AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1999
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 [ ]
PRE-EFFECTIVE AMENDMENT NO. ____ [ ]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 8 [X]
ALEXANDER HAMILTON VARIABLE ANNUITY
SEPARATE ACCOUNT
(EXACT NAME OF REGISTRANT)
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
(NAME OF DEPOSITOR)
100 N. Greene St., Greensboro, NC 27401
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE
(336) 691-3000
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NAME AND ADDRESS OF
AGENT FOR SERVICE: COPY TO:
Shari J. Lease, Esquire Joan E. Boros, Esquire
Alexander Hamilton Life Insurance Jorden Burt Boros Cicchetti Berenson & Johnson LLP
Company of America 1025 Thomas Jefferson Street, N.W.
One Granite Place Suite 400 East
Concord, NH 03301 Washington, D.C. 20007
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IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on May 1, 1999 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 previously filed Post-Effective Amendment.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after effectiveness of the Registration Statement
TITLE OF SECURITIES BEING REGISTERED:
Variable Portion of Contracts issued by the Separate Account
No filing fee is due because an indefinite number of shares is deemed to have
been registered in reliance on Section 24(f) of the Investment Company Act of
1940.
<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
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<CAPTION>
Item of Form N-4 Prospectus Caption
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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 ...................... The Separate Account
(c) Portfolio Company................ Separate Account Investments
(d) Fund Prospectus.................. Separate Account Investments
(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) Fund Expenses.................... Other Expenses Including
Investment Advisory Fees
(f) Expenses - Registrant............ Not Applicable
7. Contracts
(a) Persons with Rights.............. Alexander Hamilton Life
Insurance Company of America;
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........................ Questions and Answers About Your Contract;
Annuity Payments;
Annuity Payment Options;
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................ Separate Account Accumulation Unit 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........................ Questions and Answers About your Contract;
................................. Free Look Period
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
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Prospectus: May 1, 1999
The Allegiance Variable Annuity
Issued by
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
In connection with
ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
SERVICE CENTER ADDRESS: One Granite Place, Concord, NH 03301
Telephone No.: 1-800-289-1776
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This Prospectus describes the Allegiance Variable Annuity (the "Contract"), an
individual flexible premium deferred variable annuity offered by Alexander
Hamilton Life Insurance Company of America ("we", "our" or the "Company"). The
Contract is designed to help you plan for retirement or other long-term
purposes. You may purchase it on either a tax qualified or non-tax qualified
basis.
Because this is a flexible premium annuity contract, you may pay multiple
premiums. We allocate your premium among the 19 Variable Sub-accounts of the
Alexander Hamilton Variable Annuity Separate Account and the 2 Interest Rate
Guarantee Periods of the Capital Developer Account in the proportions that you
choose. You may also allocate your premium to the Dollar Cost Averaging Fixed
Account ("DCA Fixed Account") if you participate in our dollar cost averaging
program. Each Variable Sub-account invests exclusively in shares of one of the
following Portfolios:
JPVF International Equity Portfolio
JPVF World Growth Stock Portfolio
JPVF Emerging Growth Portfolio
JPVF Capital Growth Portfolio
JPVF Growth Portfolio
JPVF Small Company Portfolio
JPVF Growth and Income Portfolio
JPVF Balanced Portfolio
JPVF High Yield Bond Portfolio
JPVF Money Market Portfolio
Fidelity VIP Growth Portfolio
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Contrafund Portfolio
Fidelity VIP II Index 500 Portfolio
MFS Research Series
MFS Utilities Series
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Bond Fund/VA
Oppenheimer Strategic Bond Fund/VA
We may make available other allocation options in the future. Not all Variable
Sub-accounts, Interest Rate Guarantee Periods or the DCA Fixed Account may be
available in all states.
You may not purchase a Non-Qualified Contract if you or the Annuitant are over
90 years old. You may not purchase certain types of Qualified Contracts if you
are over 80 years old.
Your Contract Value will vary up or down depending on the investment
performance of the Variable Sub-accounts to which you have allocated your
Premium Payments. We do not guarantee any minimum Contract Value for amounts
allocated to the Variable Sub-accounts. Amounts which you allocate to the
Capital Developer Account or the DCA Fixed Account will earn a specified
interest rate. A Market Value Adjustment could increase or decrease the value
of amounts withdrawn, transferred, or annuitized from the Capital Developer
Account.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This Prospectus sets forth the information you should know about the Contract.
You should read it before investing and keep it for future reference. We have
filed a Statement of Additional Information with the Securities and Exchange
Commission ("SEC"). The current Statement of Additional Information is dated
May 1, 1999. The information in the Statement of Additional Information is
incorporated by reference in this Prospectus. You can obtain a free copy by
writing us or calling us at the address or telephone number given above. The
Table of Contents of the Statement of Additional Information appears at page 42
of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY CURRENT
PROSPECTUSES FOR THE FUNDS LISTED ABOVE. PLEASE READ THIS PROSPECTUS AND THE
PROSPECTUSES FOR THE FUNDS CAREFULLY AND RETAIN THEM FOR YOUR FUTURE REFERENCE.
Contracts and shares of the Funds are not deposits or obligations of or
guaranteed by any bank. They are not federally insured by the FDIC or any other
government agency. Investing in the contracts involves certain investment
risks, including possible loss of principal invested.
This Prospectus and other information about the Alexander Hamilton Variable
Annuity Separate Account required to be filed with the SEC can be found in the
SEC's Web Site at http://www.sec.gov or may be obtained from the SEC's Public
Reference Room by calling 202-942-8090.
<PAGE>
table of contents
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DEFINITIONS .................................. 4
QUESTIONS AND ANSWERS ABOUT
YOUR CONTRACT ............................... 6
FEE TABLES ................................... 10
Contract Owner Transaction Expenses 10
Separate Account Annual Expenses ............ 10
Fund Annual Expenses ........................ 10
Examples .................................... 11
CONDENSED FINANCIAL
INFORMATION ................................. 12
ALLOCATION OPTIONS ........................... 14
Separate Account Investments ................ 14
Mixed and Shared Funding; Conflicts
of Interest ................................ 16
The Capital Developer Account ............... 17
Market Value Adjustment ..................... 17
Dollar Cost Averaging Fixed Account
Option ..................................... 18
THE ALLEGIANCE VARIABLE ANNUITY
CONTRACT .................................... 18
Contract Application and Issuance of
Contracts .................................. 18
Free Look Period ........................... 19
Premium Payments ............................ 19
Initial Premium Payment .................... 19
Additional Premium Payments ................ 19
Allocation of Premium Payments ............. 19
Payment Not Honored by Bank ................ 20
Contract Value .............................. 20
Separate Account Accumulation Unit
Value ..................................... 20
Minimum Contract Value ..................... 20
Transfers ................................... 21
Telephone Transfers and
Reallocations ............................. 21
Dollar Cost Averaging ....................... 21
Automatic Rebalancing ....................... 22
DISTRIBUTIONS UNDER THE CONTRACT 23
Surrenders and Partial Withdrawals .......... 23
Systematic Withdrawal Plan .................. 24
Annuity Payments ............................ 24
Maturity Date .............................. 24
Election of Annuity Payment Option 24
Taxes ...................................... 24
Annuity Payment Options ..................... 24
Death Benefit ............................... 26
Death of Contract Owner Prior to
Maturity Date ............................. 26
IRS Required Distribution .................. 27
Death of Annuitant Prior to Maturity
Date ...................................... 27
Death of Annuitant on or After
Maturity Date ............................. 27
Death of Contract Owner on or
After Maturity Date ....................... 27
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Contract Owner's Spouse as
Beneficiary ............................... 27
Payment of Death Benefit to
Beneficiary ............................... 27
Beneficiary ................................. 28
Change of Contract Owner .................... 28
Restrictions Under the Texas Optional
Retirement Program ......................... 28
Restrictions Under Qualified Contracts 28
Restrictions Under Section 403(b)
Plans ...................................... 28
CHARGES AND DEDUCTIONS ....................... 28
Surrender Charge ............................ 28
Mortality and Expense Risk Charge ........... 29
Administrative Expense Charge ............... 30
Annual Administrative Fee ................... 30
Transfer Charge ............................. 30
Premium Taxes ............................... 30
Federal, State and Local Taxes .............. 30
Other Expenses Including Investment
Advisory Fees .............................. 30
Reduction in Charges for Certain Groups 30
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ................................ 31
Taxation of Annuities ....................... 32
In General ................................. 32
Possible Changes in Taxation ............... 32
Surrenders and Partial Withdrawals
from Qualified Contracts .................. 32
Surrenders and Partial Withdrawals
from Non-Qualified Contracts .............. 32
Annuity Payments ........................... 32
Penalty Tax ................................ 33
Death Benefit Proceeds ..................... 33
Gifts, Transfers, Assignments, or
Exchanges of the Contract ................. 33
Generation-Skipping Transfers .............. 33
Multiple Contracts ......................... 33
Withholding ................................ 34
Other Tax Consequences ..................... 34
Qualified Plans ............................ 34
Qualified Pension and Profit Sharing
Plans ..................................... 34
Individual Retirement Annuities and
Individual Retirement Accounts ............ 34
Tax-Sheltered Annuities .................... 35
Section 457 Deferred Compensation
("Section 457") Plans ..................... 35
ALEXANDER HAMILTON LIFE
INSURANCE COMPANY OF AMERICA 35
The Separate Account ........................ 36
Year 2000 Matter ............................ 36
DISTRIBUTOR OF THE CONTRACTS ................. 37
VOTING RIGHTS ................................ 37
ADDITIONAL INFORMATION ABOUT
THE SEPARATE ACCOUNT ........................ 38
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2
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Addition, Deletion, or Substitution of
Investments ................................ 38
Performance Data ............................ 38
Company Ratings ............................. 40
GENERAL CONTRACT PROVISIONS .................. 40
LEGAL PROCEEDINGS ............................ 41
AVAILABLE INFORMATION ........................ 41
STATEMENT OF ADDITIONAL
INFORMATION TABLE OF CONTENTS 42
APPENDIX I -- SURRENDER CHARGE
CALCULATION ................................. I-1
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APPENDIX II -- MARKET VALUE
ADJUSTMENT CALCULATION AND
EXAMPLES .................................... II-1
FUND PROSPECTUSES
Jefferson Pilot Variable Fund, Inc. ......... JPVF-l
Fidelity's Variable Insurance Products
Funds (VIP and VIP II) ..................... VIP-I
MFS Variable Insurance Trust .............. MFSRS-1
Oppenheimer Variable Account Funds
(OVAF) .................................. OVAF-1
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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.
