four corresponding portfolios, of the T. Rowe Price
Series. T. Rowe Price Associates, Inc. is responsible for selection and
management of the portfolio investments of T. Rowe Price Equity Series and T.
Rowe Price Fixed Income Series. Rowe Price-Fleming International, Inc.,
incorporated in 1979 as a joint venture between T. Rowe Price Associates, Inc.
and Robert Fleming Holdings Limited, is responsible for selection and management
of the portfolio investments of T. Rowe Price International Series. The
investment objectives and policies of each Portfolio of T. Rowe Price
Associates, Inc. are summarized below. There is no assurance that any of the
Portfolios will achieve their stated objectives. More detailed information,
including a description of investment objectives, policies, restrictions,
expenses and risks, is in the prospectus for each of the T. Rowe Price Series
which must accompany this Prospectus and which should be read carefully together
with this Prospectus and retained.
T. ROWE PRICE EQUITY SERIES, INC.
T. ROWE PRICE EQUITY INCOME PORTFOLIO ... seeks to provide substantial
dividend income and also capital appreciation by investing primarily in
dividend-paying common stocks particularly of established companies with
favorable prospects for both increasing dividends and capital appreciation.
T. ROWE PRICE MID-CAP GROWTH PORTFOLIO ... seeks to provide long term capital
appreciation by investing primarily in common stocks of medium-sized (mid-cap)
growth companies. The fund will focus on companies with superior earnings growth
potential that are no longer considered new or emerging, but are not yet well
established. Mid-cap growth company stocks are generally more volatile than
stocks of large, well-established companies, but they offer the possibility of
more rapid growth.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO ... seeks a total return on its
assets from long-term growth of capital and income, by investing substantially
all of its assets in common stocks of established non-U.S. companies. The
Portfolio will not purchase any debt security which at the time of purchase is
rated below investment grade. This would not prevent the Portfolio from
retaining a security downgraded to below investment grade after purchase.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. ROWE PRICE LIMITED-TERM BOND PORTFOLIO ... seeks a high level of income
consistent with modest price fluctuation by investing primarily in investment
grade debt securities.
MFS VARIABLE INSURANCE TRUST
Pursuant to a Participation Agreement between American National, Massachusetts
Financial Services Company and the MFS Variable Insurance Trust, four of the
Subaccounts of the Separate Account invest in the shares of four corresponding
portfolios of the MFS Variable Insurance Trust. Massachusetts Financial Services
Company is responsible for the management of the assets of the MFS Variable
Insurance Trust. The investment objectives and policies of each Portfolio of the
MFS Variable Insurance Trust are summarized below. There is no assurance that
any of the Portfolios will achieve their stated objectives. More detailed
information, including a description of investment objectives, policies,
restrictions, expenses and risks, is in the prospectus for the MFS Variable
Insurance Trust which must accompany this Prospectus and which should be read
carefully together with this Prospectus and retained.
MFS VALUE SERIES PORTFOLIO ... seeks capital appreciation. Dividend income, if
any, is a consideration incidental to the Series' objective of capital
appreciation. While the Series' policy is to invest primarily in common stocks,
it may seek appreciation in other types of securities such as fixed income
securities(which may be unrated), convertible bonds, convertible preferred
stocks and warrants when relative values make such purchases appear attractive
either as individual issues or as types of securities in certain economic
environments. The Series may invest in lower rated fixed income securities or
comparable unrated securities.
MFS EMERGING GROWTH SERIES PORTFOLIO ... seeks to provide long-term growth of
capital through investing primarily in common stocks of emerging growth
companies, which involves greater risk than is customarily associated with
investments in more established companies. The Series may invest in a limited
extent in lower rated fixed income securities or comparable unrated securities.
MFS RESEARCH SERIES PORTFOLIO ... seeks to provide long-term growth of capital
and future income by investing a substantial proportion of its assets in the
common stocks or securities convertible into common stocks of companies believed
to possess better than average prospects for long-term growth. No more than 5%
of the Portfolio's convertible securities, if any, will consist of securities in
lower rated categories or securities believed to be of similar quality to lower
rated securities. The Portfolio may invest in a limited extent in lower rated
fixed income securities or comparable unrated securities.
MFS GROWTH WITH INCOME SERIES PORTFOLIO ... seeks to provide reasonable
current income and long-term growth and income. Under normal market conditions,
the Series will invest at least 65% of its assets in common stocks or securities
convertible into common stocks that are believed to have long-term prospects for
growth and income. The Series may also invest up to 75% of its net assets in
foreign securities which are not traded on a U.S. exchange.
Massachusetts Financial Service Company is the investment advisor to each
series and manages the series portfolios in accordance with the investment
objectives and policies of each series.
VAN ECK WORLDWIDE INSURANCE TRUST
Pursuant to a Participation Agreement between American National and Van Eck
Worldwide Insurance Trust, two Subaccounts of the Separate Account invest in the
shares of two corresponding Portfolios of the Van Eck Worldwide Insurance Trust.
The investment objectives and policies of each Portfolio of the Van Eck
Worldwide Insurance Trust are summarized below. There is no assurance that any
of the Portfolios will achieve their
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stated objectives. More detailed information, including a description of
investment objectives, policies, restrictions, expenses and risks, is in the
prospectus for each of the Van Eck Worldwide Insurance Trust which must
accompany this Prospectus and which should be read carefully together with this
Prospectus and retained.
VAN ECK WORLDWIDE HARD ASSETS PORTFOLIO (formerly Van Eck Gold and Natural
Resources Fund) ... seeks long-term capital appreciation by investing primarily
in "Hard Asset Securities." Income is a secondary consideration. Hard Asset
Securities include equity securities of "Hard Asset Companies" and securities,
including structured notes, whose value is linked to the price of a Hard Asset
commodity or a commodity index. "Hard Asset Companies" includes companies that
are directly or indirectly (whether through supplier relationships, servicing
agreements or otherwise) engaged to a significant extent in the exploration,
development, production or distribution of one or more of the following
(together "Hard Assets"): (i) precious metals, (ii) ferrous and non-ferrous
metals, (iii) gas, petroleum, petrochemicals and other hydrocarbons, (iv) forest
products, (v) real estate and (vi) other basic non-agricultural commodities.
VAN ECK WORLDWIDE EMERGING MARKETS PORTFOLIO ... seeks long-term capital
appreciation by investing primarily in equity securities in emerging markets
around the world.
Van Eck Associates Corporation serves as investment advisor and manages the
investment operations of the Van Eck Portfolios and furnishes the Portfolios
with a continuous investment program which includes determining which securities
should be bought, sold or held.
FEDERATED INSURANCE SERIES
Pursuant to a Participation Agreement between American National, Federated
Advisors and the Federated Insurance Series, five of the Subaccounts of the
Separate Account invest in the shares of five corresponding Portfolios of the
Federated Insurance Series. Federated Advisors is responsible for the portfolio
investment decisions of the Federated Insurance Series, subject to direction by
the Federated Insurance Series Trustees. The investment objectives and policies
of each portfolio of the Federated Insurance Series are summarized below. There
is no assurance that any of the Portfolios will achieve their stated objectives.
More detailed information, including a description of investment objectives,
policies, restrictions, expenses and risks, is in the prospectus for each of the
Federated Insurance Series which must accompany this Prospectus and which
should be read carefully together with this Prospectus and retained.
FEDERATED UTILITY FUND II PORTFOLIO ... seeks to achieve high current income
and moderate capital appreciation. The Portfolio invests primarily in equity and
debt securities of utility companies.
FEDERATED GROWTH STRATEGIES PORTFOLIO ... seeks capital appreciation. The
Portfolio invests at least 65% of its assets in equity securities of companies
with prospects for above average growth in earnings and dividends.
FEDERATED U.S. GOVERNMENT BOND PORTFOLIO ... seeks current income by investing
in a diversified portfolio limited to U.S. government securities.
FEDERATED HIGH INCOME BOND PORTFOLIO ... seeks high current income. The
Portfolio invests in fixed income securities which are lower rated corporate
debt obligations, which are commonly referred to as "junk bonds." The risk in
investing in junk bonds is described in the prospectus for the Insurance
Management Series, which should be read carefully before investing.
FEDERATED EQUITY INCOME FUND II PORTFOLIO ... seeks to provide above average
income and capital appreciation by investing in income producing equity
securities including common stocks, preferred stocks, and debt securities that
are convertible into common stocks, in cash and cash items during times of
unusual conditions to maintain liquidity. Cash items may include commercial
paper, Europaper, certificates of deposit, obligations of the U. S. Government,
repurchase agreements and other short-term instruments.
Federated Advisors makes all investment decisions for the Insurance Management
Series, subject to direction by the Federated Insurance Series Trustees.
LAZARD RETIREMENT SERIES, INC.
Pursuant to a Participation Agreement between American National, Lazard Freres
Asset Management and the Lazard Retirement Series, Inc., two of the Subaccounts
of the Separated Account invest in the shares of two corresponding Portfolios of
the Lazard Retirement Series, Inc. The investment objectives and policies of
each Portfolio of the Lazard Retirement Series, Inc. are summarized below. There
is no assurance that any of the Portfolios will achieve their stated objectives.
More detained information, including a description of investment objective,
policies, restrictions, expenses and risks, is in the prospectus of each of the
Lazard Retirement Series, Inc. which must accompany this Prospectus and which
should be read carefully together with this Prospectus and retained.
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO ... seeks capital appreciation.
This Portfolio invests primarily in equity securities of non-United States
issuers located, or doing significant business, in emerging market countries
that the Investment Manager considers inexpensively priced relative to the
return on total capital or equity.
LAZARD RETIREMENT SMALL CAP PORTFOLIO ... seeks capital appreciation. This
Portfolio invests primarily in equity securities of companies with market
capitalization under $1 billion that the Investment Manager considers
inexpensively priced relative to the return on total capital or equity.
Lazard Freres Asset Management serves as investment advisor and continually
furnishes an investment program for each Portfolio consistent with its
investment objectives and policies, including the purchase, retention and
disposition of securities.
American National has entered into arrangements with either the investment
advisor or distributor for certain of the Portfolios pursuant to which the
advisor or distributor pays American National a fee based upon an annual
percentage of the average aggregate net amount invested by American National on
behalf of the Portfolio. These percentages differ, and American National is paid
a greater percentage by some investment advisors or distributors than other
advisors or distributors. These agreements reflect administrative and other
services provided by American National.
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ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
American National reserves the right, subject to applicable law, to make
additions to, deletions from, or substitutions for the shares that are held in
the Separate Account or that the Separate Account may purchase. If the shares of
an Eligible Portfolio are no longer available for investment or if in American
National's judgment further investment in any Eligible Portfolio should become
inappropriate in view of the purposes of the Separate Account, American National
may redeem the shares, if any, of that Eligible Portfolio, and substitute shares
of another registered open-end management company. American National will not
substitute any shares attributable to a Contractowner's interest in a Subaccount
of the Separate Account without notice and prior approval of the SEC and
possibly state insurance authorities, to the extent required by the 1940 Act or
other applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other contracts or permit a conversion between
contracts upon request by the Contractowners.
American National also reserves the right to establish additional Subaccounts
of the Separate Account, each of which would invest in shares corresponding to a
new portfolio of the American National Fund or in shares of another investment
company having a corresponding investment objective. American National may
eliminate one or more Subaccounts with SEC approval if marketing needs, tax
considerations or investment conditions warrant. Any new Subaccounts may be made
available to existing Contractowners on a basis to be determined by American
National.
If any of these substitutions or changes are made, American National may by
appropriate endorsement change the Contract to reflect the substitution or
change. If American National deems it to be in the best interest of
Contractowners, and subject to any approvals that may be required under
applicable law, the Separate Account may be operated as a management company
under the 1940 Act, it may be registered under that Act if registration is no
longer required, or it may be combined with other American National Separate
Accounts. In addition, American National may, when permitted by law, restrict or
eliminate any voting rights as to the Separate Account.
The Contractowner will be notified of any material change in the investment
policy of any Eligible Portfolio in which the Contractowner has an interest.
Unless Contractowners have directed a different allocation, shares of the
Eligible Portfolios will be redeemed, pro rata, to the extent necessary for
American National to collect charges under the Contract, to pay the surrender
value upon full or partial surrenders of the Contracts, to provide benefits
under the Contract, or to transfer assets from one Subaccount to another or to
the Fixed Account. Any dividend or capital gain distribution received from an
Eligible Portfolio will be reinvested immediately at net asset value in shares
of that Eligible Portfolio and retained as assets of the corresponding
subaccount.
Each Contractowner should periodically consider the allocation among the
Subaccounts and the Fixed Account in light of current market conditions and the
investment risks attendant to investing in the Eligible Portfolios.
RESOLVING MATERIAL CONFLICTS
The Eligible Portfolios presently serve as the investment medium for the
Contracts. In addition, the Eligible Portfolios (other than the portfolios of
the American National Fund) are available to registered separate accounts of
insurance companies, other than American National, offering variable annuity and
variable life insurance contracts.
We do not currently foresee any disadvantages to you resulting from the
Eligible Portfolios selling shares to fund products other than the Contracts.
However, there is a possibility that a material conflict of interest may arise
between Contractowners whose Accumulation Value is allocated to the Separate
Account and the owners of variable life insurance policies and variable annuity
contracts issued by other companies whose values are allocated to one or more
other separate accounts investing in any one of the Eligible Portfolios. Shares
of certain Eligible Portfolios may also be sold to certain qualified pension and
retirement plans. As a result, there is a possibility that a material conflict
may arise between the interests of Contractowners or owners of other contracts
(including contracts issued by other companies), and such retirement plans or
participants in such retirement plans. In the event of a material conflict,
American National will take any necessary steps, including removing the Separate
Account from that Eligible Portfolio, to resolve the matter. The Board of
Directors of each Eligible Portfolio will monitor events in order to identify
any material conflicts that may arise and determine what action, if any, should
be taken in response to those events or conflicts. See the accompanying
prospectuses for the Eligible Portfolios for more information.
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FIXED ACCOUNT
During the Accumulation Period, Contractowners may elect to allocate all or a
portion of their Net Purchase Payment to the Fixed Account and, subject to
certain limitations, they may also transfer Accumulation Value from the
Subaccounts to the Fixed Account. Transfers from the Fixed Account to the
Subaccount are restricted. (See "Transfers Prior to Annuity Date," page 17.)
Net Purchase Payments allocated to the Fixed Account and transfers from a
Subaccount to the Fixed Account are placed in the General Account of American
National. The General Account includes all of American National's assets except
those segregated in its separate accounts. American National has the sole
discretion to invest the assets of its General Account, subject to applicable
law. American National bears an investment risk for all amounts allocated or
transferred to the Fixed Account and interest credited thereto, less any
deduction for charges and expenses, whereas the Contract owner bears the
investment risk that the declared rate will fall to a lower rate after the
expiration of a declared rate period. Because of exemptive and exclusionary
provisions, interests in the General Account have not been registered under the
Securities Act (the "1933 Act"), nor is the General Account registered as an
investment company under the 1940 Act. Accordingly, neither the General Account
nor any interest therein is generally subject to the provisions of the 1933 or
1940 Act. American National understands that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account
portion of the Contract; however, disclosures regarding the Fixed Account
portion of the Contract may be subject to generally applicable provisions of the
federal securities laws regarding the accuracy and completeness of statements
made in prospectuses.
American National guarantees that it will credit interest to the Fixed Account
at an effective annual rate of at least 3.0% compounded daily. American National
may, at its discretion, declare higher interest rate(s) for amounts allocated or
transferred to the Fixed Account.
CONTRACTS
PURPOSE OF THE CONTRACTS
The Contracts described in this Prospectus may be issued for use with
retirement plans and trusts qualified under the Internal Revenue Code of 1986,
as amended (the "Code"), for favorable tax treatment ("Qualified Contracts") and
for use with plans and trusts which are not so qualified ("Non-Qualified
Contracts"). See section entitled "Federal Tax Considerations-Taxation of
Qualified Plans," page 26 for further details.
The terms of the Contracts may only be changed by mutual agreement between
American National and each Contractowner, except as described in "Substitution
of Investments,"on page 15; for changes required to make the Contracts comply
with any law or regulation issued by a governmental agency to which American
National or the Contracts are subject; and for changes necessary to assure
continued qualification of the Contracts under the Internal Revenue Code.
TYPE OF CONTRACTS
This Prospectus offers a Deferred Annuity Contract:
DEFERRED ANNUITY CONTRACT
This type of Contract allows an individual to vary the Purchase Payments or
pay a single Purchase Payment. There are two types of Flexible or Single
Purchase Payment Deferred Annuities: Non-qualified and Qualified. Annuity
payments will commence at a later date.
CONTRACT APPLICATION AND PURCHASE PAYMENTS
Individuals wishing to purchase a Contract must complete an application and
provide the required initial Purchase Payment which will be sent to American
National's Home Office. (See page 17, "Allocation of Purchase Payments.") If an
incomplete application cannot be completed within five days of its receipt, the
applicant will be notified of the reasons for the delay and any payment received
will be returned immediately unless the applicant specifically consents to have
American National retain the payment pending completion of the application.
Initial Net Purchase Payments will be credited to the Contract within two
business days after a complete application is received at American National's
Home Office.
As indicated earlier, Contractowners have a "free look" period, generally ten
days, within which a Contractowner can return the Contract to American
National's Home Office and American National will then refund the greater of all
Purchase Payments made by the Contractowner or the Accumulation Value determined
as of the date the Contract is returned to American National's Home Office or to
one of American National's authorized agents, plus any premium taxes, mortality
and expense risk fees, administrative charges and advisory fees deducted. The
"free look" period is established by state law and generally runs ten days after
the Contractowner receives the Contract. American National requires that all Net
Purchase Payments received by American National during the 15-day period after
the Date of Issue be allocated to the Subaccount of the American National Money
Market Portfolio. Thereafter, such amounts allocated to the Subaccount of the
American National Money Market Portfolio and Net Purchase Payments paid are
allocated as directed by the Contractowner.
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No surrender charges are assessed on premiums returned during this "free look"
period.
Contracts require a minimum initial payment of $5,000. The maximum Purchase
Payment under any Deferred Annuity Contract is $1,000,000 without the prior
approval of American National.
The minimum subsequent payments are $1,000. These amounts may be changed at
the sole discretion of American National. In addition, American National
reserves the right to terminate any Contract for certain specified reasons,
including failure of the Accumulation Value to meet certain specified minimums.
ALLOCATION OF PURCHASE PAYMENTS
After the "free look" period, Net Purchase Payments will be allocated to each
Subaccount in accordance with the written instructions contained in the
application. The Contractowner indicates in the application one or more
Subaccounts and/or the Fixed Account to which a specified portion or portions of
the Net Purchase Payment should be applied, except that no allocation will be
permitted which would result in less than 1% of the Net Purchase Payment being
allocated to any one Subaccount and/or the Fixed Account. The minimum initial
deposit in any Subaccount and/or the Fixed Account is $500. Changes in
allocation of future Net Purchase Payments (with the same 1% minimum) may be
made at any time by written instruction to the Home Office or by telephone
instruction, provided that a properly completed Telephone Transfer Authorization
Form is on file with American National.
CREDITING OF ACCUMULATION UNITS
During the Accumulation Period, all Net Purchase Payments received will
purchase Accumulation Units in the Subaccount selected and/or will be allocated
to the Fixed Account. The number of Accumulation Units purchased is determined
by dividing the dollar amount of the Net Purchase Payment allocated to the
Subaccount by the Accumulation Unit Value for that Subaccount next computed
following allocation of the Net Purchase Payment to such Subaccount.
DETERMINING THE ACCUMULATION UNIT VALUES
The Accumulation Unit Value of each Subaccount reflects the investment
performance of that Subaccount. The Accumulation Unit Value of each Subaccount
shall be calculated by: (i) multiplying the per share net asset value of the
corresponding Eligible Portfolio on the Valuation Date times the number of
shares held by the Subaccount, after the purchase or redemption of any shares on
that date; (ii) subtracting therefrom a charge for the administrative fee and
the mortality and expense risk fee for that Subaccount and (iii) dividing the
result by the total number of units held in the Subaccount on the Valuation
Date, before the purchase or redemption of any units on that date. The
Accumulation Unit Value for each Subaccount shall be calculated at the end of
each Valuation Period. Investment performance of the portfolio companies,
portfolio company expenses, and the deduction of certain charges affect the
Accumulation Unit Value for each Subaccount.
