<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 1997
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. _2_ /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO._3_ /X/
ALEXANDER HAMILTON VARIABLE ANNUITY
-----------------------------------
SEPARATE ACCOUNT
----------------
(EXACT NAME OF REGISTRANT)
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
----------------------------------------------------
(NAME OF DEPOSITOR)
32991 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, Esquire Frederick R. Bellamy, Esquire
Alexander Hamilton Life Insurance Sutherland, Asbill & Brennan,
Company of America L.L.P.
100 N. Greene Street 1275 Pennsylvania Avenue, N.W.
Greensboro, NC 27401 Washington, D.C. 20004-2404
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 2, 1997 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 in connection with File No. 33-75714. Its Rule 24f-2 Notice for fiscal
year ending December 31, 1996, was filed on or about March 3, 1997 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 . Condensed Financial
Information
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>
THE ALLEGIANCE VARIABLE ANNUITY
ISSUED BY
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
32991 HAMILTON COURT
PROSPECTUS FARMINGTON HILLS, MI 48334 MAY 1, 1997
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 II. 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 II 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, 1997, 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 II.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES DIVISION, NOR HAS THE COMMISSION OR
ANY STATE SECURITIES DIVISION 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................... 10
INVESTMENT OPTIONS..................................................... 10
The Separate Account................................................. 10
The Capital Developer Account........................................ 13
THE ALLEGIANCE VARIABLE ANNUITY CONTRACT............................... 14
Contract Application and Issuance of Contracts....................... 14
Premium Payments..................................................... 15
Initial Premium Payment............................................ 15
Additional Premium Payments........................................ 15
Allocation of Premium Payments..................................... 15
Payment Not Honored by Bank........................................ 16
Contract Value....................................................... 16
The Separate Account Value......................................... 16
The Capital Developer Account Value................................ 16
Minimum Contract Value............................................. 16
Transfers............................................................ 17
Dollar Cost Averaging................................................ 18
DISTRIBUTIONS UNDER THE CONTRACT....................................... 18
Surrenders and Partial Withdrawals................................... 18
Systematic Withdrawal Plan........................................... 19
Annuity Payments..................................................... 20
Maturity Date...................................................... 20
Election of Annuity Payment Option................................. 20
Taxes.............................................................. 20
Annuity Payment Options.............................................. 20
Death Benefit........................................................ 23
Death of Contract Owner Prior to Maturity Date..................... 23
IRS Required Distribution.......................................... 23
Death of Annuitant Prior to Maturity Date.......................... 24
Death of Annuitant on or After Maturity Date....................... 24
Death of Contract Owner on or After Maturity Date.................. 24
Contract Owner's Spouse as Beneficiary............................. 24
Payment of Death Benefit to Beneficiary............................ 24
Beneficiary.......................................................... 24
Change of Contract Owner............................................. 24
Restrictions Under the Texas Optional Retirement Program............. 25
Restrictions Under Section 403(b) Plans.............................. 25
CHARGES AND DEDUCTIONS................................................. 25
Surrender Charge..................................................... 25
Market Value Adjustment.............................................. 26
Reduction in Charges for Certain Groups.............................. 27
Mortality and Expense Risk Charge.................................... 27
Administrative Expense Charge........................................ 28
Annual Administrative Fee............................................ 28
Transfer Charge...................................................... 28
Premium Taxes........................................................ 28
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
Money Market Variable Subaccount Yield............................... 35
Other Variable Subaccount Yield...................................... 35
Total Return......................................................... 35
Performance Comparisons.............................................. 36
General.............................................................. 36
Company Ratings...................................................... 36
GENERAL CONTRACT PROVISIONS............................................ 37
LEGAL PROCEEDINGS...................................................... 38
AVAILABLE INFORMATION.................................................. 38
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS.................. 39
APPENDIX I -- SURRENDER CHARGE CALCULATION
APPENDIX II -- MARKET VALUE ADJUSTMENT
FUND PROSPECTUSES
Alexander Hamilton Variable Insurance Trust (AHVIT).................. AHVIT-1
Federated Prime Money Fund II (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
48333-9896. 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 II -- A diversified portfolio of the Insurance
Management Series, managed by Federated Investors.
FIXED ANNUITY OPTIONS -- Annuity Payment Options under the Contract that
provide for scheduled payments.
1
<PAGE>
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 II. 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. 15.) 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 II.
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 II.
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 (both periods are not 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. 13.)
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. 17.)
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. 17.)
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 Consequences," 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. 23.)
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. 25.)
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. 25.)
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
5
<PAGE>
apply to amounts transferred from the one year Interest Rate Guarantee Period
pursuant to the Dollar Cost Averaging Option.
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. 26.)
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. 27.)
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. 28.)
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. 28.)
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. 28.)
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 II.
6
<PAGE>
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.
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. 26.)
TRUST ANNUAL EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
TOTAL FUND(3)
OTHER EXPENSES EXPENSES
(AFTER EXPENSE (AFTER EXPENSE
FUND MANAGEMENT FEES REIMBURSEMENT) REIMBURSEMENT)
- ---------------------------------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Grade Bond................... 0.60% 0.25% 0.85%
High Yield Bond......................... 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......................... 0.80% 0.25% 1.05%
International Equity.................... 1.00% 0.40% 1.40%
Federated Prime Money Fund II (Money
Market)................................ 0.00% 0.80% 0.80%
</TABLE>
- ------------------------
(3) The adviser of the AHVIT Funds voluntarily agreed to limit the fund's
operating expenses during 1996. Without this limit, the fund's total
expenses would have been 2.95% for Investment Grade
7
<PAGE>
Bond, 4.09% for High Yield Bond, 2.66% for Balanced, 2.14% for Growth &
Income, 2.03% for Growth, 2.14% for Emerging Growth and 2.59% for
International Equity. The management fee for the Federated Prime Money Fund
II has been reduced to reflect the voluntary waiver of the management fee.
The total Fund expenses of the Federated Prime Money Fund II were 1.37%
absent the volutnary waiver of the management fee and the voluntary
reimbursement of certain other operating expenses.
EXAMPLES
<TABLE>
<CAPTION>
10
1 YEAR 3 YEARS 5 YEARS YEARS
------- ------- ------- -------
<C> <C> <C> <C> <C>
1. If you surrender the Allegiance Contract you would pay the
following expenses on a $1,000 investment assuming a 5%
annual return on assets: *
Money Market Variable Subaccount............................ $ 95 $ 139 $ 180 $ 324
Investment Grade Bond Variable Subaccount................... $ 95 $ 141 $ 182 $ 330
High Yield Bond Variable Subaccount......................... $ 96 $ 144 $ 188 $ 343
Balanced Variable Subaccount................................ $ 97 $ 145 $ 190 $ 349
Growth & Income Variable Subaccount......................... $ 96 $ 142 $ 185 $ 337
Growth Variable Subaccount.................................. $ 97 $ 145 $ 190 $ 349
Emerging Growth Variable Subaccount......................... $ 97 $ 147 $ 193 $ 355
International Equity Variable Subaccount.................... $ 100 $ 157 $ 211 $ 398
2. If you annuitize the Allegiance Contract for a period of
five years or greater or do not surrender, you would pay
the following expenses on a $1,000 investment assuming a 5%
annual return on assets:
Money Market Variable Subaccount............................ $ 23 $ 75 $ 134 $ 324
Investment Grade Bond Variable Subaccount................... $ 24 $ 76 $ 137 $ 330
High Yield Bond Variable Subaccount......................... $ 25 $ 79 $ 142 $ 343
Balanced Variable Subaccount................................ $ 25 $ 81 $ 145 $ 349
Growth & Income Variable Subaccount......................... $ 24 $ 78 $ 139 $ 337
Growth Variable Subaccount.................................. $ 25 $ 81 $ 145 $ 349
Emerging Growth Variable Subaccount......................... $ 26 $ 82 $ 148 $ 355
International Equity Variable Subaccount.................... $ 29 $ 93 $ 167 $ 398
</TABLE>
- ------------------------
* These expense figures also apply if the Contract is annuitized for less than
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 for
1996. (See "Charges and Deductions," p. 25 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
0.1% of assets, based on an average Contract Value of $30,000.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS ONLY HYPOTHETICAL AND IS NOT AN INDICATION OF PAST
OR FUTURE RETURNS.
CONDENSED FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statments of the Separate Account. The data should be read in conjunction with
the financial statements, related notes, and other financial information
included in the Statement of Additional Information.
The following table sets forth certain information regarding the Variable
Subaccounts for a Contract for the period from commencement of business
operations on February 27, 1996 through December 31, 1996.
8
<PAGE>
The Accumulation Unit values and the number of Accumulation Units
outstanding for each Variable Subaccount for the year ending 1996 are as
follows:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION ACCUMULATION
UNIT VALUE* UNIT VALUE* UNITS**
02/27/96 12/31/96 12/31/96
--------------- ------------- ------------
<S> <C> <C> <C>
Money Market Variable Subaccount...................................... 1.00 1.027 480,732
Investment Grade Bond Variable Subaccount............................. 10.00 10.223 10,568
High Yield Bond Variable Subaccount................................... 10.00 10.812 14,869
Balanced Variable Subaccount.......................................... 10.00 10.801 27,907
Growth & Income Variable Subaccount................................... 10.00 9.975 40,125
Growth Variable Subaccount............................................ 10.00 11.844 53,999
Emerging Growth Variable Subaccount................................... 10.00 10.344 88,358
International Equity Variable Subaccount.............................. 10.00 10.985 101,024
</TABLE>
- ------------------------
* Accumulation Unit values are rounded to the nearest tenth of a cent.
** Accumulation Units are rounded to the nearest unit.
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.
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 48333-9896 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.
9
<PAGE>
* * *
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 II, 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 II.
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
The Company, 32911 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, 1996, the Company had assets of over $9.2
billion. The Company is wholly-owned by Jefferson-Pilot Corporation, a $17.6
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.
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 II 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.
10
<PAGE>
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
II. The Separate Account will invest in shares of the Federated Prime Money
Fund II 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.
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>
11
<PAGE>
<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 II 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.
* * *
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 100 North Greene Street,
Greensboro, North Carolina 27401. 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., ("Warburg G.P."), a New York general partnership, which itself
is controlled by Warburg, Pincus & Co. ("WP&Co."), also a New York general
partnership. Lionel I. Pincus, the managing partner of WP&Co., may be deemed to
control both WP&Co. and Warburg. Warburg G.P. has no business other than being a
holding company of Warburg and its subsidiaries. Warburg is located at 466
Lexington Avenue, New York, New York 10017.
Strong Capital Management Inc. acts as sub-adviser to the Growth Fund.
Strong Capital Management Inc. 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 II. 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
12
<PAGE>
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 II, current copies of which are attached to this
Prospectus. 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. INFORMATION CONTAINED IN THE TRUST'S AND FEDERATED PRIME MONEY FUND
II'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
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 bi-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.
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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. 25 AND "MARKET VALUE
ADJUSTMENT," P. 26.)
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.
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
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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 allocated
to the Variable Account 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, the initial Net Premium Payment
and all other Premium Payments will be allocated among the eight Variable
Subaccounts and the Capital Developer Account 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 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
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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 II. 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. 13.) In addition, interest at specified interest rates is
credited to the Capital Developer Account Value. When amounts are surrendered or
withdrawn from, transferred out 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. 26.) 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.
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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 if less.
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.
- The minimum amount you may transfer from a Variable Subaccount is $250 or
the entire Contract Value remaining in the Variable Subaccount if less.
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
DURING THE ANNUITY PERIOD.
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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.
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,
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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.