- --------------------------------------------------------------------------------
3
<PAGE>
definitions
- --------------------------------------------------------------------------------
Accumulation Period--The period, beginning on the Contract Date, during which
Contract Value builds up under your Contract, and ending on the date preceding
the Maturity Date.
Accumulation Unit--A unit of measure which we use to calculate Separate Account
Value during the Accumulation Period.
Annuitant(s)--The natural person(s) upon whose life the Annuity Payments are
based. You will be the Annuitant unless you name someone else to be the
Annuitant in the Contract application. The Annuitant named in the application
cannot be changed.
Annuity Payments--The payments we make to the Payee beginning on the Maturity
Date. The amount of the Annuity Payments will be based on the Contract Value
and the age of the Annuitant on the Maturity Date, and the Annuity Payment
Option and payment frequency that you select.
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.
Beneficiary--The persons or entities designated by you to receive the Death
Benefit under the Contract.
Capital Developer Account--An allocation option available under the Contract
that provides a Guaranteed Interest Rate for a specified Interest Rate
Guarantee Period. This rate will never be less than 3% per year. The Capital
Developer Account is guaranteed by us and is not part of the Separate Account.
Capital Developer Account Value--The portion of the Contract Value held 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
deferred 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 and the DCA Fixed 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 the 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.
Fixed Annuity Options--Annuity Payment Options under the Contract that provide
for scheduled and fixed payments.
Funds--The Jefferson Pilot Funds, VIP Portfolios, MFS Funds and Oppenheimer
Funds.
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 Variable Sub-account of the Separate Account.
4
<PAGE>
Issue Age--The age of the Contract Owner on the Contract Date.
Jefferson Pilot Variable Fund, Inc. ("JPVF")--An open-end diversified
management investment company registered under the 1940 Act. JPVF was
previously known as Chubb America Fund, Inc. and changed its name as part of
the acquisition of Chubb Life and its affiliates by Jefferson-Pilot
Corporation.
Jefferson Pilot Funds--The portfolios of JPVF which are available under the
Contracts--International Equity Portfolio, World Growth Stock Portfolio,
Emerging Growth Portfolio, Capital Growth Portfolio, Growth Portfolio, Small
Company Portfolio, Growth and Income Portfolio, Balanced Portfolio, High Yield
Bond Portfolio and Money Market Portfolio.
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 later
of the Annuitant's 85th birthday or 10 years from the Contract Date.
MFS Funds--Mutual fund series of the MFS Variable Insurance Trust which are
available under the Contract--MFS Research Series and MFS Utilities Series.
MFS Variable Insurance Trust--An open-end management investment company
registered under the 1940 Act.
Net Premium Payment--A Premium Payment less any applicable Premium Tax.
Oppenheimer Funds--The Portfolios of the Oppenheimer Variable Account Funds
which are available under the Contract--Oppenheimer Capital Appreciation
Fund/VA, Oppenheimer Strategic Bond Fund/VA and Oppenheimer Bond Fund/VA.
Oppenheimer Variable Account Funds ("OVAF")--An open-end management investment
company registered under the 1940 Act.
Payee--The person or entity who will receive Annuity Payments under the
Contract.
Premium Payment--A payment to the Company 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.
Request--A request in a form satisfactory to the Company, which is received by
the Company's Variable Annuity Service Center.
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 1940 Act.
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) plus or minus any applicable Market Value
Adjustment, (c) minus any applicable Surrender Charge, (d) minus the Annual
Administrative Fee, and (e) minus any applicable Premium Tax.
The VIP Funds--The Variable Insurance Products Fund ("VIP") and the Variable
Insurance Products Fund II ("VIP II"), which are open-end diversified
management investment companies registered under the 1940 Act.
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.
Valuation Day--Any day on which the New York Stock Exchange is open for trading
except for normal federal holiday closing or when the Securities and Exchange
Commission has determined that a state of emergency exists. In addition, the
Company will be closed on the following local or regional business holidays
which shall not constitute a Valuation Day: Good Friday, the Friday following
Thanksgiving and the day before or following Christmas Day.
5
<PAGE>
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 Sub-accounts.
Variable Annuity Service Center--P.O. Box 515, Concord, NH 03302-0515. Notices,
Requests and Premium Payments under the Contract must be sent to the Company's
Variable Annuity Service Center.
Variable Sub-account--Separate Account assets are divided into Variable
Sub-accounts. Assets of the Variable Sub-accounts will be invested in shares of
the corresponding Funds.
VIP Portfolios--The portfolios of the VIP Funds which are available under the
Contracts--VIP Equity-Income Portfolio, VIP II Index 500 Portfolio, VIP Growth
Portfolio and VIP II Contrafund Portfolio.
questions and answers about your contract
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The following are answers to some of the questions you may have about some of
the more important features of the Contract. The Contract is more fully
described in the rest of the Prospectus. Please read the Prospectus carefully.
1. What is the Contract?
The Contract is a flexible premium deferred variable annuity contract. It is
designed for tax-deferred retirement investing. It 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").
The Contract, like all deferred annuity contracts, has two phases: the
Accumulation Period and the Annuity Period. During the Accumulation Period,
earnings accumulate on a tax-deferred basis and are taxed as income when you
make a withdrawal. The Annuity Period begins when you begin receiving payments
under one of the Annuity Payment Options described in the answer to Question
No. 2. The amount of money accumulated under your Contract during the
Accumulation Period will be used to determine the amount of your Annuity
Payments during the Annuity Period.
You may allocate your Premium Payments to any combination of the allocation
options under the Contract. However, over the life of your Contract, you are
currently limited to allocating your Premium Payments to no more than 16 of the
current or future Variable Sub-accounts. The Company may change this limitation
in the future. The allocation options currently available are the 19 Variable
Sub-accounts of the Separate Account, the two Interest Rate Guarantee Periods
of the Capital Developer Accounts and if you have elected to participate in our
dollar cost averaging program, the DCA Fixed Account. These allocation options
may not be available in all states.
Each Variable Sub-account will invest in a single investment portfolio (a
"Portfolio") of a mutual fund. Because the Separate Account Value will increase
or decrease depending on the investment experience of the Variable Sub-accounts
to which you allocate your premiums, you bear the entire investment risk with
respect to amounts allocated to the Variable Sub-accounts. The investment
policies and risks of each Portfolio are described in prospectuses for the
Portfolios which accompany this Prospectus.
The Contract may be issued as a group contract in certain states. If you are
covered under a group contract, you will be issued a certificate as evidence of
your participation under the group contract. The description of the Contract in
this Prospectus applies equally to a certificate under a group contract unless
otherwise described.
2. What annuity options does the
Contract offer?
The Contract offers four Annuity Payment Options. You may choose a fixed
annuity, a variable annuity, or a combination of both. The Annuity Payment
Options include:
[diamond] Fixed payments for a specified period between five and thirty years
(available as a fixed annuity only).
[diamond] Payments for life with optional guaranteed periods.
[diamond] Joint and last survivor life income payments.
6
<PAGE>
[diamond] Payments based on terms agreed upon in writing by you and the Company.
You may change your Annuity Payment Option at any time before annuitization.
