<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1996
REGISTRATION NO. 33-75714
811-8374
SECURITIES AND EXCHANGE COMMISSION
==================================
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO.____ / /
POST-EFFECTIVE AMENDMENT NO. _1_ /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO._2_ /X/
ALEXANDER HAMILTON VARIABLE ANNUITY
-----------------------------------
SEPARATE ACCOUNT
----------------
(EXACT NAME OF REGISTRANT)
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
----------------------------------------------------
(NAME OF DEPOSITOR)
33045 Hamilton Court, Farmington Hills, MI 48334-3358
-----------------------------------------------------
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE
(810) 553-2000
NAME AND ADDRESS OF
AGENT FOR SERVICE: COPY TO:
J. Gregory Poole, Counsel Frederick R. Bellamy, Esquire
Jefferson-Pilot Life Insurance Sutherland, Asbill & Brennan
Company 1275 Pennsylvania Avenue, N.W.
100 N. Greene Street Washington, D.C. 20004-2404
Greensboro, NC 27420
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 1, 1996 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(i)
___ on ________ pursuant to paragraph (a)(i)
___ 75 days after filing pursuant to paragraph (a)(ii)
___ on ________ pursuant to paragraph (a)(ii) of Rule 485
IF APPROPRIATE CHECK THE FOLLOWING BOX:
___ this Post-Effective Amendment designates a new effective
date for a new effective date for a previously filed
Post-Effective Amendment.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after effectiveness of the Registration Statement
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, an indefinite
number or amount of securities has been registered under the Securities Act of
1933. As of December 31, 1995, the Registrant had not commenced operations and,
no Rule 24f-2 Notice for fiscal year ending December 31, 1995, was filed with
the Securities and Exchange Commission.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 495
Showing Location in Part A (Prospectus)
Part B (Statement of Additional Information) and Part C
of Registration Statement Information Required by Form N-4
----------------------------------------------------------
PART A
------
Item of Form N-4 Prospectus Caption
- ---------------- ------------------
1. Cover Page. . . . . . . . . . . . Cover Page
2. Definitions . . . . . . . . . . . Definitions
3. Synopsis. . . . . . . . . . . . . Summary; Historical
Performance Data
4. Condensed Financial Information . Not Applicable
5. General
(a) Depositor. . . . . . . . . . Alexander Hamilton Life
Insurance Company of America;
Additional Information about
the Company
(b) Registrant . . . . . . . . . Alexander Hamilton Variable
Annuity Separate Account
(c) Portfolio Company. . . . . . Alexander Hamilton Variable
Insurance Trust
(d) Fund Prospectus. . . . . . . Alexander Hamilton Variable
Insurance Trust
(e) Voting Rights. . . . . . . . Voting Rights
6. Deductions and Expenses
(a) General. . . . . . . . . . . Charges and Deductions
(b) Sales Load % . . . . . . . . Surrender Charge
(c) Special Purchase Plan. . . . Not Applicable
(d) Commissions. . . . . . . . . Distributor of the Contracts
(e) Expenses - Registrant. . . . Other Expenses Including
Investment Advisory Fees
(f) Fund Expenses. . . . . . . . Not Applicable
(g) Organizational Expenses. . . Not Applicable
7. Contracts
(a) Persons with Rights. . . . . The Alexander Hamilton Life
Insurance Company of America
Variable Annuity Contract;
Distributions Under The
Contract; Voting Rights
<PAGE>
(b)(i) Allocation of Premium
Payments . . . . . . . . . Premium Payments
(ii) Transfers. . . . . . . . . Transfers
(iii) Exchanges. . . . . . . . . Not Applicable
(c) Changes . . . . . . . . . . . Addition, Deletion or
Substitution of Investments
(d) Inquiries . . . . . . . . . . Summary; Annuity Payments;
Annuity Payment Options;
Benefit; General Provisions
8. Annuity Period. . . . . . . . . . Annuity Payment Options
9. Death Benefit . . . . . . . . . . Death Benefit
10. Purchase and Contract Balances
(a) Purchases . . . . . . . . . . Contract Application and
Issuance of Contracts
(b) Valuation . . . . . . . . . . Contract Value
(c) Daily Calculation . . . . . . The Separate Account Value
(d) Underwriter . . . . . . . . . Distributor of the Contracts
11. Redemptions
(a) By Contract Owners. . . . . . Surrenders
By Annuitant. . . . . . . . . Not Applicable
(b) Texas ORP . . . . . . . . . . Restrictions Under the Texas
ORP Retirement Program
(c) Check Delay . . . . . . . . . Surrenders
(d) Lapse . . . . . . . . . . . . Lapse
(e) Free Look . . . . . . . . . . Summary; Right to Examine the
Contract
12. Taxes . . . . . . . . . . . . . . Certain Federal Income Tax
Consequences
13. Legal Proceedings . . . . . . . . . . . Legal Proceedings
14. Table of Contents for the
Statement of Additional Information . . Statement of Additional
Information Table of Contents
PART B
------
Statement of
Additional
Item of Form N-4 Information Caption
- ---------------- -------------------
15. Cover Page . . . . . . . . . . . . . . Cover Page
16. Table of Contents . . . . . . . . . . . Table of Contents
17. General Information
and History. . . . . . . . . . . . (Prospectus) Alexander
Hamilton Life Insurance
Company of America; Additional
Information About the Company
<PAGE>
18. Services
(a) Fees and Expenses
of Registrant. . . . . . . . . . Not Applicable
(b) Management Contracts . . . . . . . Not Applicable
(c) Custodian. . . . . . . . . . . . . Records, Reports and Services
Independent
Auditors . . . . . . . . . . . . . Financial Statements
(d) Assets of Registrant . . . . . . . Not Applicable
(e) Affiliated Person. . . . . . . . . Not Applicable
(f) Principal Underwriter. . . . . . . Not Applicable
19. Purchase of Securities
Being Offered . . . . . . . . . . . . . (Prospectus) The Alexander
Hamilton Life Insurance
Company of America Variable
Annuity Contract
Offering Sales Load. . . . . . . . . . (Prospectus) Surrender Charge
20. Underwriters. . . . . . . . . . . . . . (Prospectus) Distributor of
the Contracts
21. Calculation of Performance
Data. . . . . . . . . . . . . . . . . . (Prospectus) Performance Data;
Performance Data and
Calculations
22. Annuity Payments. . . . . . . . . . . . (Prospectus) Annuity Income
Payments; Annuity Payment
Options
23. Financial Statements. . . . . . . . . . Financial Statements
PART C -- OTHER INFORMATION
---------------------------
Item of Form N-4 Part C Caption
- ---------------- --------------
24. Financial Statements
and Exhibits. . . . . . . . . . . . . . Financial Statements and
Exhibits
(a) Financial Statements . . . . . . . Financial Statements
(b) Exhibits . . . . . . . . . . . . . Exhibits
25. Directors and Officers of The Company's Directors
the Depositor. . .. . . . . . . . . . . and Officers
26. Persons Controlled By or
Under Common Control. . . . . . . . . . Persons Controlled By or Under
Common Control with the
Depositor or Registrant
<PAGE>
27. Number of Contract Owners . . . . . . . Number of Contract Owners
28. Indemnification . . . . . . . . . . . . Indemnification
29. Principal Distributor of the
Underwriters. . . . . . . . . . . . . . Contracts
30. Location of Accounts
and Records . . . . . . . . . . . . . . Location of Accounts and
Records
31. Management Services . . . . . . . . . . Management Services
32. Undertakings. . . . . . . . . . . . . . Undertakings
Signature Page. . . . . . . . . . . . . Signatures
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTIVE
<PAGE>
THE ALLEGIANCE VARIABLE ANNUITY
ISSUED BY
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
33045 HAMILTON COURT
PROSPECTUS FARMINGTON HILLS, MI 48334 MAY 1, 1996
This Prospectus describes the Allegiance Variable Annuity (the "Contract"),
an individual Flexible Premium Multi-Funded Deferred Variable Annuity offered by
Alexander Hamilton Life Insurance Company of America (the "Company"). The
Contract provides for the accumulation of capital on a tax-deferred basis for
retirement or other long-term purposes. A minimum initial Premium Payment of
only $2,000 is required to purchase a Contract (although a lower minimum may
apply to certain tax-qualified Contracts). You generally may make additional
Premium Payments of at least $50 each at any time before the Maturity Date.
Additional limitations on Premium Payments apply.
You may allocate Premium Payments to one or more Variable Subaccounts of the
Alexander Hamilton Variable Annuity Separate Account (the "Separate Account"),
in which the Contract Value varies to reflect investment performance, or to one
or more Interest Rate Guarantee Periods of the Capital Developer Account, in
which a specified rate of interest is credited to the Contract Value (subject to
a Market Value Adjustment), or to a combination of these Variable Subaccounts
and Interest Rate Guarantee Periods. The Separate Account currently has eight
different Variable Subaccounts (the "Variable Subaccounts"). Assets of each
Variable Subaccount are invested in a corresponding portfolio (each, a "Fund")
of the Alexander Hamilton Variable Insurance Trust (the "Trust") or the
Federated Prime Money Fund. The Trust currently consists of seven Funds:
Investment Grade Bond, High Yield Bond, Balanced, Growth & Income, Growth,
Emerging Growth, and International Equity. The Trust and the Federated Prime
Money Fund are described in separate prospectuses that accompany this
Prospectus. The Contract Value allocated to the Separate Account will vary up or
down in accordance with the investment performance of the Fund(s) you select.
Therefore, you bear the entire investment risk for all amounts allocated to the
Separate Account. The Capital Developer Account currently has two Interest Rate
Guarantee Periods: one year and seven years. The Market Value Adjustment could
decrease the value of amounts prematurely surrendered, withdrawn, transferred,
or annuitized from the Capital Developer Account, but amounts invested in the
Capital Developer Account are guaranteed to earn interest at an annual rate of
at least three percent. There is no guaranteed or minimum Surrender Value for
the Variable Subaccounts, so the Surrender Value with respect to amounts
allocated to the Variable Subaccounts could be less than the Premium Payments
allocated thereto.
The Contract provides for annuity payments to be made by the Company on a
fixed or a variable basis for the life of the Annuitant or for some other
period, beginning on the Maturity Date that you select. Prior to the Maturity
Date, you can transfer amounts among the ten Investment Options, that is, among
the two Interest Rate Guarantee Periods of the Capital Developer Account and the
eight Variable Subaccounts of the Separate Account. After the Maturity Date,
transfers are permitted among the Variable Subaccounts. Prior to the Maturity
Date, you can also Surrender the Contract or withdraw a portion of the Surrender
Value in exchange for a cash payment; however, Surrenders and Withdrawals may be
taxable, subject to a Surrender Charge, a Market Value Adjustment, an Annual
Administrative Fee, and/or a tax penalty, and payment of Surrenders from the
Capital Developer Account may be delayed.
This Prospectus sets forth your rights under the Contract, and information
regarding the Investment Options that you should know before investing. A
Statement of Additional Information dated May 1, 1996, has been filed with the
Securities and Exchange Commission ("SEC") and is available without charge, upon
Request by calling the Administrative Service Center at 1-800-289-1776. The
Table of Contents of the Statement of Additional Information is included at the
end of this Prospectus. The Statement of Additional Information, as supplemented
from time to time, is incorporated herein by reference.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
THE ALEXANDER HAMILTON VARIABLE INSURANCE TRUST AND THE FEDERATED PRIME MONEY
FUND.
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.
CONTRACTS AND SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF OR
GUARANTEED BY ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY. INVESTING IN THE CONTRACTS INVOLVES CERTAIN INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS............................................................ 1
SUMMARY................................................................ 4
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA................... 9
INVESTMENT OPTIONS..................................................... 10
The Separate Account................................................. 10
The Capital Developer Account........................................ 12
THE ALLEGIANCE VARIABLE ANNUITY CONTRACT............................... 13
Contract Application and Issuance of Contracts....................... 14
Premium Payments..................................................... 14
Initial Premium Payment............................................ 14
Additional Premium Payments........................................ 14
Allocation of Premium Payments..................................... 14
Payment Not Honored by Bank........................................ 15
Contract Value....................................................... 15
The Separate Account Value......................................... 15
The Capital Developer Account Value................................ 15
Minimum Contract Value............................................. 16
Transfers............................................................ 16
Dollar Cost Averaging................................................ 17
DISTRIBUTIONS UNDER THE CONTRACT....................................... 18
Surrenders and Partial Withdrawals................................... 18
Systematic Withdrawal Plan........................................... 19
Annuity Payments..................................................... 19
Maturity Date...................................................... 19
Election of Annuity Payment Option................................. 19
Taxes.............................................................. 20
Annuity Payment Options.............................................. 20
Death Benefit........................................................ 22
Death of Contract Owner Prior to Maturity Date..................... 22
Death of Annuitant Prior to Maturity Date.......................... 23
Death of Annuitant on or After Maturity Date....................... 23
Death of Contract Owner on or After Maturity Date.................. 23
Contract Owner's Spouse as Beneficiary............................. 23
Payment of Death Benefit to Beneficiary............................ 23
Beneficiary........................................................ 24
Change of Contract Owner........................................... 24
IRS Required Distribution............................................ 24
Restrictions Under the Texas Optional Retirement Program............. 24
Restrictions Under Section 403(b) Plans.............................. 24
CHARGES AND DEDUCTIONS................................................. 24
Surrender Charge..................................................... 24
Market Value Adjustment.............................................. 25
Reduction in Charges for Certain Groups.............................. 26
Mortality and Expense Risk Charge.................................... 26
Administrative Expense Charge........................................ 27
Annual Administrative Fee............................................ 27
Transfer Charge...................................................... 27
Premium Taxes........................................................ 27
Federal, State and Local Taxes....................................... 28
Other Expenses Including Investment Advisory Fees.................... 28
</TABLE>
i
<PAGE>
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................ 29
Taxation of Annuities................................................ 29
In General......................................................... 29
Possible Changes in Taxation....................................... 29
Surrenders and Partial Withdrawals................................. 30
Annuity Payments................................................... 30
Penalty Tax........................................................ 30
Death Benefit Proceeds............................................. 30
Transfers, Assignments, or Exchanges of the Contract............... 31
Generation-Skipping Transfers...................................... 31
Multiple Contracts................................................. 31
Withholding........................................................ 31
Other Tax Consequences............................................. 31
Qualified Plans...................................................... 31
Qualified Pension and Profit Sharing Plans......................... 32
Individual Retirement Annuities and Individual Retirement
Accounts.......................................................... 32
Tax-Sheltered Annuities............................................ 32
Section 457 Deferred Compensation ("Section 457") Plans............ 32
General.............................................................. 33
DISTRIBUTOR OF THE CONTRACTS........................................... 33
VOTING RIGHTS.......................................................... 33
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT...................... 34
Addition, Deletion, or Substitution of Investments................... 34
Performance Data..................................................... 35
Company Ratings...................................................... 36
GENERAL CONTRACT PROVISIONS............................................ 36
LEGAL PROCEEDINGS...................................................... 38
AVAILABLE INFORMATION.................................................. 38
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS.................. 39
APPENDIX I -- SURRENDER CHARGE CALCULATION
APPENDIX II -- MARKET VALUE ADJUSTMENT CALCULATION AND EXAMPLES
FUND PROSPECTUSES
Alexander Hamilton Variable Insurance Trust (AHVIT).................. AHVIT-1
Federated Prime Money Fund (FPMF).................................... FPMF-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON 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.
ii
<PAGE>
DEFINITIONS
ACCUMULATION PERIOD -- The period from the Contract Date to the date
preceding the Maturity Date.
ACCUMULATION UNIT -- A unit of measure used to determine the Separate
Account Value during the Accumulation Period.
ADMINISTRATIVE SERVICE CENTER -- P.O. Box 1776, Farmington Hills, MI
48333-1776. Notices, Requests, and Premium Payments under the Contract must be
sent to the Company's Administrative Service Center.
ANNUITANT(S) -- The person(s) upon whose life the Annuity Payments are to be
based. You will be deemed the Annuitant unless you name another to be the
Annuitant in the Contract Application. An Annuitant must be a natural person.
The Annuitant(s) named in the Application cannot be changed.
ANNUITY PAYMENTS -- The payments from the Company to the Payee that will
begin on the Maturity Date. The amount of Annuity Payments will be based on the
Contract Value and the age of the Annuitant, as well as on the Annuity Payment
Option and payment frequency selected.
ANNUITY PAYMENT OPTIONS -- Options available for methods of receiving
Annuity Payments.
ANNUITY PERIOD -- The period which begins on the Maturity Date and ends with
the last Annuity Payment.
ANNUITY UNIT -- A unit of measure used to determine the amount of each
Variable Annuity Payment.
APPLICATION -- The document you signed that evidences your application for
the Contract.
BENEFICIARY -- The persons or entities designated by you in the Application
(or as subsequently changed by you) to receive the Death Benefit provided by the
Contract.
CAPITAL DEVELOPER ACCOUNT -- An account of the Company that provides a
Guaranteed Interest Rate for a specified Interest Rate Guarantee Period. This
rate will never be less than 3% per year.
CAPITAL DEVELOPER ACCOUNT VALUE -- The portion of Contract Value in the
Capital Developer Account.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY (OUR, WE, US) -- Alexander Hamilton Life Insurance Company of
America.
CONTRACT -- The Allegiance Variable Annuity, an individual flexible premium
multi-funded variable annuity contract that is described in this Prospectus.
CONTRACT DATE -- The effective date of coverage under the Contract and the
date from which the Company measures Contract Years, Quarters, Months, and
Anniversaries.
CONTRACT OWNER (YOU, YOUR) -- The person or entity entitled to the ownership
rights of the Contract. The Contract Owner is the person in whose name the
Contract is issued. It is the person or entity named in the Application, unless
otherwise changed. Joint Contract Owners are permitted only if they are spouses.
CONTRACT VALUE -- The value of all of the Accumulation Units held under the
Contract in the Separate Account plus the value of all amounts held under the
Contract in the Capital Developer Account.
CONTRACT YEAR -- The first Contract Year is the annual period which begins
on the Contract Date. Subsequent Contract Years begin on each anniversary of the
Contract Date.
DEATH BENEFIT -- The amount payable upon the death of any Contract Owner.
DUE PROOF OF DEATH -- Information required by the Company to process a claim
for a Death Benefit, including a death certificate and a death claim form
acceptable to the Company.
FEDERATED PRIME MONEY FUND -- A diversified portfolio of the Insurance
Management Series, managed by Federated Investors.
1
<PAGE>
FIXED ANNUITY OPTIONS -- Annuity Payment Options under the Contract that
provide for scheduled payments.
GUARANTEED INTEREST RATE -- The applicable effective annual interest rate
which the Company will credit and compound annually on the Capital Developer
Account Value during each Interest Rate Guarantee Period. The rate is guaranteed
to be at least three percent per year.
INTEREST RATE GUARANTEE PERIOD -- A specified period which begins on the
date that a Premium Payment is allocated to (or a portion of Contract Value is
transferred to) the Capital Developer Account to accumulate at a Guaranteed
Interest Rate. Currently, the Company offers one and seven year Interest Rate
Guarantee Periods.
INVESTMENT OPTION -- Each Interest Rate Guarantee Period of the Capital
Developer Account and each Variable Subaccount of the Separate Account.
ISSUE AGE -- The age of the Contract Owner on the Contract Date.
MARKET VALUE ADJUSTMENT -- A positive or negative adjustment applied to the
Capital Developer Account Value in the event of a premature full Surrender,
Partial Withdrawal, Transfer, or annuitization that is requested prior to the
end of an Interest Rate Guarantee Period. The Market Value Adjustment does not
apply during the last 30 days of the Interest Rate Guarantee Period.
MATURITY DATE -- The date on which the Company makes the first Annuity
Payment under the Contract. The latest Maturity Date that may be elected is the
Annuitant's 85th birthday or 10 years from the contract date, whichever is
later.
NET PREMIUM PAYMENT -- A Premium Payment less any applicable Premium Tax.
PAYEE -- The person or entity who will receive Annuity Payments under the
Contract.
PREMIUM TAX -- A tax imposed by certain states when a Premium Payment is
made, when Annuity Payments begin, when a Partial Withdrawal is made, or when
the Contract is Surrendered.
PREMIUM PAYMENT -- A payment to the Company under the Contract.
REQUEST -- A request in a form satisfactory to the Company, which is
received by the Company's Administrative Service Center.
TREASURY RATE -- The applicable effective annual U.S. Treasury Rate used by
the Company for determining the Market Value Adjustment applicable to a
Surrender, Withdrawal, Transfer, or annuitization from the Capital Developer
Account at any given time.
TRUST -- Alexander Hamilton Variable Insurance Trust, a diversified open-end
management investment company which offers investment alternatives through its
seven separate classes of shares: Investment Grade Bond Fund, High Yield Bond
Fund, Balanced Fund, Growth & Income Fund, Growth Fund, Emerging Growth Fund,
and International Equity Fund, (each referred to as a "Fund" and collectively as
the "Funds"). Each Fund is managed for investment purposes as if it were a
separate investment company issuing its own shares.
SEPARATE ACCOUNT -- The Alexander Hamilton Variable Annuity Separate
Account, a separate account of Alexander Hamilton Life Insurance Company of
America, which consists of assets set aside by the Company, the investment
performance of which is kept separate from that of the general assets and all
other separate account assets of the Company. The Separate Account is registered
as a unit investment trust under the Investment Company Act of 1940.
SEPARATE ACCOUNT VALUE -- The portion of Contract Value held in the Separate
Account. There is no guaranteed or minimum Separate Account Value.
SURRENDER VALUE -- Proceeds payable upon a surrender of the Contract, equal
to (a) the Contract Value (b) minus any applicable Surrender Charge, (c) plus or
minus any applicable Market Value Adjustment, (d) minus the Annual
Administrative Fee, and (e) minus any applicable Premium Tax.
2
<PAGE>
VALUATION DAY -- Any day on which the New York Stock Exchange is open for
trading except for normal holiday closing or when the Securities and Exchange
Commission has determined that a state of emergency exists.
VALUATION PERIOD -- The period of time beginning at the close of business on
the New York Stock Exchange on any Valuation Day and ending at the close of
business on the next Valuation Day. A Valuation Period may be more than one day.
VARIABLE ANNUITY OPTIONS -- Annuity Payment Options under the Contract that
provide for payments which vary as to dollar amount in relation to the
investment performance of specified Variable Subaccounts of the Separate
Account.
VARIABLE SUBACCOUNT -- Separate Account assets are divided into Variable
Subaccounts. Assets of each Variable Subaccount will be invested in shares of a
corresponding Fund of the Trust or in the Federated Prime Money Fund. The
Company reserves the right to eliminate or add Variable Subaccounts and to
change investment companies or to substitute other investments for Trust shares.
3
<PAGE>
THE ALLEGIANCE VARIABLE ANNUITY
SUMMARY
THE CONTRACT
The Allegiance Variable Annuity Contract is an individual Flexible Premium
Multi-Funded Variable Deferred Annuity which can be purchased on a non-qualified
basis ("Non-qualified Contract") or in connection with certain plans qualifying
for favorable federal income tax treatment ("Qualified Contract"). A Contract
may be purchased with an initial Premium Payment of at least $2,000 (although a
lower minimum may apply to certain Qualified Contracts).
You may make additional Premium Payments of at least $50 each at any time
before the Maturity Date. (See "Premium Payments," p. 14.) You may allocate
Premium Payments to any combination of the ten Investment Options under the
Contract. The Investment Options currently available are the eight Variable
Subaccounts of the Alexander Hamilton Separate Account (the "Separate Account"),
and the two Interest Rate Guarantee Periods of the Capital Developer Account.
(See "Investment Options," p. 10.)
THE INVESTMENT OPTIONS
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT. The Separate
Account, a separate account of the Company, invests in shares of Alexander
Hamilton Variable Insurance Trust (the "Trust"), a mutual fund managed by
Alexander Hamilton Capital Management, and in the Federated Prime Money Fund.
The Trust currently has seven Funds: Investment Grade Bond, High Yield Bond,
Balanced, Growth & Income, Growth, Emerging Growth, and International Equity.
Each of the eight Variable Subaccounts of the Separate Account invests solely in
a corresponding Fund of the Trust or in the Federated Prime Money Fund. Because
the Separate Account Value will increase or decrease depending on the investment
experience of the selected Variable Subaccounts, you bear the entire investment
risk with respect to Premium Payments allocated to, and amounts transferred to,
the Separate Account. (See "The Separate Account," p. 10.)
THE CAPITAL DEVELOPER ACCOUNT. The Company currently offers two different
Interest Rate Guarantee Periods in the Capital Developer Account, lasting for
one and seven years (not all periods are available in all states). The Capital
Developer Account provides for fixed accumulations at a specified Guaranteed
Interest Rate. Amounts allocated to the Capital Developer Account may be subject
to a Market Value Adjustment upon a premature Surrender, Withdrawal, Transfer,
or annuitization requested 31 days or more prior to the end of the Interest Rate
Guarantee Period. Because of this adjustment and for other reasons, the amount
payable upon Partial Withdrawal or Surrender or applied to a Transfer or
annuitization may be more or less than the Capital Developer Account Value at
the time of the transaction. However, the Market Value Adjustment will never
reduce the earnings on amounts allocated to the Capital Developer Account to
less than three percent per year (See "The Capital Developer Account," p. 12.)
TRANSFERS
You may transfer Contract Value during the Accumulation Period (I.E., prior
to the Maturity Date) among the Investment Options subject to certain
limitations. The minimum Transfer amount is $250 for transfers from any Variable
Subaccount and $1,000 for transfers from the Capital Developer Account.
Transfers from Interest Rate Guarantee Periods may be subject to a Market Value
Adjustment. (See "Transfers," p. 16.)
During the Annuity Period (I.E., after the Maturity Date), if a Variable
Annuity Option is chosen then a portion of the Separate Account Value may be
transferred from one Variable Subaccount to any other Variable Subaccount. No
Transfers are permitted when a Fixed Annuity Option is chosen. (See "Transfers,"
p. 16.)
A fee equal to $10 may be imposed for each transfer in excess of 15 during
any Contract year. Although the Company reserves the right to impose a $10 fee,
it currently has no plans to do so.
4
<PAGE>
SURRENDERS AND PARTIAL WITHDRAWALS
You may elect to Surrender all or withdraw a portion of the Surrender Value
in exchange for a cash payment at any time prior to the Maturity Date. The
minimum withdrawal amount is $250 from a Variable Subaccount and $1,000 from the
Capital Developer Account. Following any Partial Withdrawal, the Contract Value
must be at least $2,000. Partial Withdrawals and Full Surrenders are subject to
any applicable Surrender Charge, Market Value Adjustment, Annual Administrative
Fee, and state premium taxes. (See "Surrenders and Partial Withdrawals," p. 18.)
Federal income taxes and a tax penalty may be applicable. (See "Certain Federal
Income Tax Matters," p. 29.) After the Maturity Date, Surrenders and Partial
Withdrawals generally are not permitted.