- 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
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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 or is not required to be made (e.g., actively employed past age 70 1/2). 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 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. 23.)
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.
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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 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
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Money Fund II. 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.
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. 17.) 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.
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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 earlier of the date of death and 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.
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
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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.
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
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the Contract Owner does not change the Annuitant or the Beneficiary. Changing
the Contract Owner may have tax implications (See "Certain Federal Income Tax
Consequences," 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 II.
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 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.
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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. 27).
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 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
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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. 13), 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. 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.
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.
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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. The Company expects a profit from this 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. 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
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. 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.
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.
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 II, 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
(i.e., a trust or corporation) may only own this Contract if the non-natural
person owns the annuity as an agent for a natural person.
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 advisor 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 Section 2612 of the Code, 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,
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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 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. Section 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.
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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 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
Jefferson-Pilot Investor Services, Inc., is the principal underwriter of the
Contracts. Jefferson-Pilot Investor Services, 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. Jefferson-Pilot Investor Services, Inc., a wholly-owned
subsidiary of Jefferson-Pilot Corporation, is a member of the NASD. Its mailing
address is 100 N. Greene Street, Greensboro, NC 27401. 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 II 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 II
shares held by the Separate Account at regular and special shareholder meetings
of Trust and the Federated Prime Money Fund II 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 II'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
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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 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 II. 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 II 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 II, 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 II 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
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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.
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 and the Annual
Administrative Fee, but the standardized yield figures will not.
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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 Annual Administrative Fee, or 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-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
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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.
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.
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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.
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.
38
<PAGE>
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
Principal Underwriter.................................................... 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
Tax Status 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. 25.)
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>
(N/12) -
1 + I 1
---------
1 + J +
.004 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 0.4% 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 0.4% 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>
ALEXANDER HAMILTON ALLEGIANCE VARIABLE ANNUITY
Offered by
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
32991 Hamilton Court
Farmington Hills, Michigan 48334-9896
------------
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 Life Insurance Company of America. You may obtain a copy
of the Prospectus dated May 1, 1997 by calling 1-800-289-1776, or by writing
to the Company at its Administrative Service Center, P.O. Box 1776, Farmington
Hills, Michigan 48333-9896. 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,
THE ALEXANDER HAMILTON VARIABLE INSURANCE TRUST, AND THE FEDERATED PRIME
MONEY FUND II.
Dated: May 1, 1997
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
Tax Status 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 shares 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.
PRINCIPAL UNDERWRITER
The Company, on its own behalf and on behalf of the Separate Account,
entered into a Principal Underwriter Agreement with Jefferson-Pilot Investor
Services, Inc. ("JPIS") dated November 1, 1996. JPIS is a wholly-owned
subsidiary of Jefferson-Pilot Corporation and is an affiliate of the Company.
During the year ended December 31, 1996 JPIS was paid $25,128.35 in brokerage
commissions, and FMG Distributors, the principal underwriter until being
relaced by JPIS, was paid $25,367.11 in brokerage commissions. FMG was also
paid $41,666.67 for underwriting activities for 1996.
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 Federated Prime Money Fund II'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 II, the types and
quality of portfolio securities held by the Federated Prime Money Fund II,
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.
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 at the end of the one, five or
ten-year period (or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the one, five, or ten-year period.
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.
These figures will not reflect any Premium Taxes.
The following table shows the Standardized Average Annual Total Return for the
Allegiance Variable Annuity subaccounts for the period ended December 31,
1996.
Annualized Cumulative
2/27/96-12/31/96 2/27/96-12/31/96
---------------- ----------------
Money Market Subaccount -8.63% -7.24%
Investment Grade Bond Subaccount -9.18% -7.71%
High Yield Bond Subaccount -2.68% -2.24%
Balanced Subaccount -2.80% -2.34%
Growth & Income Subaccount -11.90% -10.02%
Growth Subaccount 8.89% 7.35%
Emerging Growth Subaccount -7.86% -6.59%
International Equity Subaccount -0.76% -0.63%
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
-------
P
Where:
CTR = the cumulative total return net of a Variable Subaccount's
recurring charges for the period;
ERV = ending redeemable value at the end of the one, five or
ten-year (or other) period (or fractional portion thereof) of a hypothetical
$1,000 Premium Payment made at the beginning of the one, five, or ten-year
(or other) period.
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.
The following table shows the Non-Standardized Average Annual Total Return
for the Allegiance Variable Annuity subaccounts for the period ended
December 31, 1996.
Annualized Cumulative
2/27/96-12/31/96 2/27/96-12/31/96
---------------- ----------------
Money Market Subaccount 3.29% 2.74%
Investment Grade Bond Subaccount 2.69% 2.23%
High Yield Bond Subaccount 9.82% 8.12%
Balanced Subaccount 9.68% 8.01%
Growth & Income Subaccount -0.30% -0.25%
Growth Subaccount 22.51% 18.44%
Emerging Growth Subaccount 4.14% 3.44%
International Equity Subaccount 11.93% 9.85%
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 as either a non-qualified annuity contract or as an annuity
contract purchased for a qualified retirement plan under Section 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 Contract Value will depend on
numerous factors that are explained in the Prospectus (See "Certain Federal
Income Tax Consequences"). 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.
10
<PAGE>
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 II, 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.
Both non-qualified and qualified annuity contracts are required to
comply with certain minimum distribution requirements in order to be treated
as annuity contracts under the Code. Owners of non-qualified annuity
contracts are generally not required to commence distributions under the
annuity contract prior to the maturity date of the contract. However, if the
Owner of a non-qualified annuity dies before the contract matures, the
beneficiary is required to either (i) annuitize the contract within one year
of the Owner's death, or (ii) totally withdraw all funds from the annuity
within five years of the Owner's death. Owners of qualified annuity
contracts are, however, generally required to commence distributions from the
annuity contract when they attain age 70 1/2, and to receive distributions
over the Owner's life expectancy (or over the joint life expectancy of the
Owner and the Owner's spouse). There are special rules that allow a
surviving spouse to take over the annuity contract at the Owner's death and
treat the contract as if it had originally been purchased by the surviving
spouse. If the Owner dies once distributions have begun (for both qualified
and non-qualified annuities), the beneficiary must continue to receive
distributions at least as rapidly as the Owner was receiving them. Further
details regarding the minimum distribution rules are contained in the
Prospectus (See "Death Benefits").
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 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.
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, L.L.P. 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 financial statements
for the Separate Account as of December 31, 1996 and for the year then ended,
audited by Ernst & Young LLP, independent auditors, as stated in their report
appearing elsewhere herein, and are included in reliance on such report given
on the authority of such firm as experts in accounting and auditing.
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, 1996, and for the year then ended, included in this Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as
stated in their report appearing elsewhere herein, and are included in
reliance on such report given on the authority of such firm as experts
in accounting and auditing. Reference is made to said report which includes
an adverse opinion with respect to conformity with generally accepted
accounting principles.
The financial statements of the Company as of December 31, 1995, and
for each of the years in the two-year period ended December 31, 1995 have
been included herein in reliance upon the reports of Arthur Andersen LLP,
independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing. Reference is made to said
report which includes an adverse opinion with respect to conformity with
generally accepted accounting principles.
13
<PAGE>
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31
1996
------------
ASSETS:
Securities of investment companies:
Federated Prime Money Fund II at net
asset value (493,895.000 shares at
$1.00 per share) (Cost - $493,895).... $ 493,895
AHVIT Investment Grade Bond Fund
at net asset value (11,184.250 shares
at $9.66 per share) (Cost - $113,075). 108,040
AHVIT High Yield Bond Fund at net
asset value (15,792.578 shares at
$10.18 per share) (Cost - $164,387). . 160,768
AHVIT Balanced Fund at net asset
value(28,570.334 shares at $10.55 per
share) (Cost - $296,709). . . . . . . 301,417
AHVIT Growth & Income Fund at net
asset value (40,511.876 shares at
$9.88 per share) (Cost - $403,727) . . 400,257
AHVIT Growth Fund at net asset value
(54,382.586 shares at $11.76 per
share) (Cost - $646,712). . . . . . . 639,539
AHVIT Emerging Growth Fund at net
asset value (89,778.183 shares at
$10.18 per share) (Cost - $916,621). . 913,942
AHVIT International Equity Fund at net
asset value (101,903.909 shares at
$10.89 per share) (Cost - $1,100,423). 1,109,734
------------
$ 4,127,592
------------
------------
1
<PAGE>
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31
1996
------------
NET ASSETS:
Variable annuity contracts (Note 8):
Federated Prime Money Fund II. . . . . $ 490,777
AHVIT Investment Grade Bond Fund . . . 107,817
AHVIT High Yield Bond Fund . . . . . . 160,521
AHVIT Balanced Fund. . . . . . . . . . 300,394
AHVIT Growth & Income Fund . . . . . . 398,590
AHVIT Growth Fund. . . . . . . . . . . 638,964
AHVIT Emerging Growth Fund . . . . . . 909,169
AHVIT International Equity Fund. . . . 1,108,940
Alexander Hamilton Life Insurance Company-Sponsor:
Federated Prime Money Fund II (3,034.967
accumulation units at $1.027382 per unit) 3,118
AHVIT Investment Grade Bond Fund (21.836
accumulation units at $10.223328 per unit) 223
AHVIT High Yield Bond Fund (22.913
accumulation units at $10.812040 per unit) 248
AHVIT Balanced Fund (94.726 accumulation
units at $10.800755 per unit). . . . . 1,023
AHVIT Growth & Income Fund (167.183
accumulation units at $9.975347 per unit) 1,667
AHVIT Growth Fund (48.535 accumulation
units at $11.843511 per unit). . . . . 575
AHVIT Emerging Growth Fund (461.414
accumulation units at $10.343573 per unit) 4,773
AHVIT International Equity Fund (72.231
accumulation units at $10.984824 per unit) 793
------------
$ 4,127,592
------------
------------
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
For the Period
Ended December 31
1996
------------
Investment Income:
Dividend income . . . . . . . . . . $ 101,068
Capital gain distribution from investment
companies . . . . . . . . . . . . -
------------
Expenses:
Mortality and expense fee (Note 3). 12,403
Administrative charges. . . . . . . 17
------------
Net Investment income. . . . . . . . . 88,648
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain on investments . . . 23,618
Unrealized (depreciation) of investments (7,957)
------------
Net gain on investments. . . . . . . . 15,661
------------
Net increase in net assets from operations $ 104,309
------------
------------
For the Period Ended
December 31, 1996
-------------------
STATEMENT OF CHANGES IN NET ASSETS
Net assets at beginning of period. . . $ -
Net increase in net assets from operations 104,309
Net contract purchase payments . . . . 4,022,456
Set aside for sponsor. . . . . . . . . 12,420
Benefits paid. . . . . . . . . . . . . (10,070)
Net transfer of reserves to sponsor. . (1,523)
------------
Net assets at end of period. . . . . . $ 4,127,592
------------
------------
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. HISTORY
The Alexander Hamilton Variable Annuity Separate Account ("Account") was
established by resolution of the Board of Directors of Alexander Hamilton Life
Insurance Company of America ("Sponsor") on January 24, 1994. The Account has
been registered as a unit investment trust under the Investment Company Act of
1940 to receive and invest payments made by purchasers of variable annuity
contracts.
The fund began conducting business on February 8, 1996.
During 1996, eight sub-accounts were established in connection with the sale of
variable annuity products. Each sub-account reflects the investment performance
of a specific underlying mutual fund. Subject to certain limitations and
restrictions, a variable annuity contractholder may elect to have net purchase
payments credited to any of the sub-accounts. Prior to the commencement of
annuity payments, a contractholder may elect to transfer accumulation units
among sub-accounts, subject to certain minimum transfer amounts.