You may select the Maturity Date of your Contract. The latest Maturity Date you
may select for a Non-qualified Contract, however, is the later of the
Annuitant's 85th birthday or 10 years from the Contract Date. If your Contract
was issued in connection with a qualified plan, a different maximum Maturity
Date may apply.
If you select Annuity Payments on a variable basis, the amount of our payments
to you will be affected by the investment performance of the Variable Sub-
accounts you have selected. A fixed annuity Payment Option provides for
payments that will be set on the Maturity Date and will not change. If you
select an Annuity Payment Option that is a combination of variable and fixed
payments, you must specify the allocation of the Contract Value between the
Fixed Payment Option and the Variable Payment Option. You may not change the
Annuity Payment Option or the frequency of Annuity Payments after we begin
making Annuity Payments to you.
3. How do I buy a Contract?
You can obtain a Contract application from your Company agent. We must receive
a completed application and an initial Premium Payment of at least $2,000
before we will issue a Contract. A lower initial Premium Payment may apply to
certain Qualified Contracts. You may pay for the initial Premium Payment in a
single payment or by twelve equal systematic payments over the first 12
Contract months. Your subsequent Premium Payments must be at least $50. We will
not issue a Contract to you if either you or the Annuitant is more than 90
years old. For certain types of Qualified Contracts you must be age 80 or
younger before we will issue a Contract to you.
4. What are my investment choices under
the Contract?
You can allocate and reallocate your investment among the Variable
Sub-accounts. Each Variable Sub-account invests in a single Portfolio. Under
the Contract, the Separate Account currently invests in the following
Portfolios:
- --------------------------------------------------------------------------------
Jefferson Pilot Variable Fund, Inc.:
International Equity Portfolio
World Growth Stock Portfolio
Emerging Growth Portfolio
Capital Growth Portfolio
Growth Portfolio
Small Company Portfolio
Growth and Income Portfolio
Balanced Portfolio
High Yield Bond Portfolio
Money Market Portfolio
- --------------------------------------------------------------------------------
Variable Insurance Products Fund:
VIP Growth Portfolio
VIP Equity-Income Portfolio
- --------------------------------------------------------------------------------
Variable Insurance Products Fund II:
VIP II Contrafund Portfolio
VIP II Index 500 Portfolio
- --------------------------------------------------------------------------------
MFS Variable Insurance Trust:
Research Series
Utilities Series
- --------------------------------------------------------------------------------
Oppenheimer Variable Account Funds:
Capital Appreciation Fund/VA
Bond Fund/VA
Strategic Bond Fund/VA
- --------------------------------------------------------------------------------
Each Portfolio holds its assets separately from the assets of the other
Portfolios. Each Portfolio has distinct investment objectives and policies
which are described in the accompanying prospectuses for the Portfolios.
5. What is the Capital Developer Account?
We currently offer two different Interest Rate Guarantee Periods in the Capital
Developer Account, lasting for one and seven years. Not all periods are
available in all states. We will credit specified interest rates to the amounts
you allocate to the Capital Developer Account. The amounts which you allocate
to the Capital Developer Account may be subject to a Market Value Adjustment if
you request a Surrender, Partial Withdrawal, transfer or annuitization 31 days
or more prior to the end of the Interest Rate Guarantee Period. Because of this
adjustment and for other reasons, the amount we pay you upon a Surrender or
Partial Withdrawal or apply 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
before any applicable Surrender Charges.
6. What are my expenses under the Contract?
Mortality and Expense Risk Charge. We deduct a daily charge equal to a
percentage of the net assets
7
<PAGE>
in the Separate Account for the mortality and expense risks that we assume. The
effective annual rate of this charge is 1.25% of the Separate Account Value.
This charge does not apply to the Capital Developer Account or the DCA Fixed
Account.
Administrative Expense Charge. We deduct a daily charge equal to a percentage
of the net assets in each Variable Sub-account for administering the Separate
Account. The effective annual rate of this charge is 0.15% of the daily value
of net assets in each Variable Sub-account. We guarantee that we will not
increase this charge. This charge does not apply to the Capital Developer
Account or the DCA Fixed Account.
Annual Administrative Fee. We impose a fee each year for Contract maintenance
and related administrative expenses. This fee is the lesser of $30 per Contract
Year or 2% of Contract Value. We guarantee that we will not increase this fee.
The fee 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. We will not deduct the fee if 100% of the Contract Value is held
in the Capital Developer Account. We will also not deduct the fee for a
Contract Year if, on the last day of that Contract Year, the Contract Value is
$30,000 or greater.
Transfer Charge. Although we currently are not charging a transfer fee, the
Contract permits us to charge you a $10 fee for each transfer in excess of 15
during any Contract Year.
Surrender Charge. We will deduct a Surrender Charge from the amount of any
Partial Withdrawal or Full Surrender during the first seven Contract Years to
help defray sales expenses. The Surrender Charge in the first three Contract
Years is 6% of the Contract Value withdrawn or surrendered and declines by one
percentage point for each of the next four Contract Years. The Surrender Charge
percentages are as follows:
<TABLE>
<CAPTION>
Percentage
Year Charge
- ------ -----------
<S> <C>
1 6%
2 6%
3 6%
4 5%
5 4%
6 3%
7 2%
8 0%
</TABLE>
We will also impose the Surrender Charge on the Maturity Date if it occurs
during the first seven Contract Years and you choose an annuity option of less
than five years. The Surrender Charge will not apply to certain distributions.
(See "Surrender Charge")
Each year you are entitled to a Free Withdrawal Amount, equal to 10% of the
Contract Value at the time of the Surrender or Partial Withdrawal, on which we
will not deduct a Surrender Charge. We guarantee that the aggregate Surrender
Charge will never exceed 8.5% of the total premium payments.
Premium Taxes. We may incur Premium Taxes relating to the Contract in certain
states. Depending upon applicable state law, Premium Taxes may be assessed at
the time premium payments are made or the time annuity payments begin. At our
discretion, we may deduct Premium Taxes at the time a premium is paid, upon
surrender of the Contract, at the time of a withdrawal, at the time a death
benefit is paid or at the time annuity payments begin.
Fund Expenses. In addition to our charges under the Contract, each Portfolio
deducts amounts from its assets to pay its investment advisory fees and other
expenses.
7. How will my investment in the Contract be taxed?
You should consult a qualified tax adviser for personalized answers. If you are
a natural person, generally, earnings under your Contract are not taxed until
amounts are withdrawn or distributions are made (e.g., a Partial Withdrawal,
Surrender or Annuity Payment). You may be deemed to have received a
distribution and taxes may be due if you pledge or assign your 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.
Special rules apply if the Contract is owned by a company or other legal
entity. Generally, such an owner must include in income any increase in the
excess of the Contract Value over the "investment in the contract" during the
taxable year.
8. Do I have access to my money?
At any time during the Accumulation Period, you may elect to receive all or a
portion of your Contract's Surrender Value. The minimum Partial With-
8
<PAGE>
drawal amount you may receive is $250 from a Variable Sub-account and $1,000
from the Capital Developer Account. After a Partial Withdrawal, the remaining
Contract Value must be at least $2,000. See "Surrenders and Partial
Withdrawals" for more information.
Although you have access to your money during the Accumulation Period, certain
charges, such as the Surrender Charge, Annual Administrative Fee and state
Premium Taxes, may be deducted on a Surrender or a Partial Withdrawal. You may
also incur federal income tax liability or tax penalties. In addition, if you
have allocated some of the value of your Contract to the Capital Developer
Account, the amount of your surrender proceeds or withdrawal may be increased
or decreased by a Market Value Adjustment.
You may elect to receive the Contract Value as of the Maturity Date, less any
applicable Surrender Charge, in a lump sum payment.
9. What is the death benefit?
We will pay a death benefit while the Contract is in force and before the
Maturity Date, if the Contract Owner dies, or if the Annuitant dies and the
Contract owner is not a natural person. To receive the death benefit payment,
the Beneficiary must return the Contract, provide us with Due Proof of Death,
and elect a Death Benefit Option. The Death Benefit will be at least equal to
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.
10. May I transfer Contract Value among the Variable Sub-accounts and the
Interest Rate Guarantee Periods?
During the Accumulation Period, you may transfer Contract Value among the
allocation options subject to certain limitations. The minimum amount you may
transfer from any Variable Sub-account is $250. The minimum amount you may
transfer from the Capital Developer Account is $1,000. Transfers from the
Capital Developer Account may be subject to a Market Value Adjustment. You may
not transfer Contract Value into the DCA Fixed Account. Transfers out of the
DCA Fixed Account are only allowed pursuant to the terms of your dollar cost
averaging program.
During the Annuity Period, if you have chosen a Variable Annuity Payment
Option, you may transfer Separate Account Value between the various Variable
Sub-accounts. However, if you have chosen a Fixed Annuity Payment Option,
transfers are not permitted.