The Separate Account Value remaining in any Variable Subaccount immediately
following a Partial Withdrawal must be at least $250, and the Account Value
remaining in an Interest Rate Guarantee Period immediately following a Partial
Withdrawal must be at least $1,000. If the processing of a Withdrawal request
would result in a remaining Variable Subaccount value of less than $250 or a
remaining Interest Rate Guarantee Period value of less than $1,000, the Company
will treat the Withdrawal request as a request for withdrawal of the entire
Contract amount in the relevant Variable Subaccount or Interest Rate Guarantee
Period.
THERE IS NO GUARANTEED OR MINIMUM SURRENDER VALUE WITH RESPECT TO AMOUNTS
ALLOCATED TO THE SEPARATE ACCOUNT, SO THE SURRENDER VALUE COULD BE LESS THAN THE
TOTAL PREMIUM PAYMENTS ALLOCATED TO THAT ACCOUNT. AMOUNTS ALLOCATED TO THE
CAPITAL DEVELOPER ACCOUNT ARE GUARANTEED TO EARN INTEREST AT A MINIMUM RATE OF
THREE PERCENT PER YEAR.
DEATH BENEFIT
In the event that any Contract Owner dies prior to the Maturity Date, a
Death Benefit is payable to the Beneficiary upon receipt of Due Proof of Death,
an election of the Death Benefit Option, and return of the Contract. The Death
Benefit will at least equal the Contract Value at the time of payment. No
Surrender Charge, Market Value Adjustment, or Annual Administrative Fee is
imposed upon amounts paid as a Death Benefit. (See "Death Benefit," p. 22.)
CHARGES AND DEDUCTIONS
SURRENDER CHARGE. A declining Surrender Charge will be deducted from the
amount of any Partial Withdrawal or Full Surrender during the first eight
Contract Years to help defray sales expenses. The Surrender Charge in the first
two Contract Years is 7% of the Contract Value Withdrawn or Surrendered, and
declines by one percentage point for each of the next six Contract Years until
it equals zero. The Surrender Charge percentages are as follows:
<TABLE>
<CAPTION>
YEAR 1 2 3 4 5 6 7 8 9+
- ------------------------- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE............... 7 7 6 5 4 3 2 1 0
</TABLE>
The Surrender Charge will also be imposed on the Maturity Date if it occurs
during the first eight years and you choose an annuity option of less than five
years. (The Contract may not be annuitized during the first Contract Year.)
The Surrender Charge will not apply to certain distributions. (See
"Surrender Charge," p. 24.)
Each Year, a Free Withdrawal Amount, equal to 10% of the Contract Value at
the time of the Surrender or Partial Withdrawal, will not be subject to any
Surrender Charge. THE COMPANY GUARANTEES THAT THE AGGREGATE SURRENDER CHARGE
WILL NEVER EXCEED 8.5% OF THE TOTAL PREMIUM PAYMENTS. (See "Surrender Charge,"
p. 24.)
MARKET VALUE ADJUSTMENT. A positive or negative Market Value Adjustment
will be applied to any Full Surrender, Partial Withdrawal, Transfer, or
annuitization of Capital Developer Account Value 31 days or more prior to the
end of the Interest Rate Guarantee Period. The Market Value Adjustment does not
apply to amounts transferred from the one year Investment Rate Guarantee Period
pursuant to the Dollar Cost Averaging Option.
5
<PAGE>
The Market Value Adjustment may be positive or negative depending on the
Guaranteed Interest Rate credited and the Treasury Rate for the remainder of the
Interest Rate Guarantee Period, so it could increase or decrease the amount of a
Full Surrender, Partial Withdrawal, Transfer, or annuitization. The adjustment
is based on a comparison of the Guaranteed Interest Rate applicable to the
Interest Rate Guarantee Period and the Treasury Rate for the Interest Rate
Guarantee Period that most closely approximates the remaining duration of the
Interest Rate Guarantee Period from which the Partial Withdrawal, Surrender,
Transfer, or annuitization is made. In general, if the Treasury Rate is higher
than the Guaranteed Interest Rate, then a negative Market Value Adjustment may
be applied, and YOU COULD RECEIVE AN AMOUNT LOWER THAN THE AMOUNT OF CAPITAL
DEVELOPER ACCOUNT VALUE ON THE DATE OF THE SURRENDER, PARTIAL WITHDRAWAL,
TRANSFER, OR ANNUITIZATION. However, you will never receive less than the amount
allocated to the Capital Developer Account, accumulated at an annual interest
rate of three percent. If the Treasury Rate is lower than the Guaranteed
Interest Rate, then a positive Market Value Adjustment may be applied, and you
could receive an amount higher than the Capital Developer Account Value. No
Market Value Adjustment will be applied to any Surrender, Partial Withdrawal,
Transfer, or annuitization from an Interest Guarantee Period made during the
last 30 days of the Interest Rate Guarantee Period. (See "Market Value
Adjustment," p. 25.)
MORTALITY AND EXPENSE RISK CHARGE. The Company deducts a daily charge equal
to a percentage of the net assets in the Separate Account for the mortality and
expense risks assumed by the Company. The effective annual rate of this charge
is 1.25% of the Separate Account Value. The Mortality and Expense Risk Charge
does not apply to the Capital Developer Account. (See "Mortality and Expense
Risk Charge," p. 26.)
ADMINISTRATIVE EXPENSE CHARGE. The Company deducts a daily charge equal to
a percentage of the net assets in the Separate Account for administering the
Separate Account. The effective annual rate of this charge is 0.15% of the
Contract Value. The amount of the fee is guaranteed not to increase. The
Administrative Expense Charge does not apply to the Capital Developer Account.
(See "Administrative Expense Charge," p. 27.)
ANNUAL ADMINISTRATIVE FEE. An Annual Administrative Fee is imposed each
year for Contract maintenance and related administrative expenses. This charge
is the lesser of $30 per Contract Year or 2% of Contract Value. The amount of
the fee is guaranteed not to increase. It will be deducted from the Contract
Value on the last day of each Contract Year and upon Full Surrender of the
Contract before a Contract Anniversary. The Annual Administrative Fee will not
be deducted if 100% of Contract Value is held in the Capital Developer Account,
and it will not be deducted for a Contract Year if, on the last day of that
Contract Year, the Contract Value is $30,000 or greater. (See "Annual
Administrative Fee," p. 27.)
TRANSFER CHARGE. A fee equal to $10 may be imposed for each transfer in
excess of 15 during any Contract Year. Although the Company reserves the right
to impose a $10 fee, it currently has no plans to do so.
TAXES. The Company may incur Premium Taxes relating to the Contracts.
Depending upon applicable state law, the Company will deduct any Premium Taxes
related to a particular Contract from Premium Payments, from the Contract Value
upon Partial Withdrawal or Surrender, or on the Maturity Date. (See "Premium
Taxes," p. 27.)
No charges are currently made against the Variable Subaccounts or the
Capital Developer Accounts for federal, state, or local taxes other than state
Premium Taxes. However, the Company may deduct charges for such taxes in the
future. (See "Federal, State and Local Taxes," p. 28.)
TRUST EXPENSES. The Separate Account Value will reflect the investment
advisory fee and other expenses incurred by the Funds of the Trust and the
Federated Prime Money Fund.
EXPENSE DATA. The charges and deductions explained above are summarized in
the following tables. This tabular information regarding expenses assumes that
the entire Contract Value is in the Separate Account.
6
<PAGE>
CONTRACT OWNER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Sales Load on Premium Payments.................... none
Maximum Surrender Charge
(as a % of Contract Value Surrendered)(2)........ 7%
- ---------------------------------------------------------------------------------
Annual Administrative Fee......................... The lesser of $30 Per
Contract or 2% of
Contract Value
- ---------------------------------------------------------------------------------
Transfer Fee...................................... No Fee for First 15 each
year; $10 for each additional
transfer (currently not
assessed)
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of account value)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge................. 1.25%
0.15%
---
Administrative Expense Charge.....................
Total Separate Account Annual Expenses.......... 1.40%
</TABLE>
- ------------------------
(1) In addition to the Contract Owner transaction expenses reflected in the
table, a Market Value Adjustment is applied to the amount of Capital
Developer Account Value subject to Full Surrender, Partial Withdrawal,
Transfer, or annuitization except during the last 30 days of the Interest
Rate Guarantee Period. The Market Value Adjustment may decrease the proceeds
to less than the Capital Developer Account Value (but never to less than the
amount allocated to that Account, plus interest at 3% per year), or increase
the proceeds.
(2) The Surrender Charge is not applicable after the Eighth Contract Year or to
the first 10% of Contract Value withdrawn or Surrendered during each
Contract Year. (See "Free Surrender Amount," p. 25.)
TRUST ANNUAL EXPENSES(3)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
OTHER TOTAL FUND
FUND MANAGEMENT FEES EXPENSES EXPENSES
- ---------------------------------------- --------------- ------------ -------------
<S> <C> <C> <C>
Investment Grade Bond................... 0.60% 0.25% 0.85%
High Yield Bond(4)...................... 0.75% 0.20% 0.95%
Growth & Income......................... 0.70% 0.20% 0.90%
Balanced................................ 0.80% 0.20% 1.00%
Growth.................................. 0.75% 0.25% 1.00%
Emerging Growth(4)...................... 0.80% 0.25% 1.05%
International Equity.................... 1.00% 0.40% 1.40%
Federated Prime Money (Money Market).... 0.50% 0.15% 0.65%
</TABLE>
- ------------------------
(3) The expenses listed for each of the Trust's Funds are estimates for the
first year of operations. Actual expenses will differ from amounts listed.
Information regarding the Trust's Funds has been provided by the Trust. The
expenses listed for the Federated Prime Money Fund represent actual expenses
for that Fund.
(4) Massachusetts Financial Services Company ("MFS"), the sub-adviser for the
High Yield Bond and Emerging Growth Funds, has voluntarily agreed to waive
the portion of the Management fee it receives
7
<PAGE>
for providing investment advisory services on behalf of the High Yield Bond
and Emerging Growth Funds of the Alexander Hamilton Variable Insurance Trust
for the period 2/8/96 to 8/8/96 and 2/8/96 to 11/8/96, respectively.*
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets (and assuming the entire Contract Value is allocated to
the applicable Subaccount):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------- -------
<C> <C> <C>
1. If the Contract is Surrendered** at the end of the applicable time period:
Money Market Variable Subaccount.................................................. $ 95.44 $141.15
Investment Grade Bond Variable Subaccount......................................... $ 97.29 $147.07
High Yield Bond Variable Subaccount............................................... $ 98.22 $150.02
Balanced Variable Subaccount...................................................... $ 98.68 $151.49
Growth & Income Variable Subaccount............................................... $ 97.76 $148.55
Growth Variable Subaccount........................................................ $ 98.68 $151.49
Emerging Growth Variable Subaccount............................................... $ 99.15 $152.96
International Equity Variable Subaccount.......................................... $102.39 $163.22
2. If the Contract is not Surrendered:***
Money Market Variable Subaccount.................................................. $ 23.59 $ 76.27
Investment Grade Bond Variable Subaccount......................................... $ 25.58 $ 82.57
High Yield Bond Variable Subaccount............................................... $ 26.58 $ 85.70
Balanced Variable Subaccount...................................................... $ 27.08 $ 87.26
Growth & Income Variable Subaccount............................................... $ 26.08 $ 84.14
Growth Variable Subaccount........................................................ $ 27.08 $ 87.26
Emerging Growth Variable Subaccount............................................... $ 27.58 $ 88.83
International Equity Variable Subaccount.......................................... $ 31.07 $ 99.74
</TABLE>
- ------------------------
* If such fee waivers are taken into account, the actual expenses for the High
Yield and Emerging Growth Variable Subaccounts would be lower than the
expenses listed for such Subaccounts shown above.
** These expense figures also apply if the Contract is annuitized for less than
five years.
*** These figures would apply if the Contract is annuitized for at least five
years.
The above tables are intended to assist you in understanding the costs and
expenses that will be borne, directly or indirectly, by Premium Payments
allocated to the Separate Account. These include the expenses of the Trust. (See
"Charges and Deductions," p. 24, and the Trust prospectus.) In addition to the
expenses listed above, Premium Taxes may be applicable.
These examples reflect the Annual Administrative Fee as an annual charge of
.02% of assets, based on an anticipated average Contract Value of $10,000.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
RIGHT TO EXAMINE CONTRACT
Until the end of the period of time specified in the Contract, you may
examine the Contract and cancel it by delivering or mailing a written notice to
the Company's Administrative Service Center or the registered representative
from whom it was purchased. The applicable period will depend on the state in
which the Contract is issued. In most states it is ten (10) days after the
Contract is delivered to you. For a Contract issued as a replacement for another
contract, the period is twenty (20) days. Notice of cancellation given by mail
and return of the Contract are effective upon being postmarked, properly
addressed, and postage paid. The Contract will then be void as if it had never
been issued.
8
<PAGE>
The Company will promptly refund the greater of (a) the Contract Value
calculated on the date the Company receives the Contract and refund Request, or
(b) Premium Payments made under the Contract. Any portion of the initial net
Premium Payment that is allocated to the Variable Account will be held in the
Money Market Variable Subaccount for 15 days from the date the Contract is
mailed from the Administrative Service Center, to allow for this Free Look Right
(the extra days are to provide time for mail or other delivery of the Contract.)
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE CONTRACT
If you are a natural person, there should be no federal income tax on
increases in the Contract Value (if any) until a distribution under the Contract
occurs (E.G., a Partial Withdrawal, Surrender, or Annuity Payment) or is deemed
to occur (E.G., a pledge or assignment of a Contract). Generally, a portion of
any distribution or deemed distribution will be taxable as ordinary income. The
taxable portion of certain distributions may be subject to withholding. In
addition, a penalty tax may apply to certain distributions or deemed
distributions under the Contract. (See "Certain Federal Income Tax
Consequences," p. 29.)
INQUIRIES AND WRITTEN NOTICES AND REQUESTS
Any questions about procedures or the Contract, or any Request required to
be directed to the Company, should be sent to the Company's Administrative
Service Center: P.O. Box 1776, Farmington Hills, Michigan 48333-1776 or faxed to
1-810-489-4688. Telephone requests and inquiries may be made by calling
1-800-289-1776. All inquiries and Requests should include the Contract number,
your name and the Annuitant's name and should be signed by you.
VARIATIONS IN CONTRACT PROVISIONS
Certain provisions of the Contracts may vary from the descriptions in this
Prospectus in order to comply with different state laws. Any such variations
will be included in the Contract itself or in riders or endorsements.
CONDENSED FINANCIAL INFORMATION
The Separate Account commenced operations on February 27th 1996.
Accordingly, no historical financial data is available for the fiscal year
ending December 31st 1995.
* * *
NOTE: THE FOREGOING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION IN THE REMAINDER OF THIS PROSPECTUS, IN THE STATEMENT OF ADDITIONAL
INFORMATION, IN THE PROSPECTUS FOR THE TRUST, THE PROSPECTUS FOR THE FEDERATED
PRIME MONEY FUND, AND IN THE CONTRACT, ALL OF WHICH SHOULD BE REFERRED TO FOR
MORE DETAILED INFORMATION. THIS PROSPECTUS GENERALLY DESCRIBES ONLY THE CONTRACT
AND THE SEPARATE ACCOUNT. SEPARATE PROSPECTUSES ATTACHED HERETO DESCRIBE THE
TRUST AND THE FEDERATED PRIME MONEY FUND.
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
The Company, 33045 Hamilton Court, Farmington Hills, Michigan 48334-3358, is
a stock life insurance company. It was incorporated under the laws of Michigan
on October 31, 1963. It is principally engaged in the sale of life insurance and
annuities, and is licensed in Canada, the District of Columbia, and all states
except New York. As of December 31, 1995, the Company had assets of over $5.4
billion. The Company is wholly-owned by Jefferson-Pilot Corporation, a $16.5
billion asset company based in Greensboro, North Carolina. Jefferson-Pilot is in
the insurance business through Jefferson-Pilot Life Insurance Company, and in
the communications business through television and radio stations. The
obligations under the Contracts are obligations of the Company.
For more information about the Company, see "Additional Information About
the Separate Account," p. 34.
9
<PAGE>
INVESTMENT OPTIONS
Premium Payments paid under a Contract may be allocated to the eight
Variable Subaccounts of the Separate Account, to the two Interest Rate Guarantee
Periods of the Capital Developer Account, or to a combination of these
Investment Options. THERE IS NO GUARANTEED OR MINIMUM SURRENDER VALUE FOR ANY
PREMIUM PAYMENTS OR AMOUNTS ALLOCATED TO ANY VARIABLE SUBACCOUNT.
THE SEPARATE ACCOUNT
ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT. The Alexander
Hamilton Variable Annuity Separate Account of Alexander Hamilton Life Insurance
Company of America (the "Separate Account") was established as a separate
investment account under the laws of the State of Michigan on January 24, 1994.
The Separate Account receives and invests the Net Premium Payments under the
Contracts that are allocated to it for investment in shares of one or more
mutual fund portfolios.
The Separate Account currently is divided into eight Variable Subaccounts.
Additional Variable Subaccounts may be established in the future at the
discretion of the Company, and the Company reserves the right to add or remove
Variable Subaccounts. Currently, each Variable Subaccount invests in shares of
the Federated Prime Money Fund or a corresponding Fund of Alexander Hamilton
Variable Insurance Trust (the "Trust"). The assets of the Separate Account are
owned by the Company. Under Michigan insurance regulations, an insurer issuing
contracts on a variable basis shall maintain in each separate account assets
having a value equal to the reserves and other reasonable liabilities and
obligations with respect to the account, and a separate account shall not be
charged with liabilities arising out of other separate accounts or out of other
business of the insurer unless the liabilities have a specific and determinable
relation to or dependence upon the separate account. The Company reserves the
right to transfer assets of the Separate Account in excess of the reserves and
other Contract liabilities with respect to the Separate Account to the Company's
general account. The income, if any, and gains or losses realized or unrealized
on each Variable Subaccount are credited to or charged against that Variable
Subaccount without regard to other income, gains or losses of the Company.
Therefore, the investment performance of any Variable Subaccount should be
entirely independent of the investment performance of the Company's general
account assets or any other separate account maintained by the Company. You bear
the entire investment risk with respect to the Contract Value allocated to the
Separate Account, and the Separate Account Value could be more or less than the
Net Premium Payments allocated to and transfers into the Separate Account.
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. It meets the definition of a "separate account"
under the Federal securities laws. However, the SEC does not supervise the
management or the investment practices or policies of the Separate Account or of
the Company.
When required by law or regulation, an investment objective of the Separate
Account may be changed. It will only be changed if approved by the appropriate
insurance official of the State of Michigan or deemed approved in accordance
with such law or regulation. If so required, the request to obtain such approval
will be filed with the insurance official of the state or the district in which
the Contract is delivered.
ALEXANDER HAMILTON VARIABLE INSURANCE TRUST AND FEDERATED PRIME MONEY
FUND. The Separate Account will invest in shares of the Federated Prime Money
Fund and in shares of the Trust, a series-type mutual fund registered under the
1940 Act as an open-end, management investment company. The Trust currently
issues shares of the following seven Funds: Investment Grade Bond Fund, High
Yield Bond Fund, Balanced Fund, Growth & Income Fund, Growth Fund, Emerging
Growth Fund, and International Equity Fund. The assets of each Fund are held
separate from the assets of the other Funds, and each Fund has its own distinct
investment objective and policies. Each Fund operates as a separate investment
fund, and the income or losses of one Fund have no effect on the investment
performance of any other Fund.
10
<PAGE>
The investment objective of each Fund is as follows:
<TABLE>
<CAPTION>
EQUITY PORTFOLIO CHOICES
<S> <C> <C>
Fund Name Objective Manager
International Long-term growth of capital through investments in Lombard Odier
Equity securities whose primary trading markets are outside International
the United States. Portfolio Management
Limited
Emerging Growth Long-term growth of capital by investing primarily Massachusetts
in common stocks of companies that the sub-adviser Financial Services
believes are early in their life cycle but which Company
have the potential to become major enterprises
(emerging growth companies).
Current income is not a consideration.
Growth Capital growth by investing primarily in equity Strong Capital
securities. Management
</TABLE>
<TABLE>
<CAPTION>
EQUITY AND FIXED-INCOME PORTFOLIO CHOICES
<S> <C> <C>
Fund Name Objective Manager
Growth & Income Long-term growth of capital and income by investing Warburg, Pincus
primarily in equity securities. Counsellors, Inc.
Balanced High total return from a diversified portfolio of J.P. Morgan
U.S. equity and fixed-income securities. Investment
Management
Under normal circumstances, the portfolio attempts
to achieve its objective by investing approximately
65% of its assets in equities and 35% in
fixed-income securities.
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO CHOICES
<S> <C> <C>
Fund Name Objective Manager
High Yield Bond High level of current income by investing primarily Massachusetts
in a professionally managed, diversified portfolio of Financial Services
fixed-income securities, some of which may involve Company
equity features.
Capital growth, if any, is a consideration incidental
to the primary objective of high current income.
Investment Grade High total return consistent with moderate risk of J.P. Morgan
Bond capital and maintenance of liquidity. Investment
Management
Money Market Current income consistent with stability of principal Federated Investors
($1 per share) and liquidity.
</TABLE>
AN INVESTMENT IN THE FEDERATED PRIME MONEY FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT OR THE FDIC OR ANY OTHER AGENCY, AND THERE CAN
BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE
OF $1 PER SHARE.
* * *
11
<PAGE>
Alexander Hamilton Capital Management, Inc., an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, is the
investment adviser to the Trust. It is located at 33045 Hamilton Court,
Farmington Hills, Michigan 48334-3358. Alexander Hamilton Capital Management,
Inc. is an affiliate of the Company. It has contracted with sub-advisers to
manage the investment portfolio of each Fund.
J.P. Morgan Investment Management is the sub-adviser to the Investment Grade
Bond Fund and the Balanced Fund. J.P. Morgan Investment Management, with
principal offices at 522 Fifth Avenue, New York 10036, provides advisory
services to pension and other institutional accounts. J.P. Morgan Investment
Management is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, a
bank holding company organized under the laws of Delaware.
Massachusetts Financial Services Company ("MFS") acts as sub-adviser to the
High Yield Bond Fund and the Emerging Growth Fund. MFS is located at 500
Boylston Street, Boston Massachusetts 02116-3741.
Warburg, Pincus Counsellors, Inc. ("Warburg") acts as sub-adviser to the
Growth & Income Fund. Warburg is a wholly-owned subsidiary of Warburg, Pincus
Counsellors, G.P., a New York general partnership. E.M. Warburg, Pincus & Co.,
Inc., controls Warburg through its ownership of a class of voting preferred
stock of Warburg. Warburg is located at 466 Lexington Avenue, New York, New York
10017.
Strong Capital Management acts as sub-adviser to the Growth Fund. Strong
Capital Management is located at One Hundred Heritage Reserve, Menomonee Falls,
Wisconsin 53051.
Lombard Odier acts as the sub-adviser to the International Equity Fund.
Lombard Odier is located at Norfolk House, 13 Southampton Place, London WC1A
2AJ; UK. Lombard Odier is wholly-owned by Lombard, Odier & Cie, one of the
largest and oldest private banks in Switzerland, established in 1798.
Federated Research is the investment adviser to the Federated Prime Money
Fund. It is located at 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222.
THERE IS NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVE. More
detailed information, including a description of each Fund's investment
objective and policies and a description of risks involved in investing in each
of the Funds and of each Fund's fees and expenses is contained in the prospectus
for the Trust or for the Federated Prime Money Fund. With regard to the High
Yield Bond Fund and other Funds of the Trust investing in higher yielding,
higher risk, lower-rated or unrated securities, please consult the section of
the Trust's prospectus entitled "Lower Rated Corporate Debt Obligations" for a
description of the risks associated with such investments. Current copies of
which are attached to this Prospectus. INFORMATION CONTAINED IN THE TRUST'S AND
FEDERATED PRIME MONEY FUND'S PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE
ALLOCATING PREMIUM PAYMENTS OR TRANSFERRING CONTRACT VALUE TO A VARIABLE
SUBACCOUNT OF THE SEPARATE ACCOUNT.
THE CAPITAL DEVELOPER ACCOUNT
Within the Capital Developer Account, the Company currently offers two
guarantee periods, lasting for one and seven years. Both provide for fixed
accumulations at a specified Guaranteed Interest Rate on Premium Payments
allocated to, and amounts transferred to, the Capital Developer Account. Amounts
allocated to the Capital Developer Account may be subject to a Market Value
Adjustment upon a Surrender, Partial Withdrawal, Transfer or annuitization
requested more than 30 days prior to the end of the Interest Rate Guarantee
Period. The Market Value Adjustment will never reduce the return on amounts
allocated to the Capital Developer Account to less than three percent per year.
Because of this adjustment and for other reasons, the amount payable upon
Partial Withdrawal or Surrender or applied to a Transfer or annuitization may be
more or less than the Capital Developer Account Value at the time of
transaction.
The Capital Developer Account is backed by the Company's general account and
assets supporting amounts allocated to the Capital Developer Account are
available to fund the claims of all classes of customers, policy owners and
other creditors of the Company. The Company may utilize a "segregated account"
within its general account in connection with the Capital Developer Account
Value. Nevertheless, Contract Owners who allocate amounts to the Capital
Developer Account do not share in the investment performance of that segregated
account or any other portion of the assets of the Company. Accordingly, in
12
<PAGE>
contrast to the Separate Account, there are no Accumulation Units or calculation
of Accumulation Unit values to measure the investment performance of the Capital
Developer Account. (This type of segregated account is sometimes referred to as
a "non-unitized, noninsulated" separate account.)
Premium Payments will be allocated to the Interest Rate Guarantee Periods to
the extent elected by the Contract Owner at the time of the initial Premium
Payment or as subsequently elected. In addition, all or part of the Separate
Account Value may be transferred to one or more of the Interest Rate Guarantee
Periods prior to Maturity Date.
Contract Value in the Interest Rate Guarantee Periods will not share in the
investment performance of the Company's general account or any portion thereof.
Instead, the Company will pay a specified rate of interest, the Guaranteed
Interest Rate, for each Interest Rate Guarantee Period. The interest rate
credited to each Interest Rate Guarantee Period will vary in the sole discretion
of the Company, but it will never be less than three percent annually. There is
no specific formula for the determination of the Guarantee Interest Rate. Some
of the factors that the Company may consider in determining the Guaranteed
Interest Rate are: general economic trends; rates of return currently available
and anticipated on the Company's investments; expected investment yields;
regulatory and tax requirements; and competitive factors. ANY INTEREST CREDITED
TO AMOUNTS ALLOCATED TO THE INTEREST RATE GUARANTEE PERIODS WILL BE DETERMINED
IN THE SOLE DISCRETION OF THE COMPANY. The Company resets this rate
periodically. It currently resets the rate monthly, but in the future the rate
may be reset more or less frequently. Due to the Market Value Adjustment and
Surrender Charge, the Contract Owner assumes the risk that the Surrender Value
of amounts allocated to the Capital Developer Account (or the proceeds of a
transfer or amount annuitized) will be less than the Capital Developer Account
Value.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Board of Directors has set no limitations.