Contractholders may also transfer accumulation units after payments begin under
a variable annuity payment option. No transfers are permitted under a fixed
annuity payment option. Contractholders may also allocate purchase payments or
transfer amounts into or out of the "Fixed Account", which is maintained in the
general account of the sponsor. The sponsor guarantees that the fixed account
accumulation value will accrue interest at an annual effective rate of not less
than 3%, although the sponsor may, at its sole discretion, credit interest in
excess of the guaranteed rate. The Fixed account accumulation values are not
charged a mortality and expense fee or an administrative fee.
In accordance with the terms of the contracts, the payments are invested in
shares of the Alexander Hamilton Variable Insurance Trust (AHVIT) Investment
Grade Bond Fund, High Yield Bond Fund, Balanced Fund, Growth & Income Fund,
Growth Fund, Emerging Growth Fund, International Equity Fund, and the Federated
Prime Money Fund II at the net asset value of such shares on the date payments
are received. The accumulation of net asset values at the date shares are
acquired represents cost.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION
The investments in the sub-accounts are carried in the Statement of Assets and
Liabilities at net asset value, which is market value at December 31, 1996.
Investment transactions are accounted for on the date the order to buy or sell
is executed (trade date).
INCOME
Investment income consists of dividend income (both ordinary and capital gains)
and is recognized on the ex-dividend date. All distributions received are
reinvested in the respective sub-accounts. Realized investment gains and losses
on investments are determined using average cost.
4
<PAGE>
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEES
In accordance with the provisions of the variable annuity contracts, specified
amounts are set aside for the Sponsor to cover the assumption of mortality and
expense risks, sales and administrative expenses, and state premium taxes. The
mortality and expense fee is 1.25%, and the administrative expense charge is
.15% annually. There is also an annual administration fee which is the lesser
of $30 or 2% of the contract value on the last day of the year.
4. FEDERAL INCOME TAXES
Operations of the Account are taxed with those of the Sponsor. Under existing
federal income tax law, no taxes are payable on the transactions of the Account.
5. USE OF ESTIMATES
The accompanying financial statements of the Account have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements of insurance companies requires management to make
estimates that affect amounts reported in the financial statements and
accompanying notes. Such estimates could change in the future as more
information becomes known, which could impact the amounts reported and disclosed
herein.
6. REMUNERATION
The Account pays no remuneration to directors, advisory boards, officers, or
such other persons who may from time to time perform services for the Account.
7. ACCUMULATION UNITS
Changes in the number of accumulation units are as follows:
1996
---------------
MONEY MARKET DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 5,484,943.240
Redemptions and charges. . . . . . . . (5,004,211.417)
---------------
Units outstanding at end of period . . 480,731.823
---------------
---------------
INVESTMENT GRADE BOND DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 10,675.871
Redemptions and charges. . . . . . . . (107.899)
---------------
Units outstanding at end of period . . 10,567.972
---------------
---------------
5
<PAGE>
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HIGH YIELD BOND DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 19,754.905
Redemptions and charges. . . . . . . . (4,885.515)
-------------
Units outstanding at end of period . . 14,869.390
-------------
-------------
BALANCED DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 38,090.687
Redemptions and charges. . . . . . . . (10,183.654)
-------------
Units outstanding at end of period . . 27,907.033
-------------
-------------
GROWTH & INCOME DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 57,722.822
Redemptions and charges. . . . . . . . (17,598.171)
-------------
Units outstanding at end of period . . 40,124.651
-------------
-------------
GROWTH DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 74,303.386
Redemptions and charges. . . . . . . . (20,304.264)
-------------
Units outstanding at end of period . . 53,999.122
-------------
-------------
EMERGING GROWTH DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 147,820.559
Redemptions and charges. . . . . . . . (59,462.128)
-------------
Units outstanding at end of period . . 88,358.431
-------------
-------------
INTERNATIONAL EQUITY DIVISION
Units outstanding at beginning of period 0.000
Units purchased. . . . . . . . . . . . 127,401.544
Redemptions and charges. . . . . . . . (26,377.292)
-------------
Units outstanding at end of period . . 101,024.252
-------------
-------------
6
<PAGE>
THE ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. VARIABLE ANNUITY CONTRACTS
Net asset values for variable annuity contracts are based on the following
accumulation units, unit values and annuity funds:
<TABLE>
<CAPTION>
Accumulation Unit Total
Units Value Value
-------------- ---------- -----------
<S> <C> <C> <C>
FEDERATED PRIME MONEY FUND II
DECEMBER 31, 1996
Qualified/non-qualified units. . . . . 477,696.856 $ 1.027382 $ 490,777
-----------
$ 490,777
-----------
-----------
AHVIT INVESTMENT GRADE BOND FUND
DECEMBER 31, 1996
Qualified/non-qualified units. . . . . 10,546.136 $ 10.223328 $ 107,817
-----------
$ 107,817
-----------
-----------
AHVIT HIGH YIELD BOND FUND
DECEMBER 31, 1996
Qualified/non-qualified units. . . . . 14,846.477 $ 10.812040 $ 160,521
-----------
$ 160,521
-----------
-----------
AHVIT BALANCED FUND
DECEMBER 31, 1996
Qualified/non-qualified units. . . . . 27,812.307 $ 10.800755 $ 300,394
-----------
$ 300,394
-----------
-----------
AHVIT GROWTH & INCOME FUND
DECEMBER 31, 1996
Qualified/non-qualified units. . . . . 39,957.468 $ 9.975347 $ 398,590
-----------
$ 398,590
-----------
-----------
AHVIT GROWTH FUND
DECEMBER 31, 1996
Qualified/non-qualified units. . . . . 53,950.587 $ 11.843511 $ 638,964
-----------
$ 638,964
-----------
-----------
AHVIT EMERGING GROWTH FUND
DECEMBER 31, 1996
Qualified/non-qualified units. . . . . 87,897.017 $ 10.343573 $ 909,169
-----------
$ 909,169
-----------
-----------
AHVIT INTERNATIONAL EQUITY FUND
DECEMBER 31, 1996. . . . . . . . . . 100,952.021 $ 10.984824 $ 1,108,940
-----------
Qualified/non-qualified units. . . . . $ 1,108,940
-----------
-----------
</TABLE>
7
<PAGE>
Report of Independent Auditors
Contractholders of The Alexander Hamilton Variable Annuity
Separate Account of Alexander Hamilton Life Insurance Company of America
Board of Directors, Alexander Hamilton Life Insurance Company of America
We have audited the accompanying statement of assets and liabilities of The
Alexander Hamilton Variable Annuity Separate Account of Alexander Hamilton Life
Insurance Company of America as of December 31, 1996, and the related
statements of operations and changes in net assets for the period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31, 1996, by
correspondence with the fund managers. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton Life Insurance Company of
America at December 31, 1996, the results of their operations and the changes
in their net assets for the period then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
April 16, 1997
<PAGE>
Alexander Hamilton Life Insurance Company of America
Statements of Admitted Assets, Liabilities,
Capital and Surplus - Statutory Basis
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Bonds $4,662,300 $4,846,685
Stocks 103,136 68,694
Mortgage loans 277,425 156,270
Real Estate 35,453 38,855
Policy loans 96,932 85,649
Cash and short-term investments 39,455 82,631
Due and uncollected premiums (782) 5,197
Investment income due and accrued 72,138 75,555
Federal income tax recoverable 16,791 -
Receivable from parent, subsidiaries and affiliates 27,311 -
Separate account assets 4,128 -
Other assets 81,382 78,934
-------------------------
Total admitted assets $5,415,669 $5,438,470
-------------------------
-------------------------
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserve for life policies $4,746,814 $4,922,304
Aggregate reserve for accident and health policies 1,993 2,008
Policy and contract claims 34,779 14,598
Interest maintenance reserve 30,607 27,540
Asset valuation reserve 72,705 75,296
Remittances and items not allocated 26,477 (1,909)
Borrowed money 63,266 18,307
Net adjustment in assets and liabilities due to
foreign exchange rates 33 33
Payable to parent, subsidiaries and affiliates 14,336 49
Separate account liabilities 4,128 -
Other liabilities 97,175 98,523
-------------------------
Total liabilities 5,092,313 5,156,749
Capital and Surplus:
Common capital stock 2,500 2,500
Preferred capital stock 50,000 50,000
Surplus note 51,220 51,230
Gross paid-in and contributed surplus 94,987 94,987
Unassigned surplus 124,649 83,004
-------------------------
Total capital and surplus 323,356 281,721
-------------------------
Total liabilities and capital and surplus $5,415,669 $5,438,470
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Statements of Operations - Statutory Basis
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Income:
Premiums and other considerations $ 506,126 $1,088,923 $1,238,920
Net investment income 395,791 567,417 513,039
Consideration for recaptured reserves - 64,907 -
Other income 19,589 13,514 9,660
----------------------------------------
Total income 921,506 1,734,761 1,761,619
Policy benefits:
Death benefits 72,247 79,806 79,801
Annuity benefits 66,808 169,064 209,825
Disability benefits 3,048 9,739 13,292
Surrender and other fund withdrawals 444,540 526,965 342,980
(Decrease) increase in aggregate reserves (181,885) 704,015 724,594
(Decrease) increase in liability
for premium and other deposit funds (143) 3,920 (6,090)
Other policy benefits 2,748 5,219 12,044
----------------------------------------
Total benefits 407,363 1,498,728 1,376,446
Commissions and other expenses:
Commissions on premiums and annuity
considerations 52,719 74,337 97,530
General insurance expenses 35,560 51,045 58,268
Insurance taxes, licenses and fees 14,009 20,595 20,174
Consideration for reinsurance 319,294 - -
Other expenses 9,717 2,116 99,669
----------------------------------------
Total commissions and other expenses 431,299 148,093 275,641
Income before dividends to policyholders,
federal income tax and net realized
capital gains (losses) 82,844 87,940 109,532
Dividends to policyholders 39 51 683
----------------------------------------
Income before federal income tax and
net realized capital gains (losses) 82,805 87,889 108,849
Federal income tax (excluding capital
gains tax) 24,432 32,419 50,791
----------------------------------------
Income before net realized capital gains
(losses) 58,373 55,470 58,058
Net realized capital (losses) gains (net of
tax expense and after-tax IMR transfer) (9,948) (6,328) 4,186
----------------------------------------
Net income $ 48,425 $ 49,142 $ 62,244
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Statements of Capital and Surplus - Statutory Basis
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS
COMMON PREFERRED PAID-IN AND
CAPITAL CAPITAL SURPLUS CONTRIBUTED UNASSIGNED
STOCK STOCK NOTE SURPLUS SURPLUS TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $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 - 51,230 39,649 244,946 339,575
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 51,230 94,487 83,004 281,721
Net income - - - - 48,425 48,425
Change in net unrealized capital
gains - - - - 6,249 6,249
Change in non-admitted assets - - - - 1,537 1,537
Change in asset valuation reserve - - - - 2,591 2,591
Changes in surplus notes - - (10) - 10 -
Other surplus adjustments - - - - (1,729) (1,729)
Change in surplus due to
reinsurance - - - - (10,519) (10,519)
Dividends to stockholders - - - - (4,919) (4,919)
----------------------------------------------------------------------------------
Balance at December 31, 1996 $2,500 $50,000 $51,220 $94,987 $124,649 $323,356
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Statements of Cash Flow - Statutory Basis
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Premiums, policy proceeds and other considerations
received, net of reinsurance paid $ 513,506 $ 1,087,678 1,241,492
Net investment income received 407,051 599,864 524,150
Commission and expense allowances received on
reinsurance ceded 14,332 7,910 3,107
Benefits paid (594,961) (807,601) (662,294)
Insurance expenses paid (109,560) (150,701) (171,229)
Net transfers to separate accounts (4,011) - -
Dividends paid to policyholders (39) (51) (1,366)
Federal income taxes paid (38,643) (46,578) (54,377)
Other revenues received less other expenses (paid) (317,638) (2,106,616) (81,799)
-------------------------------------------
Net cash (used in) provided by operations (129,963) (1,416,095) 797,684
INVESTMENT ACTIVITIES
Proceeds from sales, maturities, or repayments
of investments:
Bonds 1,164,669 2,784,093 1,784,399
Stocks 15,910 1,610,688 1,685,047
Mortgage loans 28,978 82,346 66,936
Real estate 2,778 8,311 15,208
Other invested assets 1,493 49,109 6,441
Miscellaneous proceeds 66 771 335
-------------------------------------------
Total investment proceeds 1,213,894 4,535,318 3,558,366
Taxes (paid) recovered on capital gains or losses (196) 6,402 32
-------------------------------------------
Net proceeds from sales, maturities, or repayments
of investments 1,213,698 4,541,720 3,558,398
Cost of investments acquired:
Bonds (981,207) (1,783,459) (2,290,143)
Stocks (43,063) (1,756,454) (1,657,928)
Mortgage loans (148,622) (75,722) (8,600)
Real estate (343) (1,014) (2,197)
Other invested assets (2,122) - -
Miscellaneous applications (4,586) (4,744) (8,973)
-------------------------------------------
Total cost of investments acquired (1,179,943) (3,621,393) (3,967,841)
Net (increase) decrease in policy loans (11,283) 458,296 (183,302)
-------------------------------------------
Net cash provided by (used in) investment activities 22,472 1,378,623 (592,745)
</TABLE>
<PAGE>
Alexander Hamilton Life Insurance Company of America
Statements of Cash Flow - Statutory Basis (continued)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
FINANCING AND MISCELLANEOUS ACTIVITIES
Other cash provided:
Capital and surplus paid-in $ (10) $ 105,338 $ -
Borrowed money received 44,959 18,307 -
Other sources 59,251 35,738 104,229
----------------------------------------
Total other cash provided 104,200 159,383 104,229
Other cash applied:
Dividends paid to stockholder (4,058) (197,961) -
Interest on indebtedness (8,940) (6,043) -
Other applications, net (26,887) (163,322) (51,296)
----------------------------------------
Total other cash applied (39,885) (367,326) (51,296)
Net cash provided by (used in) financing and
miscellaneous activities 64,315 (207,943) 52,933
----------------------------------------
Net (decrease) increase in cash and short-term
investments (43,176) (245,415) 257,872
Cash and short-term investments at beginning of year 82,631 328,046 70,174
----------------------------------------
Cash and short-term investments at end of year $ 39,455 $ 82,631 $328,046
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OWNERSHIP
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
all states except New York and in Canada. The Company primarily writes ordinary
life, universal life, fixed annuity and variable annuity products through
several distribution channels.