11. Do I have any right to cancel my Contract?
You have a limited time period in which to return your Contract for cancellation
and receive a refund as described in your Contract. This time period depends on
the state in which your Contract is issued. In most states, it is 10 days after
you receive it. If your Contract replaces another contract, you have 20 days in
which to cancel your Contract. The amount of your refund will depend on the
state in which your Contract was issued. In most states, we will pay you an
amount equal to the Contract Value on the date we receive the Contract from you
and we will not deduct any Surrender Charges or administrative charges that
would otherwise apply. The Contract Value may be more or less than your Premium
Payments. In some states, we are required to refund your Premium Payments less
any Partial Withdrawals you may have already made from your Contract. Since
state laws differ as to the time period you have to return your Contract and the
amount of the refund you would be entitled to, you should refer to your Contract
for specific information about your circumstances.
12. Who can I contact for more information?
If you have a question about procedures or your Contract, or if you have a
request that is required to be made to us, you can write to us at the Variable
Annuity Service Center, P.O. Box 515, Concord, New Hampshire 03302-0515. You
may also send us a fax at 603-226-5123 or call us at 1-800-289-1776. When
contacting us you should include the Contract number, your name and the
Annuitant's name. Please make sure you also sign the inquiry or request.
The foregoing summary is qualified in its entirety by the information in the
remainder of this Prospectus, in the Statement of Additional Information, in
the prospectus for each of the underlying Funds and in the Contract. You should
refer to these documents for more detailed information. This Prospectus
generally describes only the Contract and the Separate Account. Separate
prospectuses attached hereto describe each Fund.
9
<PAGE>
fee tables
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Contract Owner Transaction Expenses
Sales Charge on Premium Payments .................. none
Maximum Surrender Charge
(as a % of Contract Value Surrendered)(1) ......... 6%
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)
Separate Account Annual Expenses
(as a percentage of average account value)
Mortality and Expense Risk Charge ................. 1.25%
Administrative Expense Charge ..................... 0.15%
-----
Total Separate Account Annual Expenses ............ 1.40%
</TABLE>
(1) The Surrender Charge is not applicable after the seventh Contract Year or
to the first 10% of Contract Value withdrawn or surrendered during each
Contract Year. (See "Free Surrender Amount.")
Fund Annual Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Total Fund
Management Other Annual
Fees Expenses Expenses
(After Expense (After Expense (After Expense
Reimbursements) Reimbursements) Reimbursements)
----------------- ----------------- ----------------
<S> <C> <C> <C>
JPVF International Equity Portfolio .............. 1.00% 0.55% 1.55%
JPVF World Growth Stock Portfolio ................ 0.75% 0.17% 0.92%
JPVF Emerging Growth Portfolio ................... 0.80% 0.14% 0.94%
JPVF Capital Growth Portfolio .................... 1.00% 0.09% 1.09%
JPVF Growth Portfolio ............................ 0.75% 0.33% 1.08%
JPVF Small Company Portfolio ..................... 0.75% 0.12% 0.87%
JPVF Growth and Income Portfolio ................. 0.75% 0.11% 0.86%
JPVF Balanced Portfolio .......................... 0.75% 0.19% 0.94%
JPVF High Yield Bond Portfolio ................... 0.75% 0.49% 1.24%
JPVF Money Market Portfolio ...................... 0.50% 0.14% 0.64%
MFS Research Series .............................. 0.75% 0.11% 0.86%(1)
MFS Utilities Series ............................. 0.75% 0.26% 1.01%(1)
Oppenheimer Capital Appreciation Fund/VA ......... 0.72% 0.03% 0.75%
Oppenheimer Bond Fund/VA ......................... 0.72% 0.02% 0.74%
Oppenheimer Strategic Bond Fund/VA ............... 0.74% 0.06% 0.80%
VIP Equity-Income Portfolio ...................... 0.49% 0.18% 0.67%(2)
VIP Growth Portfolio ............................. 0.59% 0.07% 0.66%(2)
VIP II Contrafund Portfolio ...................... 0.59% 0.07% 0.66%(2)
VIP II Index 500 Portfolio ....................... 0.24% 0.04% 0.28%(2)
</TABLE>
(1) The MFS Research and Utilities Series have expense reimbursement
arrangements with the investment advisor. Had no reimbursement agreement
been in place the expense ratio for the MFS Research and MFS Utilities
Series would have been .88% and .98%, respectively.
(2) FMR or the fund has entered into varying arrangements with third parties
who either paid or reduced a portion of the class' expenses. Without these
arrangements, the total annual expenses presented in the table would have
been .35% for VIP II Index 500 Portfolio, .80% for VIP II Contrafund
Portfolio, .80% for the VIP Growth Portfolio, and .68% for the VIP
Equity-Income Portfolio.
10
<PAGE>
Examples
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets (and assuming the entire Contract Value is allocated to
the applicable Variable Sub-account):
1. If you surrender the Allegiance Contract or if the Contract is annuitized
for less than five years, you would pay the following expenses on a $1,000
investment assuming a 5% annual return on assets.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
Variable Sub-accounts: -------- --------- --------- ---------
<S> <C> <C> <C> <C>
JPVF International Equity Portfolio ............... $92 $162 $219 $416
JPVF World Growth Stock Portfolio ................. $86 $143 $186 $339
JPVF Emerging Growth Portfolio .................... $86 $144 $187 $342
JPVF Capital Growth Portfolio ..................... $87 $148 $195 $360
JPVF Growth Portfolio ............................. $87 $148 $194 $359
JPVF Small Company Portfolio ...................... $85 $142 $183 $333
JPVF Growth and Income Portfolio .................. $85 $141 $183 $332
JPVF Balanced Portfolio ........................... $86 $144 $187 $342
JPVF High Yield Bond Portfolio .................... $89 $153 $203 $379
JPVF Money Market Portfolio ....................... $83 $135 $171 $304
MFS Research Series ............................... $85 $141 $183 $332
MFS Utilities Series .............................. $87 $146 $191 $350
Oppenheimer Capital Appreciation Fund/VA .......... $84 $138
Oppenheimer Bond Fund/VA .......................... $84 $138 $176 $316
Oppenheimer Strategic Bond Fund/VA ................ $85 $139 $180 $324
VIP Equity-Income Portfolio ....................... $83 $136 $173 $307
VIP Growth Portfolio .............................. $83 $135 $172 $306
VIP II Contrafund Portfolio ....................... $83 $135 $172 $306
VIP II Index 500 Portfolio ........................ $80 $124 $152 $256
</TABLE>
2. If you annuitize for a period of five years or greater, or do not surrender
the Allegiance Contract, you would pay the following expenses on a $1,000
investment assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
Variable Sub-accounts: -------- --------- --------- ---------
<S> <C> <C> <C> <C>
JPVF International Equity Portfolio ............... $31 $98 $175 $416
JPVF World Growth Stock Portfolio ................. $24 $78 $141 $339
JPVF Emerging Growth Portfolio .................... $24 $79 $142 $342
JPVF Capital Growth Portfolio ..................... $26 $84 $150 $360
JPVF Growth Portfolio ............................. $26 $83 $149 $359
JPVF Small Company Portfolio ...................... $24 $77 $138 $333
JPVF Growth and Income Portfolio .................. $24 $76 $137 $332
JPVF Balanced Portfolio ........................... $24 $79 $142 $342
JPVF High Yield Bond Portfolio .................... $27 $88 $158 $379
JPVF Money Market Portfolio ....................... $21 $69 $125 $304
MFS Research Series ............................... $24 $76 $137 $332
MFS Utilities Series .............................. $25 $81 $146 $350
Oppenheimer Capital Appreciation Fund/VA .......... $23 $73
Oppenheimer Bond Fund/VA .......................... $22 $73 $131 $316
Oppenheimer Strategic Bond Fund/VA ................ $23 $75 $134 $324
VIP Equity-Income Portfolio ....................... $22 $70 $127 $307
VIP Growth Portfolio .............................. $22 $70 $126 $306
VIP II Contrafund Portfolio ....................... $22 $70 $126 $306
VIP II Index 500 Portfolio ........................ $18 $58 $105 $256
</TABLE>
We have included the above table and examples to assist you in understanding
the costs and expenses that you will bear directly or indirectly, by investing
in the Separate Account. The table reflects expenses of the Separate Account as
well as the Portfolios. For additional information you should read "Charges and
Deductions" in the Prospectus and the section on expenses in the Prospectus for
each underlying Portfolio. In addition to the expenses listed above, Premium
Taxes may be applicable.
11
<PAGE>
These examples reflect the Annual Administrative Fee as an annual charge of
.01% of assets, based on an anticipated average Contract Value of $30,000.
The Examples should not be considered a representation of past or future
expenses, and your actual expenses may be greater or lesser than those shown.