However, inherent in the Company's exercise of discretion in this regard is the
equitable allocation of distributable earnings and surplus to its sole
stockholder.
SURRENDERS, PARTIAL WITHDRAWALS, TRANSFERS, AND ANNUITIZATIONS OF CAPITAL
DEVELOPER ACCOUNT VALUE FROM AN INTEREST RATE GUARANTEE PERIOD MAY BE SUBJECT TO
A MARKET VALUE ADJUSTMENT (AS WELL AS A SURRENDER CHARGE). THEREFORE, THE NET
AMOUNT YOU RECEIVE MAY BE LESS THAN THE AMOUNT REQUESTED FOR WITHDRAWAL,
TRANSFER OR SURRENDER. (SEE "SURRENDER CHARGE," P. 24 AND "MARKET VALUE
ADJUSTMENT," P. 25.)
The Company will invest the assets of the Capital Developer Account in those
assets chosen by the Company and allowed by applicable state laws regarding the
nature and quality of investment that may be made by life insurance companies
and the percentage of their assets that may be committed to any particular type
of investment. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
THE ALLEGIANCE VARIABLE ANNUITY CONTRACT
The Allegiance Variable Annuity Contract (the "Contract") is an individual
Flexible Premium Multi-Funded Deferred Variable Annuity Contract. The Contract
may be purchased on a non-qualified basis ("Non-qualified Contract"). The
Contract may also be purchased in connection with retirement plans or individual
retirement accounts that qualify for favorable federal income tax treatment
("Qualified Contract").
THERE IS NO GUARANTEED OR MINIMUM SURRENDER VALUE UNDER THE CONTRACT, SO THE
AMOUNT RECEIVED ON SURRENDER COULD BE LESS THAN THE AMOUNT OF PREMIUM PAYMENTS.
HOWEVER, AMOUNTS ALLOCATED TO THE CAPITAL DEVELOPER ACCOUNT ARE GUARANTEED TO
EARN A MINIMUM RATE OF INTEREST OF AT LEAST THREE PERCENT PER YEAR.
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CONTRACT APPLICATION AND ISSUANCE OF CONTRACTS
Before it will issue a Contract, the Company must receive a completed
Application and an initial Premium Payment of at least $2,000 (although a lower
minimum may apply to certain Qualified Contracts). The initial Premium Payment
can be made in a single payment or by twelve equal systematic payments over the
first 12 Contract Months. The systematic payments must be made via automatic
debits or automated clearing house transfers from a checking or savings account.
The Company reserves the right to reject any Application or Premium Payment. For
a Non-qualified Contract, the Contract Owner (or the Annuitant, if different
than the Contract Owner) must be age 80 or younger. The Contract Owner (who
generally must also be the Annuitant for Qualified Contracts) must be age 75 or
younger for certain types of Qualified Contracts. The Contract is not available
in all states.
If the Application is properly completed and can be accepted in the form
received, the initial Net Premium Payment will be credited to the Contract Value
within two Business Days after the later of receipt of the Application or
receipt of the initial Premium Payment at the Company's Administrative Service
Center. (The Net Premium Payment is the total Premium Payment less any
applicable Premium Tax.) If the initial Net Premium Payment allocated to the
Separate Account cannot be credited because the Application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay, and the initial Premium
Payment will be returned at that time unless the applicant consents to the
Company's retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled. In that event, the initial Net Premium
Payment will be credited to the Contract Value within two Business Days of the
Application's completion.
The Contract will become effective on the date the initial Net Premium
Payment is credited to the Contract Value.
PREMIUM PAYMENTS
All Premium Payments, checks, or electronic fund transfers should be made
payable to Alexander Hamilton Life Insurance Company of America and sent to the
Company's Administrative Service Center. Receipts will be provided upon request.
A confirmation of each transaction will be provided. Premium Payments may be
made directly by the Contract Owner on a flexible basis, through the systematic
investment program, on a monthly or quarterly basis, or through a group billing
or payroll deduction arrangement on a periodic basis.
INITIAL PREMIUM PAYMENT. The minimum initial Premium Payment is currently
$2,000 (although a lower minimum may apply to certain Qualified Contracts).
However, the minimum initial premium can be made in 12 equal monthly payments
when a Contract Owner has elected the systematic investment program for
additional premiums to be automatically withdrawn monthly from the Contract
Owner's bank account or when an applicant is part of a periodic group billing or
payroll deduction arrangement. The Company reserves the right to increase or
decrease this amount for Contracts issued after some future date. The initial
Premium Payment is the only Premium Payment required to be paid under a
Contract. The maximum initial Premium Payment that the Company will currently
accept without its prior approval is $1,000,000.
ADDITIONAL PREMIUM PAYMENTS. Prior to the Maturity Date and before a Death
Benefit has become payable, you may make additional Premium Payments at any
interval. The minimum additional Premium Payment under the Contract is $50. The
Company reserves the right to limit the dollar amount of any additional Premium
Payments. Cumulative Premium Payments under the Contract may not exceed
$1,000,000 without the prior approval of the Company. Additional Premium
Payments will be credited to Contract Value as of the Valuation Period during
which they are received by the Company at its Administrative Service Center.
ALLOCATION OF PREMIUM PAYMENTS. The initial Net Premium Payment will be
allocated to the Money Market Variable Subaccount for 15 days after the Contract
Date except for premiums allocated to the Capital Developer Account. After 15
days, it and all other Premium Payments will be allocated among the eight
Variable Subaccounts as specified by you in the Application. (If you fail to
specify how Premium Payments are to be allocated, the Application cannot be
accepted). You must allocate Premium Payments to
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one or more Variable Subaccounts of the Separate Account or to one or more
Interest Rate Guarantee Periods, or some combination thereof in whole
percentages (totaling 100%). Any allocation to a Variable Subaccount must be at
least $50 and in increments of 5% of a Premium Payment. Any allocation to an
Interest Rate Guarantee Period of the Capital Developer Account must be at least
$1,000. Premium Payments allocated to an Interest Rate Guarantee Period will be
credited with interest from the day after they are received.
The allocation specified in the Application will continue to be used for
additional Premium Payments unless you request a change of allocation. You may
change the allocation instructions for Net Premium Payments any time before the
Maturity Date by Request to the Company's Administrative Service Center. You
must specify your new allocation choices. The allocation change will apply to
Premium Payments received with or after the Request.
PAYMENT NOT HONORED BY BANK. Any payment due under the Contract which is
derived, all or in part, from any amount paid to the Company by check or draft
may be postponed until such time as the Company determines that such instrument
has been honored.
CONTRACT VALUE
On the Contract Date, the Contract Value equals the initial Net Premium
Payment. Thereafter, on any day on or before the Maturity Date, the Contract
Value equals the sum of the Separate Account Value and the Capital Developer
Account Value. The Contract Value will increase by (1) any additional Premium
Payments received by the Company; (2) any increases in the Contract Value due to
investment results of the selected Separate Account Variable Subaccounts; (3)
interest credited to the Capital Developer Account; and (4) any positive Market
Value Adjustments. The Contract Value will decrease by (1) any Partial
Withdrawals or Full Surrenders, including applicable charges; (2) any decreases
in the Contract Value due to investment results of the selected Separate Account
Variable Subaccounts; (3) the Mortality and Expense Risk Charge, the
Administrative Expense Charge, any applicable Transfer Charge, and, on the last
day of any Contract Year, the Annual Administrative Fee; (4) any negative Market
Value Adjustment; and (5) taxes, when applicable. The Company will inform you of
your Contract Value upon request.
The Contract Value is expected to change from Valuation Period to Valuation
Period. A Valuation Period is the period between successive Valuation Days. A
Valuation Day is any day that the New York Stock Exchange is open for trading.
Holidays are generally not Valuation Days.
THE SEPARATE ACCOUNT VALUE. When a Net Premium Payment is allocated or an
amount is transferred to a Variable Subaccount of the Separate Account, it is
credited to the Separate Account Value in the form of Accumulation Units. Each
Variable Subaccount of the Separate Account has a distinct Accumulation Unit
value. The number of units credited is determined by dividing the portion of the
Net Premium Payment or amount transferred by the dollar value of one
Accumulation Unit of the Variable Subaccount as of the end of the Valuation
Period during which the allocation or transfer is made. When amounts are
transferred out of, or withdrawn or Surrendered from, a Variable Subaccount,
Accumulation Units are cancelled or redeemed in a similar manner.
The Separate Account Value will be determined on every Valuation Day. For
each Variable Subaccount, the Accumulation Unit value for a given Valuation
Period is based on the net asset value of a share of the corresponding Fund of
the Trust or the Federated Prime Money Fund. Therefore, the Accumulation Units
will fluctuate in value from day to day based on the investment experience of
the corresponding Fund and the Separate Account Value will increase or decrease
to reflect the investment performance of the corresponding Fund. The Separate
Account Value also reflects expenses borne by the Fund(s) and the deduction of
certain charges. The determination of Variable Subaccount Accumulation Unit
values is described in detail in the Statement of Additional Information.
THE CAPITAL DEVELOPER ACCOUNT VALUE. When a Net Premium Payment is
allocated or an amount is transferred to a Capital Developer Account Interest
Rate Guarantee Period, it is credited to a new Account. (See "The Capital
Developer Account," p. 12.) In addition, interest at specified interest rates is
credited to the Capital Developer Account Value. When amounts are surrendered or
withdrawn from, transferred out
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of, or annuitized from an Interest Rate Guarantee Period, the Capital Developer
Account Value is reduced accordingly, and it may also be increased or decreased
by any Market Value Adjustment. (See "Market Value Adjustment," p. 25.) Unlike
the Separate Account, there are no Accumulation Units in the Capital Developer
Account.
MINIMUM CONTRACT VALUE. A minimum Contract Value of $2,000 for
Non-Qualified Contracts must be maintained during the Accumulation Period. If
you fail to maintain the minimum Contract Value and no Premium Payments have
been made in the past two years, then the Company may, upon ninety (90) days
notice forwarded to your most current address given us, cancel the Contract and
return the Contract Value less any applicable fees to you in one lump sum. If
you make sufficient Premium Payments to restore the Contract Value to at least
the minimum Contract Value within ninety (90) days of the date of notice, the
Contract will not be cancelled.
TRANSFERS
You can transfer Contract Value to or from Interest Rate Guarantee Periods
of the Capital Developer Account and/or any Variable Subaccount of the Separate
Account, within certain limits, as described below. The Company reserves the
right to restrict the transfer privilege in any way or to eliminate it entirely.
A Request for a transfer, made by you, must be received at the Company's
Administrative Service Center before a transfer will be effected.
The Company reserves the right to defer transfers among Variable Subaccounts
or to the Capital Developer Account as permitted by the Investment Company Act
of 1940, as amended. Such delay may occur because (i) the New York Stock
Exchange is closed for trading (other than usual weekend or holiday closing);
(ii) the SEC determines that a state of emergency exists; or (iii) an order or
pronouncement of the SEC permits a delay for your protection.
TRANSFERS DURING THE ACCUMULATION PERIOD are subject to the following
provisions:
- There is no limit to the number of transfers that can be made. No fee is
imposed on the first 15 transfers in each Contract Year during the
Accumulation Period, but a fee equal to $10 may be imposed for each
transfer in excess of 15 during any Contract Year. Although the Company
reserves the right to impose the $10 fee, it currently has no plans to do
so.
- Transfers from an Interest Rate Guarantee Period that are made within 30
days of the end of the Interest Rate Guarantee Period are not subject to a
Market Value Adjustment. All other transfers from Interest Rate Guarantee
Periods are subject to a Market Value Adjustment.
- If, after a transfer, the remaining Contract Value in the Variable
Subaccount from which the transfer was made would be less than $250, the
Company may include that remaining Contract Value as part of the transfer.
- The minimum amount you may transfer among the Variable Subaccounts is $250
or the entire Contract Value remaining in the Investment Option. The
minimum amount that may be transferred to or from an Interest Rate
Guarantee Period of the Capital Developer Account is $1,000.
- No transfers are permitted during the fifteen day period immediately
following the Contract Date.
DURING THE ANNUITY PERIOD, under any Variable Annuity Option, you (whether
you are the Annuitant or not) may transfer Separate Account Value among Variable
Subaccounts, subject to the following provisions:
- There is no limit to the number of transfers that can be made. No fee is
imposed on the first 15 transfers in each Contract Year during the
Accumulation Period, but there may be a charge of $10 for each transfer in
excess of 15 during any Contract Year. The Company reserves the right to
charge the fee, however, it currently has no plans to do so. The Company
will provide at least 30 days notice of its intention to impose such fee.
- If, after a transfer, the remaining Separate Account Value in the Variable
Subaccount from which the transfer was made is less than $250, the Company
may include that remaining Separate Account Value as part of the transfer.
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- The minimum amount you may transfer from a Variable Subaccount is $250 or
the entire Contract Value remaining in the Variable Subaccount.
Transfers between Variable Subaccounts during the Annuity Period will be
processed based on the formula outlined in the Statement of Additional
Information (see "Annuity Period Transfer Formulas").
NO TRANSFERS OF AMOUNTS APPLIED TO A FIXED ANNUITY OPTION ARE PERMITTED.
DOLLAR COST AVERAGING
Under the Dollar Cost Averaging program, if elected, you can instruct the
Company to automatically transfer a specified dollar amount from any Variable
Subaccount or the One Year Interest Rate Guarantee Period of the Capital
Developer Account to the Variable Subaccounts or the One Year Interest Rate
Guarantee Period. The program is not available in connection with the Seven Year
Interest Rate Guarantee Period of the Capital Developer Account. The automatic
transfers can occur monthly or quarterly, and the amount transferred each time
must be at least $50. At the time the program begins, there must be a minimum
value of $5,000 in the Contract. Automatic transfers from the One Year Interest
Rate Guarantee Period of the Capital Developer Account taken under the Dollar
Cost Averaging program will not be subject to a Market Value Adjustment.
Dollar Cost Averaging, a long-term investment method which provides for
regular, level investments over time, results in the purchase of more
Accumulation Units when the Accumulation Unit Value is low, and fewer
Accumulation Units when the Accumulation Unit Value is high. However, there is
no guarantee that the Dollar Cost Averaging program will result in a higher
Contract Value, protect against loss, or otherwise be successful.
The Dollar Cost Averaging program can be elected when purchasing the
Contract or at a later date. The election 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 when
the amount in the Variable Subaccount or the One Year Interest Rate Guarantee
Period of the Capital Developer Account, as applicable, equals $250 or less.
There is no charge for this program. Transfers made as part of the Dollar Cost
Averaging program do not count toward the 15 free transfers that are permitted
annually under the Contract.
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DISTRIBUTIONS UNDER THE CONTRACT
SURRENDERS AND PARTIAL WITHDRAWALS
Prior to the Maturity Date, you may surrender all (a "Surrender" or "Full
Surrender") or withdraw a portion (a "Partial Withdrawal") of the Surrender
Value in exchange for a cash payment from the Company by sending a Request,
signed by you, to the Company's Administrative Service Center. The Surrender
Value is the Contract Value minus any applicable Surrender Charge, Annual
Administrative Fee, and any applicable Premium Taxes, and plus or minus any
Market Value Adjustment. THERE IS NO MINIMUM OR GUARANTEED SURRENDER VALUE FOR
AMOUNTS ALLOCATED OR TRANSFERRED TO THE VARIABLE SUBACCOUNTS OF THE SEPARATE
ACCOUNT.
The proceeds payable upon a Partial Withdrawal will be the Partial
Withdrawal amount requested. Any applicable Surrender Charge will be subtracted,
and then any applicable Market Value Adjustment will be added to or subtracted
from the remaining Contract Value. For Partial Withdrawals, you must specify the
Investment Option from which the withdrawal should be taken; otherwise we will
prorate the amount based on your current Contract Value allocation.
No Market Value Adjustment is imposed on Surrenders or Partial Withdrawals
made from an Interest Rate Guarantee Period during the last 30 days of the
Interest Rate Guarantee Period.
The minimum amount that can be withdrawn is $250 ($1,000 from any Guaranteed
Interest Period of the Capital Developer Account) unless the Company agrees
otherwise or unless a smaller amount is required to comply with the Code.
Qualified Contracts may be subject to required minimum distribution
requirements. (See "Certain Federal Income Tax Consequences," p. 29.) In
addition, following any Partial Withdrawal, the remaining Contract Value must be
at least $2,000. If the processing of a Partial Withdrawal request would result
in a remaining Contract Value of less than $2,000, the Company may treat the
Partial Withdrawal request as a request for a Full Surrender of the Contract,
and you will receive the Surrender Value. Following payment of the Surrender
Value, the Contract will be cancelled. If the amount requested to be withdrawn
or Surrendered from an Investment Option is greater than the Contract Value of
that Investment Option, the Company will pay you the entire Contract Value of
that Investment Option, minus any Surrender Charge and plus or minus any Market
Value Adjustment, and minus any Annual Administrative Fee and any charge for
applicable Premium Taxes that may apply.
The Separate Account Value remaining in any Variable Subaccount immediately
following a Partial Withdrawal must be at least $250. The Capital Developer
Account Value remaining in an Interest Rate Guarantee Period immediately
following a Partial Withdrawal must be at least $1,000. If the processing of a
withdrawal request would result in Separate Account Value remaining in a
Variable Subaccount of less than $250 or Capital Developer Account Value
remaining in an Interest Rate Guarantee Period of less than $1,000, the Company
may treat the Withdrawal request as a request for withdrawal of the entire
Separate Account Value remaining in the relevant Variable Subaccount or the
entire Capital Developer Account Value remaining in the relevant Interest Rate
Guarantee Period.
You may Surrender the Contract at any time prior to the Maturity Date by
sending a Request to the Company at its Administrative Service Center. After the
Maturity Date, no Surrenders or Partial Withdrawals are permitted. (See "Annuity
Payment Options," p. 20.)
Withdrawals and Surrenders will be processed using the Separate Account
Value for the Valuation Period during which the Request for Withdrawal or
Surrender is received by the Company at its Administrative Service Center. The
Company will pay all Partial Withdrawals and Full Surrender requests to you or
to any other Payee that you designate within five (5) business days (unless you
choose a later date) following receipt by the Company at its Administrative
Service Center of your Request and all requirements necessary to process the
request, except as follows:
- CAPITAL DEVELOPER ACCOUNT -- The Company reserves the right, when
permitted by law, to defer payment of any Partial Withdrawal or Full
Surrender from the Interest Rate Guarantee Periods for up to six (6)
months. Interest will be paid on any amount deferred for 30 days or more
at a rate of at least 3.0% per year.
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- SEPARATE ACCOUNT -- The Company reserves the right to defer the payment of
any Partial Withdrawal or Full Surrender from the Separate Account as
permitted by the Investment Company Act of 1940, as amended. Such delay
may occur because (i) the New York Stock Exchange is closed for trading
(other than usual weekend or holiday closing); (ii) the SEC determines
that a state of emergency exists; or (iii) an order or pronouncement of
the SEC permits a delay for your protection.
In addition, a Premium Payment amount is not available to satisfy a Partial
Withdrawal or Full Surrender until the check or other instrument by which such
Premium Payment was made has been honored.
Since you assume the entire investment risk with respect to Premium Payments
and Transfers allocated to the Separate Account, and because Partial Withdrawals
and Surrenders are subject to a Surrender Charge, an Annual Administrative Fee,
and possibly Premium Taxes, THE TOTAL AMOUNT PAID UPON FULL SURRENDER MAY BE
MORE OR LESS THAN THE TOTAL PREMIUM PAYMENTS ALLOCATED TO THE SEPARATE ACCOUNT
(taking any prior Partial Withdrawals into account). Following a Full Surrender,
or at any time Partial Withdrawals reduce the Contract Value to zero, all of
your rights and those of the Annuitant will terminate.
PARTIAL WITHDRAWALS (INCLUDING SYSTEMATIC WITHDRAWALS DESCRIBED BELOW) AND
SURRENDERS MAY BE TAXABLE AND A PENALTY TAX MAY APPLY PRIOR TO AGE 59 1/2. (SEE
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," P. 29.)
SYSTEMATIC WITHDRAWAL PLAN
Under the Systematic Withdrawal Plan, you can instruct the Company to make
automatic withdrawal payments to you monthly, quarterly, semi-annually or
annually from a specified Variable Subaccount. The minimum monthly payment is
$250, the minimum quarterly payment is $750, the minimum semi-annual payment is
$1,500, and the minimum annual payment is $3,000, or the amounts can be the
minimum required amounts to comply with qualified plan requirements. The request
for systematic withdrawal must specify a date for the first payment, which must
be at least 30 but not more than 90 days after the form is submitted. The
Surrender Charge will not apply to the first 10% of Contract Value (determined
at the time of the Withdrawal) that is withdrawn during a Contract Year. Amounts
withdrawn in excess of 10% will be subject to any applicable Surrender Charge.
After the eighth Contract Year, amounts withdrawn will no longer be subject to a
Surrender Charge. Systematic Withdrawals may not be taken from the Interest Rate
Guarantee Periods. Systematic Withdrawals may result in certain tax
consequences. (See "Certain Federal Income Tax Consequences," p. 29.)
ANNUITY PAYMENTS
The Company will make Annuity Payments beginning on the Maturity Date,
provided that the Contract is in force on that date. The Annuity Payment Option
and frequency of Annuity Payments may not be changed after Annuity Payments
begin. Unless you specify otherwise, the Payee of the Annuity Payments is the
Annuitant. The dollar amount of the payments will depend on numerous factors
including the Contract Value, the type of Annuity and Annuity Payment Option you
elected, the frequency of payments you elected, and possibly the age of the
Annuitant.
MATURITY DATE. Initially, you select the Maturity Date at the time the
Application is completed. You may change the Maturity Date from time to time, by
submitting a Request to the Company, provided that notice of each change is
received by the Company's Administrative Service Center at least thirty (30)
days prior to the then-current Maturity Date along with the written consent of
any irrevocable Beneficiaries. The latest Maturity Date which may be elected for
a Non-qualified Contract, unless otherwise consented to by the Company, is the
Annuitant's 85th birthday or the tenth Contract anniversary (whichever is later)
and for a Qualified Contract, the date the Annuitant attains age 70 1/2, unless
you demonstrate that the minimum required distribution under the Code is being
made. If you do not select a Maturity Date, the Maturity Date will be the
Annuitant's 85th birthday (for a Non-qualified Contract) or the date the
Annuitant attains age 70 1/2 (for a Qualified Contract).
ELECTION OF ANNUITY PAYMENT OPTION. During your lifetime and that of the
Annuitant and prior to the Maturity Date, you may choose an Annuity Payment
Option. You may change the option, but a Request specifying a change of option
and the written consent of any irrevocable Beneficiary must be received by the
Company's Administrative Service Center at least thirty (30) days prior to the
Maturity Date. If no election is
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made at least 30 days prior to the Maturity Date, Annuity Payments will be made
as an annuity for the Annuitant's life with Annuity Payments guaranteed for ten
years. (See "Annuity Payment Options," below.) You may not change the Annuity
Payment Option after the Maturity Date.
If the Maturity Date is in the first eight Contract Years and if an annuity
option of less than five years is elected, then the surrender charge will be
deducted.
If any Contract Owner or the Annuitant (if the owner is a non-natural
person) dies prior to the Maturity Date, the Beneficiary may receive a Death
Benefit. (See "Death Benefit," p. 22.)
TAXES. All or part of each Annuity Payment will be taxable. (See "Certain
Federal Income Tax Consequences," p. 29.) The Company may be required by state
law to pay a Premium Tax on the amount of Premiums or the amount applied to an
Annuity Payment Option. The Company will deduct a charge for the amount of any
Premium Taxes when it is required by law to pay such Premium Taxes.
ANNUITY PAYMENT OPTIONS
The Contract provides five Annuity Payment Options which are described
below. Four of these are offered as EITHER a Fixed Annuity or a Variable Annuity
(Option D is only available as a Fixed Annuity). You may elect a Fixed Annuity,
a Variable Annuity, or a combination of both. If you elect a combination, you
must specify what part of the Contract Value is to be applied to the Fixed and
Variable Payment Options. Unless specified otherwise, the Capital Developer
Account Value will be used to provide a Fixed Annuity and the Separate Account
Value will be used to provide a Variable Annuity. Variable Annuity Payments will
be based on the Variable Subaccount(s) that you select, or on the allocation of
the Separate Account Value among the Variable Subaccounts.
If the amount of the Annuity Payments will depend on the age of the
Annuitant, the Company reserves the right to ask for satisfactory proof of the
Annuitant's age. If Annuity Payments are contingent upon the survival of the
Annuitant, the Company may require evidence satisfactory to it that such
Annuitant is living. The Company may delay making Annuity Payments until
satisfactory proof is received.
On the Maturity Date, the sum of (i) the Capital Developer Account Value and
(ii) the Separate Account Value, minus (iii) any applicable Surrender Charge,
minus (iv) any Premium Tax, plus or minus (v) any Market Value Adjustment will
be applied to provide for Annuity Payments under the selected Annuity Payment
Option.
The Contract's annuity premium rates are based on the Commissioners'
Standard Ordinary 1983 Mortality Table a with Projection Scale G, with 10 years'
projected mortality improvement and with interest compounded annually at 3%.
(The projection of mortality improvement results in smaller annuity payments
than you would receive without this projection.) However, if the Company's
annuity premium rates in effect on the Maturity Date would result in higher
Annuity Payments, then those more favorable rates will be used. Unisex tables
will be used for Qualified Contracts, and sex-distinct tables will be used,
where permitted, for Non-qualified Contracts. If you ask, the Company will
provide you with a copy of those annuity premium rate tables. The amounts you
receive, however, may be greater than the amounts shown in the tables.
A FIXED ANNUITY provides for Annuity Payments which will remain constant
pursuant to the terms of the Annuity Payment Option elected. The effect of
choosing a Fixed Annuity is that the amount of each payment will be set on the
Maturity Date and will not change. If a Fixed Annuity is selected, the Separate
Account Value used to provide the Fixed Annuity will be transferred to the
general assets of the Company, and may become subject to the claims of the
Company's third party creditors. The Annuity Payments will be fixed in amount by
the Fixed Annuity provisions selected and, for some options, the age of the
Annuitant. The Fixed Annuity payment amounts are determined by applying the
annuity premium rate specified in the Contract to the portion of the Contract
Value allocated to the Fixed Annuity Option that you select.
A VARIABLE ANNUITY provides for payments that fluctuate or vary in dollar
amount, based on the investment performance of your selected allocations to one
or more Separate Account Variable Subaccounts. The Variable Annuity Purchase
Rate tables in the Contract reflect an assumed interest rate of 3.0%, so if the
actual net investment performance of the Variable Subaccount is less than this
rate, then the dollar
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amount of the actual Variable Annuity Payments will decrease. If the actual net
investment performance of the Variable Subaccount is higher than this rate, then
the dollar amount of the actual Variable Annuity Payments will increase. If the
net investment performance exactly equals the 3.0% rate, then the dollar amount
of the actual Variable Annuity Payments will remain constant.