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 $475.0 million in cash and $50.0
million in redeemable preferred stock to Household Group, Inc., and $50.0
million paid to Household International, Inc. by GARCO Capital Corp., a
subsidiary of Jefferson-Pilot Corporation, for the outstanding $50.0 million
surplus note 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 and 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.
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. 1994 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.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Substantially all of the life and single premium deferred annuity business of
the Company and FAHL was included in the acquisition. Certain credit life and
accident and health insurance, Periodic Payment Annuity (PPA) 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.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses for the reporting
period. Those estimates are inherently subject to change and actual results
could differ from those estimates. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates are asset valuation allowances, policy liabilities and the potential
effects of resolving litigated matters.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Michigan
Insurance Bureau, which practices differ from generally accepted accounting
principles ("GAAP").
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 GAAP, the periods of different ownership
would not be combined in the Company's financial statements.
The more significant variances from GAAP are as follows:
INVESTMENTS: Investments in bonds and mandatorily redeemable preferred stocks
are reported at amortized cost or market value based on their National
Association of Insurance Commissioners ("NAIC") rating; for GAAP, such fixed
maturity investments would be designated at purchase as held-to-maturity,
trading, or available-for-sale. Held-to-maturity fixed investments would be
reported at amortized cost, and the remaining fixed maturity investments are
reported at fair value with unrealized holding gains and losses reported in
operations for those designated as trading and as a separate component of
shareholder's equity for those designated as available-for-sale.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments in real estate are reported net of related obligations rather than
on a gross basis. Real estate owned and occupied by the Company is included in
investments rather than reported as an operating asset. Changes between cost
and admitted asset investment amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account.
Valuation allowances, if necessary, are established for mortgage loans based on
the difference between the unpaid loan balance and the estimated fair value of
the underlying real estate when such loans are determined to be in default as to
scheduled payments. Such allowances are based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, if
foreclosure is probable, on the estimated fair value of the underlying real
estate. Under GAAP, valuation allowances would be established when the Company
determines it is probable that it will be unable to collect all amounts (both
principal and interest) due according to the contractual terms of the loan
agreement. For statutory reporting, the initial valuation allowance and
subsequent changes in the allowance for mortgage loans are charged or credited
directly to unassigned surplus, rather than being included as a component of
earnings as would be required under GAAP.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining period
to maturity based on groupings of individual securities sold in five-year bands.
That net deferral is reported as the interest maintenance reserve (IMR) in the
accompanying statements of admitted assets, liabilities, capital and surplus.
Realized capital gains and losses are reported in income net of federal income
tax and transfers to the interest maintenance reserve. Under GAAP, realized
capital gains and losses would be reported in the income statement on a pretax
basis in the period that the asset giving rise to the gain or loss is sold. The
IMR balance at December 31, 1996 includes 1996 net capital gains (net of tax) of
$4.6 million transferred to IMR, less 1996 amortization of $1.5 million. The
IMR balance at December 31, 1995 included net capital losses for the year (net
of tax) of $0.4 million transferred to IMR, less amortization for the year of
$1.4 million and the release of $30.4 million deferred gains for the year 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, Inc. (see Note 1). The IMR was no longer required for the
Company to maintain interest spreads and thus was released as permitted by NAIC
guidelines.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The asset valuation reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, valuation
allowances would be provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines would be charged
to earnings.
SUBSIDIARIES: The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required under GAAP. Investments in subsidiaries totaled $64.4 million and $28.0
million at December 31, 1996 and 1995, respectively. Investment in subsidiaries
are carried as stock at amounts which are equal to statutory capital and surplus
for insurance companies and GAAP equity for non-insurance companies. Dividends
from subsidiaries are included in net investment income. The remaining net
change in the subsidiaries' equity is included in the change in net unrealized
capital gains in the statements of capital and surplus amounts.
POLICY ACQUISITION COSTS: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to traditional
life, to the extent recoverable from future policy revenues, would be deferred
and amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit reserves. For
universal life insurance and annuity products, to the extent recoverable from
future gross profits, deferred policy acquisition costs are amortized generally
in proportion to the present value of expected gross profits from surrender
charges and investment, mortality, and expense margins.
NON-ADMITTED ASSETS: Certain assets designated as "non-admitted," principally
capitalized organizational costs, computer software, agents' debit balances and
furniture and equipment, are excluded from the accompanying statements of
admitted assets, liabilities, capital and surplus and are charged directly to
unassigned surplus.
UNIVERSAL LIFE POLICIES: Revenues for universal life policies consist of the
entire premium received and benefits represent the death benefits paid and the
change in policy reserves. Under GAAP, premiums received in excess of policy
charges would not be recognized as premium revenue and benefits would represent
the excess of benefits paid over the policy account value and interest credited
to the account values.
BENEFIT RESERVES: Certain policy reserves are calculated based on statutorily
required interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REINSURANCE: Policy and contract liabilities ceded to reinsurers have been
reported as reductions of the related reserves rather than as assets as would be
required under GAAP. Commissions allowed by reinsurers on business ceded are
reported as income when received rather than being deferred and amortized with
deferred policy acquisition costs.
EMPLOYEE BENEFITS: For purposes of calculating the Company's postretirement
benefit obligation, only vested participants and current retirees are included
in the valuation. Under GAAP, active participants not currently eligible would
also be included. The company follows the provisions of FASB Statement No. 87,
EMPLOYER'S ACCOUNTING FOR PENSIONS.
FEDERAL INCOME TAXES: Deferred federal income taxes are not provided for
differences between the financial statement amounts and tax bases of assets and
liabilities.
POLICYHOLDER DIVIDENDS: Policyholder dividends are recognized when declared
rather than over the term of the related policies.
SURPLUS NOTES: Surplus notes are reported as surplus rather than as
liabilities.
The effects of the foregoing variances from GAAP on the accompanying
statutory-basis financial statements have not been determined, but are presumed
to be material.
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks, common stocks, short-term investments and derivative
instruments are stated at values prescribed by the NAIC, as follows:
Bonds not backed by other loans are principally stated at amortized
cost using the interest method.
Loan-backed bonds and structured securities are valued at amortized
cost using the interest method including anticipated prepayments.
Prepayment assumptions are obtained from dealer surveys or internal
estimates and are based on the current interest rate and economic
environment. The retrospective adjustment method is used to value all
such securities.
Short-term investments include investments with maturities of less
than one year at the date of acquisition.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Redeemable preferred stocks are reported at cost or amortized cost and
nonredeemable preferred stocks are reported at market value as
determined by the Securities Valuation Office of the NAIC.
Common stocks are reported at market value as determined by the
Securities Valuation Office of the NAIC and the related unrealized
capital gains or losses are reported directly in unassigned surplus
without any adjustment for federal income taxes.
The Company uses interest rate swaps as part of its overall interest
rate risk management strategy for certain investments. The Company
values all derivative instruments on a consistent basis with the
hedged item. Upon termination, gains and losses on those instruments
are included in the carrying values of the underlying hedged items and
are amortized over the remaining lives of the hedged items as
adjustments to investment income or benefits from the hedged items.
Any unamortized gains or losses are recognized when the underlying
hedged items are sold.
Interest rate swap contracts are used to convert the interest rate
characteristics of certain liabilities to match those of the related
investments supporting those liabilities. The net interest effect of
such swap transactions is reported as an adjustment of interest
credited on the hedged liabilities as incurred.
Mortgage loans are reported at unpaid principal balances, less allowance for
impairments.
Policy loans are reported at unpaid principal balances.
Real estate occupied by the company is reported at depreciated cost and other
real estate is reported at the lower of depreciated cost or fair value.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of the properties.
Realized capital gains and losses are determined using a specific identification
method. Changes in admitted asset carrying amounts of bonds, mortgage loans,
common and nonredeemable preferred stocks are credited or charged directly to
unassigned surplus.
FURNITURE AND EQUIPMENT
The Company's electronic data processing equipment is reported at cost, less
accumulated depreciation and is included in other assets in the Statements of
Admitted Assets, Liabilities, Capital and Surplus. Electronic data processing
equipment and other furniture and equipment is depreciated on a straight-line
basis. Asset balances, accumulated depreciation balances, and depreciation
expense are not significant.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMIUMS
Ordinary and credit insurance premiums are recognized as revenue when due.
Universal life and annuity premiums are recognized as revenue when collected.
Accident and health premiums are earned pro-rata over the terms of the policy.