Similarly, the annual rate of return of 5% assumed in the example is not an
estimate or guarantee of future investment performance.
condensed financial information
- --------------------------------------------------------------------------------
The following condensed financial information is derived from the financial
statements 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
Sub-accounts for a Contract since the commencement of business operations on
February 28, 1996.
The Accumulation Unit values and the number of Accumulation Units outstanding
for each Variable Sub-account for each of the periods indicated are as follows
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
JPVF International Equity Sub-account**
Accumulation unit value N/A N/A
o Beginning of period $ 11.371 N/A N/A
o End of period $ 12.970 N/A N/A
Number of accumulation units N/A N/A
o End of period 144,191 N/A N/A
- ---------------------------------------------------------------------------------------
JPVF World Growth Stock Sub-account*
Accumulation unit value
o Beginning of period $ 11.179 $ 10.985 10.000
o End of period $ 11.335 $ 11.179 10.985
Number of accumulation units
o End of period 263,838 123,760 101,024
- ---------------------------------------------------------------------------------------
JPVF Emerging Growth Sub-account*
Accumulation unit value
o Beginning of period $ 12.469 $ 10.344 10.000
o End of period $ 16.345 $ 12.469 10.344
Number of accumulation units
o End of period 391,328 132,225 88,358
- ---------------------------------------------------------------------------------------
JPVF Capital Growth Sub-account*
Accumulation unit value
o Beginning of period $ 14.527 $ 11.844 10.000
o End of period $ 19.844 $ 14.527 11.844
Number of accumulation units
o End of period 684,717 142,456 53,999
- ---------------------------------------------------------------------------------------
JPVF Growth Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 14.655 N/A N/A
o End of period $ 18.879 N/A N/A
Number of accumulation units N/A N/A
o End of period 37,158 N/A N/A
- ---------------------------------------------------------------------------------------
JPVF Small Company Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 8.588 N/A N/A
Number of accumulation units N/A N/A
o End of period 155,050 N/A N/A
- ---------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
JPVF Growth & Income Sub-account*
Accumulation unit value
o Beginning of period $ 12.477 $ 9.975 10.000
o End of period $ 13.864 $ 12.477 9.975
Number of accumulation units
o End of period 466,744 105,759 40,125
- ---------------------------------------------------------------------------------------
JPVF Balanced Sub-account*
Accumulation unit value
o Beginning of period $ 12.910 10.801 10.000
o End of period $ 14.990 12.910 10.801
Number of accumulation units
o End of period 382,872 104,886 27,907
- ---------------------------------------------------------------------------------------
JPVF High Yield Bond Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 11.909 N/A N/A
o End of period $ 11.695 N/A N/A
Number of accumulation units N/A N/A
o End of period 125,160 N/A N/A
- ---------------------------------------------------------------------------------------
JPVF Money Market Sub-account*
Accumulation unit value
o Beginning of period $ 1.062 1.027 1.000
o End of period $ 1.099 1.062 1.027
Number of accumulation units
o End of period 8,842,988 1,052,017 480,732
- ---------------------------------------------------------------------------------------
MFS Research Series Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 11.896 N/A N/A
Number of accumulation units N/A N/A
o End of period 230,004 N/A N/A
- ---------------------------------------------------------------------------------------
MFS Utilities Series Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 11.672 N/A N/A
Number of accumulation units N/A N/A
o End of period 324,448 N/A N/A
- ---------------------------------------------------------------------------------------
Oppenheimer Bond Sub-account*
Accumulation unit value
o Beginning of period $ 10.915 $ 10.223 10.000
o End of period $ 11.449 $ 10.915 10.223
Number of accumulation units
o End of period 336,679 151,322 10,568
- ---------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 9.989 N/A N/A
Number of accumulation units N/A N/A
o End of period 134,573 N/A N/A
- ---------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
VIP Equity-Income Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 11.296 N/A N/A
Number of accumulation units N/A N/A
o End of period 425,663 N/A N/A
- -----------------------------------------------------------------
VIP II Contrafund Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 12.355 N/A N/A
Number of accumulation units N/A N/A
o End of period 254,379 N/A N/A
- -----------------------------------------------------------------
VIP II Index 500 Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 12.926 N/A N/A
Number of accumulation units N/A N/A
o End of period 736,865 N/A N/A
- -----------------------------------------------------------------
VIP Growth Sub-account** N/A N/A
Accumulation unit value N/A N/A
o Beginning of period $ 10.000 N/A N/A
o End of period $ 13.095 N/A N/A
Number of accumulation units N/A N/A
o End of period 335,670 N/A N/A
- -----------------------------------------------------------------
</TABLE>
* On December 5, 1997, the Company substituted shares of various Portfolios of
the Jefferson Pilot Variable Fund, Inc. and the Oppenheimer Bond Fund/VA for
the then existing shares of the Alexander Hamilton Variable Insurance Trust
("AHVIT") and the Federated Prime Money Fund II. The above numbers reflect
the performance of the AHVIT and the Federated Prime Money Fund II for the
period prior to the date of the substitution and reflect the performance of
the Jefferson Pilot Variable Fund, Inc. and the Oppenheimer Bond Fund/VA for
the period after the date of the substitution. In the substitution, the
Oppenheimer Bond Fund/VA was substituted for two of the AHVIT Funds and the
pre-substitution performance numbers for the Oppenheimer Bond Sub-Account
reflect the performance of only one of such AHVIT Funds.
** These Sub-accounts were added to the contract as of January 1, 1998.
allocation options
- --------------------------------------------------------------------------------
You may allocate your Premium Payments to the 19 Variable Sub-accounts of the
Separate Account, to the two Interest Rate Guarantee Periods of the Capital
Developer Account, or to a combination of these Investment Options. If you
participate in our dollar cost averaging program, you may also allocate your
Premium Payments to the DCA Fixed Account. These allocation options may not be
available in all states. However, over the life of your Contract, you are
currently limited to allocating your Premium Payments to no more than 16 of the
Variable Sub-accounts in existence now or in the future. The Company reserves
the right to modify this limitation in the future. There is no guaranteed or
minimum Surrender Value for any Premium Payments or amounts allocated to any
Variable Sub-account.
Separate Account Investments
The Separate Account currently is divided into 19 Variable Sub-accounts. We
reserve the right to add or remove Variable Sub-accounts. Each Variable
Sub-account reflects the investment performance of a specific underlying Fund.
Currently, ten Variable Sub-accounts invest in shares of the Jefferson Pilot
Funds, two Variable Sub-accounts invest in shares of the Variable Insurance
Products Fund (VIP), two Variable Sub-accounts invest in shares of the Variable
Insurance Products Fund II (VIP II), two Variable Sub-accounts invest in shares
of the MFS Funds and three Variable Sub-accounts invest in shares of the
Oppenheimer Funds. JPVF, the VIP Funds, MFS Variable Insurance Trust and
Oppenheimer Variable Account Funds are open-end
14
<PAGE>
management investment companies and, with the exception of the MFS Utilities
Fund and JPVF International Equity Portfolio, all of the Funds available under
the Contracts are diversified. Each Fund is managed by a registered investment
adviser.
The investment adviser for JPVF is Jefferson Pilot Investment Advisory
Corporation (formerly known as "Chubb Investment Advisory Corporation"), One
Granite Place, Concord, New Hampshire, 03301. Jefferson Pilot Investment
Advisory Corporation has contracted with seven unaffiliated companies,
Templeton Global Advisors, Limited, Lord Abbett & Company, Janus Capital
Corporation, Warburg Pincus Asset Management Inc. (formerly known as "Warburg,
Pincus Counsellors, Inc."), Lombard Odier International Portfolio Management,
Limited, Strong Capital Management, Inc. and Massachusetts Financial Services
Company to act as sub-investment managers to the Jefferson Pilot Funds. These
sub-investment managers are shown in the table below.
The investment adviser for VIP and VIP II is Fidelity Management & Research
Company ("FMR"), 82 Devonshire Street, Boston, Massachusetts. For certain of
the VIP and VIP II Funds, FMR has entered into sub-advisory agreements with
affiliated companies.
The investment adviser for the MFS Variable Insurance Trust is Massachusetts
Financial Services Company ("MFS").
The investment adviser for the Oppenheimer Variable Account Funds is
OppenheimerFunds, Inc.
The investment objective of each Fund is as follows:
<TABLE>
<CAPTION>
EQUITY PORTFOLIO CHOICES
- -----------------------------------------------------------------------------------------------------------
Fund Name Objective Manager
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF Growth Capital growth by investing primarily in equity Strong Capital
Portfolio securities that the Sub-Investment Manager believes have Management, Inc.
above-average growth prospects.
- -----------------------------------------------------------------------------------------------------------
JPVF Long-term growth of capital through investments in Lombard Odier
International securities whose primary trading markets are outside the International
Equity Portfolio United States. Portfolio
Management Limited
- -----------------------------------------------------------------------------------------------------------
JPVF Capital Seeks capital growth. Realization of income is not a Janus Capital
Growth significant investment consideration and any income Corporation
Portfolio realized will be incidental.