TRANSFERS PRIOR TO ANNUITY DATE
Accumulation Value may be transferred among the Subaccounts and/or the Fixed
Account subject to the following limits. The transfers may be requested in
person, by mail, or by telephone. A Telephone Transfer Authorization Form must
be on file at American National's Home Office before any telephone instructions
will be allowed. The total amount transferred from each Subaccount must be at
least $250, or the balance of the Subaccount, if less. The minimum amount that
may remain in a Subaccount after a transfer is $100. American National will
effectuate transfers and determine all values in connection with transfers on
the later of the date designated in the request or at the end of the Valuation
Period during which the transfer request is received. Transfers from the Fixed
Account to the Subaccounts are allowed subject to the following limits. The
maximum amount which may be transferred from the Fixed Account to the
Subaccounts is the greater of (a) ten percent of the amount in the Fixed
Account, or (b) $1,000.
The first twelve transfers per Contract Year will be permitted free of charge.
Any additional transfers will be charged a $10.00 fee at the time of the
transfer and will be deducted from the amount transferred. (See "Exchange Fee,"
page 19). American National may at any time revoke or modify the transfer
privilege, including the number and minimum amount transferable. For a
discussion of transfers after the Annuity Date, see "Allocation of Benefits,"
page 22).
American National will employ reasonable procedures to confirm that the
transfer instructions communicated by telephone are genuine, and if American
National follows those procedures it will not be liable for any losses due to
unauthorized or fraudulent instructions. American National may be liable for
such losses if it does not follow those reasonable procedures. The procedures
American National will follow for telephone transfers include some form of
personal identification prior to acting on instructions received by telephone,
providing written confirmation of the transaction, and making a tape recording
of the instructions givin by telephone.
DOLLAR COST AVERAGING
Under the dollar cost averaging program, the Contractowner can instruct
American National to automatically transfer, on a periodic basis, a
predetermined amount or percentage specified by the Contractowner from any one
Subaccount or Fixed Account, to any Subaccount(s) or Fixed Account. The
automatic transfers can occur monthly, quarterly, semi-annually or annually, and
the amount transferred each time must be at least $1,000 in total. The minimum
transfer to each Subaccount must be at least $100. At the time the program
begins, there must be at least $10,000 of Accumulation Value in the Contract.
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Dollar cost averaging results in the purchase of more Accumulation Units when
the Accumulation Unit Value is low, and fewer units when the Accumulation Unit
value is high. However, there is no guarantee that the dollar cost averaging
program will result in higher Accumulation Value or otherwise be successful.
The Contractowner can request participation in the dollar cost averaging
program when purchasing the Contract or at a later date. Transfers will begin as
specified by the Contractowner(or if not a Valuation Period, the next following
Valuation Period). The Contractowner can specify that only a certain number of
transfers will be made, in which case the program will terminate when that
number of transfers has been made. Otherwise, the program will terminate, if on
a transfer date, the Accumulation Value is less than $5,000.
The Contractowner can increase or decrease the amount of the transfers or
discontinue the program by sending written notice to American National or by
telephone, if a telephone transfer authorization form is on file. There is no
charge for participation in this program.
ASSET ALLOCATION PROGRAM
Under the Asset Allocation Program, the Contractowner can instruct American
National to allocate Purchase Payments and Accumulation Value among the
Subaccounts and the Fixed Account in accordance with allocation instructions
specified by the Contractowner or allocation instructions recommended by
American National and approved by the Contractowner. American National will
rebalance a Contractowner's investment by allocating Net Purchase Payments and
transferring Accumulation Value among the Subaccounts and the Fixed Account to
ensure conformity with current allocation instructions. Rebalancing will be
performed on a calendar quarterly, semi-annual or annual basis as specified by
the Contractowner. Transfers of Accumulation Value made pursuant to this program
will not be counted in determining whether the Exchange Fee applies. At the time
the program begins, there must be at least $10,000 of Accumulation Value under
the Contract. The Program will be discontinued if, on a rebalancing date, the
Accumulation Value is less than $5,000.
The Contractowner can request participation in the Asset Allocation Program when
purchasing the Contract or at a later date. The Contractowner can change his
allocation percentage or discontinue the program by sending written notice or
calling American National by telephone. There is no charge for participation in
this program.
CONTRACTOWNER INQUIRIES
Contractowner inquiries should be addressed to American National Insurance
Company, One Moody Plaza, Galveston, Texas 77550-7999, or made by calling (409)
763-4661.
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CHARGES AND DEDUCTIONS DURING THE ACCUMULATION PERIOD
SURRENDER CHARGE
Since no deduction for a sales charge is made from Purchase Payments, a
contingent deferred sales charge (a "Surrender Charge") is imposed on certain
partial and full withdrawals to cover certain expenses relating to the
distribution of the Contracts. An amount of the Accumulation Value equal to the
greater of (i) Accumulation Value less total Purchase Payments made, or (ii) 10%
of the Accumulation Value in a Contract Year, may be withdrawn without a
Surrender Charge. The 10% annual free withdrawal amount is determined as
follows. Each time a withdrawal is made, the amount of the withdrawal is divided
by the Accumulation Value at the time of the withdrawal. The resulting
percentage then applies towards the 10% annual free withdrawal amount. On
withdrawals of that portion of the Accumulation Value representing Purchase
Payments, a Surrender Charge is imposed based upon the number of Contract Years
since the Contract Year in which the Purchase Payments withdrawn were paid, on a
first paid, first withdrawn basis. The Surrender Charge is a maximum of 7% of
the Purchase Payment withdrawn and grades down to zero in the eighth Contract
Year after the Purchase Payment being withdrawn was made .
In no event will the sum of all surrender charges assessed exceed 8.5% of
total Purchase Payments paid. (See the chart under "Contractowners Transaction
Expenses" at Page 7)
OTHER CHARGES
(a) Administrative Charges
American National's administrative charges consist of an annual contract
fee and a daily administrative asset fee. These administrative charges are
to cover all fixed and varying costs of administering the Contract.
In order to cover American National's fixed cost of administration of the
contract, the annual contract fee of $35.00 is charged at the end of each
Contract Year against any funds held in the Separate Account. If all of the
funds are in the Fixed Account, no annual contract fee is charged. If the
Accumulation Value is greater than $50,000 on the last day of a Contract
Year, no annual contract fee is charged.
An administrative asset fee is charged daily at an annual rate of 0.10% to
each Subaccount to cover the varying costs of a Deferred Annuity Contract.
(b) State Premium Taxes
An amount for state premium taxes (which presently range from 0% to 3.5%)
will be deducted if assessed by a given state. American National's current
practice is to deduct any state premium tax imposed by a State upon
annuitization of the Contracts. In some states, however, premium taxes must
be deducted from Purchase Payments made under the Contracts when the
payments are received by American National.
(c) Mortality and Expense Risk Fee
American National assumes a number of risks under the Contracts. While
annuity payments will vary in accordance with the investment performance of
the selected Subaccounts, the amount of such payments will not be decreased
because of adverse mortality experiences of Annuitants as a class or
because of an increase in actual expenses of American National over the
expense charges provided for in the Contracts. American National assumes
the risk that Annuitants as a class may live longer than expected
(necessitating a greater number of annuity payments) and that fees deducted
may not prove sufficient to cover its actual costs. In assuming these
risks, American National agrees to continue annuity payments under life-
contingent annuity options determined in accordance with the annuity tables
and other provisions of the Contracts to the Annuitant or other payee for
as long as he or she may live. In addition, American National is at risk
for the death benefits payable under the Contracts to the extent that the
death benefit in such cases exceeds the Accumulation Value.
For American National's contractual promises to accept these risks, a 0.80%
per annum Mortality Risk Fee and a 0.35% per annum Expense Risk Fee will be
assessed daily against the Separate Account based on the value of its net
assets. This fee is assessed during the Accumulation Period and during the
Annuity Period.
(d) Charges for Taxes
Currently, no charge will be made against the Separate Account for federal,
state or local income taxes. American National may, however, make such a
charge in the future if income or gains within the Separate Account will
incur any federal, or any significant state or local tax treatment or if
tax treatment of American National changes. Charges for such taxes, if any,
would be deducted from the Separate Account and/or the Fixed Account.
American National would not realize a profit on such taxes with respect to
the Contracts.
(e) Exchange Fee
An exchange fee of $10.00 will be imposed for each additional transfer
among the Subaccounts and Fixed Account after twelve transfers per Contract
Year to compensate American National for the costs of effecting the
transfer. Since the fee reimburses American National for the cost of
effecting the transfer only, American National does not expect to make any
profit from the exchange fee. This fee will be deducted from the amount
transferred. The amount of the transfer charge will not be increased.
DEDUCTION OF FEES
When annual contract fees are deducted from the Accumulation Value of a
Contract, the deductions shall be allocated among the Subaccounts in the same
proportion as the Accumulation Value in each Subaccount bears to the total
Accumulation Value on that date.
EXCEPTIONS TO CHARGES
The surrender charges, mortality and expense risk fees and
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administrative charges may be reduced for, or additional amounts credited on,
sales of Contracts to a trustee, employer, or similar entity representing a
group where American National determines that such sales result in savings of
sales or administrative expenses. In addition, directors, officers and bona fide
full-time employees (and their spouses and minor children) of SM&R and American
National are permitted to purchase Contracts with substantial reduction of the
surrender charges, mortality and expense risk fees, or administrative charges.
The Contracts may be sold directly, without compensation, to a registered
representative, to employees, officers, directors, and trustees of American
National and its affiliated companies, and spouses and immediate family members
(i.e., children, siblings, parents, and grandparents) of the foregoing, and to
employees, officers, directors, trustees and registered representatives of any
broker-dealer authorized to sell the Contracts, and spouses and immediate family
members of the foregoing. If sold under these circumstances, a Contract may be
credited with an amount that reflects in part or in whole any cost savings
resulting from the Contract being sold directly, rather than through an agent
with an associated commission, but only if such credit will not be unfairly
discriminatory to any person.
DISTRIBUTIONS UNDER THE CONTRACT
ACCUMULATION PERIOD
FULL AND PARTIAL SURRENDERS
Any Contract may be surrendered in full or partially during the Accumulation
Period, subject to the limitations discussed herein. If a partial surrender
would leave less than $1,000 total Accumulation Value in the Contract, then the
Contract will be fully surrendered. A request for a partial surrender should
specify the allocation of that surrender, as applicable, from the Fixed Account
and each Subaccount. In the absence of specification, American National will
take amounts in the same proportion as needed to satisfy the surrender in the
manner set forth in "Deduction of Fees," on page 19. Upon a partial surrender,
the amount of the partial surrender and any surrender charges will be deducted
from the Accumulation Value.
Upon receipt of an application for a partial or full surrender of a Contract
signed by the Contractowner, the applicable Accumulation Unit Value will be that
next determined after such application is received in American National's Home
Office. The Accumulation Value of a Contract which is available for full
surrender may be determined by multiplying the number of Accumulation Units for
each Subaccount times the Accumulation Unit Value at that time, adding any
Accumulation Value in the Fixed Account and deducting any surrender charge.
Partial or full surrenders will be paid within seven days of receipt of the
written request in proper form, except as described below.
If at the time the Contractowner makes a surrender request, he or she has not
provided American National with a written election not to have federal and state
income taxes withheld, American National is required by law to withhold such
taxes from the taxable portion of any surrender, and to remit that amount to the
federal and/or state government.
SYSTEMATIC WITHDRAWAL PROGRAM
Under the Systematic Withdrawal Program, the Contractowner can instruct
American National to make automatic payments of a predetermined dollar amount of
Accumulation Value on a monthly, quarterly, semi-annually or annually from a
specified Subaccount. The minimum systematic withdrawal payment is $100. The
minimum systematic withdrawal from each Subaccount is $50. Systematic
withdrawals can be started at issue or at some date in the future. American
National must receive written notification from the Contractowner specifying the
dollar amount and the mode of payment. The Contractowner may specify the
Subaccount from which systematic withdrawals will be made. If the Contractowner
does not specify the Subaccounts from which systematic withdrawals are to be
taken, systematic withdrawals will be taken from each Subaccount in the
proportion that the Accumulation Value in each Subaccount bears to the total
Accumulation Value of the Policy. Surrender Charges will apply in accordance
with its terms.
A qualified tax adviser should be consulted before a systematic withdrawal is
requested since distributions may be taxable and subject to a penalty tax. (See
"Federal Tax Considerations," page 23.)
Under the Systematic Withdrawal Program, the Contractowner can elect to
participate in the Minimum Distributions Program by instructing American
National to calculate and make minimum distributions that may be required if the
Contract is used with a qualified plan. (See "Taxation of Qualified Plans," page
26.) American National will determine the amount that is required to be
distributed from the Contract based on the information the Contractowner
provides and various choices the Contractowner makes. In order to participate in
the Minimum Distributions Program, the Contractowner must notify American
National of such election in writing in the calendar year during which the
Contractowner attains age 70 1/2. The Minimum Distributions Program is subject
to all the rules applicable to the Systematic Withdrawal Program. In addition,
certain rules apply only to the Minimum Distributions Program. For a description
of the requirements applicable to the Minimum Distributions Program, see
"Minimum Distributions Program" in the Statement of Additional Information, page
4. Numerous special tax rules apply to Contractowners whose Contracts are used
with a qualified plan. Contractowners should consult a tax advisor before
electing to participate in the Minimum Distributions Program.
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WAIVER OF SURRENDER CHARGES
American National will waive the surrender charge upon partial surrenders,
systematic withdrawals and full surrenders in the event the Contractowner
becomes confined to a hospital, hospice facility or convalescent care facility,
disabled, diagnosed with a terminal illness or involuntarily unemployed. Those
waivers and any restrictions associated with such waivers are set forth below:
A. NURSING HOME WAIVER
The surrender charge will not be imposed as a result of any withdrawal made
pursuant to the Contractowner's confinement, upon the written proof from a
licensed physician, to the following facilities for 60 or more consecutive days:
(a) a hospital licensed or recognized as a general hospital by the state in
which it is located and is engaged in providing or operating diagnostic and
major surgery facilities for the medical care and treatment of injured and sick
persons on an inpatient basis for which a charge is made and provides 24-hour
nursing service by or under the supervision of a graduate registered
nurse(R.N.); (b)convalescent care facility licensed by the state as a
convalescent nursing facility, a skilled nursing facility, a convalescent
hospital, a convalescent unit of a hospital, an intermediate care facility, or a
custodial care facility and provides continuous nursing service by or under the
supervision of a physician or a graduate registered nurse(R.N.) and maintains a
daily record of each patient which is available for review by American National
and administers a planned program of observation and treatment by a physician
which is in accordance with existing standards of medical practice for the
injury or sickness causing the confinement; and (c) hospice facility which
provides a formal program of care for terminally ill patients whose life
expectancy is less than 6 months, provided on an inpatient basis and directed by
a physician and is licensed, certified or registered in accordance with state
law. Proof of confinement must be provided. This waiver only applies to
surrenders and withdrawals requested no later than 90 days of the last day of
confinement to such facility. The nursing home waiver is not available if any
Contractowner is confined to a hospital, nursing home or hospice facility on the
Date of Issue and if the application is signed by power of attorney. The
Contractowner must be age 80 or younger on the Date of Issue and must have
entered the hospital, convalescent care facility or hospice facility after 90
days from the Date of Issue.
B. DISABILITY WAIVER
The surrender charge will not be imposed upon any withdrawal where either
Contractowner is physically disabled. American National requires proof of such
disability, including written confirmation of receipt and approval of any claim
for Social Security Disability Benefits. Proof of continued disability may be
required through the date of any partial surrender or systematic withdrawal.
American National reserves the right to have any Contractowner claiming such
disability examined by a licensed physician. American National will not accept
any additional Purchase Payments under a Contract once the disability waiver has
been elected. The disability waiver is not available if any Contractowner is
receiving Social Security Disability Benefits on the Date of Issue or is age 65
or older. The disability waiver may not be available in all states.
C. INVOLUNTARY UNEMPLOYMENT WAIVER
American National will waive the surrender charge for any partial surrender or
systematic withdrawal in the event the Contractowner becomes unemployed. The
involuntary unemployment waiver is available upon submission of a letter from a
state Department of Labor indicating the Contractowner was employed at least 60
days prior to the election of such waiver. The involuntary unemployment waiver
may be exercised only once and is not available if any Contractowner or
Annuitant is receiving unemployment benefits on the Date of Issue. The
involuntary unemployment waiver may not be available in all states.
D. TERMINAL ILLNESS WAIVER
American National will waive the surrender charge for any surrenders or
withdrawals where the Contractowner is diagnosed with a terminal illness.
American National will require proof of such illness including written
confirmation from a licensed physician. American National reserves the right to
have a Contractowner diagnosed with such illness examined by a licensed
physician. American National will not accept any additional Purchase Payments
under a Contract once the terminal illness waiver has been elected. The terminal
illness waiver is not available if any Contractowner is diagnosed with a
terminal illness prior to or on the Date of Issue. The terminal illness waiver
may not be available in all states.
DEATH BENEFIT DURING ACCUMULATION PERIOD
In the event of Annuitant's death prior to the Annuity Date, a death benefit
will be payable equal to the greater of: (i) Accumulation Value on the date due
proof of death is received by American National at its Home Office, or (ii) the
Minimum Guaranteed Death Benefit on the Contract. The death benefit will be paid
in a lump sum to the beneficiary named in the contract within seven business
days of receipt of proof of death in proper form.
In lieu of payment in one lump sum, the Contractowner may elect that the death
benefit be applied under any one of the annuity options described on page 22. If
the Contractowner did not make such an election, the beneficiary may do so. The
person selecting the annuity option settlement may also designate contingent
beneficiaries to receive any further amounts due, should the first beneficiary
die before completion of the specified payments. The manner in which annuity
payments to the beneficiary are determined and in which they may vary from month
to month are described under "Annuity Period," on page 22.
Other rules relating to distributions at death apply to Qualified Contracts.
You should consult your legal counsel and tax adviser regarding these rules and
their impact on Qualified Contracts. (See "Qualified Plans," page 26.)
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ANNUITY PERIOD
All or a part of any amount payable at the Annuity Date may be applied to any
of the Annuity Options. American National will discharge in a single sum any
liability under an assignment of the Contract and any applicable federal, state,
municipal or other governmental authority taxes, fees or assessments based on or
predicated on the purchase payments of this contract which have not otherwise
been deducted or offset. The remaining amount is the net sum payable. The
minimum amount that American National will apply to an Annuity Option is $5,000.
American National's consent is required for any payment to a corporation,
association, partnership, or trustee.
ELECTION OF ANNUITY DATE AND FORM OF ANNUITY
(a) Non-Qualified Contracts
The date on which annuity payments are to begin and the form of annuity are
elected in the application. A Contract may not be purchased after age 85
and annuity payments must begin no later than age 95.
(b) Qualified Contracts
The date on which annuity payments are to begin and the form of annuity are
elected in the application. A Contract may not be purchased after age 85
and under the Internal Revenue Code annuity payments must begin no later
than age 95, or in some cases, the later of April 1st of the calendar year
in which the Annuitant reaches age 70-1/2 or retires.
If no election of an Annuity Date is made under a Contract, American
National reserves the right to automatically begin payments at age 95 under
Option 2, Life Annuity with 120 monthly payments certain. Once an Annuity
Payment is made, the Annuity Option can not be changed to another Annuity
Option. (See "Federal Tax Considerations" on page 23.)
ALLOCATION OF BENEFITS
If no election is made to the contrary, the Accumulation Units of each
Subaccount will be changed into Annuity Units and applied to provide a Variable
Annuity based on that Subaccount.
In lieu of this automatic allocation of annuity benefits the Contractowner may
elect to transfer his or her Accumulation Units to any other Eligible Portfolio.
After the Annuity Date, transfers among Subaccounts may be made twelve times
each Contract Year. Each Contractowner may transfer Annuity Units of one
Subaccount into Annuity Units of another Subaccount and/or the Fixed Account as
discussed above at any time other than during the five-day interval prior to and
including any annuity payment date. There are no transfers allowed during the
Annuity Period from the Fixed Account to the Separate Account.