BENEFITS
Life and annuity benefit reserves are developed by actuarial methods and are
determined based on published tables using statutorily specified interest rates
and valuation methods that will provide, in the aggregate, reserves that are
greater than or equal to the minimum or guaranteed policy cash values or the
amounts required by the Michigan Insurance Bureau. The Company waives deduction
of deferred fractional premiums on the death of life and annuity policy insureds
and returns any premium beyond the date of death. Surrender values on policies
do not exceed the corresponding benefit reserves. Additional reserves are
established when the results of cash flow testing under various interest rate
scenarios indicate the need for such reserves or the net premiums exceed the
gross premiums on any insurance in force. For 1996 and 1995, all additional
reserves were ceded, as they related to blocks of business covered by
reinsurance agreements.
For substandard table ratings, mean reserves are based on 125% to 500% of
standard mortality rates. For flat extra ratings, mean reserves are based on
the standard or substandard mortality rates increased by one to twenty-five
deaths per thousand. As of December 31, 1996, reserves of $30.7 million are
recorded on inforce amounts of $3,273.2 million for which gross premiums are
less than the net premiums according to the standard of valuation required by
the State of Michigan. Tabular interest, tabular less actual reserve released,
and tabular cost have been determined by formula. Tabular interest on funds not
involving life contingencies is calculated as one-hundredth of the product of
such valuation rate of interest times the mean of the amount of funds subject to
such valuation rate of interest held at the beginning and end of the year of
valuation.
The liabilities related to policyholder funds left on deposit with the Company
generally are equal to fund balances less applicable surrender charges.
POLICY AND CONTRACT CLAIMS
Policy and contract claims are accrued for 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
estimates based on management's judgment with regard to the ultimate exposure to
the Company. For accident and health policies, those estimates are subject to
the effects of trends in claim severity and frequency. Although considerable
variability is inherent in such estimates, management
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
believes that the reserves for unpaid claims are adequate. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current operations.
BORROWED MONEY
At December 31, 1996 and 1995, the Company has an outstanding liability for
borrowed money in the amount of $18.3 million payable in Canadian dollars. The
note bears interest at 6% annually. Also, at December 31, 1996, the Company has
$44.5 million outstanding under a reverse repurchase agreement, plus accrued
interest. Interest accrues at 5.5% and the agreement matures February 18, 1997.
The borrowings are collateralized by invested assets in the general account of
the Company with both amortized cost and fair value of $46.7 million at December
31, 1996. Interest expense was $3.3 million and $1.1 million in 1996 and 1995,
respectively.
REINSURANCE
Reinsurance premiums and benefits paid or provided are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts.
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, Capital and Surplus.
GUARANTY-FUND ASSESSMENTS
Guaranty-fund assessments are accrued when the Company receives notice that an
insolvency has occurred for which the Company will be assessed.
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying Statements
of Admitted Assets, Liabilities, Capital and Surplus represent funds that are
separately administered, principally for annuity contracts, and for which the
contractholder, rather than the Company, bears the investment risk. Separate
account contractholders have no claim against the assets of the general account
of the Company. Separate account assets are reported at market value. The
operations of the separate accounts are not included in
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the accompanying financial statements. Fees charged on separate account
policyholder deposits are included in other income.
RECLASSIFICATION
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the current year presentation. The reclassifications
had no effect on previously reported net income or total capital and surplus.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Michigan Insurance
Bureau. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC currently is in the process of recodifying
statutory accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices. Accordingly,
that project, which is expected to be completed in 1997, will likely change, to
some extent, prescribed statutory accounting practices, and may result in
changes to the accounting practices that the Company uses to prepare its
statutory-basis financial statements. The impact of any such changes on the
Company's statutory-surplus cannot be determined at this time and could be
material.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
2. INVESTMENT SECURITIES
The statement value and estimated fair value of investments in bonds are
presented in the following tables (in thousands). Fair values have been
determined primarily from fair values published by the NAIC Securities
Valuation Office (SVO). In some instances, the SVO's fair values for certain
bonds are deemed to equal amortized cost.
<TABLE>
<CAPTION>
DECEMBER 31,1996
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS (LOSSES) VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Government Bonds:
U.S. Treasuries $ 20,164 $ 175 $ (90) $ 20,249
Agency Mortgage -
Backed/CMOs 874,113 - - 874,113
State & Municipal 476 15 - 491
Other Government Bonds 147,543 2,921 (56) 150,408
Corporate Bonds:
Asset-Backed Securities 281,930 - - 281,930
CMOs 414,611 - - 414,611
Other Corporate Bonds 2,892,213 50,631 (6,477) 2,936,367
Affiliate bonds 31,250 - - 31,250
----------------------------------------------------------
Total $4,662,300 $ 53,742 $ (6,623) $4,709,419
----------------------------------------------------------
----------------------------------------------------------
DECEMBER 31,1996
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS (LOSSES) VALUE
---------------------------------------------------------
Government Bonds:
U.S. Treasuries $ 84,149 $ 5,028 $ (2) $ 89,175
Agency Mortgage -
Backed/CMOs 738,324 22 - 738,346
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
Other Corporate Bonds 2,960,286 89,693 (5,898) 3,044,081
-----------------------------------------------------------
Total $4,846,685 $106,107 $(13,446) $4,939,346
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
2. INVESTMENT SECURITIES (CONTINUED)
The carrying amount of bonds in the balance sheets at December 31, 1996 and 1995
reflects NAIC adjustments of $199 thousand and $297 thousand respectively, to
decrease amortized cost.
The statement value and estimated fair value of bonds at December 31, 1996, by
contractual maturity, is as follows (in thousands):
STATEMENT FAIR
VALUE VALUE
--------------------------
Due in one year or less $ 37,577 $ 37,760
Due after one year through five years 1,083,121 1,092,699
Due after five years through ten years 1,655,281 1,684,522
Due after ten years 597,597 605,714
--------------------------
3,373,576 3,420,695
Mortgage-backed securities 1,288,724 1,288,724
--------------------------
Total $4,662,300 $4,709,419
--------------------------
--------------------------
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Proceeds from the sales of investments in bonds during 1996, 1995 and 1994 were
$972.7 million, $2,455.8 million and $1,444.1 million. Gross gains of $14.1
million and gross losses of $16.0 million were realized on 1996 sales; 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.
Bonds with a par value of $21.3 million and $27.7 million were on deposit
pursuant to regulatory requirements at December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company held unrated or less-than-investment grade
corporate bonds of $303.6 million with an aggregate fair value of $313.0
million. Those holdings amounted to approximately 6.5% of the Company's
investments in bonds and less than 5.6% of the Company's total admitted assets.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
2. INVESTMENT SECURITIES (CONTINUED)
The gross unrealized gains and losses on, and the cost and fair value of,
investments in common stocks and redeemable preferred stocks are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-----------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996
Redeemable preferred stocks $29,550 $ 1,008 $(3,275) $ 27,283
Common stocks 60,792 14,464 (1,670) 73,586
-----------------------------------------------------
Total $90,342 $15,472 $(4,945) $100,869
-----------------------------------------------------
-----------------------------------------------------
At December 31, 1995
Redeemable preferred stocks $33,336 $ 2,456 $(3,250) $ 32,542
Common stocks 28,514 8,365 (1,521) 35,358
-----------------------------------------------------
Total $61,850 $10,821 $(4,771) $ 67,900
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
The Company's mortgage loan portfolio is comprised primarily of conventional
real estate mortgages collateralized by apartment (42%), industrial (17%),
retail (15%), office (10%) and other commercial properties (8%). The remaining
mortgages are collateralized by residential properties. Mortgage loan
underwriting standards emphasize the credit status of a prospective borrower,
quality of the underlying collateral and conservative loan-to-value
relationships. Approximately 37%, 21% and 12% of the stated mortgage loan
balances as of December 31, 1996 are due from borrowers in West South Central
states, South Atlantic states and East North Central states, respectively. No
other geographic region represents as much as 10% of mortgage loans at December
31, 1996.
During 1996, the maximum and minimum lending rates for new mortgage loans were
8.875% and 7.125% for commercial loans. No residential loans were originated in
1996. At the issuance of a loan, the percentage of loan to value on any one
loan, exclusive of insured or guaranteed or purchase money mortgages, does not
exceed 75% for commercial loans or 80% for residential loans. At December 31,
1996, the Company held mortgages aggregating $287 thousand with interest overdue
beyond one year. Non-admitted interest due on those mortgages was $44 thousand
at December 31, 1996. Total non-admitted interest due at December 31, 1996 was
$245 thousand and related entirely to mortgage loans. At December 31, 1996,
there were no amounts of mortgage principle that were non-admitted, no mortgage
loans were subject to prior liens, and mortgage loans with a statement value of
$1.2 million had been converted to loans that require principal or interest
payments be made based upon the cash flows generated by the property serving as
collateral for the loans or that have a diminutive payment requirement. All
properties covered by mortgage loans have fire insurance at least equal
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
2. INVESTMENT SECURITIES (CONTINUED)
to the excess of the loan over the maximum loan that would be allowed on the
land without the building.
The components of the Company's real estate are summarized as follows (in
thousands):
DECEMBER 31
1996 1995
-----------------------
Occupied by the Company:
Buildings and land $ 18,588 $ 18,728
Accumulated depreciation (7,095) (6,680)
-----------------------
Total real estate occupied by the Company 11,493 12,048
Other:
Buildings and land 40,195 44,112
Accumulated depreciation (16,235) (17,305)
-----------------------
Total other real estate 23,960 26,807
-----------------------
Total real estate $ 35,453 $ 38,855
-----------------------
-----------------------
Major categories of the Company's net investment income are summarized as
follows (in thousands):
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------
Income:
Bonds $376,753 $448,845 $426,604
Preferred stocks 2,815 3,169 3,264
Common stocks 592 24,295 3,154
Mortgage loans 18,229 19,077 17,730
Real estate 4,754 7,511 9,017
Derivative investments (260) - 1,147
Policy loans 5,942 64,335 44,568
Short-term investments and cash 1,550 7,526 8,178
Other 1,207 5,741 11,287
---------------------------------
Total investment income 411,582 580,499 524,949
Expenses:
Depreciation 1,634 1,931 2,065
Other 14,157 11,151 9,845
---------------------------------
Total investment expenses 15,791 13,082 11,910
---------------------------------
Net investment income $395,791 $567,417 $513,039
---------------------------------
---------------------------------
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
2. INVESTMENT SECURITIES (CONTINUED)
The Company does not include amounts for the occupancy of Company-owned
properties in real estate income. Non-admitted accrued investment income at
December 31, 1996 amounted to $245 thousand. All accrued investment income at
December 31, 1995 was admitted.
Realized capital gains (losses) are reported net of federal income taxes and
amounts transferred to the IMR for the year ended December 31 as follows (in
thousands):
1996 1995 1994
-------------------------------
Realized capital (losses) gains $ (5,165) $(13,112) $4,989
Less amount transferred to IMR 7,057 (588) 1,285
-------------------------------
(12,222) (12,524) 3,704
Less federal income taxes on realized capital
(losses) gains before effect of transfer to
IMR 196 (6,402) (32)
Plus federal income taxes on realized capital
(losses) gains on amounts transferred to
IMR 2,470 (206) 450
-------------------------------
Net realized capital (losses) gains $ (9,948) $ (6,328) $4,186
-------------------------------
-------------------------------
3. USE OF DERIVATIVES
The Company's investment policy permits the use of derivative financial
instruments such as interest rate swaps in certain circumstances. The following
summarizes open interest rate swaps (notional amounts in millions):
DECEMBER 31
1996 1995
---------------------
Receive-fixed swaps held as hedges of direct
investments:
Notional amount $ 208.7 $ 125.0
Average rate received 5.66% 5.28%
Average rate paid 5.55% 5.72%
Receive-fixed swaps held to modify annuity
crediting rates:
Notional amount $ 12.5 $ -
Average rate received 6.78% -%
Average rate paid 5.56% -%
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
3. USE OF DERIVATIVES (CONTINUED)
Interest rate swaps are used to reduce the impact of interest rate fluctuations
on specific floating-rate direct investments. Interest is exchanged
periodically on the notional value, with the Company receiving the fixed rate
and paying various short-term LIBOR rates on a net exchange basis. The net
amount received or paid under these swaps is reflected as an adjustment to
investment income.