- -----------------------------------------------------------------------------------------------------------
JPVF Small Seeks growth of capital. The Portfolio pursues its Lord Abbett & Company
Company objective by investing primarily in a diversified
Portfolio portfolio of equity securities issued by small companies.
- -----------------------------------------------------------------------------------------------------------
JPVF Emerging Long-term growth of capital. Dividend and interest income MFS
Growth Portfolio from portfolio securities, if any, is incidental to the
Portfolio's investment objective of long-term growth.
- -----------------------------------------------------------------------------------------------------------
JPVF World Long-term capital growth through a policy of investing Templeton Global
Growth primarily in stocks of companies organized in the U.S. or Advisors, Limited
Stock Portfolio in any foreign nation. A portion of the Portfolio may
also be invested in debt obligations of companies and
governments of any nation. Any income realized will be
incidental.
- -----------------------------------------------------------------------------------------------------------
MFS Research Seeks to provide long-term growth of capital and future MFS
income.
- -----------------------------------------------------------------------------------------------------------
MFS Utilities Seeks capital growth and current income (income above MFS
that available from a portfolio invested entirely in
equity securities).
- -----------------------------------------------------------------------------------------------------------
Oppenheimer Capital Seeks to achieve capital appreciation by investing in OppenheimerFunds, Inc.
Appreciation Fund/VA securities of well-known established companies.
- -----------------------------------------------------------------------------------------------------------
VIP Growth Seeks to achieve capital appreciation. FMR
Portfolio
- -----------------------------------------------------------------------------------------------------------
VIP II Contrafund Seeks long-term capital appreciation. FMR
Portfolio
- -----------------------------------------------------------------------------------------------------------
VIP II Index 500 Seeks investment results that correspond to the total FMR
Portfolio return of common stocks publicly traded in the United
States, as represented by the S&P 500.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
EQUITY AND FIXED-INCOME PORTFOLIO CHOICES
- ---------------------------------------------------------------------------------------------------------
Fund Name Objective Manager
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF Balanced Reasonable current income and long-term capital growth, Janus Capital Corporation
Portfolio consistent with conservation of capital, by investing
primarily in common stocks and fixed income securities.
- ---------------------------------------------------------------------------------------------------------
JPVF Growth and Long-term growth of capital by investing primarily in a Warburg Pincus Asset
Income Portfolio wide range of equity issues that may offer capital Management, Inc.
appreciation and, secondarily, to seek a reasonable level
of current income.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO CHOICES
- -------------------------------------------------------------------------------------------------------
Fund Name Objective Manager
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
VIP Equity- Seeks reasonable income by investing primarily in FMR
Income Portfolio income-producing equity securities. In choosing these
securities the fund will also consider the potential for
capital appreciation. The fund's goal is to achieve a
yield which exceeds the composite yield on the securities
comprising the Standard & Poor's Composite Index of 500
Stocks (S&P 500).
- -------------------------------------------------------------------------------------------------------
JPVF High High level of current income by investing primarily in MFS
Yield Bond corporate obligations with emphasis on higher yielding,
Portfolio higher risk, lower-rated or unrated securities.
- -------------------------------------------------------------------------------------------------------
JPVF Money Seeks to achieve as high a level of current income as is MFS
Market consistent with preservation of capital and liquidity.
Portfolio
- -------------------------------------------------------------------------------------------------------
Oppenheimer Seeks a high level of current income. As a secondary OppenheimerFunds, Inc.
Bond Fund/VA objective, seeks capital growth when consistent with its
primary objective.
- -------------------------------------------------------------------------------------------------------
Oppenheimer Seeks a high level of current income principally derived OppenheimerFunds, Inc.
Strategic Bond from interest on debt securities and to enhance such
Fund/VA income by writing covered call options on debt
securities.
- -------------------------------------------------------------------------------------------------------
</TABLE>
An investment in the JPVF Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government or the FDIC or any other agency.
* * *
We do not promise that the Funds will meet their investment objectives. Amounts
you have allocated to Variable Sub-accounts may grow in value, decline in
value, or grow less than you expect, depending on the investment performance of
the Funds in which those Variable Sub-accounts invest. You bear the investment
risk that those Funds will not meet their investment objectives. You should
carefully review their prospectuses before allocating amounts to the Variable
Sub-accounts of the Separate Account. With regard to the JPVF High Yield Bond
Portfolio and other Funds investing in higher yielding, higher risk,
lower-rated or unrated securities, you should consult the appropriate section
of the corresponding prospectus for a description of the risks associated with
such investments.
On December 5, 1997, the Company and the Separate Account, pursuant to an Order
issued by the Securities and Exchange Commission, substituted shares of the
various investment portfolios of the Jefferson Pilot Funds and of the
Oppenheimer Bond Fund/VA of Oppenheimer Variable Account Funds for shares of
various investment funds of the Alexander Hamilton Variable Insurance Trust and
the Federated Prime Money Fund II of Federated Insurance Series.
Mixed and Shared Funding: Conflicts of Interest
Shares of the Funds are available to insurance company separate accounts which
fund variable annuity contracts and variable life insurance policies, including
the Contract described in the Prospectus. Because Fund shares are offered to
separate accounts of both affiliated and unaffiliated insurance companies, it
is conceivable that, in the future, it may not be advantageous for variable
life insurance separate accounts and variable annuity separate accounts to
invest in these Funds simultaneously, since the interests of such policyowners
or contract owner may differ. Although neither the Company
16
<PAGE>
nor the Funds currently foresees any such disadvantages either to variable life
insurance policyowners or to variable annuity contract owners, each Fund's
Board of Trustees/Directors has agreed to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response thereto. If such a conflict
were to occur, one of the separate accounts might withdraw its investment in a
Fund. This might force that Fund to sell portfolio securities at
disadvantageous prices.
The Capital Developer Account
Premium Payments allocated to the Capital Developer Account and transfers to
the Capital Developer Account are not part of the Separate Account. Rather, the
Capital Developer Account is guaranteed by the general account of the Company,
which supports insurance and annuity obligations. Interests in the Capital
Developer Account have not been registered with the SEC in reliance upon
exemptions under the Securities Act of 1933 and the Capital Developer Account
has not been registered as an investment company under the Investment Company
Act of 1940. However, disclosures regarding the Capital Developer Account may
be subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses. Disclosure in this Prospectus relating to the Capital Developer
Account has not been reviewed by the SEC.
Within the Capital Developer Account, we offer two Interest Rate Guarantee
Periods, lasting for one and seven years. We will credit interest at a
specified Guaranteed Interest Rate on Premium Payments you allocate and amounts
you transfer to the Capital Developer Account. Amounts you allocate 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 3% per year before any applicable Surrender
Charge. Because of this adjustment and for other reasons, the amount you
receive upon Partial Withdrawal or Surrender or the amount applied to a
transfer or annuitization may be more or less than the Capital Developer
Account Value at the time of the transaction.
You may elect to have your Premium Payments allocated to the Interest Rate
Guarantee Periods at any time. In addition, you may transfer all or part of the
Separate Account Value to one or more of the Interest Rate Guarantee Periods
prior to the Maturity Date.
Contract Value in the Interest Rate Guarantee Periods will not share in the
investment performance of our general account or any portion thereof. Instead,
we 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 our sole discretion, but it will
never be less than 3% annually. There is no specific formula for the
determination of the Guaranteed Interest Rate. Some of the factors that we may
consider in determining the Guaranteed Interest Rate are: general economic
trends; rates of return currently available and anticipated on our investments;
expected investment yields; regulatory and tax requirements; and competitive
factors. We reset this rate periodically. We currently reset the rate
bi-weekly, but in the future the rate may be reset more or less frequently. Due
to the Market Value Adjustment and Surrender Charge, you assume 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.
We will invest the assets that support the Capital Developer Account in those
assets chosen by us and allowed by applicable state laws regarding the nature
and quality of investments 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.
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 With-
17
<PAGE>
drawal, Surrender or transfer from an Interest Rate Guarantee Period made
during the last 30 days of the Interest Rate Guarantee Period.
The Market Value Adjustment will reflect the relationship between (a) the
Treasury Rate for the period, the term to maturity of which most closely
approximates the duration remaining in the Interest Rate Guarantee Period from
which the Partial Withdrawal, Surrender, or transfer is made, and (b) the
Guaranteed Interest Rate applicable to the Interest Rate Guarantee Period from
which the Partial Withdrawal, Surrender, or transfer is made at the time of the
transaction.
Generally, if your Guaranteed Interest Rate does not exceed the applicable
Treasury Rate by at least 0.4%, 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 exceeds the applicable
Treasury Rate by more than 0.4%, 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.
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.