- ANNUITY UNITS AND PAYMENTS. The dollar amount of each variable annuity
payment depends on the number of Annuity Units credited to that Annuity
Payment Option and the value of those units. The number of Annuity Units
is determined as follows:
1. The dollar amount of the first payment with respect to each Variable
Subaccount is determined by multiplying the portion of the Contract
Value to be applied to the Variable Subaccount by the annuity premium
rate specified in the Settlement Option table in the Contract.
2. The number of Annuity Units credited in each Variable Subaccount is
then determined by dividing the dollar amount of the first payment by
the value of one Annuity Unit in that Variable Subaccount on the
Maturity Date.
3. The amount of each subsequent Annuity Payment equals the product of
the Annuitant's number of Annuity Units and the Annuity Unit values
on the payment date. The amount of each payment may vary.
- ANNUITY UNIT VALUE. The value of the Annuity Units will increase or
decrease on a daily basis to reflect the investment performance of the
applicable Fund of the Trust or the Federated Prime Money Fund. The value
of an Annuity Unit in a Variable Subaccount on any Valuation Day is
determined as follows:
1. The value of the Annuity Unit for the Variable Subaccount on the
preceding Valuation Day is multiplied by the Net Investment Factor
for the Valuation Period.
2. The result in (1) is then multiplied by a factor (slightly less than
one) to compensate for the interest assumption built into the Annuity
Premium Rates.
The Net Investment Factor reflects the investment experience of the
applicable Fund and certain charges (See the Statement of Additional Information
for a detailed description of the Net Investment Factor).
You may choose to receive Annuity Payments under any one of the Annuity
Payment Options described below. The Company may consent to other plans of
payment before the Maturity Date. Additionally, you may also elect to receive
the Contract Value as of the Maturity Date in a lump sum payment.
NOTE CAREFULLY: UNDER ANNUITY OPTIONS II AND III IT WOULD BE POSSIBLE FOR
ONLY ONE ANNUITY PAYMENT TO BE MADE IF THE ANNUITANT(S) WERE TO DIE BEFORE THE
DUE DATE OF THE SECOND ANNUITY PAYMENT; ONLY TWO ANNUITY PAYMENTS IF THE
ANNUITANT(S) WERE TO DIE BEFORE THE DUE DATE OF THE THIRD ANNUITY PAYMENT; AND
SO FORTH.
The following Annuity Options are available:
ANNUITY OPTION I -- PERIOD CERTAIN (AVAILABLE AS A FIXED ANNUITY ONLY) --
Payments will be made for a specified period. The specified period must be
at least five (5) years and cannot be more than thirty (30) years.
ANNUITY OPTION II -- LIFE INCOME -- Payments will be made as long as the
Annuitant lives with optional guaranteed periods (Life Income with Period
Certain).
ANNUITY OPTION III -- (1) JOINT AND LAST SURVIVOR PAYMENTS -- Payments will
be made during the joint lifetime of two Annuitants, continuing in the same
amount during the lifetime of the surviving Annuitant; or (2) Joint and 50%
or 75% Survivor Annuity -- Payments will be made during the joint lifetime
of two Annuitants, continuing during the lifetime of the surviving Annuitant
and will be computed on the basis of one-half or three-fourths of the
Annuity Payment (or units) in effect during the joint lifetime.
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ANNUITY OPTION IV -- SPECIAL INCOME SETTLEMENT AGREEMENT -- The Company will
pay the proceeds in accordance with terms agreed upon in writing by you and
the Company.
During the Annuity Period, you may (whether or not you are the Annuitant),
upon Request, transfer a portion of any Variable Subaccount to another Variable
Subaccount within the Separate Account. (See "Transfers," p. 16.) However,
during the Annuity Period, no Partial Withdrawals or Surrenders are permitted.
A portion or the entire amount of the Annuity Payments may be taxable as
ordinary income. If, at the time the Annuity Payments begin, the Company has not
received a proper written election not to have federal income taxes withheld,
the Company must by law withhold such taxes from the taxable portion of such
annuity payments and remit that amount to the federal government. (See "Certain
Federal Income Tax Consequences," p. 29.)
Except as otherwise agreed to by you and the Company, Annuity Payments will
be payable monthly. If the Contract Value is less than $2,000 (or an amount that
would provide monthly Annuity Payments of less than $100 under any Annuity
Payment Option) on the Maturity Date, the Company will make payment in a lump
sum. The Company may require proof from the Payee of the Annuitant's survival as
a condition of future payments.
DEATH BENEFIT
DEATH OF CONTRACT OWNER PRIOR TO MATURITY DATE. If any Contract Owner dies
before the Maturity Date, a Death Benefit will be paid to the Beneficiary, if
living. The Death Benefit is payable upon the Company's receipt of Due Proof of
Death, as well as proof that the death occurred during the Accumulation Period.
Upon the Company's receipt of this proof and an election of a Death Benefit
Option and return of the Contract, the Death Benefit generally will be payable
after the Company has sufficient information to make the Death Benefit
payment(s). If an election by the Beneficiary to receive annuity payments as
described below under "Payment of Death Benefit to Beneficiary" is not received
by the Company within 90 days following the date Due Proof of Death of the
Contract Owner is received by the Company, the Beneficiary will be deemed to
have elected to receive the Death Benefit in the form of a single cash payment
on such 90th day.
The determination of the Death Benefit depends upon the Contract Owner's
Issue Age (age when the Contract was issued). If any Contract Owner dies and his
or her Issue Age is less than or equal to age 75, the amount of the Death
Benefit is equal to the greatest of:
(A) the sum of all Premium Payments less any "Adjusted Partial Withdrawals,"
including premium taxes, with interest compounded at 4% per year
(compounding continues up to the date of death and ends at the Contract
Owner's age 75);
(B) the Contract Value as of the most recent fifth Contract Anniversary
occurring while the Contract Owner was living and before the Contract
Owner's age 75, plus any Premium Payments and minus any "Adjusted Partial
Withdrawals" made since that Contract Anniversary; and
(C) the Contract Value as of the date the Company has sufficient information
to make the Death Benefit payment.
(For purposes of (A) and (B), above, the Death Benefit will be calculated as of
the date of the Contract Owner's death but will never be greater than 200% of
all Premium Payments, less any Partial Withdrawals.)
The "Adjusted Partial Withdrawal" for each Partial Withdrawal is the product
of (a) times (b) where:
(a) is the ratio of the amount of the Partial Withdrawal to the Contract
Value on the date of (but prior to) the Partial Withdrawal; and
(b) is the Death Benefit on the date of (but prior to) the Partial
Withdrawal.
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If any Contract Owner dies and his or her Issue Age is greater than age 75,
the amount of the Death Benefit is equal to the Contract Value on the date the
Company has received Due Proof of Death, election of a payment option, and
return of the Contract.
If the Contract Owner is deemed a non-natural person (i.e., a trust or
corporation) under Section 72 of the Code, the Death Benefit is payable upon the
death of the primary Annuitant. (The "primary Annuitant" is that individual
whose life affects the timing or amount of Annuity Payments under the Contract.)
The Death Benefit in such situation is equal to the Contract Value on the date
the Company has received Due Proof of Death of the primary Annuitant, election
of a payment option, and return of the Contract.
Payment of the Death Benefit will be in full settlement of the Company's
liability under the Contract, and the Contract will be cancelled on the date the
Death Benefit is determined and paid.
Death Benefit Payments will be made in a lump sum or in accordance with the
Contract Owner's or Beneficiary's election, as described below. The Contract
Value will be calculated as of the date the Company receives at its
Administrative Service Center Due Proof of Death and all requirements necessary
to make the payment. The Contract will end on such date.
IRS REQUIRED DISTRIBUTION. Federal tax law requires that if any Contract
Owner dies before the Maturity Date, then the entire value of the Contract must
generally be distributed within five years of the date of the Contract Owner's
death. Special rules may apply to the Contract Owner's spouse. See "Federal Tax
Matters," in the Statement of Additional Information, for a detailed description
of these rules. Other rules apply to Qualified Contracts. (See "Certain Federal
Income Tax Consequences," p. 29.)
DEATH OF ANNUITANT PRIOR TO MATURITY DATE. If the Annuitant is not the
Contract Owner and the Annuitant dies prior to the Maturity Date, you may name a
new Annuitant. If no new Annuitant is named, the Contract Owner becomes the new
Annuitant.
If the Contract Owner is a non-natural person (i.e., a trust or corporation)
for purposes of Code section 72, then the primary Annuitant's death will be
treated as the death of the Contract Owner and will result in payment of the
Contract Value. (No enhanced Death Benefit will apply.)
DEATH OF ANNUITANT ON OR AFTER MATURITY DATE. If the Annuitant dies while
there are remaining guaranteed Annuity Payments to be made, the Company will
continue to make the remaining guaranteed Annuity Payments to only one of the
following, in this order: (1) the named Payee, if any and if living, (2) the
Contract Owner, if living, (3) the Beneficiary, if any and if living, and (4)
the Contract Owner's estate. Annuity Payments will be paid at least as rapidly
as under the Annuity Payment Option in effect at the time of death. However, the
recipient of the remaining Annuity Payments can elect to accelerate payment of
the remaining Annuity Payments. No amount will be payable to a Beneficiary under
any Annuity Payment Option if the Annuitant dies after all guaranteed Annuity
Payments have been made.
DEATH OF CONTRACT OWNER ON OR AFTER MATURITY DATE. If any Contract Owner
dies after the Maturity Date and before the Annuitant, the Company will pay any
remaining guaranteed Annuity Payments to only one of the following, in this
order: (1) any named Payee, if living, (2) any joint Contract Owner, if living,
(3) any Beneficiary, if living, (4) the deceased Contract Owner's estate.
Annuity Payments will be paid at least as rapidly as under the Annuity Payment
Option in effect at the time of death.
CONTRACT OWNER'S SPOUSE AS BENEFICIARY. If the Beneficiary is the deceased
Contract Owner's surviving spouse, the Contract Owner's spouse may choose not to
receive the Death Benefit and may continue the Contract and become the Contract
Owner. If the deceased Contract Owner is also the Annuitant, the Contract
Owner's spouse will be the new Annuitant. If the Contract Owner's spouse chooses
to continue the Contract, no Death Benefit will be paid because of the Contract
Owner's death.
PAYMENT OF DEATH BENEFIT TO BENEFICIARY. Instead of accepting the Death
Benefit, the Beneficiary (after any Contract Owner's death) can choose by
Request to receive Annuity Payments based on his or her life expectancy. Payment
under any payment option must be for the life of the Beneficiary or for a number
of years that is not more than the life expectancy of the Beneficiary, at the
time of any Contract Owner's death (as determined for federal tax purposes), and
must begin within one year of any Contract Owner's death.
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BENEFICIARY. You may name more than one Beneficiary in the Application. You
may change a Beneficiary by sending a Request, signed by you, to the Company's
Administrative Service Center. When the Administrative Service Center records
the change, it will take effect as of the date the Company received your Request
at its Administrative Service Center. You may designate the amount or percentage
of the Death Benefit that each Beneficiary receives, either in the Application
or by a Request, signed by you. If you do not make such a designation, the Death
Benefit will be paid in equal shares to each Beneficiary. The Company will
comply with all state and federal laws requiring notification of the change in
Beneficiary.
CHANGE OF CONTRACT OWNER. You may change the Contract Owner while the
Annuitant is alive by sending a Request to the Company. The change will be
effective on the date the Request is recorded by the Company, but will be
subject to any payment made or action taken by the Company before recording the
change. When the change takes effect, all rights of ownership in the Contract
will pass to the new Contract Owner. Changing the Contract Owner does not change
the Annuitant, or the Beneficiary. Changing the Contract Owner may have tax
implications (See "Certain Federal Income Tax Considerations," p. 29.) Your
rights as Contract Owner are nonforfeitable. The Company will comply with all
state and federal laws requiring notification of the change in Contract Owner.
The Annuitant named in the Application can not be changed unless that Annuitant
dies prior to the Maturity Date.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program ("ORP") to withdraw their interest in a
variable annuity contract issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education; (2) retirement;
or (3) death. Accordingly, a participant in the ORP (or the participant's estate
if the participant has died) will be required to obtain a certificate of
termination from the employer or a certificate of death before the Contract can
be surrendered.
RESTRICTIONS UNDER QUALIFIED CONTRACTS
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Contracts or under the terms
of the plan in respect of which Qualified Contracts are issued.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Contract used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
CHARGES AND DEDUCTIONS
The Company will make certain charges and deductions under the Contract in
order to compensate it for incurring expenses in distributing the Contract,
bearing mortality and expense risks under the Contract, and administering the
Accounts and the Contracts. The Company may also deduct charges for transfers,
Premium Taxes, and other federal, state or local taxes. Charges and expenses are
also deducted from the Trust and the Federated Prime Money Fund.
SURRENDER CHARGE
The Company will incur expenses relating to the sale of Contracts, including
commissions to registered representatives and other promotional expenses. In
connection with a Partial Withdrawal, Full Surrender, or an Annuity Payment
Option of less than five years during the first eight Contract Years, the
Company will impose a Surrender Charge on the gross amount withdrawn or
Surrendered, before any deductions for the
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Annual Administrative Fee or Premium Taxes and before application of any Market
Value Adjustment. The Surrender Charge is calculated as a percentage of the
Contract Value withdrawn, Surrendered, or annuitized. The Surrender Charge
schedule is as follows:
<TABLE>
<CAPTION>
CONTRACT YEAR 1 2 3 4 5 6 7 8 9+
- ------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender Charge......... 7 % 7 % 6 % 5 % 4 % 3 % 2 % 1 % 0
</TABLE>
The Surrender Charge may not be applied under the following circumstances:
1. If you cancel the Contract during the "Right to Examine Contract"
period.
2. If you choose to annuitize the Contract after the first Contract Year
and you choose an Annuity Payment Option of longer than five years.
3. Payment of the Death Benefit.
4. On any Free Surrender Amount. (See below.)
5. To comply with the minimum distribution requirements of the Internal
Revenue Code.
6. If, subsequent to the Contract Date, you become confined to a hospital
or a state-licensed inpatient nursing care facility ("nursing care
facility") and meet all of the following conditions:
(a) You were not confined to a nursing care facility at any time on or
before the Contract Date;
(b) You have been confined to a nursing care facility for at least 30
consecutive days;
(c) It is medically necessary for you to be confined to the nursing care
facility; and
(d) You send the Company a Request for a Surrender or Partial Withdrawal
along with the Request for waiver of Surrender Charges while you are
confined or within 90 days after your discharge from such facility.
The Company will tell you the amount of Surrender Charge that would be
assessed upon a Withdrawal or Surrender upon request. More information about how
the Surrender Charge is calculated for Partial Withdrawals and Full Surrenders
is in Appendix I. The Company may waive or reduce the Surrender Charge for
Contracts sold to certain groups (See "Reduction in Charges for Certain Groups,"
p. 26).
The Company anticipates that the Surrender Charge will not generate
sufficient funds to pay the cost of distributing the Contracts. If this charge
is insufficient to cover the distribution expenses, the deficiency will be met
from the Company's general funds, which will include amounts derived from the
charge for mortality and expense risks.
THE COMPANY GUARANTEES THAT THE AGGREGATE SURRENDER CHARGE WILL NEVER EXCEED
8.5% OF THE TOTAL PREMIUM PAYMENTS MADE UNDER THE CONTRACT.
FREE SURRENDER AMOUNT. A Surrender Charge is imposed on Partial Withdrawals
and Full Surrenders (and certain annuitizations) in the first eight Contract
Years. However, you are entitled to an annual Free Surrender Amount, which is
exempt from the Surrender Charge (but not exempt from the imposition of the
Market Value Adjustment). The Free Surrender Amount for any Contract Year equals
10% of the Contract Value at the time of the first Surrender or Partial
Withdrawal during that Contract Year. Because the Contract Value may change from
day to day, the Free Surrender Amount or any remaining portion thereof may
increase or decrease on any day. Any cumulative amount Surrendered or withdrawn
in excess of the annual Free Surrender Amount during one of the first eight
Contract Years is subject to the Surrender Charge, as applicable. Unused Free
Surrender Amounts cannot be accumulated and carried from one Contract Year to
the next. The Free Surrender Amount does not apply to amounts applied to an
Annuity Payment Option.
MARKET VALUE ADJUSTMENT
The proceeds of a Partial Withdrawal, Full Surrender, or Transfer made from
an Interest Rate Guarantee Period of the Capital Developer Account 31 days or
more prior to the end of the Interest Rate Guarantee
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Period will be increased or decreased by the application of the Market Value
Adjustment. Where applicable, the Market Value Adjustment is applied to the
Capital Developer Account Value. NO MARKET VALUE ADJUSTMENT IS APPLIED TO ANY
PARTIAL WITHDRAWAL, SURRENDER, OR TRANSFER FROM AN INTEREST RATE GUARANTEE
PERIOD MADE DURING THE LAST 30 DAYS OF THE INTEREST RATE GUARANTEE PERIOD. IN
ADDITION, NO MARKET VALUE ADJUSTMENT WILL APPLY TO TRANSFERS FROM THE ONE YEAR
INTEREST RATE GUARANTEE PERIOD OF THE CAPITAL DEVELOPER ACCOUNT UNDER THE DOLLAR
COST AVERAGING PROGRAM.
The Market Value Adjustment will reflect the relationship between (a) the
Treasury Rate for the period, the duration of which most closely approximates
the duration remaining in the Interest Rate Guarantee Period from which the
Partial Withdrawal, Surrender, or Transfer is made, and (b) the Guaranteed
Interest Rate applicable to the Interest Rate Guarantee Period from which the
Partial Withdrawal, Surrender, or Transfer is made at the time of the
transaction.
Generally, if your Guaranteed Interest Rate is lower than the applicable
Treasury Rate, then the application of the Market Value Adjustment will reduce
the proceeds of a Partial Withdrawal, Surrender or Transfer. Similarly, if your
Guaranteed Interest Rate is higher than the applicable Treasury Rate, the
application of the Market Value Adjustment will increase the proceeds of a
Partial Withdrawal, Surrender, or Transfer.
For example, assume that a Contract Owner selects an initial Interest Rate
Guarantee Period of seven years and the Guaranteed Interest Rate for that
duration is 8% per annum, and, at the end of four years, the Contract Owner
makes a Partial Withdrawal. If the three year Treasury Rate is then 6%, the
Market Value Adjustment will be positive and will increase the proceeds. On the
other hand, if the Treasury Rate is higher than the Guaranteed Interest Rate,
for example 10%, the application of the Market Value Adjustment will cause a
decrease in the amount payable.
Since Guaranteed Interest Rates are based in part upon the investment yields
available to the Company (See "The Capital Developer Account," p. 12), the
effect of the Market Value Adjustment may be closely related to the levels of
such yields.
The formula for calculating the Market Value Adjustment is set forth in
Appendix II to this Prospectus, which contains illustrations of the application
of the Market Value Adjustment.
The Market Value Adjustment will never reduce the return on amounts
allocated to the Capital Developer Account below three percent per year.
REDUCTION IN CHARGES FOR CERTAIN GROUPS
The Company may reduce or eliminate the Annual Administrative Fee or
Surrender Charge on contracts that have been sold to (1) employees and sales
representatives of the Company or its affiliates; (2) customers of the Company
or distributors of the Contracts who are transferring existing contract values
to a Contract; (3) individuals or groups of individuals when sales of the
Contract result in savings of sales or administrative expenses; or (4)
individuals or groups of individuals where Premium Payments are to be made
through an approved group payment method and where the size and type of the
group results in savings of administrative expenses.
In no event will reduction or elimination of the Annual Administrative Fee
or Surrender Charge be permitted where such reduction or elimination will be
unfairly discriminatory to any person.
MORTALITY AND EXPENSE RISK CHARGE
The Company imposes a daily charge as compensation for bearing certain
mortality and expense risks in connection with the Contracts. This charge is
1.25% annually (equal to a daily rate of .003403%), of the daily value of net
assets in the Separate Account. (Approximately 0.50% is estimated to be
attributable to mortality risks, and approximately 0.75% is estimated to be
attributable to expense risks.) The Mortality and Expense Risk Charge is
reflected in the Accumulation Unit value or Annuity Unit value for each Variable
Subaccount. The Mortality and Expense Risk Charge will not be deducted with
respect to amounts held in the Capital Developer Account.
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Contract Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by the Company. The
mortality risks assumed by the Company arise from its contractual obligations to
make Annuity Payments determined in accordance with the annuity tables and other
provisions contained in the Contract. Thus, you are assured that neither the
Annuitant's own longevity nor an unanticipated improvement in general life
expectancy will adversely affect the Annuity Payments that the Annuitant will
receive under the Contract.
The Company also bears substantial risk in connection with the Death
Benefit. During the Accumulation Period, if the Contract Owner's Issue Age is
less than 75, the Company will pay a Death Benefit that could be greater than
the Contract Value. Otherwise, the Death Benefit is based on the Contract Value.
The Death Benefit is paid without imposition of a Surrender Charge or
application of the Market Value Adjustment.
The expense risk assumed by the Company is the risk that the Company's
actual expenses in administering the Contract and the Separate Account will
exceed the amount recovered through the Annual Administrative Fee and the
Administrative Expense Charge.
If the Mortality and Expense Risk Charge is insufficient to cover the
Company's actual costs, the Company will bear the loss; conversely, if the
charge is more than sufficient to cover costs, the excess will be profit to the
Company. The Company expects a profit from this charge. To the extent that the
Surrender Charge is insufficient to cover the actual cost of Contract
distribution, the deficiency will be met from the Company's general corporate
assets, which may include amounts, if any, derived from the mortality and
expense risk charge.
ADMINISTRATIVE EXPENSE CHARGE
The Company deducts a daily charge equal to a percentage of the net assets
in the Separate Account for administering the Separate Account. The effective
annual rate of this charge is 0.15% (equal to a daily rate of .000411%) of the
Contract Value. The amount of this charge is guaranteed not to increase and the
Company does not anticipate any profit from this charge. The Administrative
Expense Charge does not apply to any amounts held in the Capital Developer
Account.
ANNUAL ADMINISTRATIVE FEE
In order to cover the costs of administering the Contracts, the Company
deducts an Annual Administrative Fee from the Contract Value of each Contract on
the last day of each Contract Year and upon Full Surrender of the Contract. This
Annual Administrative Fee is the lesser of $30 or 2% of Contract Value on the
last day of the applicable Contract Year. It is guaranteed not to increase. The
Company does not anticipate realizing any profit from this charge. The Annual
Administrative Fee will be deducted pro rata from the investment options in the
same proportion that the amount of Account Value in each Account bears to the
total Contract Value. The Annual Administrative Fee will be waived if, on the
last day of that Contract Year, the Contract Value is $30,000 or greater or if
100% of Contract Value is allocated to the Capital Developer Account. No Annual
Administrative Fee is deducted after the Maturity Date.
The Company may waive or reduce the Annual Administrative Fee for the
Contracts sold to certain groups (See "Reduction in Charges for Certain Groups,"
p. 26).
TRANSFER CHARGE
A fee equal to $10 may be imposed for each Transfer in excess of 15 during
any Contract Year. Although the Company reserves the right to impose a $10 fee,
it currently has no plans to do so.
PREMIUM TAXES
The Company may pay Premium Taxes in connection with Premium Payments under
the Contracts. Depending upon applicable state law, the Company will deduct the
Premium Taxes paid with respect to a particular Contract when it is required to
pay them. This deduction may be made from the Premium Payments, from the
Contract Value on the Maturity Date (thus reducing the Contract Value), upon a
Partial Withdrawal, or upon the Full Surrender of a Contract. Premium Taxes may
range from 0% to 3.5% of Premium Payments or of Contract Value.
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FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
state Premium Taxes. However, the Company reserves the right to deduct charges
in the future for such taxes or other economic burden resulting from the
application of any tax laws that the Company determines to be attributable to
the Contracts.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each Fund is responsible for all of its expenses. In addition, charges will
be made against each Fund for investment advisory services provided to the Fund.
The net assets of each Fund will reflect deductions in connection with the
investment advisory fee and other expenses.
For more information concerning the investment advisory fee and other
charges against the Funds, see the prospectuses for the Trust and for the
Federated Prime Money Fund, current copies of which accompany this Prospectus.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION IS A GENERAL DESCRIPTION OF FEDERAL TAX
CONSIDERATIONS RELATING TO THE CONTRACT AND IS NOT INTENDED AS TAX ADVICE. 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 CONTRACT. ANY PERSON CONCERNED ABOUT THESE TAX
IMPLICATIONS SHOULD CONSULT A COMPETENT TAX ADVISOR BEFORE INITIATING ANY
TRANSACTION. THIS DISCUSSION IS BASED UPON THE COMPANY'S UNDERSTANDING OF THE
PRESENT FEDERAL INCOME TAX LAWS AS THEY ARE CURRENTLY INTERPRETED BY THE
INTERNAL REVENUE SERVICE. 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 INTERNAL REVENUE SERVICE. 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 ("Non-qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("Qualified Contract"). Qualified Contracts are designed
for use by individuals whose Premium 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, 403(b),
408, or 457 of the Internal Revenue Code of 1986, as amended (the "Code"). The
ultimate effect of Federal income taxes on the amounts held under a Contract, on
Annuity Payments, and on the economic benefit to you, the Annuitant, or the
Beneficiary depends on the type of retirement plan, on the tax and employment
status of the individual concerned and on the employer'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 the Contract for their
situation, the applicable requirements, and the tax treatment of the rights and
benefits of the Contract. The following discussion assumes that a Qualified
Contract is purchased with proceeds from and/or contributions under retirement
plans that qualify for the intended special Federal income tax treatment.
The following discussion is based on the assumption that the Contract
qualifies as an annuity contract for federal income tax purposes. The Statement
of Additional Information discusses the requirements for qualifying as an
annuity.
TAXATION OF ANNUITIES
IN GENERAL. Section 72 of the Code governs taxation of annuities in
general. The Company believes that if you are a natural person, you generally
are not taxed on increases in the value of a Contract until distribution occurs
by withdrawing all or part of the Contract Value (E.G., Partial Withdrawals,
Full Surrenders or Annuity Payments under the Annuity Payment Option elected).
For this purpose, the assignment, pledge, or agreement to assign or pledge any
portion of the Contract 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
lump sum payment or an annuity) is taxable as ordinary income.
The owner of any Non-qualified annuity contract who is not a natural person
generally must include in income any increase in the excess of the contract's
value over the "investment in the contract" (discussed below) during the taxable
year. There are some exceptions to this rule, and a prospective Contract Owner
that is not a natural person may wish to discuss these with a competent tax
advisor.
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
nonqualified 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 actively considering any legislation regarding the
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 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).
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The following discussion generally applies to a Contract owned by a natural
person.