Interest rate swaps are used to modify the interest characteristics of certain
blocks of annuity contract deposits. Interest is exchanged periodically on the
notional value, with the Company receiving a fixed rate and paying a short-term
LIBOR rate on a net exchange basis. The net amount received or paid under this
swap is reflected as an adjustment to annuity benefits.
The Company is exposed to credit risk in the event of non-performance by
counterparties to swap agreements. The Company limits this exposure by entering
into swap agreements with counterparties having high credit ratings and by
regularly monitoring the ratings. The Company's credit exposure on swaps is
limited to the fair value of swap agreements that are favorable to the Company.
The Company does not expect any counterparty to fail to meet its obligation;
however, non-performance would not have a material adverse effect on the
Company's financial position or results of operations. The Company's exposure to
market risk is mitigated by the offsetting effects of changes in the value of
swap agreements and the related credited interest on annuities.
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. Futures contracts were entered into and terminated
during 1995 and 1994 to hedge existing and anticipated investment transactions.
No significant gain or loss was recognized on the 1995 contracts. A capital
loss of $9.7 million was recognized in 1994.
4. SUBSIDIARIES
The Company wholly-owns two insurance subsidiaries. First Alexander Hamilton
Life Insurance Company is domiciled in the state of New York and writes
primarily universal life and annuity business solely in that state. AH
(Michigan) Life Insurance Company (AH(M)) is domiciled in the state of Michigan.
AH(M) was formed in September 1996 by issuing $2.0 million in common stock.
Shortly thereafter, AH(M) reinsurered a block of PPA business initially ceded by
the Company to Household affiliates and a block of annuity business ceded to it
by the Company.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
4. SUBSIDIARIES (CONTINUED)
Statutory-basis financial information of the Company's two insurance company
subsidiaries is summarized as follows (in thousands):
AH (MICHIGAN)
SUMMARY STATUTORY BASIS FIRST ALEXANDER HAMILTON LIFE INSURANCE
BALANCE SHEETS LIFE INSURANCE COMPANY COMPANY
--------------------------------------------
DECEMBER 31 DECEMBER 31
1996 1995 1996
--------------------------- ----------------
Investments $477,546 $396,791 $799,980
Other assets 7,785 12,088 11,833
--------------------------------------------
Total admitted assets $485,331 $408,879 $811,813
--------------------------------------------
--------------------------------------------
Insurance reserves $449,357 $373,665 $768,229
Other liabilities 7,328 7,299 18,947
Capital and surplus 28,646 27,915 24,637
--------------------------------------------
Total liabilities and
capital and surplus $485,331 $408,879 $811,813
--------------------------------------------
--------------------------------------------
AH (MICHIGAN)
SUMMARY STATUTORY BASIS FIRST ALEXANDER HAMILTON LIFE INSURANCE
STATEMENTS OF INCOME LIFE INSURANCE COMPANY COMPANY
--------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
1996 1995 1996
--------------------------- ----------------
Revenues $130,821 $ 97,230 $794,818
Expenses 129,394 94,627 798,926
--------------------------------------------
Net income (loss) $ 1,427 $ 2,603 $ (4,108)
--------------------------------------------
--------------------------------------------
The cost of the Company's investment in the common stock of its subsidiaries was
$51.8 million and $21.2 million at December 31, 1996 and 1995, respectively.
None of the Company's insurance subsidiaries paid dividends to the Company in
any year presented.
The operations and net worth of Alexander Hamilton Capital Management, Inc.
(AHCMI), the Company's wholly-owned capital management company subsidiary, are
not significant.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
5. 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%.
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
rates 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 from 3.0% to 5.0%.
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.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
6. ANNUITY RESERVES
The Company's annuity reserves and deposit fund liabilities that are subject to
discretionary withdrawal (with adjustment), subject to discretionary withdrawal
(without adjustment), and not subject to discretionary withdrawal provisions are
summarized as of December 31 as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal
(with adjustment):
At book value less current surrender
charge $1,149.4 26.3% $1,501.3 33.6%
At market value 4.1 0.1 - -
-----------------------------------------
Total with adjustment or at market
value 1,153.5 26.4 1,501.3 33.6
Subject to discretionary withdrawal
(without adjustment):
At book value with minimal or no
charge or adjustment 1,792.8 41.0 1,513.2 33.9
Not subject to discretionary withdrawal 1,423.7 32.6 1,454.2 32.5
-----------------------------------------
Total annuity reserves and deposit fund
liabilities--before reinsurance 4,370.0 100.0% 4,468.7 100.0%
-------- --------
-------- --------
Less reinsurance ceded 1,748.7 1,464.6
----------- ---------
Total annuity actuarial reserves and
deposit fund liabilities (net) $2,621.3 $3,004.1
---------- ----------
---------- ----------
</TABLE>
The annuity reserves not subject to discretionary withdrawal are comprised
primarily of periodic payment annuities.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
7. 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):
1996 1995 1994
----------------------------------------
Balance at January 1 $6,457 $22,607 $26,336
Less reinsurance recoverables 3,875 240 393
----------------------------------------
Net balance at January 1 2,582 22,367 25,943
Plus claims incurred:
Current 2,931 6,949 10,311
Prior (157) (2,127) (323)
----------------------------------------
2,774 4,822 9,988
Less claims paid:
Current 946 5,081 2,216
Prior 1,833 19,526 11,348
----------------------------------------
2,779 24,607 13,564
Net balance at December 31 2,577 2,582 22,367
Plus reinsurance recoverables 5,697 3,875 240
----------------------------------------
Balance at December 31 $8,274 $ 6,457 $22,607
----------------------------------------
----------------------------------------
The yearend 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, Capital and Surplus. No additional premiums or return
premiums have been accrued as a result of the changes to the prior year's unpaid
claim liability.
The liability for unpaid claims and claim adjustment expenses for credit life
insurance amounted to $295 thousand and $455 thousand as of December 31, 1996
and 1995, respectively.
8. REINSURANCE
The Company attempts to reduce its exposure to significant individual claims by
reinsuring portions of certain individual life insurance policies and annuity
contracts written. The Company reinsures the portion of an individual life
insurance risk that exceeds amounts ranging from $1.0 million to $250 thousand
based on the year of policy issue. The Company assumes portions of the life
risks underwritten by certain other insurers on a limited basis, but amounts
related to assumed reinsurance are not material to the financial statements.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
8. REINSURANCE (CONTINUED)
The principal effects of these transactions with the assuming companies are
summarized as follows (in millions):
1996 1995 1994
---------------------------
Premiums $264.4 $172.9 $40.1
Consideration for recaptured reserves - 64.9 -
Increase (decrease) in aggregate
reserves ceded
416.5 (26.6) 182.8
Policy benefits 200.1 58.6 16.3
Commissions 11.7 9.5 4.7
The principal effects of the reinsurance activity associated with the
acquisition of the Company by Jefferson-Pilot Corporation in 1995, 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.
Amounts payable or recoverable for reinsurance on policy and contract
liabilities are not subject to periodic or maximum limits. At December 31, 1996,
the Company's reinsurance recoverables are not material and no individual
reinsurer owed the Company an amount that was equal to or greater than 3% of the
Company's surplus.
In 1996, 1995, and 1994 the Company did not commute any ceded reinsurance. In
1996, 1995 and 1994, the Company entered into various agreements that reinsured
policies or contracts that were in-force or had existing reserves as of the
effective date of such agreements. The reserve credits as a result of those
transactions were $344.4 million, $1,617.3 million and $182.9 million,
respectively.
The Company, nor any of its related parties, control, either directly or
indirectly, any reinsurers with which the Company conducts business other than
AH(M). As discussed in Note 4, certain annuity business was reinsured in
September 1996 in which the Company transferred $319.3 million in assets and
$349.2 million in reserves to AH(M). No policies issued by the Company have
been reinsured with a foreign company which is controlled, either directly or
indirectly, by a party not primarily engaged in the business of insurance.
The Company has not entered into any reinsurance agreements in which the
reinsurer may unilaterally cancel any reinsurance for reasons other than
nonpayment of premiums or other similar credits. The Company does not have any
reinsurance agreements in effect
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
8. REINSURANCE (CONTINUED)
in which the amount of losses paid or accrued through December 31, 1996 would
result in a payment to the reinsurer of amounts which, in the aggregate and
allowing for offset of mutual credits from other reinsurance agreements with the
same reinsurer, exceed the total direct premiums collected under the reinsured
policies.
Reinsurance contracts do not relieve the Company from its primary obligation to
policyholders. Therefore, the failure of a reinsurer to discharge its
reinsurance obligations could result in a loss to the Company. The Company
regularly evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk related to reinsurance activities. No significant
credit losses resulted from the Company's reinsurance activities during the
three years ended December 31, 1996.
9. SEPARATE ACCOUNTS
In 1996, the Company began issuing nonguaranteed individual annuity contracts.
Separate accounts, primarily for those individual policyholders, do not have any
minimum guarantees and the investment risks associated with market value changes
are borne entirely by the policyholder. The assets in the accounts, carried at
estimated fair value, consist of investments in unit investment trusts.
Information regarding the separate accounts of the Company as of and for the
year ended December 31, 1996 is as follows (in thousands):
NONGUARANTEED
SEPARATE
ACCOUNTS
---------------
Premiums, deposits and other considerations $4,022
Reserves for accounts with assets at market value 4,128
All reserves are subject to discretionary withdrawal at market value.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
9. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts is
presented below (in thousands):
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $4,022
Transfers from separate accounts (11)
Transfers to separate accounts as reported -------
in the Summary of Operations of the Life,
Accident & Health Annual Statement $4,011
-------
-------
10. BENEFIT PLANS
PENSION PLANS
Prior to October 1, 1995, the Company participated in Household International,
Inc.'s defined benefit pension plans which covered 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 (JP Life), an affiliate. The assets of the plans are those of the
related contracts, and are primarily held in the separate accounts of JP Life.
The plans provide benefits based on annual compensation and years of service.
The funding policy is to contribute annually no more than the maximum amount
deductible for federal income tax purposes. The plan is administered by
Jefferson-Pilot Corporation.
The components of pension expense for 1996 were as follows (in thousands):
Service cost, benefits earned during the year $ 465
Interest cost on projected benefit obligation 760
Actual return on plan assets (1,656)
Net amortization and deferral 402
-------
Pension benefit $ (29)
-------
-------
No pension expense was allocated to the Company in 1995 or 1994 as the plans
were over-funded.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
10. BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plan as of December 31,
1996 (in thousands):
Actuarial present value of benefit obligation:
Vested benefit obligation $ 10,010
--------
--------
Accumulated benefit obligation $ 10,240
--------
--------
Projected benefit obligation $ 11,394
Plan assets at fair value 15,381
--------
Plan assets in excess of projected benefit obligation 3,987
Unrecognized net gain (721)
--------
Prepaid pension cost $ 3,266
--------
--------
The net asset is not recorded for statutory purposes due to its non-admitted
status. Certain assumptions used in determining the funded status of the plans
at December 31, 1996 were as follows:
Discount rate 7%
Expected long-term rate of return on plan assets 8%
Rate of increase in compensation level 5%
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.