No election may be made for any individual unless such election would produce
an initial annuity payment of at least $100.
ANNUITY OPTIONS
The following annuity options are available.
Option 1 - Life Annuity - Annuity payment payable monthly during the lifetime
of an individual, ceasing with the last annuity payment due prior to the death
of the individual. This option offers the maximum level of monthly annuity
payments since there is no provision for a minimum number of annuity payments or
a death benefit for beneficiaries. It would be possible under this option for an
individual to receive only one annuity payment if death occurred prior to the
due date of the second annuity payment, two if death occurred before the third
annuity payment date, etc.
Option 2 - Life Annuity with 10 or 20 Years Certain - An annuity payable
monthly during the lifetime of an individual with payments made for a period
certain of not less than 10 or 20 years, as elected. The annuity payments will
be continued to a designated beneficiary until the end of the period certain.
Option 3 - Unit Refund Life Annuity - An annuity payable monthly during the
lifetime of an individual with annuity payments made for a period certain not
less than the number of months determined by dividing the amount applied under
this option by the amount of the first monthly annuity payment. This option
guarantees that the annuity units but not the dollar value applied under a
Variable Annuity payout will be repaid to the Annuitant or his beneficiary.
Option 4 - Joint and Survivor Annuity - An annuity payable monthly during the
joint lifetime of an individual and another named individual and thereafter
during the lifetime of the survivor, ceasing with the last annuity payment due
prior to the death of the survivor. It would be possible under this option, for
only one annuity payment to be made if both individuals under the option died
prior to the second annuity payment date, or only two annuity payments if both
died prior to the third annuity payment date, etc.
Option 5 - Installment Payments, Fixed Period - An amount payable monthly for
any specified number of years of at least 5, but not exceeding 30. The amount of
each Variable Annuity payment will be determined by multiplying (a) and (b)
where (a) is the Annuity Unit Value on the day the annuity payment is made and
(b) is the number of Annuity Units applied under this Option divided by the
number of remaining monthly annuity payments.
Option 6 - Equal Installment Payments, Fixed Amount- An amount payable in
equal monthly installments (not less than $6.25 per $1,000 applied) until the
amount applied, adjusted daily by the investment results, is exhausted. The
final annuity payment will be the remaining sum left with American National.
Option 7 - Deposit Option - The amount due may be left on deposit with
American National for placement in its Fixed Account with interest at the rate
of not less than 3.0% per year. Interest will be paid annually, semiannually,
quarterly or monthly as elected. This option may not be available under certain
Qualified Contracts.
At any time, any amount remaining under Option 5, 6 or 7 may be withdrawn as a
full or partial surrender or, if that amount is at least
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$5,000, may be applied under any one of the first four Options. The lump sum
payment requested will be paid within seven days of receipt of the request at
the Home Office based on the value next computed after receipt of the request.
Other Annuity Forms - Provision may be made for annuity payments in any
reasonable arrangement mutually agreed upon.
If the beneficiary dies while receiving annuity payments certain under Option
2, 3, 5, or 6 above, the present value will be paid in a lump sum to the estate
of the beneficiary.
VALUE OF VARIABLE ANNUITY PAYMENTS:
ASSUMED INVESTMENT RATES
The annuity tables in the Contract which are used to calculate the annuity
payments are based on an "assumed investment rate" of 3.0%. If the actual
investment performance of the particular Subaccount selected is such that the
net investment return to the Contract is 3.0% per annum, the annuity payments
will remain constant. If the net investment return exceeds 3.0%, the annuity
payments will increase and if the return is less than 3.0%, the annuity payments
will decline.
The annuity payment will be greater for shorter guaranteed periods than for
longer guaranteed periods, and greater for life annuities than for joint and
survivor annuities, because the life annuities are expected to be made for a
shorter period.
ANNUITY PROVISIONS
Non-qualified life contingent annuity payments are determined on the basis of
the mortality table [1983 Table "a" with Projection Scale G, and 3.0% interest]
which generally reflects the age and sex of the Annuitant and the type of
annuity option selected, and varies with the investment performance of the
Eligible Portfolios in which the Contractowner has invested. The attained age
at settlement will be adjusted downward by one year for each full five-year
period that has lapsed since January 1, 1993.
Qualified life contingent annuity payments are determined on the basis of the
mortality table [1983 Table "a" (female) with Projection Scale G, and 3.0%
interest] which generally reflects the age of the Annuitant and type of annuity
option selected and varies with the investment performance of the Eligible
Portfolios in which the Contractowner has invested. The attained age at
settlement will be adjusted downward by one year for each full five-year period
that has lapsed since January 1, 1993.
Payment of any amount upon surrender, benefits payable in connection with
death, annuity payments, and transfers may be postponed whenever: (i) the New
York Stock Exchange is closed other than customary week-end and holiday
closings, or trading on the New York Stock Exchange is restricted as determined
by the Securities and Exchange Commission ("Commission"); (ii) the Commission by
order permits postponement for the protection of the Contractowners; or (iii) an
emergency exists, as determined by the Commission, as a result of which disposal
of securities is not reasonably practicable or it is not reasonably practicable
to determine the value of the Separate Account's net assets.
FEDERAL TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS GENERAL AND
IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the annuity contract issued by American National. Any person
concerned about these tax implications should consult a competent tax advisor
before initiating any transaction. This discussion is based upon American
National's understanding of the present federal income tax laws, as they are
currently interpreted by the Internal Revenue Service ("IRS"). No representation
is made as to the likelihood of the continuation of the present federal income
tax laws or of the current interpretation by the IRS. Moreover, no attempt has
been made to consider any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis or purchased and used
in connection with plans qualifying for favorable tax treatment. The Qualified
Contract is designed for use by individuals whose Purchase Payments are
comprised solely of proceeds from and/or contributions under retirement plans
which are intended to qualify as plans entitled to special income tax treatment
under Sections 401(a), 403(b), 408, or 457 of the Code. The ultimate effect of
federal income taxes on the amounts held under a Contract, or annuity payments,
and on the economic benefit to the owner, the annuitant, or the beneficiary
depends on the type of retirement plan, on the tax and employment status of the
individual concerned, and on American National's tax status. In addition,
certain requirements must be satisfied in purchasing a Qualified Contract with
proceeds from a tax-qualified plan and receiving distributions from a Qualified
Contract in order to continue receiving favorable tax treatment. Therefore,
purchasers of Qualified Contracts should seek competent legal and tax advice
regarding the suitability of a Contract for their situation, the
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applicable requirements, and the tax treatment of the rights and benefits of a
Contract. The following discussion assumes that Qualified Contracts are
purchased with proceeds from and/or contributions under retirement plans that
qualify for the intended special federal income tax treatment.
TAX STATUS OF THE CONTRACT
Diversification Requirements. Section 817(h) of the Internal Revenue Code,
(the "Code") Code provides that separate account investments underlying a
contract must be "adequately diversified" in accordance with Treasury
regulations in order for the contract to qualify as an annuity contract under
Section 72 of the Code. The Separate Account, through each underlying fund,
intends to comply with the diversification requirements prescribed in
regulations under Section 817(h) of the Code, which affect how the assets in the
various Subaccounts may be invested. Although American National does not have
direct control over the funds in which the Separate Account invests, we believe
that each fund in which the Separate Account owns shares will meet the
diversification requirements, and therefore, the Contract will be treated as an
annuity contract under the Code.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance
would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets."
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the owner of a Contract has the choice of several subaccounts in which
to allocate net purchase payments and Contract values, and may be able to
transfer among subaccounts more frequently than in such rulings. These
differences could result in an owner being treated as the owner of the assets of
the Separate Account. In addition, American National does not know what
standards will be set forth, if any, in the regulations or rulings which the
Treasury Department has stated it expects to issue. American National therefore
reserves the right to modify the Contract as necessary to attempt to prevent the
contract owner from being considered the owner of the assets of the Separate
Account.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires any Non-
Qualified Contract to provide that: (a) if any owner dies on or after the
annuity date but prior to the time the entire interest in the contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of that
owner's death; and (b) if any owner dies prior to the annuity date, the entire
interest in the Contract will be distributed within five years after the date of
the owner's death. These requirements will be considered satisfied as to any
portion of the owner's interest which is payable to or for the benefit of a
"designated beneficiary" and which is distributed over the life of such
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
owner's death. The owner's "designated beneficiary" is the person designated by
such owner as a beneficiary and to whom ownership of the contract passes by
reason of death and must be a natural person. However, if the owner's
"designated beneficiary" is the surviving spouse of the owner, the Contract may
be continued with the surviving spouse as the new owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. American National intends
to review such provisions and modify them if necessary to assure that they
comply with the requirements of Code Section 72(s) when clarified by regulation
or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general.
American National believes that a Contractowner who is a natural person is not
taxed on increases in the value of a Contract until distribution occurs by
withdrawing all or part of the Accumulation Value (e.g., partial withdrawals and
surrenders) or as annuity payments under the payment option elected. For this
purpose, the assignment, pledge, or agreement to assign or pledge any portion of
the Accumulation Value (and in the case of a Qualified Contract, any portion of
an interest in the qualified plan) generally will be treated as a distribution.
The taxable portion of a distribution (in the form of a single sum payment or
payment option) is taxable as ordinary income.
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the contract value over the
"investment in the contract" during the taxable year. There are some exceptions
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to this rule, and a prospective owner that is not a natural person may wish to
discuss these with a competent tax advisor.
The following discussion generally applies to Contracts owned by natural
persons.
Partial Withdrawals. In the case of a partial withdrawal from a Qualified
Contract, under Section 72(e) of the Code, a ratable portion of the amount
received is taxable, generally based on the ratio of the "investment in the
contract" to the participant's total accrued benefit or balance under the
retirement plan. The "investment in the contract" generally equals the portion,
if any, of any purchase payments paid by or on behalf of the individual under a
Contract which was not excluded from the individual's gross income. For
Contracts issued in connection with qualified plans, the "investment in the
contract" can be zero. Special tax rules may be available for certain
distributions from Qualified Contracts.
In the case of a partial withdrawal (including Systematic Withdrawals) from a
Non-Qualified Contract, under Section 72(e), any amounts received are generally
first treated as taxable income to the extent that the Accumulation Value
immediately before the partial withdrawal exceeds the "investment in the
contract" at that time. Any additional amount withdrawn is not taxable.
In the case of a full surrender under a Qualified or Non-Qualified Contract,
the amount received generally will be taxable only to the extent it exceeds the
"investment in the contract."
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of one annuity contract for another. If the
surrendered contract was issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the extent the amount received
exceeds the owner's investment in the contract will continue to apply to amounts
allocable to investments in that contract prior to August 14, 1982. In contrast,
contracts issued after January 19, 1985 in a Code Section 1035 exchange are
treated as new contracts for purposes for purposes of the penalty and
distribution-at-death rules. Special rules and procedures apply to Section 1035
transactions. Prospective owners wishing to take advantage of Section 1035
should consult their tax adviser.
Annuity Payments. Although tax consequences may vary depending on the payment
option elected under an annuity contract, under Code Section 72(b), generally
(prior to recovery of the investment in the contract) gross income does not
include that part of any amount received as an annuity under an annuity contract
that bears the same ratio to such amount as the investment in the contract bears
to the expected return at the annuity starting date. For variable annuity
payments, the taxable portion is generally determined by an equation that
establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. However, the entire distribution
will be taxable once the recipient has recovered the dollar amount of his or her
"investment in the contract." For fixed annuity payments, in general, there is
no tax on the portion of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each annuity
payment is taxable until the recovery of the investment in the contract, and
thereafter the full amount or each annuity payment is taxable. If death occurs
before full recovery of the investment in the contract, the unrecovered amount
may be deducted on the annuitant's final tax return.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a Contract
because of the death of an owner. Generally, such amounts are includible in the
income of the recipient as follows: (i) if distributed in a lump sum, they are
taxed in the same manner as a full surrender of the contract or (ii) if
distributed under a payment option, they are taxed in the same way as annuity
payments.
Penalty Tax on Certain Withdrawals. In the case of a distribution pursuant to
a Non-Qualified Contract, there may be imposed a federal penalty tax equal to
10% of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2;
2. made on or after the death of the holder (or if the holder is not an
individual, the death of the primary annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments (not less
frequently than annually) for the life (or life expectancy) of the taxpayer
or the joint lives (or joint life expectancies) of the taxpayer and his or
her designated beneficiary;
5. made under certain annuities issued in connection with structured settlement
agreements; and
6. made under an annuity contract that is purchased with a single purchase
payment when the annuity date is no later than a year from purchase of the
annuity and substantially equal periodic payments are made, not less
frequently than annually, during the annuity payment period.
Other tax penalties may apply to certain distributions under a Qualified
Contract.
Possible Changes in Taxation. In past years, legislation has been proposed
that would have adversely modified the federal taxation of certain annuities.
For example, one such proposal would have changed the tax treatment of non-
qualified annuities that did not have "substantial life contingencies" by
taxing income as it is credited to the annuity. Although as of the date of this
prospectus Congress is not considering any legislation regarding taxation of
annuities, there is always the possibility that the tax treatment of annuities
could change by legislation or other means (such as IRS regulations, revenue
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rulings, judicial decisions, etc.). Moreover, it is also possible that any
change could be retroactive (that is, effective prior to the date of the
change).
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership of a Contract, the designation of an annuitant, payee
or other beneficiary who is not also the owner, the selection of certain annuity
dates or the exchange of a Contract may result in certain tax consequences to
the owner that are not discussed herein. A Contractowner contemplating any such
transfer, assignment, or exchange of a Contract should contact a competent tax
advisor with respect to the potential tax effects of such a transaction.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding. Certain states also
require withholding of state income tax whenever federal income tax is withheld.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts that are issued by American
National (or its affiliates) to the same Contractowner during any calendar year
are treated as one annuity contract for purposes of determining the amount
includible in gross income under Section 72(e) of the Code. The effects of this
rule are not yet clear; however, it could affect the time when income is taxable
and the amount that might be subject to the 10% penalty tax described above. In
addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of Section 72(e) of the Code through the serial
purchase of annuity contracts or otherwise. There may also be other situations
in which the Treasury Department may conclude that it would be appropriate to
aggregate two or more annuity contracts purchased by the same owner.
Accordingly, a Contract owner should consult a competent tax advisor before
purchasing more than one annuity contract.
QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans. The
tax rules applicable to participants in these qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Contracts
with the various types of qualified retirement plans. Contractowners, the
annuitants, and Beneficiaries are cautioned that the rights of any person to any
benefits under these qualified retirement plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract, but American National shall not be bound by the terms and
conditions of such plans to the extent such terms contradict the Contract,
unless American National consents. American National will amend the Contract as
necessary to conform it to the requirements of such plan. Employers intending to
use the Contract with such plans should seek competent advice. Brief
descriptions follow of the various types of qualified retirement plans in
connection with a Contract.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Section 401(a)
of the Code permits corporate employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish these
plans for themselves and their employees. Such retirement plans may permit the
purchase of the Contract to provide benefits under the plans. Adverse or other
legal consequences to the plan, to the participant, or to both may result if
this Contract is assigned or transferred to any individual as a means to provide
benefit payments.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA". These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred basis
into an IRA. Sales of the Contract for use with IRAs may be subject to special
requirements of the Internal Revenue Service. Employers may establish Simplified
Employee Pension (SEP) Plans to provide IRA contributions on behalf of their
employees.
SIMPLE Individual Retirement Annuities. Beginning January 1, 1997, certain
small employers may establish SIMPLE plans as provided by Section 408(p) of the
Code, under which employees may elect to defer a percentage of compensation of
up to $6,000 (as increased for cost of living adjustments). The sponsoring
employer is required to make a matching contribution on behalf of contributing
employees. Distributions from a SIMPLE plan are subject to the same restrictions
that apply to IRA distributions and are taxed as ordinary income. Subject to
certain exceptions, premature distributions prior to age 59 1/2 are subject to a
10% penalty tax, which is increased to 25% if the distribution occurs within the
first two years after the commencement of the employee's participation in the
plan. The failure of the SIMPLE plan to meet Code requirements may result in
adverse tax consequences.
Tax Sheltered Annuities. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the purchase payments paid, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These purchase
payments may be subject to FICA (social security) tax. Additionally, in
accordance with the requirements of the Code, distribution is not permitted for
(i) elective contributions made in year beginning after December 31, 1988, (ii)
earnings on those contributions, and (iii) earnings on amounts attributed to
elective contributions held as of the end of the last year beginning before
January 1, 1989. Distributions of such amounts will be allowed only upon the
death of the employee, the attainment of age 59 1/2, separation from service,
disability, or financial hardship, except that income attributable to elective
contributions may not be distributed in the case of hardship.
Deferred Compensation Plans. Section 457 of the Code provides for certain
deferred compensation plans. These plans may be offered with respect to service
for state governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. With respect to non-
governmental plans, all investments are owned by the sponsoring employer and are
subject to the claims of the general creditors of the employer. Depending on the
terms of the plan, a non-governmental employer may be entitled to draw on
deferred amounts for purposes unrelated to its Section 457 plan obligations. In
general, all amounts received under a Section 457 plan are taxable and are
subject to federal income tax withholding as wages.
Distributions from Qualified Plans. Under the tax qualification rules of
Section 401(a), 403(b), 408, and 457 plans, distributions generally must
commence no later than the later of April 1 of the calendar year following the
calendar year in which the owner (or plan participant) (i) reaches age 70 1/2 or
(ii) retires, and must be made in a specified form and manner. If the plan
participant is a "five percent owner" (as defined in the Code), distributions
generally must begin no later than the date described in (i). Special rules or
other restrictions may apply depending on the type of plan and the particular
circumstance. Each owner is responsible for requesting distributions under the
Contract that satisfy the applicable rules and should consult a qualified tax
advisor when appropriate.
POSSIBLE CHARGE FOR AMERICAN NATIONAL'S TAXES
At the present time, American National makes no charge to the subaccounts for
any Federal, state, or local taxes that American National incurs which may be
attributable to such
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subaccounts or the Contracts. American National, however, reserves the right in
the future to make a charge for any such tax or other economic burden resulting
from the application of the tax laws that it determines to be properly
attributable to the subaccounts or to the Contracts.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under these Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in the Prospectus. Further, the
Federal income tax consequences discussed herein reflect American National's
understanding of current law and the law may change. Federal estate and state
and local estate, inheritance and other tax consequences of ownership or receipt
of distributions under a Contract depend on the individual circumstances of each
owner or recipient of the distribution. A competent tax advisor should be
consulted for further information.
PERFORMANCE
Performance information for the Subaccounts may appear in advertising or sales
literature to Contractowners or to prospective investors. THE PERFORMANCE
INFORMATION IS BASED ON HISTORICAL INVESTMENT EXPERIENCE OF THE SUBACCOUNTS AND
THE FUNDS AND DOES NOT INDICATE OR REPRESENT FUTURE PERFORMANCE. For more
information about the performance data calculations described below, see the
Statement of Additional Information.
Total returns are based on the overall dollar or percentage change in value of
a hypothetical investment. Total return quotations reflect changes in Fund share
price, the automatic reinvestment by the separate account of all distributions
and the deduction of applicable annuity charges (including any contingent
deferred sales charges that would apply if a Contractowner surrendered the
Contract at the end of the period indicated). Quotations of total return may
also be shown that do not take into account certain contractual charges such as
a contingent deferred sales load. The total return percentage will be higher
under this method than under the standard method described above.
A cumulative total return reflects performance over a stated period of time.
An average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the
performance had been constant over the entire period. Because average annual
total returns tend to smooth out variations in a Subaccount's returns, you
should recognize that they are not the same as actual year-by-year results.
Some Subaccounts may also advertise yield. These measures reflect the income
generated by an investment in the Subaccount over a specified period of time.
This income is annualized and shown as a percentage. Yields do not take into
account capital gains or losses or the contingent deferred sales load.
The American National Money Market Subaccount may advertise their current and
effective yield. Current yield reflects the income generated by an investment
in the Subaccount over a 7-day period. Effective yield is calculated in a
similiar manner except that income earned is assumed to be reinvested.