Dollar Cost Averaging Fixed Account Option
You may also allocate Premium Payments to the Dollar Cost Averaging Fixed
Account ("DCA Fixed Account"). The DCA Fixed Account is part of our general
account. We will credit interest to Premium Payments allocated to this option
for up to one year at the current rate that we declare when you make the
allocation. The effective annual rate will never be less than 3%. You may not
transfer funds to this option from the Variable Sub-accounts or the Capital
Developer Account.
the allegiance variable annuity contract
- --------------------------------------------------------------------------------
The Allegiance Variable Annuity Contract (the "Contract") is an individual
Flexible Premium Deferred Variable Annuity Contract. You may purchase the
Contract on a non-qualified basis ("Non-qualified Contract"). You may also
purchase the Contract in connection with retirement plans or individual
retirement accounts that qualify for favorable federal income tax treatment
("Qualified Contract"). The Contract is designed to aid you in long-term
financial planning.
Contract Application and Issuance of Contracts
Before we will issue a Contract, we 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). You may pay the initial Premium Payment in a
single payment or in 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 your checking or savings account. We
reserve the right to reject any application or Premium Payment. For a
Non-qualified Contract, you (or the Annuitant, if you are not the Annuitant)
must be age 90 or younger. You must be age 80 or younger for certain types of
Qualified Contracts. The Contract is not available in all states.
If you properly complete the application and it can be accepted in the form
received, your initial Net Premium Payment will be credited to the Contract
Value within 2 business days after the later of our receipt of the application
or our receipt of the initial Premium Payment at our Variable Annuity Service
Center. If we cannot credit the initial Net Premium Payment to the Separate
Account because the application or other issuing requirements are incomplete,
we will contact you within 5 business days and give an explanation for the
delay. We will return the initial Premium Payment to you at that time unless
you permit us to keep the initial Premium Payment and credit it as soon as the
necessary requirements are fulfilled. In that event, we will credit the initial
Net
18
<PAGE>
Premium Payment to the Contract Value within 2 business days of the
application's completion.
Your Contract will become effective on the date we credit the initial Net
Premium Payment to the Contract Value.
Free Look Period. You have a limited time period in which to return your
Contract for cancellation and receive a refund as described in your Contract.
This time period depends on the state in which your Contract is issued. In most
states, it is 10 days after you receive it. In most states if your Contract
replaces another contract, you have 20 days in which to cancel your Contract.
In order to cancel the Contract you must deliver or mail a written notice to
our Variable Annuity Service Center, or to your registered representative from
whom you purchased the Contract, and return the Contract. Such cancellation
will be effective upon being postmarked, properly addressed and postage paid.
The Contract will then be void as if it had never been issued.
The amount of your refund will depend on the state in which your Contract was
issued. In most states we will pay you an amount equal to the Contract Value on
the date we receive the Contract from you. We will not deduct any Surrender
Charges or administrative charges that would otherwise apply. The Contract
Value at that time may be more or less than your Premium Payments. In some
states we are required to refund your Premium Payments less any Partial
Withdrawals you may have already made from your Contract. If your Contract is
issued in one of the states where we are required to refund your Premium
Payments, we will allocate any Premium Payments made prior to the expiration of
the free look period (plus 5 days to allow for mailing time) to the JPVF Money
Market Sub-account. Five days after the expiration of the free look period, we
will allocate your Premium Payments to the Variable Sub-accounts in accordance
with the instructions set forth in your application.
Premium Payments
You should make all Premium Payments, checks, or electronic fund transfers
payable to Alexander Hamilton Life Insurance Company of America and they should
be sent to our Variable Annuity Service Center. We will provide you a receipt
upon request. We will provide you with a confirmation of each transaction. Your
Premium Payments may be made directly 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 you have elected the systematic investment program for additional premiums
to be automatically withdrawn monthly from your bank account or when you are
part of a periodic group billing or payroll deduction arrangement. We reserve
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 we
currently accept without our 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. We
reserve the right to limit the dollar amount of any additional Premium
Payments. Total Premium Payments under the Contract may not exceed $1,000,000
without our prior approval. Additional Premium Payments will be credited to
Contract Value as of the Valuation Period during which they are received at our
Annuity Service Center.
Allocation of Premium Payments. Premium Payments will be allocated among the
Variable Sub-accounts 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
Sub-accounts of the Separate Account, to one or more Interest Rate Guarantee
Periods, to the DCA Fixed Account or some combination thereof in whole
percentages (totaling 100%). Any allocation to a Variable Sub-account 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. Any allocation to the DCA Fixed Account must be at least $5,000.
Premium Payments allocated to an Interest Rate Guarantee Period will be
credited with interest from the day after they are received.
19
<PAGE>
The allocation specified in the application will continue to be used for
additional Premium Payments unless you request a change of allocation. If you
allocated some or all of your initial Premium Payment to the DCA Fixed Account,
any subsequent Premium Payments will be allocated according to the future
premium allocation instructions indicated on your Additional Features Form, if
any. If instructions for future premium allocations were not indicated on this
Form, that portion of the premium that would have been allocated to the DCA
Fixed Account will instead be allocated into the allocation options indicated
in the dollar cost averaging section of your completed Additional Features Form
and the remaining portion of your subsequent premiums will be allocated
according to the instructions in your application. You may change the
allocation instructions for Net Premium Payments any time before the Maturity
Date by sending a Request to our Variable Annuity 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 us by check or draft may be
postponed until such time as we determine that such instrument has been
honored.
Contract Value
On the Contract Date, your Contract Value equals your initial Net Premium
Payment. Thereafter, on any day on or before your Maturity Date, your Contract
Value equals the sum of the Separate Account Value, the Capital Developer
Account Value and the DCA Fixed Account Value. Your Contract Value will
increase by (1) any additional Premium Payments we receive; (2) any increases
in the Contract Value due to investment results of the Variable Sub-accounts
you have selected; (3) interest credited to the Capital Developer Account and
the DCA Fixed Account; and (4) any positive Market Value Adjustments. Your
Contract Value will decrease by (1) any Partial Withdrawals or Full Surrenders,
including applicable charges; (2) any decreases in your Contract Value due to
investment results of the Variable Sub-accounts you have selected; (3) the
Mortality and Expense Risk Charge, the Administrative Expense Charge, any
applicable Transfer Charge, and, on the last day of any Contract Year, the
Annual Administrative Fee; (4) any negative Market Value Adjustment; and (5)
taxes, when applicable. We will inform you of your Contract Value upon request.
Your 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.
Separate Account Accumulation Unit Value. When you allocate a Net Premium
Payment or transfer an amount to a Variable Sub-account, it is credited to the
Separate Account Value in the form of Accumulation Units. Each Variable
Sub-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
Sub-account 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 Sub-account, Accumulation Units are cancelled or
redeemed in a similar manner.
We will determine the Separate Account Value on every Valuation Day. For each
Variable Sub-account, the Accumulation Unit value for a given Valuation Period
is based on the net asset value of a share of the corresponding Fund.
Therefore, the Accumulation Units will fluctuate in value from day to day based
on the investment experience of the corresponding Fund and the Separate Account
Value will increase or decrease to reflect the investment performance of the
corresponding Fund. The Separate Account Value also reflects expenses borne by
the Fund(s) and the deduction of certain charges. The determination of Variable
Sub-account Accumulation Unit values is described in detail in the Statement of
Additional Information.
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 we may cancel the Contract and return the Contract
Value less any applicable fees to you in one lump sum. We will send a 90 day
notice to the most current address you have given us before we cancel your
contract. If you make sufficient Premium Payments to restore the Contract Value
to at least the minimum Contract Value within 90 days of the date of notice,
the Contract will not be cancelled.
20
<PAGE>
Transfers
You can transfer Contract Value to or from Interest Rate Guarantee Periods of
the Capital Developer Account and/or any Variable Sub-account of the Separate
Account, within certain limits, as described below. We do not permit transfers
into the DCA Fixed Account. We reserve the right to restrict the transfer
privilege in any way. We must receive your transfer request at our Variable
Annuity Service Center before a transfer will be effected.
We only make transfers on days when we and the New York Stock Exchange are open
for business. If we receive your request on one of those days, we will make the
transfer that day. Otherwise, we will make the transfer on the first subsequent
day on which we and the New York Stock Exchange are open.
Transfers during the Accumulation Period are subject to the following
provisions:
[diamond] 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 we reserve
the right to impose the $10 fee, we currently have no plans to do so.
We will provide at least 30 days notice of our intention to impose
such a fee.
[diamond] 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.
[diamond] If, after a transfer, the remaining Separate Account Value in the
Variable Sub-account from which the transfer was made would be less
than $250, we may include that remaining Separate Account Value as
part of the transfer.
[diamond] The minimum amount you may transfer among the Variable Sub-accounts is
$250 or the entire Separate Account Value remaining in the Investment
Option. The minimum amount that may be transferred to or from an
Interest Rate Guarantee Period of the Capital Developer Account is
$1,000.