Benefits provided to retirees by annuity contracts issued by JP Life
approximated $2.8 million in 1996.
DEFINED CONTRIBUTION PLAN
Prior to October 1, 1995, the Company participated in Household International,
Inc.'s defined contribution plan. Effective October 1, 1995, the Company
participates 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. In 1996,
there was a $86 thousand benefit due to excess accruals in 1995. These costs
totaled approximately $1 million in both 1995 and 1994.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
10. BENEFIT PLANS (CONTINUED)
OTHER POSTRETIREMENT BENEFIT PLANS
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 participates in contributory
health care and life insurance postretirement plans sponsored by Jefferson-Pilot
Corporation. Most of the postretirement health care and life insurance benefits
are provided through JP Life.
The following table sets forth the funded status of the Company's postretirement
health care and life insurance plans as of December 31, 1996 (in thousands):
Unfunded postretirement benefit obligation on
retirees and surviving spouses $ 4,751
Unrecognized net loss (1,904)
--------
Accrued postretirement benefit cost $ 2,847
--------
--------
The unfunded postretirement benefit obligation for retirees and other fully
eligible or vested plan participants was $2.7 million at December 31, 1995,
which is included in other liabilities in the Statements of Admitted Assets,
Liabilities, Capital and Surplus.
The estimated cost of the benefit obligation for active non-vested employees was
$0.2 million for 1996 and $0.3 million for 1995. 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 7.5% in 1996 and 7.0% in 1995.
The components of nonpension postretirement benefits expense for the year ended
December 31, 1996, were as follows (in thousands):
Cost of new vestings $ 56
Interest cost on unfunded postretirement
benefit obligation 211
--------
Net periodic postretirement benefits expense $ 267
--------
--------
Net postretirement benefit costs for the years ended December 31, 1995 and 1994
were $1.0 million in each year, and included 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.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
10. BENEFIT PLANS (CONTINUED)
Benefits do not take into consideration compensation increases. The Company's
postretirement health care plan limits annual benefit increases to a maximum
rate of 4%. Because future health care cost trend rates of 4% have been assumed
in determining the accumulated postretirement benefit obligation as of December
31, 1996, future health care cost increases exceeding 4% per year will have no
effect on the Company's obligation.
DEFERRED AGENT COMPENSATION
The Company sponsors a contributory deferred compensation plan and a major
producer's incentive plan for certain qualified agents. The accumulated value
of both the Company and agent contributions was $43.9 million and $38.7 million
at December 1996 and 1995, respectively, and is included with other liabilities.
In 1991, the Company established a Rabbi Trust supporting the deferred
compensation plan liability which is recorded at the market value of the
underlying assets of $39.0 million and $33.6 million at December 31, 1996 and
1995, respectively. The trust is included with other assets.
11. STOCK OPTION PLAN
Jefferson-Pilot Corporation sponsors a Long Term Incentive Plan of which
officers of Jefferson-Pilot Corporation and its subsidiaries may qualify for
participation. A committee of directors awards nonqualified or incentive stock
options and stock appreciation rights, and makes grants of the Company's stock
to the employees of Jefferson-Pilot Corporation and certain full-time life
insurance agents. Stock grants may be either restricted stock or unrestricted
stock distributed upon the achievement of performance goals established by the
committee.
12. 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, and for the
year ended December 31, 1996, the Company was included in the consolidated
life/non-life federal income tax return with its subsidiaries FAHL, AH(M) 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.
Amounts due from the subsidiaries for federal income taxes were $451 thousand
and $347 thousand at December 31, 1996 and 1995, respectively.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
12. FEDERAL INCOME TAXES (CONTINUED)
Income before federal income taxes differs from taxable income principally due
to dividends-received tax deductions, policy acquisition costs, and differences
in reserves for policy and contract liabilities for tax and financial reporting
purposes.
13. CAPITAL AND SURPLUS
The Company 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. Dividends on the preferred stock
are cumulative and 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.
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. As of
December 31, 1996, the maximum dividend amount payable by the Company without
the Commissioners approval is $22.2 million.
In 1994, the Company issued a surplus note to Household International, Inc. for
cash. In 1995, the surplus note was purchased by GARCO Capital Corp., an
affiliate, as discussed in Note 1. The note calls for the Company to pay
interest semiannually on March 31 and September 30. The Company has the right
to prepay the note on any March 31 or September 30 after September 30, 2004.
Any payment of interest or repayment of principal may be paid out only if the
Company has obtained the prior written approval of the Michigan Insurance
Bureau, has adequate earned surplus funds for such payment, and if such payment
would not cause the Company to violate the statutory capital requirements as set
forth in the Michigan Insurance Code. The Company accrues interest as an
increase to the note balance in surplus. A summary of the terms of this surplus
note follows:
<TABLE>
<CAPTION>
Interest
Paid Total
Date Interest Amount Current Current Interest Accrued Date of
Issued Rate of Notes Value Year Paid Interest Maturity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
9/29/94 9.76% $50,000,000 $50,000,000 $4,880,000 $9,773,656 $1,220,000 9/30/24
</TABLE>
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
13. CAPITAL AND SURPLUS (CONTINUED)
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by a life insurance company is to be determined
based on the various risk factors related to it. At December 31, 1996, the
Company meets the RBC requirements.
14. TRANSACTIONS WITH AFFILIATED COMPANIES
At December 31, 1996, the Company holds in its investment portfolio bonds with a
par value of $31.3 million issued by Jefferson-Pilot Communications Company, an
affiliate. Interest earned on these bonds totaled $768 thousand in 1996.
As discussed in Note 8, the Company reinsured certain annuity business with
AH(M), an affiliate, in 1996.
The Company wrote 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 were not deemed to be transactions with
affiliates. The principal affiliate transactions and balances included in the
accompanying financial statements for 1995 and 1994 are summarized as follows
(in millions):
<TABLE>
<CAPTION>
1995 1994
------------------------------
<S> <C> <C>
Premiums $43.8 $42.2
Policy benefits 26.6 25.4
Increase (decrease) in aggregate reserves (4.0) (3.6)
Due and uncollected premiums - 5.8
Aggregate reserves and policy and contract claims - 29.8
</TABLE>
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 $7.3 million, $2.9 million and $3.1 million in 1996, 1995, and 1994,
respectively. Costs are allocated to the Company based on cost allocations
arrangements based on GAAP.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
14. TRANSACTIONS WITH AFFILIATED COMPANIES (CONTINUED)
The Company leased two office buildings to Household Finance and one building to
Household Credit Services, Inc., which were considered affiliates prior to
October 1, 1995. The investment in these buildings was $26.8 million at
December 31, 1995. The building leases had combined rentals of $3.4 million for
the nine months ended September 30, 1995 and annual rental of $4.5 million for
1994.
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, were 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 $0.5 million
dividend declared in 1993. Dividends of $24.0 million were received from HNLIC
during 1995. All dividends are reflected in investment income in the
accompanying Statements of Operations.
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.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
15. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values and fair values of financial instruments as of December 31
are summarized as follows (in millions):
1996 1995
---------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------------------------------------------
FINANCIAL ASSETS
Bonds $4,662 $4,709 $4,847 $4,939
Stocks 103 101 67 68
Mortgage loans 277 273 156 156
Policy loans 97 97 86 86
FINANCIAL LIABILITIES
Annuity contract liabilities
in accumulation phase (2,591) (2,549) (3,011) (2,963)
Borrowed money (63) (63) (18) (18)
OFF-BALANCE-SHEET
FINANCIAL INSTRUMENTS
Interest rate swaps - (1) - (2)
The fair values of cash, short-term investments, balances due on account from
agents, reinsurers and others, and accounts payable approximate their carrying
amounts as reflected in the Statements of Assets, Liabilities, Capital and
Surplus due to their short-term maturity or availability. Assets and
liabilities related to the Company's separate accounts are reported at fair
value in the accompanying Statements of Assets, Liabilities, Capital and
Surplus.
The fair values of bonds and stocks securities have been determined primarily
from values published by the NAIC Securities Valuation Office (SVO). In some
instances, the SVO's fair value for certain bonds are deemed to equal amortized
cost. These fair values are disclosed together with carrying amounts in Note 2.
The fair value of the mortgage loan portfolio has been estimated by discounting
expected future cash flows using the interest rate currently offered for similar
loans.
The fair values of policy loans on universal life-type and annuity products
approximate carrying values due to the variable interest rates charged on those
loans.
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
15. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Annuity contracts issued by the Company do not generally have defined
maturities. Therefore, fair values of the Company's liabilities under annuity
contracts, the carrying amounts of which are included with policyholder contract
deposits in the accompanying Statements of Admitted Assets, Liabilities, Capital
and Surplus, are estimated to equal the cash surrender values of the underlying
contracts.
The fair value of the liability for borrowed money approximates its carrying
amounts, which amounts include accrued interest.
The fair value of interest rate swaps have been estimated based on prices
provided by the counterparties.
The determination of the fair value of the surplus note is not practicable due
to the restrictions on repayment of principal and interest amounts.
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Company routinely enters into commitments to extend credit in the form of
mortgage loans and to purchase certain debt instruments for its investment
portfolio in private placement transactions. The fair value of outstanding
commitments to fund mortgage loans and to acquire bonds in private placement
transactions, which are not reflected in the balance sheets, approximates $91.2
million as of December 31, 1996.
In the normal course of business, the Company is involved in various lawsuits.
Because of the considerable uncertainties that exist, the Company cannot
predict the outcome of pending or future litigation. However, management
believes that the resolution of pending legal proceedings will not have a
material adverse effect on the Company's financial position or operations.
The Company leases electronic data processing equipment and field office space
under noncancelable operating lease agreements. The lease terms generally range
from three to five years. Annual rent and future rental commitments are not
significant.
<PAGE>
Report of Independent Auditors
Board of Directors
Alexander Hamilton Life Insurance Company of America
We have audited the accompanying statutory-basis statement of admitted assets,
liabilities, capital and surplus of Alexander Hamilton Life Insurance Company of
America as of December 31, 1996, and the related statutory-basis statements of
operations, capital and surplus, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The statutory-basis financial statements for the years ended
December 31, 1995 and 1994 were audited by predecessor auditors, whose report
dated April 25, 1996 expressed an adverse opinion as to conformity with
generally accepted accounting principles and an unqualified opinion as to
conformity with accounting practices prescribed or permitted by the Michigan
Insurance Bureau as described in Note 1.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Michigan Insurance Bureau, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles also are described in Note 1. The
effects on the financial statements of these variances are not reasonably
determinable but are presumed to be material.
<PAGE>
In our opinion, because of the effects of the matter described in the preceding
paragraph, the 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 at December 31, 1996, or
the results of its operations or its cash flows for the year then ended.
Also, in our opinion, the financial statements, referred to above present
fairly, in all material respects, the financial position of Alexander Hamilton
Life Insurance Company of America at December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting practices prescribed or permitted by the Michigan Insurance Bureau.
April 18, 1997
<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,
capital and surplus - statutory basis of ALEXANDER HAMILTON LIFE INSURANCE
COMPANY OF AMERICA (a Michigan corporation) as of December 31, 1995, and the
related statements of operations - statutory basis, capital and surplus -
statutory basis and cash flows - statutory basis for each of the two 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, although not reasonably determinable, are presumed to be 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, or the results of its operations or its
cash flows for each of the two 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 the results of its operations
and its cash flow for each of the two 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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Detroit, Michigan
April 25, 1996
<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 Jefferson-Pilot
Investor Services, Inc. 3/
(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 Alexander Hamilton
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 II
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.2/
(10) (a) Consent of Ernst & Young LLP.3/
(b) Consent of Arthur Andersen LLP.3/
(c) Consent of Counsel.3/
(11) Not Applicable.