SURRENDERS AND PARTIAL WITHDRAWALS. In the case of a Surrender or Partial
Withdrawal under 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 individual's total accrued benefit for the
balance under the retirement plan. The "investment in the contract" generally
equals the amount of any premium payments paid by or on behalf of any
individual. For a Contract issued in connection with qualified plans, the
"investment in the contract" can be zero. Special tax rules may be available for
certain distributions from a Qualified Contract.
With respect to NON-QUALIFIED CONTRACTS, Partial Withdrawals (including
systematic withdrawals) are generally treated as taxable income to the extent
that the Contract Value immediately before the Partial Withdrawal exceeds the
"investment in the contract" at that time. The Contract Value immediately before
a Partial Withdrawal may have to be increased by any positive Market Value
Adjustment which results from such a Partial Withdrawal. There is, however, no
definitive guidance on the proper tax treatment of Market Value Adjustments, and
you should contact a competent tax advisor with respect to the potential tax
consequences of a Market Value Adjustment. Full Surrenders are treated as
taxable income to the extent that the amount received exceeds the "investment in
the contract."
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
Annuity Payment Option elected under the Contract, in general, only the portion
of the Annuity Payment that represents the amount by which the Contract Value
exceeds the "investment in the contract" will be taxed; after the "investment in
the contract" is recovered, the full amount of any additional Annuity Payments
is taxable. 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. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional Annuity Payments is taxable. If Annuity Payments cease as a result of
an Annuitant's death before full recovery of the "investment in the contract,"
consult a competent tax advisor regarding deductibility of the unrecovered
amount.
PENALTY TAX. 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 tax on
distributions: (1) made on or after the date on which you attain age 59 1/2; (2)
made as a result of your death or disability; (3) received in substantially
equal periodic payments as a life annuity or a joint and survivor annuity for
the lives or life expectancies of you and a "designated beneficiary"; (4)
resulting from the direct rollover of the Contract into another qualified
contract or individual retirement annuity; (5) allocable to investment in the
Contract before August 14, 1982; (6) under a qualified funding asset (as defined
in Code Section 130(d)); (7) under an immediate annuity (as defined in Code
Section 72(u)(4)); or (8) which are purchased by an employer on termination of
certain types of qualified plans and which are held by the employer until the
employee separates from service. Other tax penalties may apply to certain
distributions under a Qualified Contract.
DEATH BENEFIT PROCEEDS. Amounts may be distributed because of the death of
a Contract Owner. Generally, such amounts are includable in the income of the
recipient as follows:
(1) if distributed in a lump sum, such amounts are taxed in the same manner
as a Full Surrender as described above, or
(2) if distributed under an Annuity Payment Option, such amounts are taxed
in the same manner as Annuity Payments as described above.
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For these purposes, the investment in the Contract is not affected by the
owner's death. That is, the investment in the Contract remains the amount of any
purchase payments paid which were not excluded from gross income.
TRANSFERS, ASSIGNMENTS, OR EXCHANGES OF THE CONTRACT. A transfer of
ownership of a Contract, the designation of an Annuitant or Beneficiary other
than yourself, or the exchange of a Contract may result in certain tax
consequences to you that are not discussed herein. If you are contemplating any
such transfer, assignment, or exchange of a Contract, you should contact a
competent tax adviser with respect to the potential tax effects of such a
transaction.
GENERATION-SKIPPING TRANSFERS. The Company may be required to determine
whether the Death Benefit or any other payment constitutes a "direct skip" as
defined in Code Section 2612, and the amount of the generation-skipping transfer
tax on the generation-skipping transfer resulting from such direct skip. A
direct skip may occur when property is transferred to or a Death Benefit is paid
to an individual determined to be two or more generations younger than you. If
the generation-skipping transfer tax is applicable, the Company may be required
to withhold the amount of such tax and remit to the Internal Revenue Service the
tax the Company is required to pay by Section 2603 of the Code.
MULTIPLE CONTRACTS. All non-qualified deferred annuity contracts that are
issued by the Company (or its affiliates) to you during any calendar year are
treated as one annuity contract for purposes of determining the amount
includable in gross income under Section 72(e) of the Code. In addition, the
Treasury Department has specific authority to issue regulations that prevent the
avoidance of Section 72(e) through the serial purchase of annuity contracts or
otherwise. Congress has also indicated that the Treasury Department may have
authority to treat the combination purchase of an immediate annuity contract and
separate deferred annuity contract as a single annuity contract under its
general authority to prescribe rules as may be necessary to enforce the income
tax laws. A prospective purchaser of more than one annuity contract in a
calendar year should consult with a competent tax advisor before making such a
purchase.
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, although withholding is mandatory for certain
types of Qualified Contracts.
OTHER TAX CONSEQUENCES. As noted above, the foregoing discussion of the
Federal income tax consequences under the Contract is not exhaustive and special
rules are provided with respect to other tax situations not discussed in this
Prospectus. Further, the Federal income tax consequences discussed herein
reflect the Company'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 the Contract depend
on your individual circumstances or those of the recipient of the distribution.
A competent tax advisor should be consulted for further information.
QUALIFIED PLANS
The Contract is designed for use with several types of qualified plans. The
tax rules applicable to Contract Owners in qualified plans, including
restrictions on contributions and benefits, taxation of distributions, and any
tax penalties, vary according to the type of plan and the terms and conditions
of the plan itself. Various tax penalties may apply to contributions in excess
of specified limits, aggregate distributions in excess of $150,000 annually,
distributions that do not satisfy specified requirements, and certain other
transactions with respect to qualified plans. Therefore, no attempt is made to
provide more than general information about the use of the Contract with the
various types of qualified plans. Contract Owners, Annuitants and Beneficiaries
are cautioned that the rights of any person to any benefits under Qualified
Contracts may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our Contract administration procedures. Contract Owners, Participants and
Beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with applicable law.
Following are brief descriptions of the various types of
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qualified plans in connection with which the Company will issue the Contract.
Contracts for all types of qualified plans may not be available in all states.
When issued in connection with a qualified plan, the Contract will be amended as
necessary to conform to the requirements of the Code.
QUALIFIED PENSION AND PROFIT SHARING PLANS. Sections 401(a) of the Code
permits corporate employers to establish various types of retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10," permits self-employed individuals to
establish qualified plans for themselves and their employees. These retirement
plans may permit the purchase of the Contracts to accumulate retirement savings
under the plans. Adverse tax or other legal consequences to the plan, to the
participant or to both may result if the Contract is assigned or transferred to
any individual as a means to provide benefit payments, unless the plan complies
with all legal requirements applicable to such benefits prior to transfer of the
Contract. Purchasers of a Contract for use with such plans should seek competent
advice regarding the suitability of the proposed plan documents and the Contract
to their specific needs.
INDIVIDUAL RETIREMENT ANNUITIES AND INDIVIDUAL RETIREMENT ACCOUNTS. Section
408 of the Code permits eligible individuals to contribute to an individual
retirement program known as an Individual Retirement Annuity or Individual
Retirement Account (each hereinafter referred to as "IRA"). IRAs are subject to
limitations on the amount which may be contributed and deducted and the time
when distributions may commence. Also, distributions from certain other types of
qualified plans may be "rolled over" on a tax-deferred basis into an IRA. The
sale of a Contract for use with an IRA may be subject to special disclosure
requirements of the Internal Revenue Service. Purchasers of a Contract for use
with IRAs will be provided with supplemental information required by the
Internal Revenue Service or other appropriate agency. Such purchasers will have
the right to revoke their purchase within 7 days of the earlier of the
establishment of the IRA or their purchase. Purchasers should seek competent
advice as to the suitability of the Contract for use with IRAs. The Internal
Revenue Service has not addressed in a ruling of general applicability whether a
death benefit provision such as the provision in the Contract comports with IRA
qualification requirements.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of religious, charitable, educational,
and scientific organizations specified in Section 501(c)(3) of the Code to
purchase annuity contracts and, subject to certain limitations, exclude the
amount of premiums from gross income for tax purposes. However, these payments
may be subject to FICA (Social Security) taxes. These annuity contracts are
commonly referred to as "Tax-Sheltered Annuities." Subject to certain
exceptions, withdrawals under Tax-Sheltered Annuities which are attributable to
contributions made pursuant to salary reduction agreements are prohibited unless
made after you attain age 59 1/2, upon your separation from service, upon your
death or disability, or for an amount not greater than the total of such
contributions in the case of hardship.
SECTION 457 DEFERRED COMPENSATION ("SECTION 457") PLANS. Under Section 457
of the Code, employees of (and independent contractors who perform services for)
certain state and local governmental units or certain tax-exempt employers may
participate in a Section 457 plan of their employer allowing them to defer part
of their salary or other compensation. The amount deferred and any income on
such amount will not be taxable until paid or otherwise made available to the
employee.
The maximum amount that can be deferred under a Section 457 plan in any tax
year is ordinarily one-third of the employee's includable compensation, up to
$7,500. Includable compensation means earnings for services rendered to the
employer which is includable in the employee's gross income, but excluding any
contributions under the Section 457 plan or a Tax-Sheltered Annuity. During the
last three years before an individual attains normal retirement age, additional
"catch-up" deferrals are permitted.
The deferred amounts will be used by the employer to purchase the Contract.
The Contract will be issued to the employer, and all Contract Values will be
subject to the claims of the employer's creditors. The employee has no rights or
vested interest in the Contract and is only entitled to payment in accordance
with the Section 457 plan provisions. The plans may permit participants to
specify the form of investment for their deferred compensation account.
Depending on the terms of the particular plan, the employer may be
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entitled to draw on deferred amounts for purposes unrelated to its Section 457
plan obligations. Present federal income tax law does not allow tax-free
transfers or rollovers for amounts accumulated in a Section 457 plan, except for
transfers to other Section 457 plans in certain limited cases.
GENERAL
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether a Non-qualified Contract or a Qualified Contract is being
purchased. If the initial Premium Payment is derived from an exchange or
surrender of another annuity contract, the Company may require that the
prospective purchaser provide information with regard to the federal income tax
status of the previous annuity contract. The Company will require that persons
purchase separate Contracts if they desire to invest monies qualifying for
different annuity tax treatment under the Code. Each such separate Contract
would require the minimum initial Premium Payment stated above. Additional
Premium Payments under a Contract must qualify for the same federal income tax
treatment as the initial Premium Payment under the Contract; the Company will
not accept an additional Premium Payment under a Contract if the Federal income
tax treatment of such Premium Payment would be different from that of the
initial Premium Payment.
DISTRIBUTOR OF THE CONTRACTS
FMG Distributors, Inc., is the principal underwriter of the Contracts. FMG
Distributors, Inc. may enter into one or more contracts with various
broker-dealers for the distribution of the Contracts. Commissions of up to 8.5%
of Premium Payments may be paid on Contract sales as currently permitted by
National Association of Securities Dealers ("NASD") rules and regulations. In
certain circumstances, commissions may be paid in installments over time. FMG
Distributors, Inc. is a member of the NASD. Its mailing address is Stamford
Harbor Park, 333 Ludlow Street, Stamford, CT 06902. There may be other
underwriters in the future.
In addition to the payment of commissions, the Company may from time to time
pay or allow additional promotional incentives, in the form of cash or other
compensation, to broker-dealers that sell variable annuity contracts. In some
instances, such other incentives may be offered only to certain broker-dealers
that sell or are expected to sell during specified time periods certain minimum
amounts of variable annuity contracts. Our payment of promotional incentives is
subject to applicable state insurance law and regulation.
VOTING RIGHTS
There are no voting rights associated with the Capital Developer Account
Value.
With respect to the Separate Account Value, the Company will be the
"shareholder" of the Trust and the Federated Prime Money Fund and as such, the
Company will have certain voting rights. However, to the extent required by law,
the Company will vote the Trust and the Federated Prime Money Fund shares held
by the Separate Account at regular and special shareholder meetings of Trust and
the Federated Prime Money Fund in accordance with instructions received from
persons having voting interests in the Funds. If, however, the 1940 Act or any
regulation thereunder should be amended, or if the present interpretation
thereof should change, and as a result the Company determines that it is
permitted to vote the Trust's and the Federated Prime Money Fund's shares in its
own right, it may elect to do so. The Company reserves the right, when permitted
by law, to restrict or eliminate any of the voting rights of Contract Owners or
other persons who have voting rights as to the Separate Account.
Before the Maturity Date, you hold the voting interest in the selected
Funds. The number of votes that you have the right to instruct will be
calculated separately for each Variable Subaccount. The number of votes that you
have the right to instruct for a particular Variable Subaccount will be
determined by dividing your Contract Value in the Variable Subaccount by the net
asset value per share of the corresponding Fund in which the Variable Subaccount
invests. Fractional shares will be counted.
After the Maturity Date, the person receiving Annuity Payments has the
voting interest, and the number of votes decreases as Annuity Payments are made
and as the reserves for the Contract decrease. The
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person's number of votes will be determined by dividing the reserve for the
Contract allocated to the applicable Variable Subaccount by the net asset value
per share of the corresponding Fund of the Trust or the Federated Prime Money
Fund. Fractional shares will be counted.
The number of votes that you or the person receiving income payments has the
right to instruct will be determined as of the date established by the Trust or
the Federated Prime Money Fund for determining shareholders eligible to vote at
the meeting. The Company will solicit voting instructions by sending you or
other persons entitled to vote written requests for instructions prior to that
meeting in accordance with procedures established by the Trust or the Federated
Prime Money Fund as applicable. Fund shares as to which no timely instructions
are received may be voted in proportion to the voting instructions that are
received with respect to all Contracts participating in the same Variable
Subaccount. Shares held by the Company or its affiliates in which you or other
persons entitled to vote have no beneficial interest may be voted by the
shareholder thereof (the Company or its affiliates) in its sole discretion.
Each person having a voting interest in a Variable Subaccount will receive
proxy material, reports, and other materials relating to the appropriate Fund.
It should be noted that the Trust is not required to, and does not intend
to, hold annual or other regular meetings of shareholders.
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right to transfer assets of the Separate Account,
which it determines to be associated with the class of policies to which the
Contract belongs, to another separate account. If this type of transfer is made,
the term "Separate Account," as used herein shall then mean the separate account
to which the assets were transferred.
The Company further 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
a Fund of the Trust or the Federated Prime Money Fund are no longer available
for investment or if in the Company's judgment further investment in any Fund
should become inappropriate in view of the purposes of the Separate Account, the
Company may redeem the shares, if any, of that Fund and substitute shares of
another Fund or of another registered open-end management investment company.
The Company will not substitute any shares attributable to a Contract's interest
in a Variable Subaccount of the Separate Account without notice and prior
approval of the SEC and state insurance authorities, if required by law.
The Company also reserves the right to establish additional Variable
Subaccounts of the Separate Account, each of which would invest in shares
corresponding to a new Fund of the Trust, the Federated Insurance Management
Series or in shares of another investment company. Subject to applicable law and
any required SEC approval, the Company, may, in its sole discretion, establish
new Variable Subaccounts or eliminate one or more Variable Subaccounts if
marketing needs, tax considerations or investment conditions warrant. Any new
Variable Subaccounts may be made available to existing Contract Owners on a
basis to be determined by the Company.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Contract to reflect the substitution or
change. If the Company deems it to be in the best interest of Contract Owners
and Annuitants, and subject to any approvals that may be required under
applicable law, the Separate Account may be operated as a management investment
company under the 1940 Act; it may be deregistered under the Act if registration
is no longer required; or it may be combined with other separate accounts of the
Company. Further, the Company reserves the right, when permitted by law, to
manage the Separate Account under the direction of a committee at any time. The
Company will notify you of its intent to exercise any such reserved rights with
respect to the Separate Account. You will have thirty-one (31) days after you
receive any such notification to accept or reject the change(s) described
therein. If you choose not to accept such change(s), you may request to cancel
your Contract and receive the Surrender Value.
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PERFORMANCE DATA
From time-to-time the Company may use the yield of the Money Market Variable
Subaccount and total returns of other Variable Subaccounts in advertisements and
sales literature. In addition, total returns for all of the Variable Subaccounts
may be advertised. These figures will be based on historical performance for the
Funds and are not intended to and do not indicate future performance.
MONEY MARKET VARIABLE SUBACCOUNT YIELD. The yield of the Money Market
Variable Subaccount refers to the annualized income generated by an investment
in that Variable Subaccount over a specified seven-day period. The yield is
"annualized" by assuming that the income generated for that seven-day period is
generated each seven-day period over a 52-week period and is shown as a
percentage of that investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in that Variable Subaccount
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.
OTHER VARIABLE SUBACCOUNT YIELD. The Company may from time to time
advertise or disclose the current annualized yield of one or more of the
Variable Subaccounts of the Separate Account (except the Money Market Variable
Subaccount) for 30-day periods. The annualized yield of a Variable Subaccount
refers to income generated by the Variable Subaccount over a specific 30-day
period. Because the yield is annualized, the yield generated by a Variable
Subaccount during the 30-day period is assumed to be generated each 30-day
period over a 12-month period. The yield is computed by: (i) dividing the net
investment income of the Variable Subaccount less Variable Subaccount expenses
for the period, by (ii) the maximum offering price per unit on the last day of
the period times the daily average number of units outstanding for the period,
(iii) compounding that yield for a 6-month period, and (iv) multiplying that
result by 2. Expenses attributable to the Variable Subaccount include (i) the
Annual Administrative Fee, (ii) the Mortality and Expense Risk Charge and (iii)
the Administrative Expense Charge.
Because of the charges and deductions imposed by the Separate Account, the
yield for a Variable Subaccount of the Separate Account will be lower than the
yield for its corresponding Fund. The yield calculations do not reflect the
effect of any Surrender Charge or Premium Taxes that may be applicable to a
particular Contract. The yield on amounts held in the Variable Subaccounts of
the Separate Account normally will fluctuate over time. Therefore, the disclosed
yield for any given past period is not an indication or representation of future
yields or rates of return. A Variable Subaccount's actual yield is affected by
the types and quality of its investments and its operating expenses.
TOTAL RETURN. Total returns for the Subaccounts may be calculated pursuant
to a standardized formula or in non-standardized manners. The standardized total
return of the Variable Subaccounts refers to return quotations assuming an
investment has been held in the Variable Subaccount for various periods of time
including, but not limited to, one year, five years, and ten years (if the
Variable Subaccount has been in operation for those periods), and a period
measured from the date the Variable Subaccount commenced operations. The total
return quotations will represent the average annual compounded rates of return
that would equate an initial investment of $1,000 to the redemption value of
that investment as of the last day of each of the periods for which total return
quotations are provided. Accordingly, the total return quotations will reflect
not only income but also changes in principal value (that is, changes in the
Accumulation Unit values), whereas the yield figures will only reflect income.
In addition, the standardized total return quotations will reflect the Surrender
Charge imposed on Partial Withdrawals and Full Surrenders, but the standardized
yield figures will not.
In addition, the Company may from time to time also disclose total return in
non-standard formats and cumulative total return for the Variable Subaccounts.
The non-standard average annual total return and cumulative total return would
not reflect the Surrender Charge, which if reflected would lower the performance
figures for periods of less than 8 years.
The Company may from time to time also disclose standard total returns and
non-standard total returns for the Variable Subaccounts based on or covering
periods of time other than those indicated above. All non-
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standard performance data will only be disclosed if the standard total return is
also disclosed. For additional information regarding the calculation of
performance data, please refer to the Statement of Additional Information.
PERFORMANCE COMPARISONS. From time to time, in advertisements, sales
literature, or in reports to you, the Company may compare the performance of the
Variable Subaccounts to that of other variable accounts or investment vehicles
with similar investment objectives or to relevant indices published by
recognized mutual fund or variable annuity statistical rating services or
publications of general variable annuity statistical rating services or
publications of general interest such as Forbes or Money magazines. For example,
a Variable Subaccount's performance might be compared to that of other accounts
or investments with a similar investment objective as compiled by Lipper
Analytical Services, Inc., VARDs, Morningstar, Inc., or by others. In addition,
a Variable Subaccount's performance might be compared to that of recognized
stock market indicators including, but not limited to the Standard & Poor's 500
Stock Index (which is a group of unmanaged securities widely regarded by
investors as representative of the stock market in general) and the Dow Jones
Industrial Average (which is a price-weighted average of 30 large, well-known
industrial stocks that are generally the leaders in their industry). Performance
comparisons should not be considered representative of the future performance of
a Variable Subaccount.
GENERAL. Performance data may also be calculated for shorter or longer base
periods. The Separate Account may use various base periods as may be deemed
necessary or appropriate to provide investors with the most informative
performance data information, depending on the then-current market conditions.
Performance will vary from time to time, and historical results will not be
representative of future performance. Performance information may not provide a
basis for comparison with other investments or other investment companies using
a different method of calculating performance. Current yield is not fixed and
varies with changes in investment income and Accumulation Unit values. The Money
Market Variable Subaccount's yield will be affected if it experiences a net
inflow of new money which is invested at interest rates different from those
being earned on its then-current investments. An investor's principal in a
Variable Subaccount and a Variable Subaccount's return are not guaranteed and
will fluctuate according to market conditions. Also, as noted above, advertised
performance data figures will be historical figures for a Contract during the
Accumulation Period.
COMPANY RATINGS
The Company may from time to time publish (in advertisements, sales
literature and reports to you) the ratings and other information assigned to it
by one or more independent rating organizations such as A.M. Best Company,
Standard & Poor's, Duff & Phelps, and Fitch Investors Services. The purpose of
the ratings is to reflect the financial strength and/or claims-paying ability of
the Company and should not be considered as bearing on the investment
performance of assets held in the Separate Account. Each year the A.M. Best
Company reviews the financial status of thousands of insurers, culminating in
the assignment of Best's Ratings. These ratings reflect A.M. Best Company's
current opinion of the relative financial strength and operating performance of
an insurance company in comparison to the norms of the life/health insurance
industry. In addition, the claims-paying ability of the Company as measured by
Standard and Poor's Insurance Ratings Services, Duff & Phelps, or Fitch
Investors Services may be referred to in such advertisements, sales literature,
or reports. These ratings are opinions regarding an operating insurance
company's financial capacity to meet the obligations of its insurance and
annuity policies in accordance with their terms. Such ratings do not reflect the
investment performance of the Separate Account or the degree of risk associated
with an investment in the Separate Account.
GENERAL CONTRACT PROVISIONS
ENTIRE CONTRACT
The entire contract consists of the Contract, any attached riders and
endorsements, and the attached copy of the Application. Only the Company's
President, or one of its Executive Vice Presidents may change the Contract. The
change must be in writing. No change will be made in the Contract unless you
agree to it in writing. No agent is authorized to change the Contract or to
change or waive any provisions of the Contract.
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RELIANCE ON INFORMATION PROVIDED IN APPLICATION
In issuing the Contract, the Company will rely on the statements made in the
Application. The Company deems all such statements to be representations and not
warranties. The Company assumes that these statements are true and complete to
the best of the knowledge and belief of those who made them. The Company will
not use any statement made in connection with the Application to void the
Contract unless that statement is a material misrepresentation and is part of
the Application.
THE COMPANY'S ABILITY TO CONTEST THE CONTRACT
The Company will not contest the Contract from the Contract Date.
MEASUREMENT OF DATES
Contract Years, Quarters, Months, and Anniversaries are measured from the
Contract Date, except where otherwise specified.
CALCULATION OF AGE
References in the Contract to a person's age on any date, refer to his or
her age on that person's last birthday.
MISSTATEMENT OF AGE
If the age of the Annuitant has been misstated, any amount payable under the
Contract will be what would have been purchased at the correct age. If payments
were made based on incorrect age, the Company will increase or reduce a later
payment or payments to adjust for the error. Any adjustment will include
interest, at 6.0% per year, from the date of the wrong payment to the date the
adjustment is made.
ASSIGNMENT OF THE CONTRACT
While the Annuitant is living, and except for Qualified Contracts, you may
assign the Contract or any interest you have in it. Any irrevocable Beneficiary
must agree to the assignment. If there is a joint Contract Owner, the joint
Contract Owner must agree to any assignment. Your interest, and anyone else's,
will then be subject to that assignment. As Contract Owner, you still have the
rights of ownership that you have not assigned.
An assignee cannot change the Contract Owner, Annuitant or Beneficiary, and
may not elect an alternative payment option. Any amount payable to the assignee
will be made in one lump sum.
To assign the Contract, you must provide the Company with a copy of the
assignment. The Company is not responsible for the validity of any assignment.
An assignment will be subject to any payment previously made by the Company or
any other action the Company may take before recording the assignment.
State law such as those governing marital property may affect your ability
to encumber the Contract.
NONPARTICIPATING
The Contract is nonparticipating and will not share in any surplus earnings
of the Company. No dividends are payable on the Contract.
NON-BUSINESS DAYS
If the due date for any activity required by the Contract falls on a
non-business day for the Company, performance will be rendered on the first
business day following the due date.
REGULATORY REQUIREMENTS
All interest guarantees, surrender benefits, and amounts payable at death
will not be less than the minimum benefits approved under the laws and
regulations of the state in which the Contract is delivered.
The Company will administer the Contract in accordance with the U.S. tax
laws and regulations in order to retain its status as an annuity contract.
The Contract is deemed to include all state and federal laws that apply.
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LEGAL PROCEEDINGS
The Company is not involved in any litigation that is of material importance
in relation to its general account assets. In addition, there are no legal
proceedings to which the Separate Account is a party.
AVAILABLE INFORMATION
The Company has filed a registration statement (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933 relating to the Contracts offered by this Prospectus.
This Prospectus has been filed as part of the Registration Statement and does
not contain all of the information set forth in the Registration Statements.
Reference is hereby made to such Registration Statement for further information
relating to the Company and the Contracts. The Registration Statement may be
inspected and copied at the public reference facilities of the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials also
can be obtained from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
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STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus. The
following is the Table of Contents for that Statement:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
More Information About the Contract...................................... B-3
Determination of Variable Subaccount Accumulation Unit Values.......... B-3
Annuity Period Transfer Formulas....................................... B-4
Administration........................................................... B-5
Records and Reports...................................................... B-5
Custody of Assets........................................................ B-6
Performance Data and Calculations........................................ B-6
Money Market Variable Subaccount Yield................................. B-6
Other Variable Subaccount Yield........................................ B-7
Variable Subaccount Total Return Calculations: Standardized............ B-8
Other Performance Data: Non-Standardized............................... B-8
Other Information...................................................... B-9
Federal Tax Matters...................................................... B-10
Taxation of the Company................................................ B-10
Taxation of the Contracts.............................................. B-11
Legal Matters............................................................ B-12
Other Information........................................................ B-13
Financial Statements..................................................... B-13
</TABLE>
39
<PAGE>
APPENDIX I
SURRENDER CHARGE CALCULATION
A Surrender Charge, which will not exceed 8.5% of total Premiums paid, is
deducted from the Contract Value upon Partial Withdrawal or Full Surrender of
the Contract, unless certain conditions apply. (See "Surrender Charge," p. 24.)
The Surrender Charge is calculated as follows:
(S - FREE) X X% = SC, but not less than zero.
Where:
<TABLE>
<C> <S>
(S) is the gross Surrender or Partial Withdrawal Amount.
(FREE) is the 10% Free Surrender Amount (net of any other applicable
withdrawals that may have been taken and applied toward the current
Contract Year).