DISTRIBUTOR OF THE CONTRACTS
SM&R, One Moody Plaza, Galveston, Texas 77550-7999, a wholly-owned subsidiary
of American National will act as the principal underwriter of the Contracts
pursuant to a Distribution and Administrative Services Agreement between itself
and American National. SM&R was organized under the laws of the State of Florida
in 1964, and is a registered broker/dealer pursuant to the Securities Exchange
Act of 1934 and a member of the National Association of Securities Dealers. (See
the American National Funds', Prospectus.)
Registered representatives of SM&R who sell Variable Annuities will receive
commissions from SM&R based upon a commission schedule. After issuance of the
Contract, broker-dealers will receive sales commissions aggregating no more than
8.0% of the Purchase Payments. In addition to such sales commissions, after the
first Contract year, broker-dealers who have entered into distribution
agreements with American National may receive an annual override commission of
no more than 0.25% of the Contract's Accumulation Value. SM&R and American
National may authorize other registered broker/dealers and their Registered
Representatives to sell the Contracts subject to applicable law.
27
<PAGE>
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
American National holds the assets of the Separate Account. The assets are
kept physically segregated and held separate and apart from the General Account
assets, except for the Fixed Account. American National maintains records of all
purchases and redemptions of shares of Eligible Portfolios by each of the
Subaccounts.
VOTING RIGHTS
All of the assets held in the Subaccounts of the Separate Account will be
invested in shares of the corresponding Eligible Portfolios. American National
is the legal holder of those shares and as such has the right to vote to elect
the Board of Directors of the American National Fund and the Fidelity Funds, to
vote upon certain matters that are required by the 1940 Act to be approved or
ratified by the shareholders of a mutual fund, and to vote upon any other matter
that may be voted upon at a shareholders' meeting. To the extent required by
law, American National will vote all shares of Eligible Portfolios held in the
Separate Account at regular and special shareholder meetings in accordance with
instructions received from Contractowners. The number of votes for which each
Contractowner has the right to provide instructions will be determined as of the
record date selected by the Board of Directors of the American National Fund or
the Fidelity Funds, as the case may be. American National will furnish
Contractowners with the proper forms, materials and reports to enable them to
give it these instructions.
The number of shares of an Eligible Portfolio in a Subaccount for which
instructions may be given by a Contractowner is determined by dividing the
Accumulation Value held in that Subaccount by the net asset value of one share
in the corresponding Eligible Portfolio. Fractional shares will be counted.
Shares of an Eligible Portfolio held in each Subaccount for which no timely
instructions from Contractowners are received and shares of an Eligible
Portfolio held in each Subaccount which do not support Contractowner interests
will be voted by American National in the same proportion as those shares in
that Subaccount for which timely instructions are received. Voting instructions
to abstain on any item to be voted will be applied on a pro rata basis to reduce
the votes eligible to be cast. Should applicable federal securities laws or
regulations permit, American National may elect to vote shares of the Eligible
Portfolios in its own right.
Matters on which Contractowners may give voting instructions include the
following: (1) election of the Board of Directors of the American National Fund,
the Fidelity Funds, the MFS Fund, the T. Rowe Price Funds, the Van Eck Fund, the
Federated Fund or the Lazard Fund (2) ratification of the independent accountant
of the American National Fund, the Fidelity Funds, the MFS Fund, the T. Rowe
Price Funds, the Van Eck Fund, the Federated Fund or the Lazard Fund; (3)
approval of the Investment Advisory Agreement for the Eligible Portfolio(s)
corresponding to the Contractowner's selected Subaccount; (4) any change in the
fundamental investment Policies of the Eligible Portfolio(s) corresponding to
the Contractowner's selected Subaccount(s); and (5) any other matter requiring a
vote of the shareholders of the American National Fund, the Fidelity Funds, the
MFS Fund, the T. Rowe Price Funds, the Van Eck Fund, the Federated Fund or the
Lazard Fund under the 1940 Act.
28
<PAGE>
STATE REGULATION OF AMERICAN NATIONAL
American National, a stock life insurance company organized under the laws of
Texas, is subject to regulation by the Texas Department of Insurance. On or
before March 1 of each year a National Association of Insurance Commissioners
convention blank covering the operations and reporting on the financial
condition of American National and the Separate Account as of December 31 of the
preceding year must be filed with the Texas Department of Insurance.
Periodically, the Texas Department of Insurance examines the liabilities and
reserves of American National and the Separate Account and certifies their
adequacy. A full examination of American National's operations is also conducted
periodically by the National Association of Insurance Commissioners.
In addition, American National is subject to the insurance laws and
regulations of other states within which it is licensed or may become licensed
to operate. The Contracts offered by the Prospectus are available in the various
states as approved. Generally, the Insurance Department of any other state
applies the laws of the state of domicile in determining permissible
investments. However, differences in state laws may require American National to
offer a Contract in one or more states which are more favorable to a
Contractowner than provisions in a Contract offered in other states.
LEGAL MATTERS
All matters of Texas law pertaining to the Contract, including the validity of
the Contract and American National's right to issue the Contract under Texas
Insurance Law, have been passed upon by Greer, Herz and Adams, L.L.P., General
Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. American National is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The consolidated financial statements of American National Insurance Company
and subsidiaries as of December 31, 1996 and December 31, 1995 and for the year
then ended, included in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the registration statement. The omitted information may be obtained
at the SEC's principal office in Washington, D.C. by paying the SEC's prescribed
fees. Statements contained in this Prospectus as to the contents of the Contract
and other legal instruments are summaries. For a complete statement of the terms
thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of American National should be considered only as
bearing on the ability of American National to meet its obligations under the
Contracts. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account. The financial statements
can be found in the Statement of Additional Information. No financial statements
of the Separate Account have been included in this Prospectus or Statement of
Additional Information because, as of the date of this Prospectus, the
Subaccounts funding the Contracts had no assets or liabilities.
29
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
The Contract..................................... 3 Records and Reports................................. 6
Valuation of Accumulation Units.................. 3 Performance......................................... 6
Computation of Variable Annuity Payments......... 3 Total Return........................................ 6
Annuity Unit Value............................... 3 Other Total Returns................................. 6
Summary.......................................... 4 Yields.............................................. 6
Exceptions to Charges............................ 4 Legal Matters....................................... 7
Assignment....................................... 4 Legal Proceedings................................... 7
Minimum Distributions Program.................... 4 Experts............................................. 7
Distribution of the Contracts.................... 5 Additional Information.............................. 7
Safekeeping of Separate Account Assets........... 5 Financial Statements................................ 7
State Regulation of American National............ 5 Financials.......................................... 8
Termination of Participation Agreements............. 30
</TABLE>
30
<PAGE>
CUSTODIAN
American National Insurance Company
One Moody Plaza
Galveston, Texas 77550-7999
INSURER
American National Insurance Company
One Moody Plaza
Galveston, Texas 77550-7999
DISTRIBUTOR
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550-7999
[LOGO OF AMERICAN NATIONAL APPEARS HERE]
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY
ONE MOODY PLAZA
GALVESTON, TEXAS 77550-7999
AMERICAN NATIONAL
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ADDITIONAL INFORMATION
September 5, 1997
Relating to the Prospectus dated September 5, 1997
(as revised October 15, 1997)
(409) 763-4661
CUSTODIAN INDEPENDENT AUDITORS
American National Insurance Company Arthur Andersen LLP
One Moody Plaza 711 Louisiana, Suite 1300
Galveston, Texas 77550-7999 Houston, Texas 77002-2786
UNDERWRITER
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550-7999
1
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY
One Moody Plaza
Galveston, Texas 77550-7999
AMERICAN NATIONAL
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF
ADDITIONAL INFORMATION
September 5, 1997
----------------------------
DATE
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Variable Annuity Contracts II ("the Contracts")
offered by American National Insurance Company ("American National"). You may
obtain a copy of the Prospectus dated September 5, 1997, by calling (409) 763-
4661, or writing to American National Insurance Company, One Moody Plaza,
Galveston, Texas 77550-7999. Terms used in the current Prospectus for the
Contract are incorporated in this Statement. All terms not specifically defined
in this Statement shall have the meaning set forth in the current
Prospectus.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
The Contract.............................. 3 Records and Reports....................... 6
Valuation of Accumulation Units........... 3 Performance............................... 6
Computation of Variable Annuity Payments.. 3 Total Return.............................. 6
Annuity Unit Value........................ 3 Other Total Returns....................... 6
Summary................................... 4 Yields.................................... 6
Exceptions to Charges..................... 4 Legal Matters............................. 7
Assignment................................ 4 Legal Proceedings......................... 7
Minimum Distributions Program............. 4 Experts................................... 7
Distribution of the Contracts............. 5 Additional Information.................... 7
Safekeeping of Separate Account Assets.... 5 Financial Statements...................... 7
State Regulation of American National..... 5 Financials................................ 8
Termination of Participation Agreements... 30
</TABLE>
2
<PAGE>
THE CONTRACT
The following provides additional information about the Contracts which
supplements the description in the Prospectus and which may be of interest to
some Contractowners.
VALUATION OF ACCUMULATION UNITS
The Accumulation Unit Value for a Subaccount on any day is equal to (a)
divided by (b), where (a) is the net asset value of the corresponding Eligible
Portfolio of the underlying fund owned by each Subaccount less any applicable
deductions and (b) is the number of Accumulation Units of that Subaccount at the
beginning of that day.
COMPUTATION OF VARIABLE ANNUITY PAYMENTS
The amount of the first variable annuity payment to the annuitant will depend
on the amount of his/her accumulation value applied to effect the variable
annuity as of the tenth day immediately preceding the date annuity payments
commence, the amount of any premium tax owed (if applicable), the annuity option
selected, and the age of the annuitant. The Contracts contain tables indicating
the dollar amount of the first annuity payment under annuity options 1, 2, 3,
and 4 for each $1,000 of accumulation value at various ages. These tables are
based upon the 1983 Table "a" (promulgated by the Society of Actuaries) and an
Assumed Investment Rate (the "AIR") of 3.0% per annum.
In any subsequent month, the dollar amount of the variable annuity payment is
determined by multiplying the number of annuity units in the applicable
division(s) by the value of such annuity unit on the tenth day preceding the due
date of such payment. The annuity unit value will increase or decrease in
proportion to the net investment return of the division(s) underlying the
variable annuity since the date of the previous annuity payment, less an
adjustment to neutralize the 3.0% or other AIR referred to above.
Therefore, the dollar amount of variable annuity payments after the first will
vary with the amount by which the net investment return is greater or less than
the 3.0% (or other AIR) per annum. For example, assuming a 3.5% AIR, if an
Eligible Portfolio has a cumulative net investment return of 5% over a one year
period, the first annuity payment in the next year will be approximately 1.5
percentage points greater than the payment on the same date in the preceding
year, and subsequent payments will continue to vary with the investment
experience of the Eligible Portfolio.
If such net investment return is 1% over a one year period, the first annuity
payment in the next year will be approximately 2.5 percentage points less than
the payment on the same date in the preceding year, and subsequent payments will
continue to vary with the investment experience of the applicable division.
ANNUITY UNIT VALUE
The value of an annuity unit is calculated at the same time that the value of
an accumulation unit is calculated and is based on the same values for shares of
Eligible Portfolios and other assets and liabilities. The following
illustrations show, by use of hypothetical examples, the method of determining
the annuity unit value and the amount of variable annuity payments.
ILLUSTRATION: CALCULATION OF ANNUITY UNIT VALUE
Annuity at age 65: Life with 120 payments certain
1. Annuity unit value, beginning of period $ .980000
2. Net investment factor for Period 1.001046
3. Daily adjustment for
3.0% Assumed Investment Rate .999919
4. (2) x (3) 1.000965
5. Annuity unit value, end of
period (1) x (4) $ .980946
ILLUSTRATION: ANNUITY PAYMENTS
Annuity at age 65: Life with 120 payments certain
1. Number of accumulation units at annuity date 10,000.00
2. Accumulation Unit value
(10 days prior to date of first monthly payment) $ 1.800000
3. Accumulation Value of Contract (1) x (2) $ 18,000.00
4. First monthly annuity payment per
$1,000 of Accumulation Value $ 5.63
5. First monthly annuity payment (3) x (4) / 1,000 $ 101.34
6. Annuity Unit value
(10 days prior to date of first monthly payment) $ .980000
7. Number of annuity units (5) / (6) 103.408
8. Assume annuity unit value for second month equal to $ .997000
9. Second monthly annuity payment (7) x (8) $ 103.10
10. Assume annuity unit value for third month equal to $ .953000
11. Third monthly annuity payment (7) x (10) $ 98.55
3
<PAGE>
SUMMARY
In conclusion, for a variable annuity the key element to pricing the annuity
is unknown; there is no interest rate guarantee made and interest credited will
depend upon actual future results. The technique used to overcome this obstacle
is the calculation of the premium for the annuity using an AIR. The initial
variable annuity payment is based upon this premium; subsequent payments will
increase or decrease depending upon the relationship between the AIR and the
actual investment performance of Eligible Portfolios to be passed to the
annuitant. Suppose an Eligible Portfolio showed a monthly return of 1% after the
first month, the participant's second monthly payment would be (assuming 30 days
between payments):
$100 X 1.01 = $100.75
------
(1.03)/30/365/
Hence, we have shown that the AIR methodology means that at each payment date
the value in a participant's annuity is updated to reflect actual investment
results to date, but continued assumption of the AIR for the remainder of the
annuity period.
EXCEPTIONS TO CHARGES
The surrender charges, mortality and expense risk fees and administrative
charges may be reduced for, or additional amounts credited on, sales of
Contracts to a trustee, employer, or similar entity representing a group where
American National determines that such sales result in savings of sales or
administrative expenses. In addition, directors, officers and bona fide full-
time employees (and their spouses and minor children) of SM&R and American
National are permitted to purchase Contracts with substantial reduction of the
surrender charges, mortality and expense risk fees, or administrative charges.
The Contracts may be sold directly, without compensation, to a registered
representative, to employees, officers, directors, and trustees of American
National and its affiliated companies, and spouses and immediate family members
(i.e., children, siblings, parents, and grandparents) of the foregoing, and to
employees, officers, directors, trustees and registered representatives of any
broker-dealer authorized to sell the Contracts, and spouses and immediate family
members of the foregoing. If sold under these circumstances, a Contract may be
credited with an amount that reflects in part or in whole any cost savings
resulting from the Contract being sold directly, rather than through an agent
with an associated commission, but only if such credit will not be unfairly
discriminatory to any person.
ASSIGNMENT
The Contracts may be assigned by the Contractowner except when issued to plans
or trusts qualified under Section 403(b) or 408 of the Internal Revenue Code.
401(k) Contracts are not assignable.
MINIMUM DISTRIBUTIONS PROGRAM
Under the Systematic Withdrawal Program, the Contractowner can elect to
participate in the "Minimum Distributions Program" by instructing American
National to calculate and make minimum distributions that may be required if the
Contract is used with a tax qualified plan. American National calculates such
amounts assuming the minimum distribution amount is based solely on the value of
the Contractowner's Contract. However, the required minimum distribution amounts
applicable to the Contractowner's particular situation may depend on other
annuities, savings, or investments of which American National is not aware, so
that the required amount may be greater than the minimum distribution amount
American National calculates based on the Contractowner's Contract. The Minimum
Distributions Program is subject to all the rules applicable to the Systematic
Withdrawal Program. In addition, certain rules apply only to the Minimum
Distributions Program. These rules are described below.
In order to participate in the Minimum Distributions Program, the
Contractowner must notify American National of such election in writing in the
calendar year in which the Contractowner attains age 70-1/2. If the
Contractowner is taking payments under the Systematic Withdrawal Program when
the Minimum Distributions Program is elected, the existing Systematic Withdrawal
Program will be discontinued.
American National will determine the amount that is required to be distributed
from a Contract each year based on the information provided by the Contractowner
and elections made by the Contractowner. The Contractowner specifies whether the
withdrawal amount will be based on a life expectancy calculated on a single life
basis, or on a joint life basis. American National calculates a required
distribution amount each year based on the Internal Revenue Code's minimum
distribution rules.
Minimum Distributions Program is based on American National's understanding of
the present federal income tax laws, as they are currently interpreted by the
IRS. Numerous special tax rules apply to Contractowners whose Contracts are used
with qualified plans. Contractowners should consult a tax advisor before
electing to participate in the Minimum Distributions Program.
4
<PAGE>
DISTRIBUTION OF THE CONTRACTS
Subject to arrangements with American National, the Contracts are sold as part
of a continuous offering by independent broker-dealers who are members of the
National Association of Security Dealers, Inc., and who become licensed to sell
life insurance and variable annuities for American National. Pursuant to a
Distribution and Administrative Services Agreement, Securities Management and
Research, Inc. ("SM&R") acts as the principal underwriter on behalf of American
National for distribution of the Contracts. Under the Agreement, SM&R is to use
commercially reasonable efforts to sell the Contracts through registered
representatives. In connection with these sales activities SM&R is responsible
for (i) compliance with the requirements of any applicable state broker-dealer
regulations and the Securities Exchange Act of 1934, (ii) keeping correct
records and books of account in accordance with Rules 17a-3 and 17a-4 of the
Securities Exchange Act, (iii) training agents of American National for the sale
of Contracts, and (iv) forwarding all purchase payments under the Contracts
directly to American National. SM&R is not entitled to any renumeration for its
services as underwriter under the Distribution and Administrative Services
Agreement; however SM&R is entitled to reimbursement for all reasonable expenses
incurred in connection with its duties as underwriter.
SAFEKEEPING OF THE SEPARATE ACCOUNT ASSETS
All assets of the Separate Account are held in the custody and safekeeping of
American National. The assets are kept physically segregated and held separate
and apart from the General Account assets. American National maintains records
of all purchases and redemptions of shares of the Eligible Portfolios by each of
the Subaccounts.
STATE REGULATION OF AMERICAN NATIONAL
American National, a stock life insurance company organized under the laws of
Texas, is subject to regulation by the Texas Department of Insurance. On or
before March 1 of each year an NAIC convention blank covering the operations and
reporting on the financial condition of American National and the Separate
Account as of December 31 of the preceding year must be filed with the Texas
Department of Insurance. Periodically, the Texas Department of Insurance
examines the liabilities and reserves of American National and the Separate
Account and certifies their adequacy. A full examination of American National's
operations is also conducted periodically by the National Association of
Insurance Commissioners.
In addition, American National is subject to the insurance laws and
regulations of other states within which it is licensed or may become licensed
to operate. The Contracts offered by the Prospectus are available in the various
states as approved. Generally, the Insurance Department of any other state
applies the laws of the state of domicile in determining permissible investment.
However, differences in state laws may require American National to offer a
Contract in one or more states which has suicide, incontestability and refund
provisions which are more favorable to a Contractowner than provisions in a
Contract offered in other states.
5
<PAGE>
RECORDS AND REPORTS
Reports concerning each Contract will be sent annually to each Contractowner.
Contractowners will additionally receive annual and semiannual reports
concerning the underlying funds and annual reports concerning the Separate
Account. Contractowners will also receive confirmations of receipt of purchase
payments, changes in allocation of purchase payments and transfer of
Accumulation Units and Annuity Units.
PERFORMANCE
Performance information for any Subaccount may be compared, in reports and
advertising to: (1) the Standard & Poor's 500 Composite Stock Price Index ("S &
P 500"), Dow Jones Industrial Average ("DJIA"), Donoghue's Money Market
Institutional Averages; (2) other variable annuity separate accounts or other
investment products tracked by Lipper Analytical Services, Lehman-Brothers,
Morningstar, or the Variable Annuity Research and Data Service, widely used
independent research firms which rank mutual funds and other investment
companies by overall performance, investment objectives, and assets; and (3) the
Consumer Price Index (measure for inflation) to assess the real rate of return
from an investment in a contact. Unmanaged indices may assume the reinvestment
of dividends but generally do not reflect deductions for annuity charges and
investment management costs.
Total returns, yields and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Reports and
advertising may also contain other information including (i) the ranking of any
subaccount derived from rankings of variable annuity separate accounts or other
investment products tracked by Lipper Analytical Series or by rating services,
companies, publications or other persons who rank separate accounts or other
investment products on overall performance or other criteria, and (ii) the
effect of tax deferred compounding on a subaccount's investment returns, or
returns in general, which may be illustrated by graphs, charts, or otherwise,
and which may include a comparison, at various points in time, of the return
from an investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis.