(12) Not Applicable.
(13) Schedule of Computation of Performance
- --------------------------------
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 Pre-Effective Amendment No. 1 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 Director; 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
Dale E. Cooper Vice President-Variable
Products
Robert A. Reed Vice President and
Secretary
Donna L. Drew Second Vice President-
32991 Hamilton Court Annuity Network
Farmington Hills, MI 48334
J. Gregory Poole Assistant Secretary
- ---------------------------
*/ Except as otherwise noted, the Principal business address for each officer
and director is 100 N. Greene St., Greensboro, North Carolina, 27401.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
C-3
<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.
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%
Jefferson-Pilot Investor Services, Inc. North Carolina 100%
Jefferson-Pilot Communications Company North Carolina 100%
Alexander Hamilton Life Insurance Company
of America Michigan 100%
Alexander Hamilton Capital Management, Inc. Michigan 100%
AH (Michigan) Life Insurance Company Michigan 100%
First Alexander Hamilton Life Insurance Company New York 100%
Chubb Life Insurance Company of America New Hampshire 100%
Chubb Colonial Life Insurance Company New Jersey 100%
Chubb Sovereign Life Insurance Company New Hampshire 100%
Chubb Securities Corporation New Hampshire 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.
C-4
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 1997, there were 146 Owners of the Contracts, 77 of which
owned non-qualified Contracts and 69 of which owned qualified 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
C-5
<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) Jefferson-Pilot Investor Services, Inc. does not act as principal
underwriter for other investment companies.
(b) The Directors and Officers of Jefferson-Pilot Invester Services Inc., the
principal underwriter for the Registrant, are as follows:
NAME AND PRINCIPAL POSITIONS AND
BUSINESS ADDRESS OFFICES WITH UNDERWRITER
---------------- ------------------------
Ronald A. Decicco Director;
Senior Vice President
and Principal
Dennis J. Swanick Treasurer
J. Gregory Poole Secretary
Robert A. Reed Assistant Secretary
Frank G. Mahoney Director
Dennis R. Glass Director
E. Jay Yelton Director
Address:
100 N. Greene Street
Greensboro, NC 27401
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NAME OF NET UNDERWRITING
PRINCIPAL DISCOUNTS AND COMPENSATION BROKERAGE
UNDERWRITER COMMISSIONS ON REDEMPTION COMMISSIONS COMPENSATION
----------- --------------- ------------- ------------- --------------
<C> <S> <C> <C> <C> <C>
1996 Jefferson-Pilot $ 0 $ 0 $ 25,128.35 $ 0
Investor
Services, Inc.
1996 FMG Securities 0 0 25,367.11 $ 41,666.67
Distributors, Inc.
</TABLE>
Amount of Compensation in column 5 was paid to FMG for services provided as
Lead Underwriter.
C-6
<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, 32991 Hamilton Court, Farmington Hills, Michigan
48334.
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
C-7
<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.
(d) Alexander Hamilton Life Insurance Company of America hereby
represents that the fees and charges deducted under the contract, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by Alexander Hamilton Life
Insurance Company of America.
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.
C-8
<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. 2 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, 1997.
ALEXANDER HAMILTON VARIABLE ANNUITY
SEPARATE ACCOUNT
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF
AMERICA
Depositor
/s/ David A. Stonecipher
------------------------------------------------
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
- ------------------------- Director; Chairman of the Board, President April 30, 1997
David A. Stonecipher
/s/ Dennis R. Glass
- ------------------------- Director; Executive Vice President April 30, 1997
Dennis R. Glass and Treasurer
/s/ John D. Hopkins
- ------------------------- Director; Executive Vice President April 30, 1997
John D. Hopkins and General Counsel
/s/ Kenneth C. Mlekush
- ------------------------- Director; Executive Vice President April 30, 1997
Kenneth C. Mlekush
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ James T. Ponder
- ------------------------- Director; Executive Vice President April 30, 1997
James T. Ponder and Chief Marketing Officer
/s/ E. Jay Yelton
- ------------------------- Director; Executive Vice President April 30, 1997
E. Jay Yelton
</TABLE>
C-10
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description of Page
No. Exhibit No.
- ------- -------------- ----
(10)(a) Consent of Ernst & Young LLP. . . . . . . . . . . . . . . . . . .
(10)(b) Consent of Arthur Andersen LLP. . . . . . . . . . . . . . . . . .
(10)(c) Consent of Counsel . . . . . . . . . . . . . . . . . . . . . . . .
(13) Schedule of Computation of Performance . . . . . . . . . . . . . .
- --------------------
<PAGE>
EXHIBIT 10(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial
Statements" in the Statement of Additional Information incorporated by
reference in the Prospectus of The Alexander Hamilton Variable Annuity
Separate Account and to the use of our reports with respect to the financial
statements of The Alexander Hamilton Variable Annuity Separate Account dated
April 16, 1997, and Alexander Hamilton Life Insurance Company of America dated
April 18, 1997, in Post-Effective Amendment No. 2 under the Securities Act of
1933 (Form N-4 33-75714) and Post-Effective Amendment No. 3 under the
Investment Company Act of 1940 to the Registration Statement (Form N-4
811-8374) of The Alexander Hamilton Variable Annuity Separate Account.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Greensboro, North Carolina
April 29, 1997
<PAGE>
EXHIBIT 10(b)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement (File Nos. 33-75714 and 811-8374).
ARTHUR ANDERSEN LLP
Detroit, Michigan
April 29, 1997
<PAGE>
Exhibit 10(c)
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
[LETTERHEAD]
April 28, 1997
Alexander Hamilton Life Insurance Company of America
32991 Hamilton Court
Farmington Hills, MI 48334
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. 2 to the Form N-4 Registration Statement for the
Alexander Hamilton Variable Annuity Separate Account. 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, L.L.P.
By: /s/ Frederick R. Bellamy
----------------------------------------
Frederick R. Bellamy
<PAGE>
EXHIBIT 13
ALLEGIANCE VARIABLE ANNUITY
SCHEDULE OF COMPUTATION OF PERFORMANCE
The following examples are calculated in accordance with the methods described
in the Prospectus and Statement of Additional Information:
1. NON-STANDARD AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
The formula for calculating non-standard average annual total return is as
follows:
n
( ERV )
( --- ) -1
( P )
Where:
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial investment of $1,000
n = 1/number of years
EXAMPLES AT AUV:
MONEY MARKET SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 1,027.38 )
( -------- ) -1 = 3.29%
( 1,000 )
INVESTMENT GRADE BOND SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 1,022.33 )
( -------- ) -1 = 2.69%
( 1,000 )
HIGH YIELD BOND SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 1,081.20 )
( -------- ) -1 = 9.82%
( 1,000 )
BALANCED SUBACCOUNT
2/27/96-12/31/96
<PAGE>
1.2
( $ 1,080.08 )
( -------- ) -1 = 9.68%
( 1,000 )
GROWTH & INCOME SUBACCOUNT
2/27/97-12/31/96
1.2
( $ 997.53 )
( ------- ) -1 = -0.30%
( 1,000 )
GROWTH SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 1,184.35 )
( -------- ) -1 = 22.51%
( 1,000 )
EMERGING GROWTH SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 1,034.36 )
( -------- ) -1 = 4.14%
( 1,000 )
INTERNATIONAL SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 1,098.48 )
( -------- ) -1 = 11.93%
( 1,000 )
2. NON-STANDARD CUMULATIVE TOTAL RETURNS FOR THE PERIODS ENDED 12/31/96:
The formula for calculating the non-standard cumulative total return is as
follows:
ERV-P
-----
P
WHERE:
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial investment of $1,000
EXAMPLES AT AUV:
MONEY MARKET SUBACCOUNT
2/27/96-12/31/96
<PAGE>
$1,027.38-1,000
- --------------- = 2.74%
1,000
INVESTMENT GRADE BOND SUBACCOUNT
2/27/96-12/31/96
$1,022.33-1,000
- --------------- = 2.23%
1,000
HIGH YIELD BOND SUBACCOUNT
2/27/96-12/31/96
$1,081.20-1,000
- --------------- = 8.12%
1,000
BALANCED SUBACCOUNT
2/27/96-12/31/96
$1,080.08-1,000
- --------------- = 8.01%
1,000
GROWTH & INCOME SUBACCOUNT
2/27/96-12/31/96
$ 997.53-1,000
- --------------- = -0.25%
1,000
GROWTH SUBACCOUNT
2/27/96-12/31/96
$ 1,184.35-1,000
- ---------------- = 18.44%
1,000
EMERGING GROWTH SUBACCOUNT
2/27/96-12/31/96
$ 1,034.36-1,000
- ---------------- = 3.44%
1,000
INTERNATIONAL SUBACCOUNT
<PAGE>
2/27/96-12/31/96
$ 1,098.48-1,000
- ---------------- = 9.85%
1,000
3. STANDARD AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
The formula for calculating Standard average annual total return is as follows:
n
( ERV )
( --- ) -1
( P )
WHERE:
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period assuming the deferred sales load would have
been 7% and the $30 annual administrative fee was charged.
P = hypothetical initial investment of $1,000
n = 1/number of years
EXAMPLES AT AUV:
MONEY MARKET SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 927.56 )
( ------- ) -1 = -8.63%
( 1,000 )
INVESTMENT GRADE BOND SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 922.87 )
( -------- ) -1 = -9.18%
( 1,000 )
HIGH YIELD BOND SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 977.62 )
( -------- ) -1 = -2.68%
( 1,000 )
<PAGE>
BALANCED SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 976.57 )
( -------- ) -1 = -2.80%
( 1,000 )
GROWTH & INCOME SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 899.81 )
( -------- ) -1 = -11.90%
( 1,000 )
GROWTH SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 1,073.55 )
( ---------- ) -1 = 8.89%
( 1,000 )
EMERGING GROWTH SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 934.05 )
( -------- ) -1 = -7.86%
( 1,000 )
INTERNATIONAL SUBACCOUNT
2/27/96-12/31/96
1.2
( $ 993.69 )
( -------- ) -1 = -0.76%
( 1,000 )
4. STANDARD CUMULATIVE TOTAL RETURNS FOR THE PERIODS ENDED 12/31/96:
The formula for calculating the standard cumulative total return is as follows:
ERV-P
-----
P
WHERE:
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period assuming the deferred sales load would have
been 7% and the $30 annual administrative fee was charged.
P = hypothetical initial investment of $1,000
<PAGE>
EXAMPLES AT AUV:
MONEY MARKET SUBACCOUNT
2/27/96-12/31/96
$ 927.56-1,000
------------ = -7.24%
1,000
INVESTMENT GRADE BOND SUBACCOUNT
2/27/96-12/31/96
$ 922.87-1,000
------------ = -7.71%
1,000
HIGH YIELD BOND SUBACCOUNT
2/27/96-12/31/96
$ 977.62-1,000
------------ = -2.24%
1,000
BALANCED SUBACCOUNT
2/27/96-12/31/96
$ 976.57-1,000
------------ = -2.34%
1,000
GROWTH & INCOME SUBACCOUNT
2/27/96-12/31/96
$ 899.81-1,000
------------ = -10.02%
1,000
GROWTH SUBACCOUNT
2/27/96-12/31/96
$ 1,073.55-1,000
-------------- = 7.35%
1,000
EMERGING GROWTH SUBACCOUNT
2/27/96-12/31/96
<PAGE>
$ 934.05-1,000
------------ = -6.59%
1,000
INTERNATIONAL SUBACCOUNT
2/27/96-12/31/96
$ 993.69-1,000
------------ = -0.63%
1,000