(SC) is the Surrender Charge Amount.
(X) is the following Surrender Charge percentage:
</TABLE>
<TABLE>
<CAPTION>
CONTRACT YEAR PERCENTAGE
- -------------- -----------
<S> <C>
1 7
2 7
3 6
4 5
5 4
6 3
7 2
8 1
9+ 0
</TABLE>
EXAMPLE.
Assume a Contract Value of $50,000 at the end of the third Contract Year.
Also assume that no Market Value adjustment has been taken and no previous
partial surrenders were made.
1) If there is a Full Surrender at the end of the third Contract Year:
Surrender Charge = ($50,000 - $5,000) X .06 = $2,700.00
Thus, the Surrender proceeds would be = $50,000 - $2,700.00 = $47,300.00
NOTE: The Annual Administrative Fee ($30) applies to Full Surrenders only
when Contract Value is less than $30,000.
2) If there is a Partial Surrender of $10,000 at the end of the third Contract
Year:
Surrender Charge = ($10,000 - $5000) X .06 = $300.00
Thus, the Contract Value would be reduced by $10,000 and you would receive
$9,700. Premium Taxes may also be applicable.
I-1
<PAGE>
APPENDIX II
MARKET VALUE ADJUSTMENT
The formula which will be used to determine the Market Value Adjustment is:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1 + I (N/12) -
---------
1 + J +
.004 1 X A
</TABLE>
NOTE:The Market Value Adjustment will be limited so that it does not reduce the
return on the Capital Developer Account below 3.0% per year.
<TABLE>
<C> <C>
I = The Guaranteed Interest Rate in effect for the current Interest Rate Guarantee Period
(expressed as a decimal, (E.G., 1% = .01).)
J = The Current U.S. Treasury Bill, Note or Bond rate (as quoted by the Wall Street Journal
and expressed as a decimal (E.G., 1% = .01)) in effect for the period most closely
approximating the duration remaining in the current Interest Rate Guarantee Period
(Fractional years will be rounded to the nearest month and the interest rate will be
calculated using interpolation). If the period is less than 1 year then the Company will
use the 1 year Treasury Bill rate.
N = The number of complete months from the Surrender or Partial Withdrawal to the end of the
current Interest Rate Guarantee Period.
A = The amount surrendered, withdrawn or transferred.
</TABLE>
The ".004" in the formula is a factor designed to cover anticipated costs of
liquidating investments. Thus, the Guaranteed Interest Rate ("I") must be at
least 0.04% higher than the Treasury Rate ("J") for there to be a positive
market value adjustment. If I is lower than J or higher but less than 0.04%
higher, the Market Value Adjustment is negative.
EXAMPLES OF MARKET VALUE ADJUSTMENT
Assume a Capital Developer Account Value of $50,000, a seven year guarantee
period with a Guaranteed Interest Rate of 6%, and an original payment of $43,000
at the beginning of the current guarantee period.
1) If there is a Full Surrender at the beginning of the fourth Contract Year
with four years remaining in the interest rate guarantee period:
(a) if the current rate for a four year Treasury Note is 5%:
Free Surrender Amount = ($50,000 X .10) = $5,000
Surrender Charge = ($50,000-$5,000) X .05 = $2,250.00
<TABLE>
<S> <C> <C> <C> <C> <C>
1.06 (48/12) - 1 = $1,148.28
----
Market Value Adjustment $50,000 X
( 1.054 )
</TABLE>
Thus, the surrender proceeds = $50,000 - $2,250 + $1,148.28
= $48,898.28 - any applicable Premium Taxes;
(b) if the current rate for the three year Treasury Note is 7%:
Free Surrender Amount = ($50,000 X .10) = $5,000
Surrender Charge = ($50,000 - $5,000) X .05 = $2,250
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Value Adjustment $50,000 X 1.06 (48/12) - 1 = -$2,556.54
----
( 1.074 )
</TABLE>
II-1
<PAGE>
Minimum Market Value Adjustment with 3% guaranteed return =
43,000 X (1.03)3 - 50,000 = -3,012.74
Since -2,556.54 is greater than -3,012.74, the actual Market Value
Adjustment is -2,556.54
Thus, the Surrender proceeds = $50,000 - $2,250 - $2,556.54
= $45,193.46 - any applicable Premium Taxes
2) If there is a Full Surrender at the beginning of the tenth Policy Year
(thus, no Surrender Charge applies) with three years remaining in the
interest rate guarantee period:
(a) if the current rate for a three year Treasury Note is 5%:
Free Surrender Amount = $50,000
Surrender Charge = 0
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Value Adjustment $50,000 X 1.06 (36/12) - 1 = $858.76
----
( 1.054 )
</TABLE>
Thus, the Surrender proceeds = $50,000 + $858.76
= $50,858.76 - any applicable Premium Taxes;
(b) if the current rate for a three year Treasury Note is 7%:
Free Surrender Amount = $50,000
Surrender Charge = 0
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Value Adjustment $50,000 X 1.06 (36/12) - 1 = -$1,929.93
----
( 1.074 )
</TABLE>
Minimum Market Value Adjustment with 3% guaranteed return =
43,000 X (1.03)4 - 50,000 = -1,603.12
Since -1,929.93 is less than -1,603.12, the actual Market Value
Adjustment is -1,603.12
Thus, the surrender proceeds = $50,000 - $1,603.12
= $48,396.88 - any applicable Premium Taxes
3) If there is a partial surrender of $10,000 at the beginning of the fourth
Contract Year with four years remaining in the interest rate guarantee
period
(a) if the current rate for a four year Treasury Note is 5%:
Free Surrender Amount = ($50,000 X .10) = $5,000
Surrender Charge = ($10,000 - $5,000) X .05 = $250.00
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Value Adjustment $10,000 X 1.06 (48/12) - 1 = $229.66
----
( 1.054 )
</TABLE>
Thus, the Surrender proceeds = $10,000 - $250 + $229.66
= $9,976.66 - any Applicable Premium Taxes;
b) if the current rate for a three year Treasury Note is 7%
Free Surrender Amount = ($50,000 X .10) = $5,000
Surrender Charge = ($10,000 - $5,000) X .05 = $250
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Value Adjustment $10,000 X 1.06 (48/12) - 1 = -$511.31
----
( 1.074 )
</TABLE>
II-2
<PAGE>
Minimum Market Value Adjustment with 3% guaranteed return =
43,000 X (1.03)3 - 50,000 = -3,012.74
Since -511.31 is greater than -3,012.74, the actual Market Value
Adjustment is -511.31
Thus, the Surrender proceeds = $10,000 - $250 - 511.31
= $9,238.69 - any applicable Premium Taxes.
4) If there is a partial surrender of $10,000 at the beginning of the tenth
Contract Year (thus no Surrender Charge applies) with three years remaining
in the interest rate guarantee period:
(a) if the current rate for a two year Treasury Note is 5%:
Free Surrender Amount = $10,000
Surrender Charge = 0
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Value Adjustment $10,000 X 1.06 (36/12) - 1 = $171.75
----
( 1.054 )
</TABLE>
Thus, the surrender proceeds = $10,000 + $171.75
= $10,171.75 - any applicable Premium Taxes;
(b) if the current rate for a two year Treasury Note is 7%:
Free Surrender Amount = $10,000
Surrender Charge = 0
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Value Adjustment $10,000 X 1.06 (36/12) - 1 = -$385.99
----
( 1.074 )
</TABLE>
Minimum Market Value Adjustment with 3% guaranteed return =
43,000 X (1.03)4 - 50,000 = -1,603.12
Since -385.99 is greater than -1,603.12, the actual Market Value
Adjustment is -385.99
Thus, the surrender proceeds = $10,000 - $385.99
= $9,614.01 - any applicable Premium Taxes.
II-3
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
ALEXANDER HAMILTON ALLEGIANCE VARIABLE ANNUITY
Offered by
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
33045 Hamilton Court
Farmington Hills, Michigan 48334-3358
------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional information expands upon certain subjects discussed
in the current Prospectus for the Alexander Hamilton Life Insurance Company of
America Variable Annuity Contract (the "Contract") offered by Alexander Hamilton
Insurance Company of America. You may obtain a copy of the Prospectus dated May
1, 1996 by calling 1-800-289-1776, or by writing to the Company at its
Administrative Service Center, P.O. Box 1776, Farmington Hills, Michigan 48333-
1776. Terms used in the current Prospectus for the Contract are incorporated in
this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND
SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR THE CONTRACT AND
ALEXANDER HAMILTON VARIABLE INSURANCE TRUST AND THE FEDERATED PRIME MONEY FUND.
Dated: May 1, 1996
1
<PAGE>
TABLE OF CONTENTS
PAGE
----
More Information About the Contract. . . . . . . . . . . . . . . . . 3
Determination of Variable Subaccount Accumulation Unit Values. . 3
Annuity Period Transfer Formulas . . . . . . . . . . . . . . . . 4
Administration . . . . . . . . . . . . . . . . . . . . . . . . . 5
Records and Reports. . . . . . . . . . . . . . . . . . . . . . . 5
Custody of Assets. . . . . . . . . . . . . . . . . . . . . . . . 6
Performance Data and Calculations. . . . . . . . . . . . . . . . 6
Money Market Variable Subaccount Yield. . . . . . . . . . . . 6
Other Variable Subaccount Yield . . . . . . . . . . . . . . . 7
Variable Subaccount Total Return Calculations: Standardized. 8
Other Performance Data: Non-Standardized . . . . . . . . . . 8
Other Information . . . . . . . . . . . . . . . . . . . . . . 9
Federal Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . 10
Taxation of the Company . . . . . . . . . . . . . . . . . . . 10
Taxation of the Contracts . . . . . . . . . . . . . . . . . . 11
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 13
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 13
2
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about the Company and the Contract which may be
of interest to you.
MORE INFORMATION ABOUT THE CONTRACT
DETERMINATION OF VARIABLE SUBACCOUNT ACCUMULATION UNIT VALUES
ACCUMULATION UNITS. Accumulation Units are used to account for all
amounts allocated to or withdrawn from the Separate Account. The Company will
determine the number of Accumulation Units of a Variable Subaccount by dividing
the Net Premium Payment allocated to (or the amount withdrawn from) the Variable
Subaccount by the dollar value of one Accumulation Unit on the date of the
transaction. The Separate Account Value will consist of the sum of the value of
all Accumulation Units in all Variable Subaccounts credited to the Contract on
the applicable Valuation Day.
ACCUMULATION UNIT VALUE. The value of an Accumulation Unit in a
Variable Subaccount on any Valuation Day is the product of (a) the value on the
preceding Valuation Day and (b) the Net Investment Factor for the Variable
Subaccount for the Valuation Period just ended. The value of an Accumulation
Unit in each Variable Subaccount was arbitrarily established at the inception of
the Separate Account's operation. The value was established at $10 for each
Variable Subaccount except the Money Market Variable Subaccount, for which the
value was established at $1.
A VALUATION DAY is every day on which the Company and the New York
Stock Exchange (NYSE) are open for business, but shall not include any day on
which trading on the NYSE is restricted, or on which an emergency exists, as
determined by the Securities and Exchange Commission and/or respective governing
bodies of the NYSE so that valuation or disposal of securities is not
practicable.
A VALUATION PERIOD is the period of time beginning at the close of
trading of the New York Stock Exchange on any Valuation Day and ending at the
close of business on the next Valuation Day. A Valuation Period may be one day
or more than one day.
3
<PAGE>
NET INVESTMENT FACTOR. The Company calculates the Net Investment
Factor for a Valuation Period for each Variable Subaccount by dividing (a) by
(b) and subtracting (c) from the result, where:
(a) is the sum of:
(1) the net asset value of a Fund share held in the Separate
Account for that Variable Subaccount determined at the end
of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain
distributions made for shares held in the Separate Account
for that Variable Subaccount if the ex-dividend date occurs
during the Valuation Period.
(b) is the net asset value of a Fund share held in the Separate
Account for that Variable Subaccount determined as of the end of
the preceding Valuation Period.
(c) is a factor representing the Mortality and Expense Risk Fee and
the Administrative Expense Charge.
This factor is equal, on an annual basis, to 1.40% (1.25% +
0.15%) of the daily net asset value of Fund share held in the
Separate Account for that Variable Subaccount.
The net investment factor may be greater or less than one; therefore,
the Accumulation Unit value may increase or decrease.
ANNUITY PERIOD TRANSFER FORMULAS
During the Annuity Period, you may transfer Separate Account Value from
one Variable Subaccount to another, subject to certain limitations. Interest
Rate Guarantee Periods are not available during the Annuity Period. (See
"Transfers," p. 16 of the Prospectus.
Transfers during the Annuity Period are implemented according to the
following formula:
1. Determine the number of units to be transferred from the Variable
Subaccount as follows:
= D/AUV1
2. Determine the number of Annuity Units remaining in such Variable
Subaccount (after the transfer):
= UNIT1 - D/AUV1
3. Determine the number of Annuity Units in the transferee Variable
Subaccount (after the transfer):
= UNIT2 + D/AUV2
4
<PAGE>
4. Subsequent Annuity Payments will reflect the changes in Annuity Units
in each Variable Subaccount as of the next Annuity Payment's due date.
Where:
(AUV1) is the Annuity Unit value of the Variable Subaccount that
the transfer is being made from.
(AUV2) is the Annuity Unit value of the Variable Subaccount that
the transfer is being made to.
(UNIT1) is the number of units in the Variable Subaccount that the
transfer is being made from, before the transfer.
(UNIT2) is the number of units in the Variable Subaccount that the
transfer is being made to, before the transfer.
(D) is the dollar amount being transferred.
ADMINISTRATION
The Company will be providing administrative services. The services
provided by the Company include issuance and redemption of the Contract,
maintenance of records concerning the Contract and certain Contract Owner
services.
If the Company does not continue to provide these services, it will
attempt to secure similar services from such sources as may then be available.
Services will be purchased on a basis which, in the Company's sole discretion,
affords the best service at the lowest cost. The Company, however, reserves the
right to select a provider of services which the Company in its sole discretion,
considers best able to perform such services in a satisfactory manner even
though the costs for the service may be higher than would prevail elsewhere.
RECORDS AND REPORTS
All records and accounts relating to the Separate Account will be
maintained by the Company. As presently required by the Investment Company Act
of 1940 and regulations promulgated thereunder, the Company will mail to you at
your last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation. You will also receive confirmation of each financial transaction
and any other reports required by law or regulation.
5
<PAGE>
CUSTODY OF ASSETS
The assets of each of the Variable Subaccounts of the Separate Account are
held in the custody of Bank of New York which also performs certain valuation
services. The assets of each of the Variable Subaccounts of the Separate
Account are segregated and held separate and apart from the assets of the other
Variable Subaccounts and from the Company's general account assets. The
Administrator maintains records of all purchases and redemptions of Fund shares
by each of the Variable Subaccounts.
PERFORMANCE DATA AND CALCULATIONS
MONEY MARKET VARIABLE SUBACCOUNT YIELD
In accordance with regulations prescribed by the Securities and Exchange
Commission (the "SEC"), the Separate Account is required to compute the Money
Market Variable Subaccount's current annualized yield for a seven-day period in
a manner which does not take into consideration any realized or unrealized gains
or losses on the Prime Money Fund's securities. This current annualized yield
is computed by determining the net change (exclusive of realized gains and
losses on the sale of securities and unrealized appreciation and depreciation)
in the value of a hypothetical account having a balance of one Accumulation Unit
of the Money Market Variable Subaccount at the beginning of such seven-day
period, dividing such net change in account value by the value of the account at
the period to determine the base period return, and annualizing this quotient on
a 365-day basis.
The SEC also permits the Separate Account to disclose the effective
yield of the Money Market Variable Subaccount for the same seven-day period,
determined on a compounded basis. The effective yield is calculated by
compounding the unannualized base period return by adding one to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result.
The yield on amounts held in the Money Market Variable Subaccount
normally will fluctuate on a daily basis. Therefore, the disclosed yield for
any given past period is not an indication or representation of future yields or
6
<PAGE>
rates of return. The Money Market Variable Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Federated Prime Money Fund, the types and quality of
portfolio securities held by the Federated Prime Money Fund, and its operating
expenses. The yield figures do not reflect Surrender Charges or Premium Taxes.
OTHER VARIABLE SUBACCOUNT YIELDS
The Company may from time to time advertise or disclose the current
annualized yield of one or more of the Variable Subaccounts of the Separate
Account (except the Money Market Variable Subaccount) for 30-day periods. The
annualized yield of a Variable Subaccount refers to income generated by the
Variable Subaccount over a specific 30-day period. Because the yield is
annualized, the yield generated by a Variable Subaccount during the 30-day
period is assumed to be generated each 30-day period over a 12-month period.
The 30-day yield is calculated according to the following formula:
6
(a-b)
Yield = 2 [(----- + 1) -1]
(cd)
Where:
a = Net investment income of the Variable Subaccount for the 30-day period
attributable to the Variable Subaccount's unit.
b = Expenses of the Variable Subaccount for the 30-day period.
c = The average number of units outstanding.
d = The unit value at the close (highest) of the last day in the
30-day period.
Because of the charges and deductions imposed by the Separate Account,
the yield for a Variable Subaccount of the Separate Account will be lower than
the yield for its corresponding Fund. The yield calculations do not reflect the
effect of any Premium Taxes or Surrender Charge that may be applicable to a
particular Contract. Surrender Charges range from 7% to 1% of the amount
withdrawn based on the Contract Year of Surrender. The yield on amounts held in
the Variable Subaccounts of the Separate Account normally will fluctuate over
time. Therefore, the disclosed yield for any given past period is not an
indication or representation of future yields or rates of return. A Variable
Subaccount's actual yield is affected by the types and quality of the Fund's
investments
7
<PAGE>
and its operating expenses. The Trust commenced operations after the date of
this Statement of Additional Information; therefore, figures based on the
Trust's past performance are not available.
VARIABLE SUBACCOUNT TOTAL RETURN CALCULATIONS: STANDARDIZED
The Company may from time to time also disclose average annual total
returns for one or more of the Variable Subaccounts for various periods of time.
Average annual total return quotations are computed by finding the average
annual compounded rates of return over one, five and ten year periods and for
the life of the Variable Subaccount that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
n
P (1 + T) = ERV
Where:
P = hypothetical initial Premium Payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one, five, or ten-year period, at the end of the
one, five, or ten-year period (or fractional portion thereof).
The Surrender Charge on Contracts and all recurring fees that are
charged to all shareholder accounts (the Annual Administrative Fee) are
recognized in the ending redeemable value for standard total return figures.
The Annual Administrative Fee is reflected by dividing the amount of the fee by
the average Contract Value. The resulting percentage is deducted from the
return in calculating the ending redeemable value. These figures will not
reflect any Premium Taxes.
OTHER PERFORMANCE DATA: NON-STANDARDIZED
The Company may from time to time also disclose average annual total
returns in non-standardized formats in conjunction with the standard format
described above. The non-standard format calculation will be identical to the
standard format except that it will NOT take any Surrender Charges into account.
8
<PAGE>
The Company may from time to time also disclose cumulative total returns
in conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula, assuming no sales charge.
CTR = (ERV / P) - 1
Where:
CTR = the cumulative total return net of a Variable Subaccount is
recurring charges for the period;
ERV = ending redeemable value of a hypothetical $1,000 Premium
Payment made at the beginning of the one, five, or ten-year (or other)
period, at the end of the one, five, or ten-year (or other) period (or
fractional portion thereof);
P = a hypothetical initial Premium Payment of $1,000.
All non-standard performance data will only be advertised if the standard
total return performance data is also included in the advertisement.
OTHER INFORMATION
The following is a partial list of those publications which may be cited
in advertising or sales literature describing investment results or other data
relative to one or more of the Variable Subaccounts. Other publications may
also be cited.
<TABLE>
<S> <C>
Broker World Financial World
Across the Board Advertising Age
American Banker Barron's
Best's Review Business Insurance
Business Month Business Week
Changing Times Consumer Reports
Economist Financial Planning
Forbes Fortune
Inc. Institutional Investor
Insurance Forum Insurance Sales
Insurance Week Journal of Accountancy
Journal of the American Society of CLU & ChFC Journal of Commerce
Life Insurance Selling Life Association News
MarketFacts Manager's Magazine
National Underwriter Money
Morningstar, Inc. Nation's Business
New Choices (formerly 50 Plus) New York Times
Pension World Pensions & Investments
Rough Notes Round the Table
U.S. Banker VARDs
Wall Street Journal Working Woman
</TABLE>
9
<PAGE>
FEDERAL TAX MATTERS
The Allegiance Variable Annuity Contract is designed for use by individuals
in retirement plans which may or may not be plans qualified for special tax
treatment under Sections 401, 403, 408 or 457 of the Internal Revenue Code of
1986, as amended (the "Code"). The ultimate effect of federal income taxes on
the Contract Value, on Annuity Payments, and on the economic benefit to you, the
Annuitant or the Beneficiary depends on the type of retirement plan for which
the Contract is purchased, on the tax and employment status of the individual
concerned and on the Company's tax status. THE FOLLOWING DISCUSSION IS GENERAL
AND IS NOT INTENDED AS TAX ADVICE. Any person concerned about these tax
implications should consult a competent tax advisor. This discussion is based
upon the Company's understanding of the present federal income tax laws as they
are currently interpreted by the Internal Revenue Service. No representation is
made as to the likelihood of continuation of these present federal income tax
laws or of the current interpretations by the Internal Revenue Service.
Moreover, no attempt has been made to consider any applicable state or other tax
laws.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under Part I of
Subchapter L of the Code. The following discussion assumes that the Company is
taxed as a life insurance company under Part I of Subchapter L. Since the
Separate Account is not an entity separate from the Company, and its operations
form a part of the Company, it will not be taxed separately as a "regulated
investment company" under Subchapter M of the Code. Investment income and
realized capital gains are automatically applied to increase reserves under the
Contract. Under existing federal income tax law, the Company believes that the
Separate Account investment income and realized net capital gains will not be
taxed to the extent that such income and gains are applied to increase the
reserves under the Contract.
Accordingly, the Company does not anticipate that it will incur any
federal income tax liability attributable to the Separate Account and,
therefore, the Company does not intend to make provisions for any such taxes.
However, if changes in the federal tax laws or interpretations thereof result in
the Company being taxed on income or
10
<PAGE>
gains attributable to the Separate Account, then the Company may impose a charge
against the Separate Account (with respect to some or all contracts) in order to
set aside provisions to pay such taxes.
TAX STATUS OF THE CONTRACTS
Section 817(h) of the Code requires that with respect to Non-Qualified
Contracts, the investments of the Trust be "adequately diversified" in
accordance with Treasury regulations in order for the Contracts to qualify as
annuity contracts under federal tax law. The Separate Account, through the
Trust and the Federated Prime Money Fund, intends to comply with the
diversification requirements prescribed by the Treasury in Reg. sec. 1.817-5,
which affect how a Fund's assets may be invested.
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 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 also announced, in connection with the issuance of
regulations concerning 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., you),
rather than the insurance company, to be treated as the owner of the assets in
the account." This announcement also stated 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 Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
policy values. These differences could result in your being treated as the
owner of a pro rata portion of the assets of the Separate Account. In addition,
the Company does not know what standards will be set forth, if any, in the
regulations or rulings which
11
<PAGE>
the Treasury Department has stated it expects to issue. The Company therefore
reserves the right to modify the Contract as necessary to attempt to prevent you
from being considered the owner of a pro rata share of the assets of the
Separate Account or to otherwise qualify the Contract for favorable tax
treatment.
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 Maturity 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 your death; and (b) if any
Owner dies prior to the Maturity Date, the entire interest in the Contract will
be distributed within five years after the date of your death. These
requirements will be considered satisfied as to any portion of your interest
which is payable to or for the benefit of a "designated beneficiary" and which
is distributed over the life of such "designated beneficiary" or over a period
not extending beyond the life expectancy of that beneficiary, provided that such
distributions begin within one year of your death. Your "designated
beneficiary" is the person designated by you as a Beneficiary and to whom
ownership of the Contract passes by reason of death and must be a natural
person. However, if your "designated beneficiary" is your surviving spouse, 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. The Company 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.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities
laws applicable to the issue and sale of the Contracts has been provided to the
Company by Sutherland, Asbill & Brennan, of Washington D.C.
12
<PAGE>
OTHER INFORMATION
Registration Statements have been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statements, amendments and exhibits
thereto has been included in the Prospectus for the Contracts or this Statement
of Additional Information. Statements contained in the Prospectus and this
Statement of Additional Information concerning the content of the Contracts and
other legal instruments are intended to be summaries. For a complete statement
of the terms of these documents, reference should be made to the instruments
filed with the Securities and Exchange Commission.
FINANCIAL STATEMENTS
This Statement of Additional Information contains no financial statements
for the Separate Account because as of December 31, 1995, it had not yet
commenced operations, had no assets or liabilities, and had not received any
income nor incurred any expenses. Ernst & Young, LLP, independent public
accountants, will serve as independent auditors for the Separate Account.
The financial statements of the Company included in this Statement of
Additional Information should be considered only as bearing on the ability of
the Company to meet its obligations under the Contracts. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account, nor do they necessarily bear on the Guaranteed Interest Rates
declared from time to time for the Capital Developer Account Interest Rate
Guarantee Periods. The statutory basis financial statements as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995, included in this Registration Statement, have been audited by Arthur
Andersen, LLP, independent public accountants, as stated in their report
appearing herein. Reference is made to said report which includes an adverse
opinion with respect to conformity with generally accepted accounting
principles.
13
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
Alexander Hamilton Life Insurance Company of America
We have audited the accompanying statements of admitted assets, liabilities
and capital and surplus - statutory basis of ALEXANDER HAMILTON LIFE
INSURANCE COMPANY OF AMERICA (a Michigan corporation) as of December 31, 1995
and 1994, and the related statements of operations - statutory basis, capital
and surplus - statutory basis and cash flows - statutory basis for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
As more fully described in Note 1, the Company prepares these financial
statements using accounting practices prescribed or permitted by the Michigan
Insurance Bureau (statutory basis), which differ from generally accepted
accounting principles. The effects on the financial statements of the
variances between the statutory basis of accounting and generally accepted
accounting principles, as delineated in Note 1, are material.
In our opinion, because of the effects of the matters discussed in the
preceding paragraph, the statutory financial statements referred to above do
not present fairly, in conformity with generally accepted accounting
principles, the financial position of Alexander Hamilton Life Insurance
Company of America as of December 31, 1995 and 1994, or the results of its
operations or its cash flows for each of the three years in the period ended
December 31, 1995.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects, the statutory basis admitted assets,
liabilities and capital and surplus of Alexander Hamilton Life Insurance
Company of America as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period
ended, December 31, 1995, in conformity with accounting practices prescribed
or permitted by the Michigan Insurance Bureau as described in Note 1.