TOTAL RETURN
Total Return quoted in advertising reflects all aspects of a Subaccount's
return, including the automatic reinvestment by the separate account of all
distributions and any change in the Subaccount's value over the period. Average
annual returns are calculated by determining the growth or decline in value of a
hypothetical historical investment in the Subaccount over a stated period, and
then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady rate
that would equal 100% growth on a compounded basis in ten years. While average
annual returns are a convenient means of comparing investment alternatives,
investors should realize that the subaccount's performance is not constant over
time, but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of a
subaccount.
Average annual total returns are computed by finding the average annual
compounded rates of return over the periods shown that would equate the initial
amount invested to the withdrawal value, in accordance with the following
formula: P(1+T)/n/ = ERV where P is a hypothetical investment payment of
$1,000, T is the average annual total return, n is the number of years, and ERV
is the withdrawal value at the end of the periods shown. Since the Contract is
intended as a long-term product, the average annual total returns assume that no
money was withdrawn from the Contract prior to the end of the period.
In addition to average annual returns, the Subaccounts may advertise
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period.
From time to time, sales literature or advertisements may also quote average
annual total returns for periods prior to the date the Separate Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the Eligible Portfolios and the
assumption that the Subaccounts were in existence for the same periods as those
indicated for the Eligible Portfolios, with the level of Contract charges
currently in effect.
OTHER TOTAL RETURN
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the Surrender Charge. These are
calculated in exactly the same way as the average annual total returns described
above, except that the ending redeemable value of the hypothetical account for
the period is replaced with an ending value for the period that does not take
into account any charges on amounts surrendered. Sales literature or
advertisements may also quote average annual total returns for periods prior to
the date the Separate Account commenced operations, calculated based on the
performance of the Eligible Portfolios and the assumption that the Subaccounts
were in existence for the same periods as those indicated for the Eligible
Portfolios, with the level of Contract charges currently in effect except for
the Surrender Charge.
YIELDS
Some Subaccounts may also advertise yields. Yields quoted in advertising
reflect the change in value of a hypothetical investment in the Subaccount over
a stated period of time, not taking into account capital gains or losses. Yields
are annualized and stated as a percentage. Yields do not reflect the impact of
any contingent deferred sales load. Yields quoted in advertising may be based on
historical seven day periods. Current yield for the American National Money
Market Subaccount will reflect the income generated by a Subaccount over a
7-day period. Current yield is calculated by determining the net change,
exclusive of capital changes, in the value of a hypothetical account having one
Accumulation Unit at the beginning of the period and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and multiplying the
6
<PAGE>
base period return by (365/7). The resulting yield figure will be carried to the
nearest hundredth of a percent. Effective yield for the American National Money
Market Subaccount is calculated in a similar manner to current yield except that
investment income is assumed to be reinvested throughout the year at the 7-day
rate. Effective yield is obtained by taking the base period returns as computed
above, and then compounding the base period return by adding 1, raising the sum
to a power equal to (365/7) and subtracting one from the result, according to
the formula Effective Yield = [(Base Period Return +1)/365/7/] - 1. Since the
reinvestment of income is assumed in the calculation of effective yield, it will
generally be higher than current yield.
A 30-day yield for bond subaccounts will reflect the income generated by a
Subaccount over a 30-day period. Yield will be computed by dividing the net
investment income per Accumulation Unit earned during the period by the maximum
offering price per Accumulation Unit on the last day of the period, according to
the following formula: Yield = 2[((a - b)/cd + 1)/6/-1] where a = net investment
income earned by the applicable portfolio, b = expenses for the period including
expenses charged to the contract owner accounts, c = the average daily number of
Accumulation Units outstanding during the period, and d = the maximum offering
price per Accumulation Unit on the last day of the period.
LEGAL MATTERS
All matters of Texas law pertaining to the Contract, including the validity of
the Contract and American National's right to issue the Contract under Texas
Insurance Law, have been passed upon by Greer, Herz and Adams, L.L.P., General
Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. American National is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The consolidated financial statements of American National Insurance Company
and subsidiaries as of December 31, 1996 and December 31, 1995 for the years
then ended, included in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Contract offered hereby. This Statement of Additional Information does not
contain all the information set forth in the registration statement and the
amendments and exhibits to the registration statement, to all of which reference
is made for further information concerning the Separate Account, American
National and the Contracts offered hereby. For a complete statement of the terms
thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of American National should be considered only as
bearing on the ability of American National to meet its obligations under the
Contracts. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account. No financial statements
of the Separate Account have been included in the Statement of Additional
Information because, as of the date of this Statement of Additional Information,
the Subaccounts funding the Contracts had no assets or liabilities.
7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors,
American National Insurance Company
We have audited the accompanying consolidated statements of financial position
of American National Insurance Company and subsidiaries (the Company) as of
December 31, 1996 and 1995, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years then ended. These
consolidated financial statements (pages 8 through 24) are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
National Insurance Company and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1997
8
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
PREMIUMS AND OTHER REVENUE
Life and annuity premiums $ 329,937 $ 308,949
Accident and health premiums 364,198 360,420
Property and casualty premiums 257,845 233,512
Other policy revenues 82,911 78,260
Net investment income 439,611 386,910
Gain from sale of investments 58,001 76,335
Other income 29,011 26,576
---------- -----------
$1,561,514 $ 1,470,962
---------- -----------
BENEFITS AND EXPENSES
Death and other benefits:
Life and annuity $ 363,035 $ 312,018
Accident and health 261,942 243,560
Property and casualty 206,120 193,453
Increase /(decrease) in liability for future policy benefits:
Life and annuity 37,988 32,582
Accident and health (1,570) (2,558)
Commissions for acquiring and servicing policies 267,305 287,506
Other operating costs and expenses 167,490 159,185
Increase in deferred policy acquisition costs, net of amortization (73,880) (98,285)
Taxes, licenses and fees 38,387 39,394
---------- -----------
$1,266,817 $ 1,166,855
---------- -----------
INCOME FROM OPERATIONS BEFORE EQUITY IN EARNINGS OF
UNCONSOLIDATED AFFILIATES AND FEDERAL INCOME TAXES $ 294,697 $ 304,107
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES 10,764 2,170
---------- -----------
GAIN FROM OPERATIONS BEFORE FEDERAL INCOME TAXES $ 305,461 $ 306,277
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current 90,103 109,471
Deferred (237) (9,558)
---------- -----------
NET INCOME $ 215,595 $ 206,364
========== ===========
NET INCOME PER SHARE $ 8.14 $ 7.79
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Investments, other than investments in unconsolidated affiliates
Debt securities:
Bonds held-to-maturity, at amortized cost $ 3,430,726 $ 2,966,939
Bonds available-for-sale, at market 528,306 482,687
Marketable equity securities, at market:
Preferred stocks 51,625 53,983
Common stocks 754,039 710,717
Mortgage loans on real estate 1,098,583 925,581
Policy loans 303,336 301,589
Investment real estate, net of accumulated depreciation of $108,974 and $105,082 330,729 330,684
Short-term investments 5,470 15,066
Other invested assets 70,064 33,739
----------- -----------
$ 6,572,878 $ 5,820,985
Cash 13,545 13,945
Investments in unconsolidated affiliates 95,836 98,790
Accrued investment income 97,883 82,541
Reinsurance ceded receivables 42,695 38,436
Prepaid reinsurance premiums 109,965 84,648
Premiums due and other receivables 70,922 74,015
Deferred policy acquisition costs 739,023 675,656
Property and equipment 26,455 31,357
Other assets 66,810 77,052
Separate account assets 152,533 142,608
----------- -----------
TOTAL ASSETS $ 7,988,545 $ 7,140,033
=========== ===========
LIABILITIES
Policyholder funds
Future policy benefits:
Life and annuity $ 1,939,926 $ 1,905,547
Accident and health 106,555 108,128
Policy account balances 2,353,245 1,775,641
Policy and contract claims 289,846 278,228
Other policyholder funds 356,456 296,934
----------- -----------
$ 5,046,028 $ 4,364,478
Current federal income taxes 17,810 11,808
Deferred federal income taxes 196,712 194,412
Other liabilities 101,556 105,614
Separate account liabilities 152,533 142,608
----------- -----------
TOTAL LIABILITIES $ 5,514,639 $ 4,818,920
=========== ===========
STOCKHOLDERS' EQUITY
Capital stock 30,832 30,832
Additional paid-in capital 211 211
Net unrealized gains on securities 163,352 158,898
Retained earnings 2,382,238 2,233,899
Treasury stock, at cost (102,727) (102,727)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 2,473,906 $ 2,321,113
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,988,545 $ 7,140,033
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except for per share data)
<TABLE>
<CAPTION>
NET
ADDITIONAL UNREALIZED TOTAL
CAPITAL PAID-IN GAINS ON RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL SECURITIES EARNINGS STOCK EQUITY
-------- ----------- ----------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994 $ 30,832 $ 211 $ 52,907 $ 2,091,085 $ (102,727) $ 2,072,308
Net income 206,364 206,364
Dividends to stockholders
($2.40 per share) (63,550) (63,550)
Increase in unrealized gains on
marketable securities, net
of applicable federal
income taxes 105,991 105,991
-------- ------ -------- ----------- --------- -----------
BALANCE DECEMBER 31, 1995 $ 30,832 $ 211 $158,898 $ 2,233,899 $ (102,727) $ 2,321,113
Net income 215,595 215,595
Dividends to stockholders
($2.54 per share) (67,256) (67,256)
Increase in unrealized gains on
marketable securities, net
of applicable federal
income taxes 4,454 4,454
-------- ------ -------- ----------- --------- -----------
BALANCE DECEMBER 31, 1996 $ 30,832 $ 211 $163,352 $ 2,382,238 $(102,727) $ 2,473,906
======== ====== ======== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 215,595 $ 206,364
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in liabilities for policyholders' funds 103,946 85,054
Charges to policy account balances (81,651) (61,454)
Interest credited to policy account balances 121,689 86,051
Deferral of policy acquisition costs (182,124) (195,253)
Amortization of deferred policy acquisition costs 108,017 96,398
Deferred federal income tax benefit (237) (9,558)
Depreciation 20,104 19,378
Accrual and amortization of discounts and premiums (7,959) (6,713)
Gain from sale of investments (58,001) (76,335)
Equity in earnings of unconsolidated affiliates (10,764) (2,170)
Decrease (increase) in premiums receivable 3,093 (863)
Increase in accrued investment income (15,342) (11,534)
Capitalization of interest on policy and mortgage loans (14,338) (14,335)
Other changes, net (36,969) (22,101)
--------- -----------
Net cash provided by operating activities $ 165,059 $ 92,929
--------- -----------
INVESTING ACTIVITIES
Proceeds from sale or maturity of investments:
Bonds $ 201,485 $ 269,704
Stocks 191,284 215,684
Real estate 26,528 12,556
Other invested assets 1,112 12,456
Principal payments received on:
Mortgage loans 56,352 137,545
Policy loans 37,645 37,296
Purchases of investments:
Bonds (725,070) $(1,087,283)
Stocks (120,441) (120,699)
Real estate (7,696) (25,187)
Mortgage loans (218,019) (152,856)
Policy loans (25,137) (24,615)
Other invested assets (74,259) (28,776)
Decrease (increase) in short-term investments, net 9,596 (2,446)
Decrease in investments in unconsolidated affiliates, net 13,718 7,050
Increase in property and equipment, net (2,867) (3,706)
--------- -----------
Net cash used in investing activities $(635,769) $ (753,277)
--------- -----------
FINANCING ACTIVITIES
Policyholders' deposits to policy account balances $ 756,727 $ 867,077
Policyholders' withdrawals from policy account balances (219,161) (132,091)
Dividends to stockholders (67,256) (63,550)
--------- -----------
Net cash provided by financing activities $ 470,310 $ 671,436
--------- -----------
NET INCREASE (DECREASE) IN CASH $ (400) $ 11,088
Cash:
Beginning of the year 13,945 2,857
--------- -----------
End of the year $ 13,545 $ 13,945
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
American National Insurance Company (American National) is a multiline
insurance company offering a broad line of insurance coverages, including
individual and group life, health, and annuities; personal lines property and
casualty; and credit insurance. In addition, through subsidiaries, American
National also offers mutual funds and real estate management services. The
majority (99%) of revenues are generated by the insurance business. With the
exception of New York, business is conducted in all states, as well as Puerto
Rico, Guam and American Samoa. American National is also authorized to sell its
products to American military personnel in Western Europe. Various distribution
systems are utilized, including home service, multiline ordinary, group
brokerage, credit and independent third party marketing organizations.
American National's insurance subsidiaries are American National Life
Insurance Company of Texas, Garden State Life Insurance Company, Standard Life
and Accident Insurance Company, American National Property and Casualty Company
and American National General Insurance Company. The major non-insurance
subsidiaries are Securities Management & Research, Inc. and ANREM Corporation.
As part of its investment portfolio, American National also owns interests in
unconsolidated affiliates, primarily several real estate joint ventures and
partnerships.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION--The consolidated
financial statements include the accounts of American National Insurance Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation. Investments in unconsolidated affiliates
are shown at cost plus equity in undistributed earnings since the dates of
acquisition.
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles which, for the insurance subsidiaries,
differs from the basis of accounting followed in reporting to insurance
regulatory authorities. (See Note 12.)
MANAGEMENT'S ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect:
1) The reported amounts of assets and liabilities
2) The disclosure of contingent assets and liabilities at the date of the
financial statements
3) The reported amounts of revenues and expenses during the reporting period
Actual results could differ from those estimates. Future events, which could
impact the estimates used in these financial statements, include changes in the
levels of mortality, morbidity, persistency and interest rates.
INVESTMENTS
DEBT SECURITIES--Bonds which are intended to be held-to-maturity are carried
at amortized cost. The carrying value of these debt securities is expected to be
realized due to American National's ability and intent to hold these securities
until maturity.
Bonds held as available-for-sale are carried at market.
Bonds with an amortized value of $71,829,000 at December 31, 1996 were on
deposit with various state insurance departments, as required by law.
PREFERRED STOCKS--All preferred stocks are classified as available-for-sale
and are carried at market.
COMMON STOCKS--All common stocks are classified as available-for-sale and are
carried at market.
UNREALIZED GAINS--For all investments carried at market, the unrealized gains
or losses (differences between amortized cost and market), net of applicable
federal income taxes, are reflected in stockholders' equity.
MORTGAGE LOANS--Mortgage loans on real estate are carried at amortized cost,
less allowance for valuation impairments.
The mortgage loan portfolio is closely monitored through the review of loan
and property information such as debt service coverage, annual operating
statements and property inspection reports. This information is evaluated in
light of current economic conditions and other factors, such as geographic
location and property type. As a result of this review, impaired loans are
identified and valuation allowances are established. Impaired loans are loans
where, based on current information and events, it is probable that American
National will be unable to collect all amounts due according to the contractual
terms of the loan agreement.
Effective January 1, 1995, American National adopted FASB Statement No. 114,
"Accounting by Creditors for Impairment of a Loan" and the statement which
amended it, FASB Statement No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." These two statements require that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment, the impairment is recorded as a valuation allowance. As American
National utilized similar methods to calculate valuation allowances in prior
years, the adoption of these standards did not have a material effect on
American National's consolidated financial position or results of operations.
POLICY LOANS--Policy loans are carried at cost.
INVESTMENT REAL ESTATE--Investment real estate is carried at cost, less
allowances for depreciation and valuation impairments. Depreciation is provided
over the estimated useful lives of the properties (15 to 50 years) using
straight-line and accelerated methods.
Effective January 1, 1996, American National adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of." This statement requires that long-lived assets be reviewed for
impairment whenever circumstances indicate that the carrying
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
value may not be recoverable. The review must be done by estimating future
undiscounted cash flows to be received. If the sum of the expected future
undiscounted cash flows is less than the carrying value, an analysis of the
investment's fair value compared with its carrying value is performed. If the
fair value is less than the carrying value, an impairment loss is recognized as
a charge to current earnings. This statement also requires that long-lived
assets to be disposed of be carried at the lower of book value or the expected
amount to be received on sale, less the cost to sell.
American National's real estate portfolio is closely monitored through the
review of operating information and periodic inspections. This information is
evaluated in light of current economic conditions and other factors, such as
geographic location and property type. As a result of this review, if there is
any indication of an adverse change in the economic condition of a property, a
complete cash flow analysis is performed to determine if an impairment allowance
is necessary. If a possible impairment is indicated, the fair market value of
the property is estimated using a variety of techniques, including cash flow
analysis, appraisals and comparison to the values of similar properties. If the
book value is greater than the estimated fair market value, an impairment
allowance is established. As American National used similar methods to calculate
valuation reserves on investment real estate in prior years, the adoption of
this new standard did not have a material effect on American National's
consolidated financial position or results of operations.
Prior to January 1, 1996, American National's real estate acquired in
satisfaction of debt (foreclosed real estate) was carried at cost less
accumulated depreciation and reserves for possible losses. Upon the adoption of
FASB Statement No. 121, American National determined that all of its foreclosed
real estate was held for sale and should therefore be held at the lower of book
value or the expected amount to be received on sale, less the cost to sell,
without any further allowance for depreciation. Since all of the book values for
foreclosed real estate were below the expected amount to be received on sale,
less the cost to sell, the adoption of this new standard did not have a material
effect on American National's consolidated financial position or results of
operations.
SHORT-TERM INVESTMENTS--Short-term investments are carried at amortized cost.
OTHER INVESTED ASSETS--Other invested assets are carried at cost, less
allowance for valuation impairments. Valuation allowances for other invested
assets are considered on an individual basis in accordance with the same
procedures as used for investment real estate.
INVESTMENT VALUATION ALLOWANCES AND IMPAIRMENTS--Investment valuation
allowances are established for other than temporary impairments of mortgage
loans, real estate and other assets in accordance with the policies established
for each class of invested asset. The increase in the valuation allowances is
reflected in current period income as a realized losS.
Management believes that the valuation allowances are adequate. However, it is
reasonably possible that a significant change in economic conditions in the near
term could result in losses exceeding the amounts established.
CASH--American National considers cash on hand and in banks as cash for
purposes of the consolidated statements of cash flows.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES--These assets are primarily
investments in real estate joint ventures, and are accounted for under the
equity method of accounting.
PROPERTY AND EQUIPMENT--These assets consist of buildings occupied by the
companies, electronic data processing equipment, and furniture and equipment.
These assets are carried at cost, less accumulated depreciation. Depreciation is
provided using straight-line and accelerated methods over the estimated useful
lives of the assets (three to 50 years).
INSURANCE SPECIFIC ASSETS AND LIABILITIES
DEFERRED POLICY ACQUISITION COSTS--Certain costs of acquiring new insurance
business have been deferred. For life, annuity and accident and health business,
such costs consist of inspection report and medical examination fees,
commissions, related fringe benefit costs and the cost of insurance in force
gained through acquisitions. The amount of commissions deferred includes first-
year commissions and certain subsequent year commissions which are in excess of
ultimate level commission rates.
The deferred policy acquisition costs on traditional life and health products
are amortized with interest over the anticipated premium-paying period of the
related policies, in proportion to the ratio of annual premium revenue to be
received over the life of the policies. Expected premium revenue is estimated by
using the same mortality and withdrawal assumptions used in computing
liabilities for future policy benefits. The amount of deferred policy
acquisition costs is reduced by a provision for possible inflation of
maintenance and settlement expenses in the determination of such amounts by
means of grading interest rates.
Costs deferred on universal life, limited pay and investment type contracts
are amortized as a level percentage of the present value of anticipated gross
profits from investment yields, mortality, and surrender charges. The effect on
the deferred policy acquisition costs that would result from realization of
unrealized gains (losses) is recognized with an offset to net unrealized gains
(losses) in consolidated stockholders' equity at the balance sheet date. It is
reasonably possible that a change in interest rates could have a significant
impact on the deferred policy acquisition costs calculated for these contracts.
Deferred policy acquisition costs associated with property and casualty
insurance business consist principally of commissions, underwriting and issue
costs. These costs are amortized over the coverage period of the related
policies, in relation to premium revenue recognized.
FUTURE POLICY BENEFITS--For traditional products, liabilities for future
policy benefits have been provided on the net level premium method based on
estimated investment yields, withdrawals, mortality and other assumptions which
were appropriate at the time the policies were issued. Estimates used are based
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
on the companies' experience, as adjusted to provide for possible adverse
deviation. these estimates are periodically reviewed and compared with actual
experience. when it is determined that actual experience differs significantly
from the assumed, the estimates are revised for current and future issues.
Investment contracts are defined as long-duration contracts which do not
subject the company to risks arising from policyholder mortality or morbidity.
Future policy benefits for universal life and investment-type contracts reflect
the current account value before applicable surrender charges. It is possible
that a change in interest rates could have a significant impact on the values
calculated for these contracts.
RECOGNITION OF PREMIUM REVENUE AND POLICY BENEFITS
TRADITIONAL ORDINARY LIFE AND HEALTH--Life and accident and health premium is
recognized as revenue when due. Benefits and expenses are associated with earned
premiums to result in recognition of profits over the life of the policy
contracts. This association is accomplished by means of the provision for
liabilities for future policy benefits and the amortization of deferred policy
acquisition costs.
ANNUITIES--Revenues from annuity contracts represent amounts assessed against
contract holders. Such assessments are principally surrender charges and, in the
case of variable annuities, administrative fees. Policy account balances for
annuities represent the premiums received plus accumulated interest less
applicable accumulated administrative fees. it is possible that a change in
interest rates could have a significant impact on the values calculated for
these contracts.
UNIVERSAL LIFE AND SINGLE PREMIUM WHOLE LIFE--Revenues from universal life
policies and single premium whole life policies represent amounts assessed
against policyholders. Included in such assessments are mortality charges,
surrender charges actually paid, and earned policy service fees. Policyholder
account balances consist of the premiums received plus credited interest, less
accumulated policyholder assessments. Amounts included in expense represent
benefits in excess of account balances returned to policyholders.
PROPERTY AND CASUALTY--Property and casualty premiums are recognized as
revenue proportionately over the contract period. policy benefits consist of
actual claims and the change in reserves for losses and loss adjustment
expenses. The reserves for losses and loss adjustment expenses are estimates of
future payments of reported and unreported claims and the related expenses with
respect to insured events that have occurred. These reserves are calculated
using case-basis estimates for reported losses and experience for claims
incurred but not reported. These loss reserves are reported net of an allowance
for salvage and subrogation. Management believes that American National's
reserves have been appropriately calculated based on available information as of
December 31, 1996. However, it is possible that the ultimate liabilities may
vary significantly from these estimated amounts.
PARTICIPATING INSURANCE POLICIES--The allocation of dividends to participating
policyowners is based upon a comparison of experience rates of mortality,
interest and expense, as determined periodically for representative plans of
insurance, issue ages and policy durations, with the corresponding rates assumed
in the calculation of premiums. Participating business comprised approximately
2.6% of the life insurance in force at December 31, 1996, and 4.5% of life
premiums in 1996.
FEDERAL INCOME TAXES--American National and its subsidiaries file a
consolidated life/non-life federal income tax return. Garden State Life
Insurance Company files a separate return.
Deferred federal income tax assets and liabilities have been recognized to
reflect the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Realization of the deferred tax assets is dependent upon generating sufficient
taxable income in the future. Management believes that it is more likely than
not that sufficient income will be generated to realize the net deferred tax
assets.
SEPARATE ACCOUNT ASSETS AND LIABILITIES--The separate account assets and
liabilities reflected in the consolidated financial statements represent funds
that are separately administered. American National maintains three separate
accounts. The first administers assets primarily for certain of the company's
own employee benefit plans. The second administers assets deposited by contract
holders of American National's variable universal life policies. The third
administers assets deposited by contract holders of American National's variable
annuity policies.
The investment income and investment gains and losses from these separate
funds accrue directly to, and investment risk is borne by, the contract holders
of the policies supported by the separate accounts. The assets of these accounts
are carried at market value. Deposits, net investment income and realized
investment gains and losses for these accounts are excluded from revenues, and
related liability increases are excluded from benefits and expenses in this
report.
NET INCOME PER SHARE--Net income per share is based on the weighted average
number of shares outstanding (26,479,165 shares for 1996 and 1995).
RECLASSIFICATIONS--Certain items in the 1995 consolidated financial statements
have been reclassified to conform with the 1996 presentation.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(3) INVESTMENTS
The amortized cost and estimated market values of investments in held-to-
maturity and available-for-sale securities are shown below (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Debt securities
Bonds held-to-maturity:
U. S. government and agencies $ 174,399 $ 3,911 $ (506) $ 177,804
States and political subdivisions 14,185 216 (39) 14,362
Foreign governments 107,573 4,257 (133) 111,697
Public utilities 1,142,072 19,654 (22,213) 1,139,513
All other corporate bonds 1,698,451 46,039 (17,584) 1,726,906
Mortgage-backed securities 294,046 13,527 (11) 307,562
---------- -------- -------- ----------
Total bonds held-to-maturity $3,430,726 $ 87,604 $(40,486) $3,477,844
---------- -------- -------- ----------
Bonds available-for-sale:
U. S. government and agencies $ 26,062 $ 559 (75) $ 26,546
Foreign governments 41,594 2,961 (10) 44,545
Public utilities 184,677 7,267 (222) 191,722
All other corporate bonds 252,053 13,826 (386) 265,493
---------- -------- -------- ----------
Total bonds available-for-sale $ 504,386 $ 24,613 $ (693) $ 528,306
---------- -------- -------- ----------
Total debt securities $3,935,112 $112,217 $(41,179) $4,006,150
---------- -------- -------- ----------
Marketable equity securities:
Preferred stocks $ 50,546 $ 1,563 $ (484) $ 51,625
Common stocks 517,385 249,796 (13,142) 754,039
---------- -------- -------- ----------
Total marketable equity securities $ 567,931 $251,359 $(13,626) $ 805,664
---------- -------- -------- ----------
Total investments in securities $4,503,043 $363,576 $(54,805) $4,811,814
========== ======== ======== ==========
DECEMBER 31, 1995
Debt securities
Bonds held-to-maturity:
U. S. government and agencies $ 176,345 $ 10,317 $ (33) $ 186,629
States and political subdivisions 22,542 1,293 (75) 23,760
Foreign governments 94,727 8,178 -- 102,905
Public utilities 1,001,988 45,204 (1,956) 1,045,236
All other corporate bonds 1,258,303 90,154 (808) 1,347,649
Mortgage-backed securities 413,034 24,526 (85) 437,475
---------- -------- -------- ----------
Total bonds held-to-maturity $2,966,939 $179,672 $ (2,957) $3,143,654
---------- -------- -------- ----------
Bonds available-for-sale:
U. S. government and agencies $ 21,568 $ 1,512 $ -- $ 23,080
Foreign governments 42,839 5,089 -- 47,928
Public utilities 168,890 15,526 -- 184,416
All other corporate bonds 202,745 24,518 -- 227,263
---------- -------- -------- ----------
Total bonds available-for-sale $ 436,042 $ 46,645 $ -- $ 482,687
---------- -------- -------- ----------
Total debt securities $3,402,981 $226,317 $ (2,957) $3,626,341
---------- -------- -------- ----------
Marketable equity securities:
Preferred stocks $ 52,642 $ 1,716 $ (375) $ 53,983
Common stocks 514,781 217,092 (21,156) 710,717
---------- -------- -------- ----------
Total marketable equity securities $ 567,423 $218,808 $(21,531) $ 764,700
---------- -------- -------- ----------
Total investments in securities $3,970,404 $445,125 $(24,488) $4,391,041
========== ======== ======== ==========
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
DEBT SECURITIES:
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
BONDS HELD- BONDS AVAILABLE-
TO-MATURITY FOR-SALE
----------------------- -------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Due in one year
or less $ 99,681 $ 100,545 $ -- $ --
Due after one year
through five years 235,585 247,131 78,917 83,558
Due after five years
through ten years 2,704,384 2,721,356 409,652 427,632
Due after ten years 97,030 101,249 15,817 17,116
---------- ---------- -------- --------
$3,136,680 $3,170,281 $504,386 $528,306
Without single
maturity date 294,046 307,563 -- --
---------- ---------- -------- --------
$3,430,726 $3,477,844 $504,386 $528,306
========== ========== ======== ========
</TABLE>
Proceeds from sales of investments in securities classified as available-for-
sale (bonds and stocks) were $190,636,000 for 1996. Gross gains of $71,768,000
and gross losses of $227,000 were realized on those sales. Bonds were called by
the issuers during 1996, which resulted in proceeds from the disposal of
$40,126,000. Gross gains of $54,000 were realized on those disposals.
Proceeds from sales of investments in securities classified as available for
sale (bonds and stocks) were $251,800,000 for 1995. Gross gains of $89,912,000
and gross losses of $7,155,000 were realized on those sales. Bonds were called
by the issuers during 1995, which resulted in proceeds from the disposal of
$105,489,000. Gross gains of $1,575,000 and gross losses of $4,000 were realized
on those disposals.
All gains and losses were determined using specific identification of the
securities sold.
As of November 30, 1995, management determined that it would be advantageous
to have a larger percentage of the bond portfolio classified as available-for-
sale. As a result, bonds with an amortized cost of $340,171,000 were
reclassified from held-to-maturity to available-for-sale. Unrealized gains of
$29,576,000 and unrealized losses of $2,703,000 were recognized in stockholders'
equity at the time of the transfer. This transfer was done in conjunction with
the one-time reassessment allowed by the FASB Special Report "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities."
UNREALIZED GAINS ON SECURITIES:
Unrealized gains on marketable equity securities and bonds available-for-sale,
presented in the stockholder's equity section of the consolidated statements of
financial position, are net of deferred tax liabilities of $87,561,000 and
$85,024,000 for 1996 and 1995, respectively.
The change in the net unrealized gains on investments for the years ended
December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Bonds available-for-sale $ (22,725) $ 50,288
Preferred stocks (262) 5,792
Common stocks 40,718 107,380
Amortization of deferred
policy acquisition costs (10,740) --
----------- ---------
$ 6,991 $ 163,460
Provision for federal
income taxes (2,537) (57,469)
----------- ---------
$ 4,454 $ 105,991
========== =========
</TABLE>
MORTGAGE LOANS:
In general, mortgage loans are secured by first liens on income-producing real
estate. The loans are expected to be repaid from the cash flows or proceeds from
the sale of real estate. American National generally allows a maximum loan-to-
collateral-value ratio of 75% to 90% on newly funded mortgage loans. As of
December 31, 1996, mortgage loans have both fixed rates from 5.25% to 13% and
variable rates from 6% to 10.24%. The majority of the mortgage loan contracts
require periodic payments of both principal and interest and have amortization
periods of two to 31 years.
American National has investments in first-lien mortgage loans on real estate
with carrying values of $1,098,583,000 and $925,581,000 at December 31, 1996 and
1995, respectively. Problem loans, on which impairment allowances were
established, totaled $14,602,000 and $7,950,000 at December 31, 1996 and 1995,
respectively.
POLICY LOANS:
Policy loans have interest rates ranging from 2.5% to 12%. Approximately 98%
of the policy loan portfolio carried interest rates of 5% to 8% at December 31,
1996.
INVESTMENT INCOME AND REALIZED GAINS (LOSSES):
Investment income and realized gains (losses) from disposals of investments,
before federal income taxes, for the years ended December 31 are summarized as
follows (in thousands):
GAINS (LOSSES) FROM
INVESTMENT INCOME DISPOSALS OF INVESTMENT
---------------------- -----------------------
1996 1995 1996 1995
--------- --------- ------- -------
Bonds $ 281,780 $ 238,262 $ 172 $ (900)
Preferred stocks 3,372 3,419 13 23
Common stocks 17,649 18,737 74,410 85,205
Mortgage loans 94,851 89,152 (4,212) 1,301
Real estate 79,045 73,304 (7,249) 648
Other invested assets 27,348 27,566 (93) 2,153
Investment in
unconsolidated
affiliates -- -- 864 (1,236)
--------- --------- ------- --------
$ 504,045 $ 450,440 $60,905 $ 87,194
Investment expenses (64,434) (63,530) -- --
Increase in valuation
allowances -- -- (2,904) (10,859)
--------- --------- ------- --------
$ 439,611 $ 386,910 $58,001 $ 76,335
========= ========= ======= ========
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(4) OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK ON INVESTMENTS
American National employs a strategy to invest funds at the highest return
possible commensurate with sound and prudent underwriting practices to ensure a
well diversified investment portfolio.
BONDS:
American National's bond portfolio is of high investment quality and is well
diversified. The bond portfolio distributed by quality rating at December 31 is
summarized as follows:
1996 1995
------ ------
AAA 14% 15%
AA 6% 11%
A 54% 51%
BBB & below 26% 18%
Not rated -- 5%
------ ------
100% 100%
====== ======
COMMON STOCK:
American National's stock portfolio by market sector distribution at December
31 is summarized as follows:
1996 1995
------ ------
Basic materials 8% 7%
Capital goods 9% 19%
Consumer goods 20% 24%
Energy 7% 6%
Finance 6% 4%
Technology 13% 8%
Health care 21% 15%
Miscellaneous 16% 17%
------ ------
100% 100%
====== ======
MORTGAGE LOANS AND INVESTMENT REAL ESTATE:
American National invests primarily in the commercial sector in areas that
offer the potential for property value appreciation. Generally, mortgage loans
are secured by first liens on income-producing real estate.
Mortgage loans and investment real estate by property type distribution at
December 31 are summarized as follows:
INVESTMENT
MORTGAGE REAL
LOANS ESTATE
--------------- -------------
1996 1995 1996 1995
------ ------ ------ ------
Office buildings 21% 25% 30% 31%
Shopping centers 56% 52% 30% 26%
Commercial 4% 5% 16% 15%
Apartments 1% 1% 2% 6%
Hotels/motels 3% 3% 13% 12%
Industrial 12% 12% 4% 4%
Residential 1% 1% -- --
Other 2% 1% 5% 6%
------ ------ ------ ------
100% 100% 100% 100%
====== ====== ====== ======
Although American National has a diversified portfolio, a substantial portion
of its mortgage loan and real estate properties are dependent upon the economic
conditions in Texas and California. Mortgage loans and real estate investments
by geographic distribution at December 31 are as follows:
INVESTMENT
MORTGAGE REAL
LOANS ESTATE
--------------- -------------
1996 1995 1996 1995
------ ------ ------ ------
Texas 15% 18% 53% 55%
South Central, except Texas 2% 3% -- 2%
California 14% 17% 10% 10%
Western, except California 6% 6% 4% 4%
Southeastern U.S. 13% 11% 16% 13%
North Central U.S. 10% 8% 11% 10%
North Eastern U.S. 40% 37% 6% 6%
------ ------ ------ ------
100% 100% 100% 100%
====== ====== ====== ======
For discussion of other off-balance sheet risks, see Note 15.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated market values of financial instruments have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in developing the estimates of fair value.
Accordingly, these estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange or the amounts that may
ultimately be realized. The use of different market assumptions or estimating
methodologies may have a material effect on the estimated market values.
DEBT SECURITIES:
The estimated market values for bonds represent quoted market values from
published sources or bid prices obtained from securities dealers.
MARKETABLE EQUITY SECURITIES:
Market values for preferred and common stocks represent quoted market prices
obtained from independent pricing services.
MORTGAGE LOANS ON REAL ESTATE:
The market value for mortgage loans on real estate is estimated using
discounted cash flow analyses based on interest rates currently being offered
for comparable loans. Loans with similar characteristics are aggregated for
purposes of the analyses.
POLICY LOANS:
The carrying amount for policy loans approximates their market value.
SHORT-TERM INVESTMENTS:
The carrying amount for short-term investments approximates their market value.
INVESTMENT CONTRACTS:
The market value of investment contract liabilities is estimated using a
discounted cash flow model, assuming the companies' current interest rates on
new products. The carrying value for these contracts approximates their market
value.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
INVESTMENT COMMITMENTS:
American National's investment commitments are all short-term in duration, and
the market value is not significant at December 31, 1996 or 1995.
The carrying amounts and estimated market values of financial instruments at
December 31 are as follows (in thousands):
1996 1995
---------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Financial assets:
Bonds:
Held-to-maturity $3,430,726 $3,477,844 $2,966,939 $3,143,654
Available-for-sale 528,306 528,306 482,687 482,687
Preferred stock 51,625 51,625 53,983 53,983
Common stock 754,039 754,039 710,717 710,717
Mortgage loans on
real estate 1,098,583 1,195,053 925,581 1,084,442
Policy loans 303,336 303,336 301,589 301,589
Short-term
investments 5,470 5,470 15,066 15,066
Financial liabilities:
Investment contracts 1,821,715 1,821,715 1,271,041 1,271,041
---------- ---------- ---------- ----------
(6) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs and premiums for the years ended December
31, 1996 and 1995 are summarized as follows (in thousands):
LIFE ACCIDENT ROPERTY &
& ANNUITY & HEALTH CASUALTY TOTAL
--------- --------- --------- ---------
Balance at
December 31, 1994 $ 465,028 $ 106,332 $ 5,441 $ 576,801
--------- --------- --------- ---------
Additions $ 154,688 $ 20,052 $ 19,943 $ 194,683
Amortization (57,774) (19,976) (18,648) (96,398)
--------- --------- --------- ---------
Net change $ 96,914 $ 76 $ 1,295 $ 98,285
Acquisitions $ 451 $ 120 $ (1) $ 570
--------- --------- --------- ---------
Balance at
December 31, 1995 $ 562,393 $ 106,528 $ 6,735 $ 675,656
--------- --------- --------- ---------
Additions $ 143,046 $ 17,847 $ 21,004 $ 181,897
Amortization (70,786) (17,311) (19,920) (108,017)
Effect of change in
unrealized gains on
available-for-sale
securities (10,740) (10,740)
--------- --------- --------- ---------
Net change $ 61,520 $ 536 $ 1,084 $ 63,140
Acquisitions $ 99 $ 128 $ -- $ 227
--------- --------- --------- ---------
Balance at
December 31, 1996 $ 624,012 $ 107,192 $ 7,819 $ 739,023
========= ========= ========= =========
1996 premiums $ 329,937 $ 364,198 $ 257,845 $ 951,980
========= ========= ========= =========
1995 premiums $ 308,949 $ 360,420 $ 233,512 $ 902,881
========= ========= ========= =========
Commissions comprise the majority of the additions to deferred policy
acquisition costs for each year.
Acquisitions relate to the acquisition of various insurance portfolios under
assumption reinsurance agreements.
(7) FUTURE POLICY BENEFITS
LIFE INSURANCE:
Interest assumptions used in the calculation of future policy benefits for
life policies are as follows:
PERCENTAGE OF
FUTURE POLICY
POLICY ISSUE INTEREST BENEFITS
YEAR RATE SO VALUED
- ------------------------------------------------------------------------------
ORDINARY--
1996 7.5% for years 1 through 5, graded to 5.5% at the
end of year 25, and level thereafter .................. 1%
1981-1995 8% for years 1 through 5, graded to 6% at the
end of year 25, and level thereafter .................. 17%
1976-1981 7% for years 1 through 5, graded to 5% at the
end of year 25, and level thereafter .................. 22%
1972-1975 6% for years 1 through 5, graded to 4% at the
end of year 25, and level thereafter .................. 9%
1969-1971 6% for years 1 through 5, graded to 3.5% at the
end of year 30, and level thereafter .................. 7%
1962-1968 4.5% for years 1 through 5, graded to 3.5% at the
end of year 15, and level thereafter .................. 14%
1948-1961 4% for years 1 through 5, graded to 3.5% at the
end of year 10, and level thereafter .................. 14%
1947 and prior Statutory rates of 3% or 3.5% ......................... 2%
INDUSTRIAL--
1948-1967 4% for years 1 through 5, graded to 3.5% at the
end of year 10, and level thereafter .................. 8%
1947 and prior Statutory rates of 3% ................................. 6%
- ------------------------------------------------------------------------------
100%
==============================================================================
Future policy benefits for universal life are calculated from the current
account value.
Future policy benefits for other policies have been calculated using level
interest rates principally as follows: annuities at 6% and group at 4%.
Mortality and withdrawal assumptions are based on American National's
experience.
HEALTH INSURANCE:
Interest assumptions used for future policy benefits on health policies are
calculated using a level interest rate of 6%.