ARTHUR ANDERSEN LLP
Detroit, Michigan
April 25, 1996
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
STATEMENTS OF ADMITTED ASSETS, LIABILITIES
AND CAPITAL AND SURPLUS - STATUTORY BASIS
DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
- --------------------------------------------------------------------------------
ADMITTED ASSETS 1995 1994
---------- ----------
Bonds ............................ $4,846,685 $5,858,569
Stocks ........................... 68,694 119,629
Mortgage loans ................... 156,270 163,564
Real estate ...................... 38,855 47,938
Policy loans ..................... 85,649 543,944
Cash ............................. 26,803 12,218
Short-term investments ........... 55,828 315,829
Due and uncollected premiums ..... 5,197 7,246
Investment income due and accrued 75,555 98,766
Other assets ..................... 78,934 120,199
---------- ----------
Total admitted assets ............ $5,438,470 $7,287,902
---------- ----------
---------- ----------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Aggregate reserve for life policies $4,922,304 $6,470,700
Aggregate reserve for accident and
health policies ................. 2,008 28,120
Policy and contract claims......... 14,598 40,671
Interest maintenance reserve ...... 27,540 59,737
Asset valuation reserve ........... 75,296 85,857
Remittances and items not allocated (1,909) 39,303
Net adjustment in assets and
liabilities due to foreign
exchange rates .................. 33 7,317
Amounts payable to brokers on
investment purchases ............ --- 3,874
Payable to parent, subsidiaries
and affiliates................... 49 86,444
Other liabilities ................. 116,830 126,304
---------- ----------
Total liabilities ................. 5,156,749 6,948,327
---------- ----------
CAPITAL AND SURPLUS:
Common capital stock .............. 2,500 3,750
Preferred Stock.................... 50,000 ---
Surplus note ...................... 51,230 51,230
Gross paid-in and contributed
surplus ......................... 94,987 39,649
Unassigned surplus ................ 83,004 244,946
---------- ----------
Total capital and surplus ......... 281,721 339,575
---------- ----------
Total liabilities and capital and
surplus ......................... $5,438,470 $7,287,902
---------- ----------
---------- ----------
The accompanying Notes to the Financial Statements - Statutory Basis are an
integral part of these statements.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
STATEMENTS OF OPERATIONS - STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
- --------------------------------------------------------------------------------
1995 1994 1993
---------- ---------- -----------
INCOME:
Premiums and other considerations...... $1,088,923 $1,238,920 $ 958,023
Net investment income ................. 567,417 513,039 500,103
Consideration for recaptured reserves.. 64,907 --- ---
Other income .......................... 13,514 9,660 6,902
---------- ---------- ----------
Total income .......................... 1,734,761 1,761,619 1,465,028
---------- ---------- ----------
POLICY BENEFITS:
Death benefits ........................ 79,806 79,801 79,294
Annuity benefits ...................... 169,064 209,825 193,601
Disability benefits.................... 9,739 13,292 18,066
Surrenders and other fund withdrawals . 526,965 342,980 174,973
Increase in aggregate reserves ........ 704,015 724,594 750,938
Increase (Decrease) in liability for
premium and other deposit funds...... 3,920 (6,090) (3,140)
Other policy benefits ................. 5,219 12,044 6,228
---------- ---------- ----------
Total policy benefits ................. 1,498,728 1,376,446 1,219,960
---------- ---------- ----------
COMMISSIONS AND OTHER EXPENSES:
Commissions on premium and annuity
considerations ...................... 74,337 97,530 88,842
General insurance expenses ............ 51,045 58,268 60,316
Insurance taxes, licenses, and fees ... 20,595 20,174 14,023
Other expenses ........................ 2,116 99,669 (1,956)
---------- ---------- ----------
Total commissions and
other expenses ...................... 148,093 275,641 161,225
---------- ---------- ----------
Income before dividends to
policyholders, Federal income tax and
net realized capital gains (losses).. 87,940 109,532 83,843
DIVIDENDS TO POLICYHOLDERS ............ 51 683 508
---------- ---------- ----------
Income before Federal income tax and
net realized capital gains (losses).. 87,889 108,849 83,335
FEDERAL INCOME TAX
(excluding capital gains tax)........ 32,419 50,791 38,255
---------- ---------- ----------
Income before net realized
capital gains (losses)............... 55,470 58,058 45,080
NET REALIZED CAPITAL GAINS (LOSSES)
(net of tax expense and after-tax
IMR transfer)........................ (6,328) 4,186 (6,600)
---------- ---------- ----------
NET INCOME $ 49,142 $ 62,244 $ 38,480
---------- ---------- ----------
---------- ---------- ----------
The accompanying Notes to the Financial Statements - Statutory Basis are an
integral part of these statements.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
STATEMENTS OF CAPITAL AND SURPLUS - STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON GROSS PAID-IN
CAPITAL & CONTRIBUTED UNASSIGNED
STOCK SURPLUS SURPLUS TOTAL
------- ------------- ---------- -------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $3,750 $15,449 $186,397 $205,596
Net income ...................... --- --- 38,480 38,480
Change in net unrealized
capital gains ................ --- --- (6,285) (6,285)
Change in non-admitted assets ... --- --- 383 383
Change in reserve on account of
change in valuation basis .... --- --- (23,495) (23,495)
Change in asset valuation reserve --- --- (12,368) (12,368)
Paid-in and contributed surplus.. --- 24,200 --- 24,200
Change in surplus due to
correction of prior-year life
aggregate reserves ........... --- --- 10 10
Change in surplus due to Federal
income tax on foreign exchange
loss ......................... --- --- 2,340 2,340
------ ------- -------- --------
BALANCE AT DECEMBER 31, 1993 $3,750 $39,649 $185,462 $228,861
Net income ...................... --- --- 62,244 62,244
Change in net unrealized
capital gains ................ --- --- 1,790 1,790
Change in non-admitted assets ... --- --- (1,867) (1,867)
Change in reserve on account of
change in valuation basis .... --- --- 6,450 6,450
Change in asset valuation reserve --- --- (13,884) (13,884)
Surplus note .................... --- 51,230 (1,230) 50,000
Change in surplus due to
correction of prior-year
investment amortization....... --- --- (9,763) (9,763)
Modco reinsurance ............... --- --- 15,744 15,744
------ ------- -------- --------
BALANCE AT DECEMBER 31, 1994 $3,750 $90,879 $244,946 $339,575
------ ------- -------- --------
<PAGE>
</TABLE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
----------------------------------
STATEMENTS OF CAPITAL AND SURPLUS - STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON GROSS PAID-IN
CAPITAL PREFERRED & CONTRIBUTED UNASSIGNED
STOCK STOCK SURPLUS SURPLUS TOTAL
------- --------- -------------- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994.... $ 3,750 $ --- $ 90,879 $ 244,946 $ 339,575
Net income...................... 49,142 49,142
Change in net unrealized
capital gains................ 4,076 4,076
Change in non-admitted assets... 5,913 5,913
Change in asset valuation
reserve...................... 10,561 10,561
Paid-in and contributed surplus. 54,088 54,088
Paid-in and contributed capital. 50,000 50,000
Transferred to surplus.......... (1,250) 1,250 ---
Change in surplus due to loss on
transfer of subsidiaries to
Household International...... (180,192) (180,192)
Change in surplus due to
consideration received for
reinsurance.................. 121,352 121,352
Change in surplus due to IMR
transfer related to
reinsurance................... 30,401 30,401
Change in surplus due to
reinsurance................... (5,234) (5,234)
Dividends to Stockholders....... (197,961) (197,961)
------- ------- -------- --------- ---------
BALANCE AT DECEMBER 31, 1995.... $ 2,500 $50,000 $146,217 $ 83,004 $ 281,721
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
</TABLE>
The accompanying Notes to the Financial Statements - Statutory Basis are an
integral part of these statements.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
STATEMENTS OF CASH FLOWS - STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash provided from operations:
Premiums and other considerations .............. $1,095,588 $1,244,599 $ 958,334
Investment income (net of investment expenses).. 599,864 524,150 486,691
Other income received .......................... 2,686 1,955 4,686
Policyholder benefits paid ..................... 807,652 663,660 472,605
Commissions, other expenses and taxes paid ..... 160,146 254,983 164,843
Net increase in policy loans.................... (458,295) 183,302 116,826
Consideration paid on reinsurance............... 2,105,898 --- ---
Federal income taxes paid ...................... 40,175 54,345 49,811
---------- ---------- ----------
Net cash from operations ....................... (957,438) 614,414 645,626
---------- ---------- ----------
Proceeds from investments sold, matured or repaid:
Bonds .......................................... 2,784,093 1,784,399 2,026,527
Stocks ......................................... 1,610,688 1,685,048 1,234,414
Mortgage loans ................................. 82,346 66,936 129,237
Real estate and other........................... 58,191 21,985 15,906
---------- ---------- ----------
Total investment proceeds ...................... 4,535,318 3,558,368 3,406,084
---------- ---------- ----------
Increase in amounts payable to brokers on
investment purchases ......................... --- --- 32,736
Capital and surplus paid-in .................... 105,338 --- 24,200
Other sources .................................. 54,043 104,228 49,285
---------- ---------- ----------
TOTAL CASH PROVIDED 3,737,261 4,277,010 4,157,931
---------- ---------- ----------
Cost of investments acquired:
Bonds .......................................... 1,783,459 2,290,143 2,831,945
Stocks ......................................... 1,756,454 1,657,928 1,256,346
Mortgage loans ................................. 75,722 8,600 529
Real estate and other .......................... 5,758 11,170 9,792
---------- ---------- ----------
Total investments acquired ..................... 3,621,393 3,967,841 4,098,612
Decrease in amounts payable to brokers on
investment purchases......................... --- 28,939 ---
Dividends paid to stockholder................... 197,961 --- ---
Other applications ............................. 163,323 22,357 28,880
---------- ---------- ----------
TOTAL CASH USED 3,982,677 4,019,137 4,127,492
---------- ---------- ----------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS $ (245,416) 257,873 $ 30,439
---------- ---------- ----------
---------- ---------- ----------
Cash and short-term investments:
Beginning of year .............................. $ 328,047 $ 70,174 $ 39,735
End of year .................................... 82,631 328,047 70,174
</TABLE>
The accompanying Notes to the Financial Statements - Statutory Basis are an
integral part of these statements.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
- --------------------------------------------------------------------------------
1) SIGNIFICANT ACCOUNTING POLICIES
Alexander Hamilton Life Insurance Company of America (the Company) is
wholly-owned by Jefferson-Pilot Corporation. The Company is principally
engaged in the life insurance business, and has a diversified base of
policyholders in Canada and in all states except New York.
Effective October 1, 1995, the Company was acquired by Jefferson-Pilot
Corporation from Household Group, Inc., a wholly-owned subsidiary of
Household International, Inc. Consideration given for the Company and its
subsidiaries, First Alexander Hamilton Life Insurance Company ("FAHL") and
Alexander Hamilton Capital Management, Inc. ("AHCMI") consisted of
$475,000,000 in cash and $50,000,000 in redeemable preferred stock to
Household Group, Inc., and $50,000,000 paid to Household International,
Inc. by GARCO Capital Corp., an affiliate of Jefferson-Pilot Corporation,
for the outstanding $50,000,000 surplus debenture of the Company. In
consummation of the acquisition, under an Agreement and Plan of Merger,
Alexander Hamilton Life Insurance Company of America ("Old AHL") was
merged into Jefferson-Pilot Pension Life Insurance Company ("JP Pension"),
a Michigan domiciled life insurance company, a wholly-owned subsidiary of
Jefferson-Pilot Corporation. JP Pension was immediately renamed Alexander
Hamilton Life Insurance Company of America ("New AHL"). The 1,041,700
authorized and issued shares of common stock, par value $2.40 per share, of
JP Pension and the 375,000 authorized and issued shares of common stock,
par value $10 per share, of Old AHL, which were outstanding before the
merger, were exchanged for the respective merger considerations. New AHL
has the following shares authorized (and outstanding): 60,000,000 shares
Series A Common Shares (2,000,000 shares outstanding), par value $1 per
share, 600,000 shares Series B Common Shares (500,000 shares outstanding),
par value $1 per share, and 500,000 shares Floating Rate Preferred Shares
(500,000 shares outstanding), par value $100 per share.
The full year of 1995 business activity of the Company is presented herein,
consisting of nine months of activity of Old AHL and three months of
activity of New AHL. JP Pension is reflected as acquired by the Company on
the acquisition effective date. Prior year information is that of Old AHL.
The Company received written approval from the Michigan Insurance Bureau
for this accounting practice, which differs from prescribed statutory
accounting practices. Statutory accounting practices prescribed by the
Michigan Insurance Bureau require prior year's amounts reported for assets,
liabilities, surplus, revenues and expenses to be reported on a merged
basis consistent with the current year's post-merger reporting basis.
Statutory surplus as of December 31, 1994 would be increased by $4.7
million under the prescribed statutory accounting practice.
For generally accepted accounting principles (GAAP) purposes, the
acquisitions have been accounted for as a purchase under Accounting
Principles Board Opinion 16. The assets and liabilities were stated at
their fair values on the effective date of acquisition. The allocation of
the purchase price has been made based on preliminary estimates of fair
values and is subject to change. The excess of the purchase price over the
combined net assets of the company, First Alexander Hamilton Life Insurance
Company, and Alexander Hamilton Capital Management, Inc. has been recorded
in the GAAP Balance Sheet as Goodwill and is being amortized on a
straight-line basis over a twenty-five year period. The carrying amount of
goodwill is regularly reviewed for indications of value impairment, with
consideration given to the financial performance of acquired properties and
other relevant factors.
Substantially all of the life and single premium deferred annuity business
of AHLIC and FAHL was included in the acquisition. Certain credit life and
accident and health insurance, Periodic Payment Annuity business and
Corporate Owned Life Insurance business written by the Company and FAHL has
been fully reinsured back to affiliates of Household International, Inc.
through coinsurance agreements. Related trust agreements for the assets
retained for this business were also established.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
- --------------------------------------------------------------------------------
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with statutory accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
BASIS OF PRESENTATION - The accompanying financial statements have been prepared
in conformity with accounting practices prescribed or permitted by the Michigan
Insurance Bureau (statutory basis), which vary in some respects from GAAP.
Prescribed statutory accounting practices include certain publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The most
significant difference between statutory basis and GAAP is that the accompanying
1995 statutory basis financial statements include the combined results of
operations for the nine month period that the Company was owned by Household
International, Inc. and the three month period that it was owned by Jefferson-
Pilot Corporation. Under purchase accounting for GAAP, the periods of different
ownership are not combined in the Company's financial statements. Other
significant accounting policies are described in the following paragraphs.
ADMITTED ASSETS - The term "admitted assets" means the assets are stated at
values which are permitted to be reported to the domiciliary state regulatory
authority for purposes of presenting Statement of Admitted Assets, Liabilities
and Capital and Surplus-Statutory Basis in accordance with the rules and
regulations of such regulatory authority. The term "non-admitted assets" means
assets other than assets which are so permitted to be reported. Non-admitted
assets include primarily capitalized organizational costs, computer software,
agents' debit balances, and furniture and equipment which were held at year end.
PREMIUMS - Ordinary and credit insurance premiums are recognized as revenue when
due. Universal life and annuity premiums are recognized as revenue when
collected.
POLICY AND CONTRACT CLAIMS - Policy and contract claims are accrued for both
statutory and GAAP purposes based on estimated unpaid settlement costs for
reported losses and for incurred but not reported losses. These accruals are
determined through a combination of historical experience and management's
judgment with regard to the ultimate exposure to the Company.
ACQUISITION COSTS - For statutory purposes, commissions and other expenses of
acquiring new business are charged to operations as incurred. For GAAP
purposes, such expenses are deferred and amortized over the life of the policy,
not exceeding a period of 25 years. Amortization is in relationship to gross
profits for universal life and annuity products and premiums earned for credit
and ordinary life products.
INVESTMENTS - For statutory purposes, bonds and preferred stocks are reported at
amortized cost. Common stocks are carried at statement value. Bonds in default
are reported at statement value. For GAAP purposes, securities are stated
according to Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." "Available
For Sale" investments are carried at market value, with market value adjustments
recorded through unassigned surplus, and "Held to Maturity" investments are
carried at amortized cost.
Statement values are determined as prescribed by the NAIC which is its
determination of "market" for each listed security. Gains and losses are
included in unassigned surplus if unrealized and in operations if realized.
Realized gains and losses are determined using principally the first-in first-
out method.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
- --------------------------------------------------------------------------------
Investments in subsidiaries (which totaled $28.0, $81.4 and $76.6 million at
December 31, 1995, 1994 and 1993, respectively) are carried as stock at amounts
which are equal to statutory capital and surplus for insurance companies and
GAAP equity for non-insurance companies. For GAAP purposes, the subsidiaries
are required to be consolidated.
MORTGAGE LOANS - For statutory purposes, mortgage loans are carried at amortized
cost and are included in the asset valuation reserve calculation. For GAAP
purposes, mortgage loans are carried at amortized cost.
INVESTMENT INCOME - For statutory as well as GAAP purposes, accrued investment
income of $.2, $.5 and $.8 million as of December 31, 1995, 1994 and 1993,
respectively, relating to mortgage loans which are past due more than three
months has been excluded from investment income.
PROPERTY AND EQUIPMENT - For GAAP purposes, property and equipment is recorded
at cost and depreciated over its estimated useful life using the straight-line
method of depreciation. For statutory purposes, certain classes of equipment
are "non-admitted" and are charged against surplus.
ASSET VALUATION RESERVE - For statutory purposes, the Company is required to
carry an asset valuation reserve (AVR), which is computed according to a formula
specified by the NAIC to provide for possible losses on securities. The AVR
requires that reserves be adjusted for credit related gains and losses (net of
tax), and that reserves be established against mortgages, real estate, bonds and
stocks. No such valuation reserve is required for GAAP purposes.
INTEREST MAINTENANCE RESERVE - For statutory purposes, the Company is required
to exclude interest rate related capital gains and losses from the income
calculation, and amortize those gains and losses over the disposed assets'
lives. The amortization amount is computed according to a formula specified by
the NAIC using the grouped method. The unamortized portion, called the interest
maintenance reserve (IMR), is recorded on the Statement of Admitted Assets,
Liabilities and Capital and Surplus-Statutory Basis (net of tax). The IMR
balance at December 31, 1995 is $27.5 million, which includes current year net
capital losses (net of tax) of $.4 million transferred to IMR, less current year
amortization of $1.4 million and the current year release of $30.4 million
deferred gains which were previously realized on assets supporting the Company's
PPA business. The liabilities for this product line were ceded to affiliates of
Household International (see note 1). The IMR was no longer required for the
Company to maintain interest spreads and thus were released as permitted by NAIC
guidelines. The IMR balance at December 31, 1994, is $59.7 million, which
includes 1994 net capital gains (net of tax) of $.8 million transferred to IMR,
less 1994 amortization of $3.0 million. The IMR balance at December 31, 1993,
is $61.9 million, which includes 1993 net capital gains (net of tax) of $45.2
million transferred to IMR, less 1993 amortization of $2.6 million. No such
procedure is required for GAAP purposes.
NET ADJUSTMENT DUE TO FOREIGN EXCHANGE RATES - For statutory purposes, United
States dollars and Canadian dollars are combined in the accompanying financial
statements. Foreign currency translation adjustments are not made to each
individual asset and liability balance, rather, such translation is performed in
aggregate as prescribed by statutory accounting principles and reflected in the
net adjustment in assets and liabilities due to foreign exchange rates in the
accompanying Statements of Admitted Assets, Liabilities and Capital and Surplus-
Statutory Basis.
POLICY LIABILITIES - The liability for future contract benefits for universal
life products is computed using the Model Regulation reserve method, using the
1980 Commissioner's Standard Ordinary (CSO) mortality table, and interest rates
from 4.0% to 6.0%
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
- --------------------------------------------------------------------------------
The policy reserves for immediate annuities issued prior to 1986 are calculated
using the 1971 Individual Annuity Mortality Table and interest rates between
7.5% and 11.25%. For immediate annuities issued 1986 and forward, the reserves
are calculated using the 1983 Annuity Mortality Table and interest rates from
5.00% to 9.25%. For deferred annuities, the Commissioner's Annuity Reserve
Valuation Method (CARVM) is used with a 4.00% to 8.75% interest rate assumption.
Policy reserves applicable to ordinary life policies are calculated on either
the net level basis or preliminary term basis. The effect of using a
preliminary term reserve basis is to partially offset the effect of immediately
charging the costs of acquiring business against income. For policies issued
prior to 1989, the statutory interest and mortality assumptions used are from
the 1958 CSO Table, with interest rates ranging from 2.25% to 6.00%. For
policies issued after 1988, the 1980 CSO Table with 2.75% to 5.50% interest is
used.
Credit life policy liabilities are calculated on the net level basis using both
the 1958 Commissioner's Extended Term (CET) and the 1941 and 1980 CSO Tables.
Interest rates for these tables range between 3.0% and 5.0%. Credit disability
reserves represent the unearned premium on disability contracts.
In 1994, the Company changed the valuation basis for a block of payroll
deduction universal life policies, resulting in a $6.4 million reduction of
reserves and increase in unassigned surplus. The change was made to use a
smoker/nonsmoker valuation mortality table in accordance with R500.1285 of the
Michigan Valuation Regulation.
FEDERAL INCOME TAXES - For the periods through September 30, 1995, the Company
was included in the consolidated Life/Non-Life Federal income tax returns filed
by Household International, Inc. For the period October 1 to December 31, 1995,
the Company was included in the consolidated Life/Non-Life Federal income tax
return with its subsidiaries FAHL and AHCMI. The consolidated tax provision is
allocated to each separate company in amounts generally equivalent to those
determinable if each company filed a separate return.
Both current and deferred tax liabilities are recognized for GAAP purposes.
Deferred tax liabilities are not recorded for statutory purposes. GAAP basis
deferred taxes exist due to differences between the book and tax bases of
certain assets and liabilities.
BENEFIT PLANS - Prior to October 1, 1995, the Company participated in Household
International, Inc.'s defined benefit pension plans which cover all eligible
employees. The benefits under this plan were based primarily on years of
service. These plans were administered by Household International, Inc. which
assessed an annual pension income or expense to the Company based on the
Company's pro-rata participation. Effective October 1, 1995, the Company's
employees participate in the Jefferson-Pilot Corporation defined benefit pension
plans covering substantially all Company employees. The plans are
noncontributory and are funded through group annuity contracts with Jefferson-
Pilot Life Insurance Company, an affiliate. The plans provide benefits based on
annual compensation and years of service. The funding policy is to contribute
annually the maximum amount deductible for federal income tax purposes. This
plan is administered by Jefferson-Pilot Corporation. No pension expense was
allocated to the Company in 1995, 1994 or 1993 as the plans are overfunded. At
December 31, 1995, the Company and subsidiaries' total accumulated benefit
obligation, valued as of December 31, 1995 and based on an assumed interest rate
of 7% was $9.5 million, including vested benefits of $8.7 million, and the
market value of the plan assets was $16.5 million.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
- --------------------------------------------------------------------------------
For GAAP purposes, such amounts are accounted for based on the principles of
SFAS No. 87, "Employers' Accounting for Pensions". This treatment results in a
net asset, which is not recorded for statutory purposes due to its non-admitted
status.
Prior to October 1, 1995, the Company participated in Household International,
Inc.'s defined contribution plan. Effective October 1 through December 31,
1995, the Company participated in Jefferson Pilot Corporation's defined
contribution plan. Under both plans each participant's contribution was matched
in whole or in part by the Company up to a maximum of 6% of the participant's
compensation. For 1995, 1994 and 1993, these costs totaled approximately $1
million annually.
Postretirement benefits are available to employees if they reach normal
retirement age while working for the Company. Prior to October 1, 1995, the
Company participated in Household International, Inc.'s postretirement benefit
plan. Effective October 1, 1995, the Company participated in Jefferson-Pilot
Corporation's postretirement benefit plan.
Effective January 1, 1993, the Company adopted the NAIC Accounting Practices
guidance on "Postretirement Benefits Other Than Pensions" which, consistent with
SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions", requires the recognition of the expected postretirement costs on an
accrual basis, similar to pension accounting. The expected cost of
postretirement benefits is required to be recognized over the employees' years
of service with the Company instead of the period in which the costs are paid.
Through September 31, 1995, the Company was recognizing the transition
obligation, which represents the unfunded and unrecognized accumulated
postretirement benefit obligation, over 20 years. The unrecognized transition
obligation was $2.3 million at December 31, 1994.
The unfunded postretirement benefit obligation for retirees and other fully
eligible or vested plan participants was $2.7 million and $2.8 million at
December 31, 1995 and 1994, respectively, of which $2.7 million in 1995 and $1.4
million in 1994 is included in other liabilities in the Statements of Admitted
Assets, Liabilities and Capital and Surplus-Statutory Basis. The estimated cost
of the benefit obligation for active non-vested employees was $.3 million for
1995 and $2.6 million for 1994. This portion of the obligation is not recorded
under NAIC guidance although it is recorded for GAAP purposes. The discount
rate used in determining the accumulated postretirement benefit obligation was
7.0% in 1995 and 8.5% in 1994.
Net postretirement benefit costs for each of the years ended December 31, 1995
and 1994 was $1.0 million and includes the expected cost of such benefits for
newly eligible or vested employees, interest cost, gains and losses arising from
differences between actuarial assumptions and actual experience, and
amortization of the transition obligation. The Company made no contributions to
the plan in 1995, 1994 or 1993.
DEFERRED AGENT COMPENSATION - The Company sponsors a contributory deferred
compensation plan for certain qualified agents. The accumulated value of both
the Company and agent contributions was $40.1, $33.0, and $32.1 million at
December 31, 1995, 1994 and 1993, respectively, and is included with other
liabilities. In 1991, the Company established a Rabbi Trust supporting the
liability which is recorded at the market value of the underlying assets. The
trust is included with other assets.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
2) TRANSACTIONS WITH AFFILIATED COMPANIES
The Company writes credit insurance policies covering loans originated by
Household Finance Company's consumer finance subsidiaries and Household
International, Inc.'s banking subsidiaries. Transactions with these companies
which occurred prior to October 1, 1995 are deemed to be transactions with
affiliates. As a result of the acquisition, transactions with these companies
occurring after September 30, 1995 are not deemed as transactions with
affiliates. The principal affiliate transactions and balances included in the
accompanying financial statements are summarized as follows (in millions of
dollars):
1995 1994 1993
---- ---- ----
Premiums ................................... $43.8 $42.2 $53.7
Policy benefits ............................ 26.6 25.4 32.0
Increase (Decrease) in aggregate reserves .. (4.0) (3.6) 1.3
Due and uncollected premiums ............... - 5.8 6.0
Aggregate reserves and policy
and contract claims....................... - 29.8 33.8
Prior to October 1, 1995, the Company paid Household Finance for administrative
expenses incurred on the Company's behalf. Effective October 1, 1995, the
Company paid Jefferson-Pilot Corporation, an affiliate, for certain expenses
incurred on the Company's behalf. The total amounts paid for these expenses
were $2.9, $3.1 and $2.8 million in 1995, 1994 and 1993, respectively.