Morbidity and termination assumptions are based on American National's
experience.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(8) LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for accident and health and property and casualty
unpaid claims and claim adjustment expenses is summarized as follows (in
thousands):
1996 1995
--------- ---------
Balance at January 1 $ 214,599 $ 213,406
Less reinsurance recoverables 1,346 1,741
--------- ---------
Net balance at January 1 $ 213,253 $ 211,665
--------- ---------
Incurred related to:
Current year $ 482,988 $ 456,721
Prior years (13,820) (19,587)
--------- ---------
Total incurred $ 469,168 $ 437,134
--------- ---------
Paid related to:
Current year $ 332,305 $ 337,421
Prior years 129,559 98,125
--------- ---------
Total paid $ 461,864 $ 435,546
--------- ---------
Net balance at December 31 $ 220,557 $ 213,253
Plus reinsurance recoverables 2,439 1,346
--------- ---------
Balance at December 31 $ 222,996 $ 214,599
========= =========
The balances at December 31 are included in policy and contract claims on the
consolidated statement of financial position.
(9) REINSURANCE
As is customary in the insurance industry, the companies reinsure portions of
certain insurance policies they write, thereby providing a greater
diversification of risk and managing exposure on larger risks. The maximum
amount that would be retained by one company (American National) would be
$700,000 individual life, $250,000 individual accidental death, $100,000 group
life and $125,000 credit life (total $1,175,000). If individual, group and
credit were in force in all companies at the same time, the maximum risk on any
one life could be $1,875,000.
The companies remain contingently liable with respect to any reinsurance ceded
and would become actually liable if the assuming companies were unable to meet
their obligations under any reinsurance treaties.
The company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. At December 31,
1996, amounts recoverable from reinsurers with a carrying value of $80,244,000
were associated with various auto dealer credit insurance program reinsurers
domiciled in the Caribbean islands of Nevis or the Turks and Caicos. The company
holds collateral related to these credit reinsurers totaling $63,068,000. This
collateral is in the form of custodial accounts controlled by the company, which
can be drawn on for amounts that remain unpaid for more than 120 days. American
National believes that the failure of any single reinsurer to meet its
obligations would not have a significant effect on its financial position or
results of operations.
Premiums, premium-related reinsurance amounts and reinsurance recoveries for
the years ended December 31 are summarized as follows (in thousands):
1996 1995
----------- -----------
Direct premiums $ 1,032,072 $ 962,190
Reinsurance premiums assumed
from other companies 20,052 24,109
Reinsurance premiums ceded
to other companies (100,144) (83,418)
----------- -----------
Net premiums $ 951,980 $ 902,881
=========== ===========
Reinsurance recoveries $ 54,871 $ 53,849
=========== ===========
Life insurance in force and related reinsurance amounts at December 31 are
summarized as follows (in thousands):
1996 1995
----------- -----------
Direct life insurance in force $41,945,640 $40,940,321
Reinsurance risks assumed
from other companies 583,853 549,337
----------- -----------
Total life insurance in force $42,529,493 $41,489,658
Reinsurance risks ceded to
other companies (6,007,905) (5,359,378)
----------- -----------
Net life insurance in force $36,521,588 $36,130,280
=========== ===========
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(10) SEGMENT INFORMATION
American National and its subsidiaries are engaged principally in the
insurance business and operate primarily in six segments (lines of business)
within the insurance industry.
The following table summarizes the premiums and other revenue, gain (loss)
from operations before equity in earnings of unconsolidated affiliates and
federal income taxes, and assets by line of business for the years ended
December 31, 1996 and 1995 (in thousands):
GAIN (LOSS)
BEFORE
APPLICABLE
FEDERAL
PREMIUMS INCOME TAXES
AND OTHER AND OTHER
LINE OF BUSINESS: REVENUE ITEMS ASSETS
- ----------------- ---------- ------------- -----------
1996
Individual life insurance $ 496,571 $ 79,076 $2,564,102
Individual accident and
health insurance 199,982 (4,943) 108,922
Annuities 167,226 5,783 1,870,659
Group life and health insurance 159,004 811 42,844
Credit insurance 53,411 1,978 123,508
Property and casualty insurance 269,519 15,052 292,113
---------- -------- -----------
Total insurance lines $1,345,713 $ 97,757 $ 5,002,148
Capital and surplus 137,573 138,781 2,912,340
Non-insurance 20,227 158 74,057
---------- -------- -----------
$1,503,513 $236,696 $ 7,988,545
Gain from sale of investments 58,001 58,001 --
---------- -------- -----------
$1,561,514 $294,697 $ 7,988,545
========== ======== ===========
1995
Individual life insurance $ 502,160 $ 77,817 $ 2,523,463
Individual accident and
health insurance 212,062 3,642 111,862
Annuities 96,716 627 1,309,626
Group life and health insurance 146,579 8,011 38,344
Credit insurance 48,616 1,679 103,382
Property and casualty insurance 243,933 10,361 258,346
---------- -------- -----------
Total insurance lines $1,250,066 $102,137 $ 4,345,023
Capital and surplus 124,403 125,899 2,709,441
Non-insurance 20,158 (264) 85,569
---------- -------- -----------
$1,394,627 $227,772 $ 7,140,033
Gain from sale of investments 76,335 76,335 --
---------- -------- -----------
$1,470,962 $304,107 $ 7,140,033
========== ======== ===========
Net investment income from fixed income assets (bonds and mortgage loans on
real estate) is allocated to insurance lines based on the funds generated by
each line at the average yield available from these fixed income assets at the
time such funds become available. Net investment income from policy loans is
allocated to the insurance lines according to the amount of loans made by each
line. Net investment income from all other assets is allocated to capital and
surplus.
Identifiable commissions and expenses are charged directly to the appropriate
line of business. The remaining expenses are allocated to the lines based upon
various factors including premium and commission ratios within the respective
lines.
Fixed income assets and policy loans have been directly assigned to the
insurance lines to the extent required for reserves. Equity type assets, such as
stocks and real estate and all other assets not required for reserves for the
insurance lines, have been assigned to capital and surplus.
Policy account deposits totaled $756,727,000 in 1996 and $867,077,000 in 1995.
The majority of these deposits were in the annuity line, which totaled
$648,234,000 and $763,049,000 in 1996 and 1995, respectively. The significant
increase in assets for the annuity line of business is directly attributable to
the volume of deposits received.
A significant portion of American National's insurance business is written
through one third-party marketing organization. Approximately 35% of the total
premium revenues and policy account deposits for both 1996 and 1995 were written
through that organization. Of the total business written by this one
organization, the majority was annuities.
(11) FEDERAL INCOME TAXES
The federal income tax provisions vary from the amounts computed when applying
the statutory federal income tax rate. A reconciliation of the effective tax
rate of the companies to the statutory federal income tax rate follows (in
thousands, except percentages):
1996 1995
------------------ -------------------
AMOUNT RATE AMOUNT RATE
-------- ------- --------- -------
Income tax on pre-tax income $106,911 35.00 % $ 107,197 35.00 %
Tax-exempt investment income (384) (0.13)% (465) (0.15)%
Dividend exclusion (3,303) (1.08)% (4,031) (1.32)%
Tax refund (7,360) (2.41)% (2,225) (0.73)%
Prior year reserve method change (3,994) (1.31)% -- -- %
Miscellaneous tax credits, net (1,350) (0.44)% -- -- %
Other items, net (654) (0.21)% (563) (0.18)%
-------- ------- --------- -------
$ 89,866 29.42 % $ 99,913 32.62 %
======== ======= ========= =======
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and December 31, 1995 are as follows (in thousands):
1996 1995
--------- ---------
Deferred tax assets:
Investment in bonds, real estate and
other invested assets, principally due to
investment valuation allowances $ 12,943 $ 18,066
Policyowner funds, principally
due to policy reserve discount 91,746 73,361
Policyowner funds, principally
due to unearned premium reserve 7,294 6,794
Other assets 9,491 6,225
--------- ---------
Total gross deferred tax assets $ 121,474 $ 104,446
Less valuation allowance (3,000) (3,000)
--------- ---------
Net deferred tax assets $ 118,474 $ 101,446
--------- ---------
Deferred tax liabilities:
Marketable equity securities, principally
due to net unrealized gains on stock $ (90,526) $ (85,025)
Investment in bonds, principally
due to accrual of discount on bonds (14,283) (12,223)
Deferred policy acquisition costs, due to
difference between GAAP and tax (188,725) (175,250)
Property, plant and equipment, principally
due to difference between GAAP
and tax depreciation methods (12,445) (14,329)
Prepaid pensions, principally due to
difference between GAAP and tax (7,091) (7,038)
Other liabilities (2,116) (1,993)
--------- ---------
Net deferred tax liabilities $(315,186) $(295,858)
--------- ---------
Total deferred tax $(196,712) $(194,412)
========= =========
Management believes that a sufficient level of taxable income will be achieved
to utilize the net deferred tax assets.
Through 1983, under the provision of the Life Insurance Company Income Tax Act
of 1959, life insurance companies were permitted to defer from taxation a
portion of their income (within certain limitations) until and unless it was
distributed to stockholders, at which time it was taxed at regular corporate tax
rates. No provision for deferred federal income taxes applicable to such untaxed
income has been made because management is of the opinion that no distributions
of such untaxed income (designated by federal law as "policyholders' surplus")
will be made in the foreseeable future. There was no change in the
"policyholders' surplus" between December 31, 1995 and December 31, 1996. The
cumulative balance was approximately $63,000,000 at both dates.
Federal income taxes totaling approximately $83,475,000 and $101,243,000 were
paid to the Internal Revenue Service in 1996 and 1995, respectively. The statute
of limitations has expired for the examination of federal income tax returns for
American National and its subsidiaries by the Internal Revenue Service, through
1992. All prior-year deficiencies have been paid or provided for, and American
National has filed appropriate claims for refunds through 1994. In the opinion
of management, adequate provision has been made for any tax deficiencies that
may be sustained.
(12) RECONCILIATION TO STATUTORY ACCOUNTING
American National and its insurance subsidiaries are required to file
statutory financial statements with state insurance regulatory authorities.
Accounting principles used to prepare such statutory financial statements differ
from those used to prepare financial statements on the basis of generally
accepted accounting principles.
Reconciliations of statutory net income and capital and surplus, as determined
using statutory accounting principles, to the amounts included in the
accompanying consolidated financial statements, as of and for the years ended
December 31, are as follows (in thousands):
1996 1995
----------- ----------
Statutory net income of insurance companies $ 146,100 $ 131,866
Net gain (loss) of non-insurance companies 750 (4,455)
----------- ----------
Combined net income $ 146,850 $ 127,411
Increases/(decreases):
Deferred policy acquisition costs 73,880 98,285
Policyholder funds (16,323) (33,461)
Deferred federal income tax benefit 237 9,558
Premiums deferred and other receivables 5,549 (1,444)
Gain on sale of investments 1,102 2,886
Change in interest maintenance reserve (463) 291
Asset valuation allowances (2,904) (4,764)
Dividend income from subsidiaries -- (1,577)
Other adjustments, net 7,711 6,979
Consolidating eliminations and adjustments (44) 2,200
Net income reported herein $ 215,595 $ 206,364
=========== ==========
1996 1995
----------- ----------
Statutory capital and
surplus of insurance companies $ 1,784,692 $1,639,304
Stockholders' equity
of non-insurance companies 79,316 89,856
----------- ----------
Combined capital and surplus $ 1,864,008 $1,729,160
Increases/(decreases):
Deferred policy acquisition costs 739,023 675,656
Policyholder funds 126,925 142,991
Deferred federal income taxes (196,712) (194,412)
Premiums deferred and other receivables (78,231) (83,781)
Reinsurance in "unauthorized companies" 30,506 16,542
Statutory asset valuation reserve 326,336 305,655
Statutory interest maintenance reserve 6,457 6,922
Asset valuation allowances (47,518) (44,668)
Non-admitted assets and
other adjustments, net 283,031 320,301
Consolidating eliminations and adjustments (579,919) (553,253)
----------- ----------
Stockholders' equity reported herein $ 2,473,906 $2,321,113
=========== ==========
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(13) STOCKHOLDERS' EQUITY
At December 31, 1996 and 1995, American National had 50,000,000 authorized
shares of $1.00 par value common stock. At December 31, 1996 and 1995, issued
shares were 30,832,449; treasury shares were 4,353,284; and outstanding shares
were 26,479,165.
American National's payment of dividends to stockholders is restricted by
statutory regulations. Generally, the restrictions require life insurance
companies to maintain minimum amounts of capital and surplus, and limit the
payment of dividends to statutory net gain from operations on an annual,
noncumulative basis in the absence of special approval. Additionally, insurance
companies are not permitted to distribute the excess of stockholders' equity as
determined on a GAAP basis over that determined on a statutory basis.
Generally, the same restrictions apply to American National's insurance
subsidiaries regarding amounts which can transfer in the form of dividends,
loans, or advances to the parent company.
At December 31, 1996, approximately $506,941,000 of American National's
consolidated stockholders' equity represents net assets of its insurance
subsidiaries. Any transfer of these net assets to American National would be
subject to statutory restrictions and approval.
(14) RETIREMENT BENEFITS
American National and its subsidiaries have one tax-qualified pension plan,
which has three separate programs. Two of the programs are contributory and
cover substantially all hourly employees and home service agents. The third
program is noncontributory, and covers salaried and management employees. The
program covering salaried and management employees provides pension benefits
that are based on years of service and the employee's compensation during the
five years before retirement. The programs covering hourly employees and agents
generally provide benefits that are based on the employee's average monthly
compensation during the five highest compensated years within the last ten years
before retirement, or career average earnings, as applicable, and years of
service. American National also sponsors two non-tax-qualified pension plans for
key executives that restore benefits that would otherwise be curtailed by
statutory limits on qualified plan benefits.
The companies' funding policy for the pension plans is to make annual
contributions in accordance with the minimum funding standards of the Employee
Retirement Income Security Act of 1974.
Actuarial computations of pension expense (before income taxes) produced a
pension debit of $902,000 for 1996 and $15,000 for 1995.
The pension debit is made up of the following (in thousands):
1996 1995
-------- --------
Service cost--benefits earned during period $ 5,040 $ 4,515
Interest cost on projected benefit obligation 6,735 6,168
Actual return on plan assets (6,542) (14,988)
Net amortization and deferral (4,331) 4,320
-------- --------
Total pension debit $ 902 $ 15
======== ========
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table sets forth the funded status and amounts recognized in the
consolidated statements of financial position at December 31 for the companies'
pension plans.
Actuarial present value of benefit obligation:
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Vested benefit obligation $(66,688) $(16,029) $(64,517) $(13,581)
======== ======== ======== ========
Accumulated benefit
obligation $(70,303) $(16,029) $(68,437) $(13,581)
======== ======== ======== ========
Projected benefit obligation $(85,891) $(20,975) $(82,891) $(17,545)
Plan assets at fair value
(long-term securities) 125,068 -- 126,591 --
-------- -------- -------- --------
Plan assets in excess of
projected benefit
obligation $ 39,177 $(20,975) $ 43,700 $(17,545)
Unrecognized net loss 7,842 3,519 3,519 2,918
Prior service cost not yet
recognized in periodic
pension cost 18 1,902 113 2,299
Unrecognized net transition
asset at January 1 being
recognized over 15 years (13,097) -- (15,716) --
Adjustment required to
recognize additional
liability -- (513) -- (1,279)
-------- -------- -------- --------
Prepaid pension cost
included in other assets $ 33,940 $(16,067) $ 31,616 $(13,607)
======== ======== ======== ========
</TABLE>
Assumptions used at December 31:
1996 1995
------ ------
Weighted-average discount rate
on benefit obligation 6.50% 6.40%
Rate of increase in compensation levels 4.50% 4.80%
Expected long-term rate of return on plan assets 8.00% 8.00%
Under American National and its subsidiaries' various group benefit plans for
active employees, a $2,500 paid-up life insurance certificate is provided upon
retirement for eligible participants who meet certain age and length of service
requirements.
American National has one retiree health benefit plan for retirees of all
companies in the consolidated group, with the exception of Standard Life and
Accident Insurance Company (Standard). The retirees of Standard are covered
under a separate health plan. Participation in either of these plans is limited
to current retirees and their dependents and those employees and their
dependents who met certain age and length of service requirements as of December
31, 1993. No new participants will be added to these plans in the future.
The retiree health benefit plans provide major medical benefits for
participants under the age of 65 and Medicare supplemental benefits for those
over 65. Prescription drug benefits are provided to both age groups. The plans
are contributory, with the company's contribution limited to $80 per month for
retirees and spouses under the age of 65 and $40 per month for retirees and
spouses over the age of 65. All additional contributions necessary, over the
amount to be contributed by the companies, are to be contributed by the
retirees.
The accrued post-retirement benefit obligation, included in other liabilities,
was $13,007,000 and $13,105,000 at December 31, 1996 and 1995 respectively.
These amounts were approximately equal to the unfunded accumulated post-
retirement benefit obligation. Since the companies' contributions to the cost of
the retiree benefit plans are fixed, the health care cost trend rate will have
no effect on the future expense or the accumulated post-retirement benefit
obligation.
(15) COMMITMENTS AND CONTINGENCIES
American National and its subsidiaries lease office space in various cities
for their insurance sales offices. The long-term lease commitments at December
31, 1996 were approximately $5,796,000.
In the ordinary course of their operations, the companies also had commitments
outstanding at December 31, 1996 to purchase, expand or improve real estate and
to fund mortgage loans aggregating $139,217,000, all of which is expected to be
funded in 1997. Of the commitment amount, $83,275,000 of mortgage loan
commitments have interest rates that are fixed.
The companies are defendants in various lawsuits concerning alleged failure to
honor certain loan commitments, alleged breach of certain agency and real estate
contracts, various employment matters, allegedly deceptive insurance sales and
marketing practices and other litigation arising in the ordinary course of
operations. Certain of these lawsuits include claims for compensatory and
punitive damages. Management is of the opinion, after reviewing the above
matters with legal counsel, that the ultimate liability, if any, resulting from
any of or all of the above matters would not have a material adverse effect on
the companies' consolidated financial position or results of operations.
However, these lawsuits are in various stages of development and future facts
and circumstances could result in management changing its conclusions.
In 1995, a series of fires occurred at a warehouse located in Houston, Texas,
which American National owns. American National leased the warehouse to a
company that, in turn, rented out space to various other parties to store
materials. As a result of these fires, some of the materials stored in the
warehouse caused damage at the warehouse site. As the owner of the warehouse,
American National is now named as a defendant in several lawsuits concerning
alleged damages related to the fires. After reviewing this situation with legal
counsel, management believes that American National has meritorious defenses
against these lawsuits. The company also has meritorious grounds to recover any
damages from the third parties who actually owned the materials that caused the
fires. Therefore, no specific reserves for this matter have been recorded in the
consolidated financial statements. However, if the defenses and recoveries are
not resolved in the manner that management anticipates, it is possible that the
resulting liability could have a material impact on the consolidated financial
results.
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors,
American National Insurance Company:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of American
National Insurance Company and subsidiaries included in this
registration statement and have issued our report thereon dated
February 17, 1997. Our audit was made for the purpose of
forming an opinion on the basic consolidated financial
statements taken as a whole. The accompanying schedules are the
responsibility of the Company's management and are presented
for purposes of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic
consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audit of
the basic consolidated financial statements and, in our
opinion, are fairly stated in all material respects in relation
to the basic consolidated financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1997
25
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (A) VALUE BALANCE SHEET
---------- ---------- -------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds Held-to-Maturity:
United States Government and government agencies
and authorities $ 174,399 $ 177,804 $ 174,399
States, municipalities and political subdivisions 14,185 14,362 14,185
Foreign governments 107,573 111,697 107,573
Public utilities 1,142,072 1,139,513 1,142,072
All other corporate bonds 1,992,497 2,034,468 1,992,497
Bonds Available-for-Sale:
United States Government and government agencies
and authorities 26,062 26,546 26,546
Foreign governments 41,594 44,545 44,545
Public utilities 184,677 191,722 191,722
All other corporate bonds 252,053 265,493 265,493
Redeemable preferred stock 50,546 51,625 51,625
---------- ---------- ----------
Total fixed maturities $3,985,658 $4,057,775 $4,010,657
---------- ---------- ----------
Equity Securities:
Common stocks:
Public utilities $ 41,606 $ 50,288 $ 50,288
Banks, trust and insurance companies 22,978 35,332 35,332
Industrial, miscellaneous and all other 452,801 668,419 668,419
---------- ---------- ----------
Total equity securities $ 517,385 $ 754,039 $ 754,039
---------- ---------- ----------
Mortgage loans on real estate $1,098,583 XXXXXX $1,098,583
Investment real estate 268,632 XXXXXX 268,632
Real estate acquired in satisfaction of debt 62,097 XXXXXX 62,097
Policy loans 303,336 XXXXXX 303,336
Other long-term investments 70,064 XXXXXX 70,064
Short-term investments 5,470 XXXXXX 5,470
---------- ---------- ----------
Total investments $6,311,225 XXXXXX $6,572,878
========== ========== ==========
</TABLE>
(a) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and valuation write-downs and adjusted for
amortization of premiums or accrual of discounts.
26
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
FUTURE POLICY BENEFITS AMORTIZATION
DEFERRED BENEFITS, OTHER POLICY CLAIMS, LOSSES OF DEFERRED
POLICY LOSSES, CLAIMS CLAIMS AND NET AND POLICY
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT ACQUISITION
SEGMENT COST EXPENSES PREMIUMS PAYABLE REVENUE INCOME (A) EXPENSES COSTS
----------- -------------- -------- ------------ ------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Individual life insurance $426,277 $2,329,606 $ 6,518 $ 54,793 $271,715 $151,323 $236,716 $ 47,715
Individual accident and
health insurance 57,183 95,424 4,316 64,641 192,450 7,471 142,628 4,429
Annuities 172,502 1,936,717 -- 8,729 35,610 115,726 115,422 15,339
Group life and A & H
insurance 19,830 37,979 3,509 39,230 152,420 4,600 109,543 4,712
Credit insurance 55,412 -- 205,213 37,499 41,940 5,213 20,668 15,902
Property and casualty
insurance 7,819 -- 111,011 110,843 257,845 11,733 206,120 19,920
Capital and surplus -- -- -- -- -- 137,264 -- --
Non-insurance -- -- -- -- -- 6,281 -- --
-------- ---------- -------- -------- -------- -------- -------- --------
Total $739,023 $4,399,726 $330,567 $315,735 $951,980 $439,611 $831,097 $108,017
======== ========== ======== ======== ======== ======== ======== ========
1995
Individual life insurance $420,737 $2,299,547 $ 5,610 $ 56,267 $271,387 $154,740 $229,989 $ 49,009
Individual accident and
health insurance 60,260 95,966 4,634 65,581 204,187 7,797 143,034 6,176
Annuities 123,788 1,359,143 4 5,857 13,348 74,275 71,748 2,182
Group life and A & H
insurance 17,803 34,660 3,881 35,567 141,374 3,940 93,351 7,683
Credit insurance 46,333 -- 175,538 29,428 39,073 4,291 17,456 12,700
Property and casualty
insurance 6,735 -- 85,442 107,353 233,512 10,864 193,453 18,648
Capital and surplus -- -- -- -- -- 123,948 -- --
Non-insurance -- -- -- -- -- 7,055 -- --
-------- ---------- -------- -------- -------- -------- -------- --------
Total $675,656 $3,789,316 $275,109 $300,053 $902,881 $386,910 $749,031 $ 96,398
======== ========== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
COLUMN J COLUMN K
OTHER
OPERATING PREMIUMS
SEGMENT EXPENSES (B) WRITTEN
------------ ---------
<S> <C> <C>
1996
Individual life insurance $122,548 $ --
Individual accident and
health insurance 58,343 --
Annuities 2,548 --
Group life and A & H
insurance 45,694 --
Credit insurance 14,863 --
Property and casualty
insurance 28,427 271,061
Capital and surplus (1,208) --
Non-insurance 20,069 --
-------- --------
Total $291,284 $271,061
======== ========
1995
Individual life insurance $124,599 $ --
Individual accident and
health insurance 61,511 --
Annuities 10,253 --
Group life and A & H
insurance 37,814 --
Credit insurance 16,828 --
Property and casualty
insurance 21,471 245,527
Capital and surplus (1,496) --
Non-insurance 20,422 --
-------- --------
Total $291,402 $245,527
======== ========
</TABLE>
(a) Net investment income from fixed income assets (bonds and mortgage loans on
real estate) is allocated to insurance lines based on the funds generated
by each line at the average yield available from these fixed income assets
at the time such funds become available. Net investment income from policy
loans is allocated to the insurance lines according to the amount of loans
made by each line. Net investment income from all other assets is allocated
to capital and surplus.
(b) Identifiable commissions and expenses are charged directly to the
appropriate line of business. The remaining expenses are allocated to the
lines based upon various factors including premium and commission ratios
within the respective lines.
27
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(In thousands except percentages)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
CEDED TO ASSUMED PERCENTAGE OF
GROSS OTHER FROM OTHER NET AMOUNT ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
1996
Life insurance in force $ 41,945,640 $ 6,007,905 $ 583,853 $ 36,521,588 1.6%
============ =========== ========= ============ =======
Premiums:
Life insurance 368,984 45,955 6,908 329,937 2.1%
Accident and health insurance 398,500 41,995 7,693 364,198 2.1%
Property and liability insurance 264,588 12,194 5,451 257,845 2.1%
------------ ----------- --------- ------------ -------
Total premiums $ 1,032,072 $ 100,144 $ 20,052 $ 951,980 2.1%
============ =========== ========= ============ =======
1995
Life insurance in force $ 40,940,321 $ 5,359,378 $ 549,337 $ 36,130,280 1.5%
============ =========== ========= ============ =======
Premiums:
Life insurance 341,766 40,501 7,684 308,949 2.5%
Accident and health insurance 387,976 36,309 8,753 360,420 2.4%
Property and liability insurance 232,448 6,608 7,672 233,512 3.3%
------------ ----------- --------- ------------ -------
Total premiums $ 962,190 $ 83,418 $ 24,109 $ 902,881 2.7%
============ =========== ========= ============ =======
</TABLE>
28
<PAGE>
AMERICAN NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
DEDUCTIONS - DESCRIBE
----------------------------
BALANCE AT ADDITIONS AMOUNTS BALANCE AT
BEGINNING OF CHARGED TO WRITTEN OFF DUE AMOUNTS END OF
DESCRIPTION PERIOD EXPENSE TO DISPOSAL (A) COMMUTED (B) PERIOD
------------ ------------ --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1996
Investment valuation allowances:
Mortgage loans on real estate $ 12,824 $ 3,037 $ -- $ 1,015 $14,846
Investment real estate 38,793 4,803 10,652 4,383 28,561
Investment in unconsolidated affiliates 1,113 1,214 -- -- 2,327
Other assets 2,000 3,447 (6,453) -- 11,900
-------- ------- ------- -------- -------
Total $ 54,730 $12,501 $ 4,199 $ 5,398 $57,634
======== ======= ======= ======== =======
1995
Investment valuation reserves:
Mortgage loans on real estate $ 9,287 $ 4,526 $ 981 $ 8 $12,824
Investment real estate 32,888 9,973 1,608 2,460 38,793
Investment in unconsolidated affiliates 1,696 -- -- 583 1,113
Other assets -- 2,000 -- -- 2,000
-------- ------- ------- -------- -------
Total $ 43,871 $16,499 $ 2,589 $ 3,051 $54,730
======== ======= ======= ======== =======
</TABLE>
(a) Amounts written off due to disposal represent reductions or (additions) in
the balance due to sales, transfers or other disposals of the asset with
which the allowance is associated.
(b) Amounts commuted represent reductions in the allowance balance due to
changes in requirements or investment conditions.
29
<PAGE>
TERMINATION OF PARTICIPATION AGREEMENTS
The participation agreements pursuant to which the Funds sell their
shares to the Variable Account contain varying provisions regarding termination.
The following generally summarizes those provisions:
THE FIDELITY FUNDS
Both participation agreements for the Fidelity Funds provide for
termination: (1) upon sixty days advance written notice by any party; (2) by
American National with respect to any Fidelity Portfolio if American National
determines that shares of such Fidelity Portfolio are not reasonably available
to meet the requirements of the Contracts; (3) by American National with respect
to any Fidelity Portfolio if any of the shares of such Fidelity Portfolio are
not registered, issued, or sold in accordance with applicable state or federal
law or such law precludes the use of such shares as the underlying investment
media of the Contracts; (4) by American National with respect to any Fidelity
Portfolio if such Fidelity Portfolio ceases to be qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code (the "Code"),
or if American National reasonably believes the Fidelity Funds may fail to so
qualify; (5) by American National with respect to any Fidelity Portfolio if such
Fidelity Portfolio fails to meet the diversification requirements specified in
the Fidelity participation agreement; (6) by the Fidelity Funds or the
underwriter, upon a determination by either, that American National has suffered
a material adverse change in its business, operations, financial condition, or
prospects, or is the subject of material adverse publicity; (7) by American
National upon a determination by American National that either the Fidelity
Funds or the underwriter has suffered a material adverse change in its business,
operations, financial condition, or prospects, or is the subject of material
adverse publicity; (8) by the Fidelity Funds or the underwriter forty-five days
after American National gives the Fidelity Funds and the underwriter written
notice of American National's intention to make another investment company
available as a funding vehicle for the Contracts, if at the time such notice was
given, no other notice of termination of the Fidelity participation agreement
was then outstanding; or (9) upon a determination that a material irreconcilable
conflict exists between the interests of the Contractowners and other investors
in the Fidelity Funds or between American National's interests in the Fidelity
Funds and the interests of other insurance companies invested in the Fidelity
Funds.
THE VAN ECK FUND
This participation agreement provides for termination: (1) upon sixty
days advance written notice by any party; (2) by American National with respect
to any Van Eck Portfolio if American National determines that shares of such Van
Eck Portfolio are not reasonably available to meet the requirements of the
Contracts; (3) by American National with respect to any Van Eck Portfolio if any
of the shares of such Van Eck Portfolio are not registered, issued, or sold in
accordance with applicable state or federal law or such law precludes the use of
such shares as the underlying investment media of the Contracts; (4) by American
National with respect to any Van Eck Portfolio if such Van Eck Portfolio ceases
to qualify as a Regulated Investment Company under Subchapter M of the Code, or
if American National reasonably believes the Van Eck Fund will fail to so
qualify; (5) by American National with respect to any Van Eck Portfolio if such
Van Eck Portfolio fails to meet the diversification requirements specified in
the Van Eck participation agreement; (6) by the Van Eck Fund or the underwriter,
upon a determination by either, that American National or its affiliated
companies has suffered a material adverse change in its business, operations,
financial condition, or prospects, or is the subject of material adverse
publicity; (7) by American National upon a determination by American National
that either the Van Eck Fund or the underwriter has suffered a material adverse
change in its business, operations, financial condition, or prospects, or is the
subject of material adverse publicity; (8) by the Van Eck Fund or the
underwriter forty-five days after American National gives the Van Eck Fund and
the underwriter written notice of American National's intention to make another
investment company available as a funding vehicle for the Contracts, if at the
time such notice was given, no other notice of termination of the Van Eck
participation agreement was then outstanding; or (9) upon a determination that a
material irreconcilable conflict exists between the interests of the
Contractowners and other investors or between American National's interests in
the Van Eck Fund and the interests of other insurance companies invested in the
Van Eck Fund.
THE T. ROWE PRICE FUNDS
This participation agreement provides for termination: (1) upon six
months advance written notice by any party; (2) by American National with
respect to any T. Rowe Price Portfolio if American National determines that
shares of such T. Rowe Price Portfolio are not reasonably available to meet the
requirements of the Contracts; (3) by American National with respect to any T.
Rowe Price Portfolio if any of the shares of such T. Rowe Price Portfolio are
not registered, issued, or sold in accordance with applicable state or federal
law or such law precludes the use of such shares as the underlying investment
media of the Contracts; (4) by the T. Rowe Price Funds or the underwriter upon
the institution of formal proceedings against American National by the SEC,
NASD, or any other regulatory body regarding American National's duties under
the T. Rowe Price participation agreement or related to the sale of the
Contracts, the operation of the Separate Account, or the purchase of T. Rowe
Price Funds shares, if the T. Rowe Price Funds or the underwriter determines
that such proceedings will have a material adverse effect on American National's
ability to perform under the T. Rowe Price participation agreement; (5) by
American National upon the institution of formal proceedings against the T. Rowe
Price Funds or the underwriter by the SEC, NASD, or any other regulatory body,
if American National determines that such proceedings will have a material
adverse effect upon the ability of the T. Rowe Price Funds or the underwriter
to perform its obligations under the T. Rowe Price participation agreement; (6)
by American National with respect to any T. Rowe Price
30
<PAGE>
Portfolio if such T. Rowe Price Portfolio ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code, or if American National
reasonably believes the T. Rowe Price Funds may fail to so qualify; (7) by
American National with respect to any T. Rowe Price Portfolio if such T. Rowe
Price Portfolio fails to meet the diversification requirements specified in the
T. Rowe Price participation agreement, or American National reasonably believes
the T. Rowe Price Portfolio may fail to so comply; (8) by the T. Rowe Price
Funds or the underwriter, upon a determination by either, that American National
has suffered a material adverse change in its business, operations, financial
condition, or prospects, or is the subject of material adverse publicity; (9) by
American National upon a determination by American National that either the T.
Rowe Price Funds or the underwriter has suffered a material adverse change in
its business, operations, financial condition, or prospects, or is the subject
of material adverse publicity; (10) by the T. Rowe Price Funds or the
underwriter sixty days after American National gives the T. Rowe Price Funds and
the underwriter written notice of American National's intention to make another
investment company available as a funding vehicle for the Contracts if at the
time such notice was given, no other notice of termination of the T. Rowe Price
participation agreement was then outstanding; or (11) upon a determination that
a material irreconcilable conflict exists between the Contractowners and other
investors in the T. Rowe Price Funds or between American National's interest in
the T. Rowe Price Funds and interests of other insurance companies invested in
the T. Rowe Price Funds.
THE FEDERATED FUND
This participation agreement provides for termination: (1) upon one
hundred eighty days advance written notice by any party; (2) at American
National's option if American National determines that shares of the Federated
Portfolios are not reasonably available to meet the requirements of the
Contracts; (3) at the option of the Federated Fund or the underwriter upon the
institution of formal proceedings against American National by the SEC, NASD, or
any other regulatory body regarding American National's duties under the
Federated participation agreement or related to the sale of the Contracts, the
operation of the Separate Account, or the purchase of Federated Fund shares; (4)
at American National's option upon the institution of formal proceedings against
the Federated Fund or the underwriter by the SEC, NASD, or any other regulatory
body; (5) upon a requisite vote of the Contractowners to substitute shares of
another fund for shares of the Federated Fund; (6) if any of the shares of a
Federated Portfolio are not registered, issued, or sold in accordance with
applicable state or federal law or such law precludes the use of such shares as
the underlying investment media of the Contracts; (7) by any party upon a
determination by the Federated Fund that an irreconcilable conflict exists
between the Contractowners and other investors in the Federated Fund or between
American National's interests in the Federated Fund and the interests of other
insurance companies invested in the Federated Fund; (8) at American National's
option if the Federated Fund or a Federated Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code; or (9) at American
National's option if the Federated Fund or a Federated Portfolio fails to meet
the diversification requirements specified in the Federated participation
agreement.
THE LAZARD FUND
This participation agreement provides for termination: (1) upon one
hundred eighty days advance written notice by any party, unless a shorter period
is agreed upon by the parties; (2) at American National's option if shares of
any Lazard Portfolio are not reasonably available to meet the requirements of
the Contracts or are not "appropriate funding vehicles" for the Contracts, as
determined by American National; (3) at American National's option upon the
institution of formal proceedings against the Lazard Fund or the underwriter by
the SEC, NASD, or any other regulatory body, if American National determines
that such proceedings will have a material adverse effect upon the Lazard Fund's
ability to perform its obligations under the Lazard participation agreement; (4)
at the option of the Lazard Fund upon the institution of formal proceedings
against American National by the SEC, NASD, or any other regulatory body if the
Lazard Fund determines that such proceedings will have a material adverse effect
on American National's ability to perform under the Lazard participation
agreement; (5) at the option of the Lazard Fund upon a determination by the
Lazard Fund that American National has suffered a material adverse change in its
business or financial condition or is the subject of material adverse publicity
and such change or publicity is likely to have a material adverse impact on the
business and operation of American National, if, after the expiration of sixty
days written notice of such determination, American National has not cured the
situation to the satisfaction of the Lazard Fund; (6) at American National's
option upon a determination by American National that the Lazard Fund has
suffered a material adverse change in its business or financial condition or is
the subject of material adverse publicity and such change or publicity is likely
to have a material adverse impact on the business and operation of the Lazard
Fund, if, after the expiration of sixty days written notice of such
determination, the Lazard Fund has not cured the situation to the satisfaction
of American National; (7) upon the termination of the Investment Management
Agreement between the Lazard Fund and its investment advisor, unless American
National specifically approves selection of a new investment advisor, or upon
the sale, acquisition or change of control of the investment advisor; (8) if any
of the shares of a Lazard Portfolio are not registered, issued, or sold in
accordance with applicable federal law, or such law precludes the use of such
shares as the underlying investment media of the Contracts; (9) at the option of
the Lazard Fund upon a determination by the Lazard Fund's Board of Trustees that
it is no longer in the best interest of the shareholders for the Lazard Fund to
operate under the Lazard participation agreement; (10) at the option of the
Lazard Fund if the Contracts cease to qualify as annuity contracts or life
insurance policies under the Code, or the Lazard
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Fund reasonably believes the Contracts may fail to so qualify; (11) at the
option of either party upon one party's breach of a material provision of the
Lazard participation agreement, which breach has not been cured to the
satisfaction of the non-breaching party within ten days after receipt of written
notice of the breach; (12) at the Lazard Fund's option if the Contracts are not
registered, issued, or sold in accordance with applicable federal or state law;
(13) upon assignment of the Lazard participation agreement, unless made with the
written consent of the non-assigning party; (14) at the option of either party
upon a determination by a majority of the Trustees of the Lazard Fund that an
irreconcilable conflict exists between the interests of the Contractowners and
other investors in the Lazard Fund or between American National's interests in
the Lazard Fund and the interests of other insurance companies invested in the
Lazard Fund; or (15) upon a requisite vote of the Contractowners, or obtaining a
SEC order or no-action letter, to substitute the shares of another fund for the
shares of one or more Lazard Portfolios upon 60 days written notice to the
Lazard Fund.
THE MFS FUND
This participation agreement provides for termination: (1) upon six
months advance written notice by any party; (2) at American National's option to
the extent the shares of any MFS Portfolio are not reasonably available to meet
the requirements of the Contracts or are not "appropriate funding vehicles" for
the Contracts, as determined by American National; (3) at the option of the MFS
Fund or the underwriter upon the institution of formal proceedings against
American National by the SEC, NASD, or any other regulatory body regarding
American National's duties under the MFS participation agreement or related to
the sale of the Contracts, the operation of the Separate Account, or the
purchase of shares of the MFS Fund; (4) at American National's option upon the
institution of formal proceedings against the MFS Fund by the SEC, NASD, or any
other regulatory body regarding the MFS Fund's or the underwriter's duties under
the MFS participation agreement or related to the sale of the shares of the MFS
Fund; (5) at the option of any party upon receipt of any necessary regulatory
approvals or the vote of the Contractowners to substitute shares of another fund
for the shares of the MFS Fund, provided American National gives the MFS Fund
and the underwriter thirty days advance written notice of any proposed vote or
other action taken to replace the shares of the MFS Fund; (6) by the MFS Fund or
the underwriter upon a determination by either that American National has
suffered a material adverse change in its business, operations, financial
condition, or prospects, or is the subject of material adverse publicity; (7) by
American National upon a determination by American National that the MFS Fund or
the underwriter has suffered a material adverse change in its business,
operations, financial condition, or prospects, or is the subject of material
adverse publicity; (8) at the option of any party, upon another party's material
breach of any provision of the MFS participation agreement; or (9) upon
assignment of the MFS participation agreement, unless made with the written
consent of the parties to the MFS participation agreement.
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