The Company leases two office buildings to Household Finance and one building to
an affiliate, Household Credit Services, Inc. These companies use the buildings
as their headquarters and administration facilities. The investment in these
buildings was $26.8 and $28.0 million at December 31, 1995 and 1994,
respectively. The building leases have combined rentals of $3.4 million for the
9 months ended September 30, 1995 and annual rentals of $4.5 million for 1994
and 1993.
Effective October 1, 1994, the Company entered into a reinsurance ceded treaty
with Hamilton National Life Insurance Company (HNLIC), a wholly-owned
subsidiary, consisting of a block of annuity contracts. The funds backing the
reserves, amounting to $64.0 million, are payable to HNLIC as of December 31,
1994. During 1995 these annuities were recaptured by the Company prior to the
acquisition.
Prior to the acquisition, the stock of subsidiary companies Alexander Hamilton
Insurance Company of America, Alexander Hamilton Insurance Agency, Inc.,
Hamilton National Life Insurance Company, Alexander Hamilton Life Insurance
Company of Arizona, Prospect Life Insurance Company, and Investment Holdings
Company was transferred through a dividend payment to Household Group. The
combined statutory equity of these subsidiaries was $138.0 million at the time
of the dividend payment. Additionally, a cash dividend of $60 million was paid
to Household International, Inc.
During 1994, Alexander Hamilton Insurance Agency, Inc., a subsidiary of the
Company, declared and paid a $2.0 million dividend and paid a $.5 million
dividend declared in 1993. In 1993, AHIA declared a $1.2 million dividend with
$.5 million of that dividend payable at December 31, 1993. Dividends of $24.0
million and $12.0 million were received from HNLIC during 1995 and 1993,
respectively. All dividends are reflected in investment income in the
accompanying Statements of Operations-Statutory Basis.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
- --------------------------------------------------------------------------------
In 1994, the surplus debenture in the amount of $50,000,000 was issued to
Household International, Inc. in exchange for cash. Effective with the merger,
the debenture was purchased by GARCO Capital Corp., an affiliate of Jefferson-
Pilot Corporation. The surplus debenture has the following repayment conditions
and restrictions: the Company shall have the privilege, on the last day of any
March or September, on or after September 30, 2004, of prepaying the outstanding
principal balance of this surplus debenture. An additional $1,230,000
representing accrued interest through December 31, 1995 and 1994 is treated as
an increase in the debenture pending approval for actual payment. Interest is
payable on March 31 and September 30 each year beginning March 31, 1995. For
1995, the Company has recorded $4,893,536 of interest expense related to this
note.
Payment of principal and/or interest otherwise required or permissible shall not
occur unless: (i) the Company has obtained the prior written approval of the
Michigan Insurance Bureau and obtained approval of the Board of Directors, (ii)
such payment will not cause the Company to violate its statutory capital
requirements as set forth in the Michigan Insurance Code, and (iii) the Company
has adequate earned surplus funds available for such payment.
During 1995, preceding the sale, the Company contributed $73.7 million, $112.0
million, $17.1 million and $78.0 million to its subsidiaries Investment Holdings
Company, Alexander Hamilton Life Insurance Company of Arizona, Hamilton National
Life Insurance Company, and Prospect Life Insurance Company respectively. In
addition, Household International, Inc. contributed $46.7 million to the
Company.
During 1993, Household International, Inc. contributed $17 million in surplus to
the Company. Additionally, the ownership of Alexander Hamilton Insurance
Company of America ($7.2 million of common capital stock and gross paid-in and
contributed surplus) was transferred to the Company on December 31, 1993 and is
included in paid-in and contributed surplus.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
- --------------------------------------------------------------------------------
3) INVESTMENT SECURITIES
The statement value and estimated market value of investments in debt securities
are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
Statement Unrealized Unrealized Market
Value Gains Losses Value
--------- --------- ---------- ------
<S> <C> <C> <C> <C>
Government Bonds:
U.S. Treasuries $ 84,149 $ 5,028 $ 2 $ 89,175
Agency Mortgage-
Backed/CMOs............ 738,324 22 - 738,346
State & Municipal........ - - - -
Other Government Bonds... 119,120 10,596 14 129,702
Corporate Bonds:
Asset-Backed Securities.. 19,450 - - 19,450
CMOs..................... 925,356 768 7,532 918,592
Investment Grade......... 2,775,276 84,435 2,448 2,857,263
Non-Investment Grade..... 185,010 5,258 3,450 186,818
---------- ---------- -------- ----------
Total $4,846,685 $106,107 $13,446 $4,939,346
---------- ---------- -------- ----------
---------- ---------- -------- ----------
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
Statement Unrealized Unrealized Market
Value Gains Losses Value
--------- --------- ---------- ------
<S> <C> <C> <C> <C>
Government Bonds:
U.S. Treasuries.......... $ 91,208 $ 5 $ 11,572 $ 79,641
Agency Mortgage-
Backed/CMOs............ 1,439,250 15,866 88,595 1,366,521
State & Municipal........ 9,135 77 43 9,169
Other Government Bonds... 95,787 65 4,816 91,036
Corporate Bonds:
Asset-Backed Securities.. 175,535 607 6 176,136
CMOs..................... 383,055 1,213 15,899 368,369
Investment Grade......... 3,375,095 31,778 169,877 3,236,996
Non-Investment Grade..... 289,504 2,006 15,472 276,038
---------- ---------- -------- ----------
Total $5,858,569 $ 51,617 $306,280 $5,603,906
---------- ---------- -------- ----------
---------- ---------- -------- ----------
</TABLE>
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
---------------------------------
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
- --------------------------------------------------------------------------------
The statement value and estimated market value of debt securities at December
31, by contractual maturity, is shown below. 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>
1995 1994
--------------------------------------------
Statement Market Statement Market
Value Value Value Value
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Due in one year or less ..... $ 16,898 $ 17,472 $ 55,142 $ 54,991
Due after one year through
five years ............... 914,717 929,686 997,850 958,997
Due after five years through
ten years ................ 1,799,653 1,865,633 1,714,296 1,633,247
Due after ten years ......... 446,875 469,618 1,268,976 1,221,781
---------- ---------- ---------- ----------
3,178,143 3,282,409 4,036,264 3,869,016
Mortgage backed ............. 1,668,542 1,656,937 1,822,305 1,734,890
---------- ---------- ---------- ----------
Total $4,846,685 $4,939,346 $5,858,569 $5,603,906
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Net realized gains (losses) from sales of investments in debt securities during
1995, 1994 and 1993 were $(9.5), $9.6, and $66.5 million, respectively. Gross
gains of $24.1 million and gross losses of $33.6 million were realized on 1995
sales; gross gains of $34.1 million and gross losses of $24.5 million were
realized on 1994 sales. Gross gains of $79.8 million and gross losses of $13.3
million were realized on 1993 sales.
Bonds with a par value of $27.7 and $24.9 million were on deposit pursuant to
regulatory requirements at December 31, 1995 and 1994, respectively.
The Company has limited involvement with derivative financial instruments and
does not use these securities for trading purposes. They are generally used to
manage well-defined interest rate risk and to hedge investment assets.
Interest rate cap agreements with a notional value of $500.0 million were
initiated and terminated during 1994. A gain of $1.4 million was recognized upon
termination in 1994.
During 1995, the Company wrote a covered call option against $25.0 million of
mortgage backed securities. The call was exercised during the year, and the
Company recognized premium income of $70.0 thousand.
Interest rate swap transactions with a total notional value of $565.0 million
were entered into during 1995, 1994 and 1993. Swaps with a notional value of
$140.0 million and $300.0 million were terminated during 1995 and 1994,
respectively, with no gain or loss and a loss of $0.4 million respectively.
Swaps with a notional value of $125.0 million remain open as of December 31,
1995. Termination of these swaps at the current market interest rates would
result in a settlement payment made by the Company of $0.3 million as of
December 31, 1995.
Interest is exchanged monthly on notional value of $125.0 million, with the
Company receiving a weighted average rate of 5.28% and paying 1 month LIBOR
(5.6875% at December 31, 1995) on a net exchange basis. The net amount received
or paid under these swaps is reflected as an adjustment to interest income.
Futures contracts were entered into and terminated during 1995 and 1994 to hedge
existing and anticipated investment transactions. A capital loss of $9.7
million was recognized 1994. No significant gain or loss was recognized on the
1995 contracts.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
For statutory purposes, the recognized gains and losses on the above derivative
instruments are included in the IMR discussed in Note 1. On a GAAP basis, the
gains and losses are recorded as an adjustment to the book value of the hedged
instrument.
4) CAPITAL AND SURPLUS
The Company has authorized 500,000 shares of $100 par value cumulative,
floating rate preferred stock, and 60,600,000 shares of $1 par value common
stock, of which 500,000 and 2,500,000 shares were outstanding respectively as
of December 31, 1995. The Company had authorized 500,000 shares of $10 par
value common stock, of which 375,000 were issued and outstanding at December
31, 1994 (see note 1). Dividends on the preferred stock are payable
quarterly in arrears at the rate of LIBOR plus 1.25% per annum. The
preferred stock is redeemable by the Company at any time after October 5,
2000, to the extent that funds are legally available, at a redemption price
of $100 per share plus accrued and unpaid dividends. At any time after April
5, 1998, the holder of the preferred shares may require the Company to redeem
its shares at a redemption price of $100 per share plus accrued and unpaid
dividends.
Under the Michigan Insurance Code, the Company is required at all times to
maintain a minimum capital and surplus of $1 million. Additionally, dividend
payments can be made only from the unassigned surplus and must be approved by
the Insurance Commissioner if they exceed certain statutory limitations.
Under these provisions, during 1996, any dividend payment prior to October 2
would require the prior approval of the Insurance Commissioner. From October
2 through December 31, 1996, the maximum dividend amount payable by the
Company without the Insurance Commissioner's approval is $55.5 million.
5) REINSURANCE
The Company routinely assumes reinsurance from outside carriers. The effects
of assuming risks, which are recorded principally on the basis of reports
from the ceding companies, are summarized as follows (in millions of dollars):
1995 1994 1993
------ ------ ------
Premiums ..................................... $0.8 $ 0.7 $3.9
Policy benefits .............................. - --- ---
Decrease in aggregate reserves ............... (0.4) (0.6) (1.1)
Commissions .................................. - --- (0.4)
Experience refund ............................ 0.3 1.6 2.3
The Company routinely cedes reinsurance to outside carriers. The principal
effects of these transactions with the assuming companies are summarized as
follows (in millions of dollars):
1995 1994 1993
------ ------ ------
Premiums ..................................... $172.9 $40.1 $22.3
Consideration for recaptured reserves......... 64.9 --- ---
Increase (Decrease) in aggregate reserves
ceded....................................... (26.6) 182.8 (3.5)
Policy benefits .............................. 58.6 16.3 14.7
Commissions .................................. 9.5 4.7 2.3
Experience refunds ........................... (0.6) 3.2 5.7
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
The principal effects of the reinsurance activity associated with
acquisition, as discussed in Note 1, was to decrease reserves by $2,280.5
million and to increase surplus by $121.4 million for the excess of reserves
ceded over consideration paid.
Future policy benefits and claim liabilities are presented net of reinsurance
with other companies in the Statements of Admitted Assets, Liabilities and
Capital and Surplus-Statutory Basis. Included in the transactions with
assuming companies are amounts related to certain lines which have been fully
reinsured back to affiliates of Household International, Inc. as part of the
acquisition (see Note 1). For GAAP purposes, future policy benefits and
claim liabilities are reported according to SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,"
under which future policy benefits and claim liabilities related to
reinsurance ceded activities must be stated on a gross basis. Reinsured
risks aggregate $21.1 billion of insurance in force at December 31, 1995 for
which the Company remains contingently liable.
6) FEDERAL INCOME TAX
Total income tax incurred is greater than the amount computed by applying the
statutory rate to income before Federal income tax and net realized capital
gains (losses) for the following reasons (in millions of dollars):
1995 1994 1993
------ ------ ------
Federal income tax at statutory rate ..... $30.8 $38.1 $29.2
Add (Deduct):
Tax on deferred acquisition costs......... 13.0 10.8 10.2
Reserves ................................. 4.7 7.6 11.8
Leveraged leases ......................... (2.1) (2.8) (3.0)
Amortization of bond discount ............ (2.6) (1.7) (2.4)
Settlement of prior years' tax return .... --- --- (0.2)
Dividend from subsidiaries ............... (8.3) (0.7) (4.5)
Other .................................... (3.1) (0.5) (2.8)
----- ----- -----
Federal income tax (excluding capital gains
tax) $32.4 $50.8 $38.3
----- ----- -----
----- ----- -----
The income tax incurred on net realized capital gains (losses) differs from
the amount computed by applying the statutory rate as follows (in millions of
dollars):
1995 1994 1993
------ ------ ------
Federal income tax at statutory rate ..... $(4.6) 1.8 $23.8
Add (Deduct):
Difference in bases of securities sold.... --- 0.4 4.1
Other..................................... (0.6) --- (0.4)
Prior year return to provision adjustment. (1.2) (2.2) 1.9
----- ----- -----
Federal income tax $(6.4) .0 $29.4
----- ----- -----
----- ----- -----
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
7) ANNUITY RESERVES
The withdrawal characteristics of annuity reserves as of
December 31, 1995 and 1994, are as follows (in millions of
dollars):
1995 1994
-------- --------
Annuity reserves subject to discretionary
withdrawal (without adjustment) at book
value .......................................... $1,497.0 $1,120.0
Annuity reserves subject to discretionary
withdrawal (with adjustment) at book value
less surrender charges ......................... 1,501.3 1,733.2
Annuity reserves not subject to discretionary
withdrawal ..................................... 5.8 1,380.9
-------- --------
Total $3,004.1 $4,234.1
-------- --------
-------- --------
The annuity reserves not subject to discretionary withdrawal are comprised of
periodic payment annuities. As of December 31, 1995, the difference between
estimated fair value and statutory reserves is deemed not to be significant.
8) LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claims adjustment expenses
for the accident and health business is summarized as follows (in thousands
of dollars):
1995 1994 1993
-------- -------- --------
Balance at January 1 $22,607 $26,336 $23,142
Less Reinsurance Recoverables 240 393 660
-------- -------- --------
Net Balance at January 1 22,367 25,943 22,482
Incurred
Current 6,949 10,311 13,072
Prior (2,127) (323) 8,285
-------- -------- --------
4,822 9,988 21,357
Paid
Current 5,081 2,216 2,943
Prior 19,526 11,348 14,953
-------- -------- --------
24,607 13,564 17,896
Net Balance at December 31 2,582 22,367 25,943
Plus Reinsurance Recoverables 3,875 240 393
-------- -------- --------
Balance at December 31 $ 6,457 $22,607 $26,336
-------- -------- --------
-------- -------- --------
As a result of changes in estimates of insured events in prior years, the
provision for claims and claim adjustment expenses (net of reinsurance
recoveries of $.4 million) increased by $8.3 million in 1993 due to longer
duration of credit accident and health disabilities than anticipated.
<PAGE>
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
NOTES TO THE FINANCIAL STATEMENTS - STATUTORY BASIS
(CONTINUED)
The year-end liability for unpaid claims and claim adjustment expenses for
accident and health insurance is included in the Aggregate reserve for
accident and health policies and Policy and contract claims in the Statements
of Admitted Assets, Liabilities and Capital and Surplus -Statutory Basis.
The liability for unpaid claims and claim adjustment expenses for credit life
insurance amounted to $0.5 million, $2.8 million and $2.4 million as of
December 31 1995, 1994, and 1993, respectively.Refer to Note 1 regarding
Policy and Contract Claims for the method used in determining this liability.
<PAGE>
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part A and Part B of
this Registration Statement.
(b) Exhibits:
(1) Resolution of the Board of Directors of Alexander Hamilton Life
Insurance Company of America authorizing establishment of the
Separate Account.1/
(2) Not Applicable.
(3) Principal Underwriting Agreement by and between Alexander
Hamilton Life Insurance Company of America, on its own behalf and
on the behalf of the Separate Account, and FMG Distributors,
Inc.2/
(4) (a) Form of Contract for the Alexander Hamilton Life Insurance
Company of America Variable Annuity.2/
(b) Form of IRA Endorsement.2/
(c) Form of IRA Disclosure and Financial Disclosure Endorsement.2/
(d) Form of TSA Endorsement.2/
(e) Form of 401(a) Endorsement.2/
(5) (a) Form of Application for the Alexander Hamilton Life Insurance
Company of America Variable Annuity Contract.2/
(b) Form of Application Supplement for 1035 Exchange.2/
(6) (a) Charter of Alexander Hamilton Life Insurance Company of
America.1/
(b) By-Laws of Alexander Hamilton Life Insurance Company of
America.1/
(7) Not Applicable.
(8) (a) Participation Agreement by and between AlexanderHamilton Variable
Insurance Trust, Alexander Hamilton Capital Management, Inc. and
Alexander Hamilton Life Insurance Company of America.2/
C-1
<PAGE>
(b) Participation Agreement by and between the Prime Money Fund and
Alexander Hamilton Life Insurance Company of America.2/
(c) Administrative Services Agreement by and between Alexander
Hamilton Life Insurance Company of America and Financial
Administrative Services.2/
(9) Opinion and Consent of Counsel.3/
(10) (a) Consent of Independent Auditors.3/
(b) Consent of Counsel.3/
(11) Not Applicable.
(12) Not Applicable.
- --------------------------------
1/ Incorporated by reference to the initial Registration Statement on Form N-4
for the Alexander Hamilton Variable Annuity Separate Account filed on
February 24, 1994 (Registration No. 33-75714).
2/ Incorporated by reference to the Registration Statement on Form N-4 for the
Alexander Hamilton Variable Annuity Separate Account filed on September 8,
1995 (Registration No. 33-75714).
3/ Filed herewith
C-2
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name and Principal Position and Offices
Business Address with Depositor
- -------------------- --------------------
David A. Stonecipher Chairman of the Board and
President
Dennis R. Glass Director, Executive Vice
President and Treasurer
John D. Hopkins Director, Executive Vice
President and General Counsel
Kenneth C. Mlekush Director, Executive Vice
President
James T. Ponder Director, Executive Vice
President/Chief Marketing
Officer
E. Jay Yelton Director, Executive Vice
President
Reggie D. Adamson Senior Vice President-
Finance
Darryl D. Andrews Senior Vice President-
Information Technology
Charles P. Elam Senior Vice President and
Annuity Actuary
John C. Ingram Senior Vice President-
Securities
Hal B. Phillips Senior Vice President and
Life Actuary
Loretta Abrams Vice President-
Underwriting/Issue
Dale Cooper Vice President-Variable
Products
Gary E. Dace Vice President-Financial
Institutions
C. Lindsay Ingram Vice President-Individual
In-Force Operations
Richard McCarter Vice President-Marketing
Services
Robert A. Reed Vice President and
Secretary
Jimmy W. Shoffner Vice President-Financial
Reporting
Richard T. Stange Vice President and Deputy
General Counsel
Francis A. Sutherland Vice President-Government
Relations
Dennis J. Swanick Vice President-Treasury
Joe E. Davis Second Vice President and
Associate Actuary
Donna L. Drew Second Vice President-
Annuity Network
Clyde Honaker, Jr. Second Vice President and
Site Manager - Lexington
Bonita G. Johnson Second Vice President and
Associate Actuary
Kristine K. Kattmann Second Vice President and
Associate Actuary
Alan D. Roman Second Vice President-
Agency
Philip T. Johnson Second Vice President-
Accounting
Russell Peck Director-Controller
James St. Louis Director-Marketing Events
Timothy Greene Director-Advanced Sales
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
- ---------------------------
*/ Except as otherwise noted, the Principal business address for each officer
and director is 100 N. Greene St., Greensboro, North Carolina, 27401.
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<PAGE>
The Company owns the assets comprising each Variable Subaccount of the
Registrant. The Company is an wholly-owned subsidiary of Jefferson-Pilot
Corporation.
Separate financial statements are filed for the Registrant. All of Jefferson-
Pilot Corporation's subsidiaries' financial statements are included in Jefferson
Pilot Corporation's consolidated financial statements.
The following is a list of corporations controlled by Jefferson-Pilot
Corporation:
Organized % Voting
Under Stock
Names of Subsidiaries Laws of: Owned by
- --------------------- Parent
--------- --------
Jefferson-Pilot Life Insurance Company North Carolina 100%
JP Investment Management Company North Carolina 100%
Jefferson-Pilot Investor Services, Inc. North Carolina 100%
Jefferson-Pilot Communications Company North Carolina 100%
Alexander Hamilton Life Insurance Company Michigan 100%
Alexander Hamilton Capital Management, Inc. Michigan 100%
Omitted from the list are subsidiaries of Jefferson-Pilot Corporation and the
other companies listed which, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary. Since none of the
companies listed is a subsidiary of the registrant, only the financial
statements of the registrant are filed.
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<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 12, 1996, there were 4 Owners of the Contracts.
ITEM 28. INDEMNIFICATION
The following provisions regarding the Indemnification of Directors and Officers
of the Depositor are applicable:
Section 450.1562 of Michigan Compiled Laws allows a corporation to indemnify a
person who was or is party or is threatened to be made a party to a threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he or she is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, or other enterprise, whether for profit or not, against
expenses, including attorneys' fees, and amounts paid in settlement actually and
reasonably incurred by the person in connection with the action or suit, if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation or its shareholders.
Indemnification shall not be made for a claim, issue, or matter in which the
person has been found liable to the corporation.Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "1933 Act") may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company
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<PAGE>
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person in connection with
the securities being registered), the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) FMG Securities Distributors, Inc. does not act as principal underwriter for
other investment companies.
(b) The Directors and Officers of FMG Distributors, Inc., the principal
underwriter for the Registrant, are as follows:
NAME AND PRINCIPAL POSITIONS AND
BUSINESS ADDRESS UNDERWRITER OFFICES WITH
---------------- ----------- -------------
James Kaiser President
Marilyn Kaiser Treasurer
Address:
Stamford Harbor Park
333 Ludlow Street
Stamford, CT 06902
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<PAGE>
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are
maintained by the Company, 33045 Hamilton Court, Farmington Hills, Michigan
48334-3358.
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more than
16 months old for so long as Premium Payments under the Contract may be accepted
(except in accordance with SEC staff no-action correspondence).
(b) Registrant undertakes that it will include either (i) a postcard or
similar written communication affixed to or included
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<PAGE>
in the Prospectus that the applicant can remove to send for a Statement of Addi-
tional Information or (ii) a space in the Contract Application that an applicant
can check to request a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request to the Company at the address or
phone number listed in the Prospectus.
SECTION 403(b) REPRESENTATIONS
The Company represents that it is relying on a no-action letter dated
November 28, 1988, to the American Council of Life Insurance (Ref. No.
IP-6-88), regarding Sections 22(e), 27(c)(1), and 27(d) of the Investment
Company Act of 1940, in connection with redeemability restrictions on Section
403(b) Contracts, and that paragraphs numbered (1) through (4) of that letter
will be complied with.
STATEMENT PURSUANT TO RULE 6c-7: TEXAS OPTIONAL RETIREMENT PROGRAM
The Company and the Separate Account rely on 17 C.F.R. Section 270.6c-7, and
represent that the provisions of that Rule have been or will be complied with.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
the requirements for effectiveness of this registration statement pursuant to
paragraph (b) of rule 485 under the Securities Act of 1933, and has duly
caused this Post-Effective Amendment No. 1 to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Farmington Hills, State of Michigan on this 30th day of April, 1996.
ALEXANDER HAMILTON VARIABLE ANNUITY
SEPARATE ACCOUNT
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF
AMERICA
Depositor
_____________________________________________
David A. Stonecipher
Chairman of the Board, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ David A. Stonecipher
- ------------------------- Chairman of the Board, President April 30, 1996
David A. Stonecipher
/s/ Dennis R. Glass
- ------------------------- Executive Vice President and Treasurer April 30, 1996
Dennis R. Glass
/s/ John D. Hopkins
- ------------------------- Executive Vice President and General Counsel April 30, 1996
John D. Hopkins
/s/ Kenneth C. Mlekush
- ------------------------- Executive Vice President April 30, 1996
Kenneth C. Mlekush
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ James T. Ponder
- ------------------------- Executive Vice President and Chief Marketing April 30, 1996
James T. Ponder Officer
/s/ E. Jay Yelton
- ------------------------- Executive Vice President April 30, 1996
E. Jay Yelton
</TABLE>
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description of Page
No. Exhibit No.
- ------- -------------- ----
(9) Opinion and Consent of Counsel.. . . . . . . . . . . . . . . . . . . .
(10)(a) Consent of Independent Auditors. . . . . . . . . . . . . . . . . . . .
(10)(b) Consent of Counsel.. . . . . . . . . . . . . . . . . . . . . . . . . .
_____________________
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<PAGE>
EXHIBIT (9)
OPINION AND CONSENT OF COUNSEL
April 29, 1996
Board of Directors
Alexander Hamilton Life Insurance
Company of America
33045 Hamilton Court
Farmington Hills MI 48334
Gentlemen:
With reference to the Registration Statement on Form N-4 for the
Allegiance Variable Annuity of Alexander Life Insurance Company of America
filed with the Securities and Exchange Commission covering individual
variable annuity contracts, I have examined such documents and such law as I
considered necessary and appropriate, and on the basis of such examination,
it is my opinion that:
1. Alexander Hamilton Life Insurance Company of America is duly
organized and validly existing under the laws of the State of
Michigan and has been duly authorized to issue individual
variable annuity contracts by the Department of Insurance of the
State of Michigan.
2. The Alexander Hamilton Variable Annuity Separate Account is a
duly authorized and existing separate account established
pursuant to the provisions of Section 925 of the Michigan
Insurance Code.
3. The individual variable annuity contracts, when issued as
contemplated by said Form N-4 Registration Statement,
will constitute legal, validly issued and binding obligations of
Alexander Hamilton Life Insurance Company of America.
I hereby consent to the filing of this opinion as an exhibit to said Form N-4
Registration Statement.
Very truly yours,
ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA
J. Gregory Poole
Counsel
<PAGE>
EXHIBIT (10)(a)
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Consent of Independent Public Accountants
As independent public accountants, we agree to the inclusion in this
Registration Statement of our report, dated April 25, 1996, on the
statutory basis financial statements for Alexander Hamilton Life Insurance
Company of America.
ARTHUR ANDERSEN LLP
Detroit, Michigan
April 26, 1996
<PAGE>
EXHIBIT (10)(b)
CONSENT OF COUNSEL
<PAGE>
[TRANSMITTED ON SA&B LETTERHEAD]
April 22, 1996
Board of Directors
Alexander Hamilton Life Insurance
Company of America
33045 Hamilton Court
Farmington Hills, MI 48334-3358
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Statement of Additional Information filed as part of Post-
Effective Amendment No. 1 to the registration statement on Form N-4 for the
Alexander Hamilton Variable Annuity Separate Account (File No. 33-75714). In
giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN
By:/s/ Frederick R. Bellamy
------------------------
Frederick R. Bellamy