During the Annuity Period, under any Variable Annuity Option, you (whether you
are the Annuitant or not) may transfer Separate Account Value among Variable
Sub-accounts, subject to the following provisions:
[diamond] 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
Annuity Period, but there may be a charge of $10 for each transfer in
excess of 15 during any Contract Year. We reserve the right to charge
the fee, however, we currently have no plans to do so. We will provide
at least 30 days notice of our intention to impose such fee.
[diamond] If, after a transfer, the remaining Separate Account Value in the
Variable Sub-account from which the transfer was made is less than
$250, we may include that remaining Separate Account Value as part of
the transfer.
[diamond] The minimum amount you may transfer from a Variable Sub-account is
$250 or the entire Separate Account Value remaining in the Variable
Sub-account.
Transfers between Variable Sub-accounts 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.
Telephone Transfers and Reallocations. You, your authorized representative or a
member of your representative's administrative staff may request transfers by
telephone of Contract Value or reallocation of Premium Payments (including
allocation changes pursuant to existing Dollar Cost Averaging and Automatic
Rebalancing programs), provided we have received the appropriate authorization
form. You will be asked to provide us with personal identification information,
such as social security number and date of birth, at the time of such request
for verification purposes. Although we have procedures that are reasonably
designed to reduce the risk of unauthorized telephone transfers or allocation
changes, there still exists some risk. Neither the Company, Jefferson Pilot
Variable Corporation, nor any of their affiliates are liable for any loss
resulting from unauthorized telephone transfers or allocation changes if the
procedures have been followed, and you bear the risk of loss in such situation.
Dollar Cost Averaging
Under the Dollar Cost Averaging program, you can instruct us to automatically
transfer a specified dollar amount from any Variable Sub-account or the DCA
21
<PAGE>
Fixed Account to the Variable Sub-accounts. The program is not available in
connection with the One Year or Seven Year Interest Rate Guarantee Periods 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, your Contract must have a minimum value of $5,000.
Dollar Cost Averaging, an 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.
Transfers from the DCA Fixed Account will take place over a 12 month period. We
may in the future offer different periods for dollar cost averaging amounts
from the DCA Fixed Account. We will only accept new Premium Payments into the
DCA Fixed Account. Amounts may not be transferred into the DCA Fixed Account
from the Variable Sub-accounts or the Capital Developer Account. Once we
commence the transfers from the DCA Fixed Account into the Variable
Sub-accounts you have selected, you may not make any additional Premium
Payments into the DCA Fixed Account.
If your Contract was issued in a state where we are required to return your
Premium Payments if you cancel your Contract during the free look period, we
reserve the right to delay commencement of dollar cost averaging transfers
until the expiration of the free look period. If the Premium Payments that are
to be used for your dollar cost averaging program will be sent to us at
different times, we will hold the funds in the JPVF Money Market Sub-account
until we have received all of the payments, at which time we will set your
interest rate and begin the dollar cost averaging transfers. If you discontinue
the dollar cost averaging program while amounts remain in the DCA Fixed
Account, we will transfer this remaining balance to the JPVF Money Market
Sub-account unless you indicate otherwise.
You can elect the Dollar Cost Averaging program when purchasing the Contract or
at a later date. If you dollar cost average out of a Variable Sub-account, 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
Sub-account equals $250 or less. At any one time, you are allowed to
participate in only one dollar cost averaging program utilizing either the DCA
Fixed Account or one of the Variable Sub-accounts. 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 you are permitted annually under the
Contract.
Automatic Rebalancing
An automatic rebalancing program is also available to you. This program
provides a method for re-establishing fixed proportions between selected
Variable Sub-accounts on a systematic basis. Under this program, the allocation
between Variable Sub-accounts will be automatically readjusted to the desired
allocation, subject to a minimum of 5% per Variable Sub-account, on a quarterly
or annual basis. Transfers made as a result of this program do not count toward
the 15 free transfers that you are permitted annually under the Contract. There
is currently no fee charged for participation in this program. This program
does not guarantee profits nor protect against losses.
You may not elect to have Dollar Cost Averaging and Automatic Rebalancing at
the same time. The applicable authorization form must be on file with us before
either program may begin. We reserve the right to modify the terms and
conditions of these programs upon 30 days advance notice to you.
22
<PAGE>
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 us by sending a Request, signed by
you, to our Variable Annuity Service Center. The Surrender Value is the
Contract Value plus or minus any Market Value Adjustment minus any applicable
Surrender Charge, Annual Administrative Fee, and any applicable Premium Taxes.
The proceeds payable upon a Partial Withdrawal will be the Partial Withdrawal
amount requested, increased or decreased by applicable Market Value Adjustment
and then decreased by any applicable Surrender Charge. For Partial Withdrawals,
you must specify the allocation option from which the withdrawal should be
taken. If we do not receive allocation instructions from you, we will allocate
the Partial Withdrawal proportionately among the Variable Sub-accounts and the
Capital Developer Account in the same proportions as you have instructed us to
allocate your Premium Payments.
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 you can withdraw is $250 ($1,000 if the withdrawal is
from any Guaranteed Interest Period of the Capital Developer Account) unless we
agree 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.") In addition,
following any Partial Withdrawal, your remaining Contract Value must be at
least $2,000. If the processing of your Partial Withdrawal request would result
in a remaining Contract Value of less than $2,000, we may treat your Partial
Withdrawal request as a request for a Full Surrender of your Contract, and you
will receive the Surrender Value. Following payment of the Surrender Value,
your Contract will be cancelled. If the amount requested to be withdrawn or
surrendered from an allocation option is greater than the portion of the
Contract Value attributable to that allocation option, we will pay you the
entire portion of the Contract Value attributable to that allocation option,
plus or minus any Market Value Adjustment, minus any Surrender Charge and minus
any Annual Administrative Fee and any charge for applicable Premium Taxes that
may apply.
The Separate Account Value remaining in any Variable Sub-account 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
your withdrawal request would result in Separate Account Value remaining in a
Variable Sub-account of less than $250 or Capital Developer Account Value
remaining in an Interest Rate Guarantee Period of less than $1,000, we may
treat your withdrawal request as a request for withdrawal of the entire
Separate Account Value remaining in the relevant Variable Sub-account 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 our Variable Annuity Service Center. All of your rights
and those of the Annuitant will terminate following a Full Surrender or at any
time Partial Withdrawals reduce your Contract Value to zero. After the Maturity
Date, no Surrenders or Partial Withdrawals are permitted. (See "Annuity Payment
Options.")
Withdrawals and Surrenders will be processed using the Separate Account Value
for the Valuation Period during which your Request for Withdrawal or Surrender
is received at our Variable Annuity Service Center. We will pay all Partial
Withdrawals and Full Surrender requests to you or to any other Payee that you
designate within 5 business days (unless you choose a later date) following
receipt of your request and all requirements necessary to process the Request
at our Variable Annuity Service Center, except as follows:
[diamond] Capital Developer Account--We reserve 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 6 months. We will pay
Interest on any amount deferred for 30 days or more at a rate of at
least 3.0% per year.
[diamond] Separate Account--We reserve the right to defer the payment of any
Partial Withdrawal or Full
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Surrender from the Separate Account as permitted by the Investment
Company Act of 1940. 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.
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.")
Systematic Withdrawal Plan
Under the Systematic Withdrawal Plan, you can instruct us to make automatic
withdrawal payments to you monthly, quarterly, semi-annually or annually from a
specified Variable Sub-account. The minimum monthly payment is $250, the
minimum quarterly payment is $750, the minimum semi-annual payment is $1,500,
and the minimum annual payment is $3,000, or the amounts can be the minimum
required amounts to comply with qualified plan requirements. The request for
systematic withdrawal must specify a date for the first payment, which must be
at least 30 but not more than 90 days after the form is submitted. The
Surrender Charge will not apply to the first 10% of Contract Value (determined
at the time of the Withdrawal) that is withdrawn during a Contract Year.
Amounts withdrawn in excess of 10% will be subject to any applicable Surrender
Charge. After the seventh 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.")
Annuity Payments
We 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 on the Maturity Date, the type of Annuity and Annuity Payment
Option you elected, the frequency of payments you elected, and possibly the age
of the Annuitant on the Maturity Date.
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 us, provided that notice of each change is received
by our Variable Annuity Service Center at least 30 days prior to the
then-current Maturity Date along with the written consent of any irrevocable
Beneficiaries. The latest Maturity Date which may be elected for a
Non-qualified Contract, unless otherwise consented to by the Company, is the
Annuitant's 85th birthday or the tenth Contract anniversary (whichever is
later) and for a Qualified Contract, the date the Annuitant attains age 70-1/2,
unless you demonstrate that the minimum required distribution under the Code is
being made. If you do not select a Maturity Date, the Maturity Date will be the
Annuitant's 85th birthday (for a Non-qualified Contract) or the date the
Annuitant attains age 70-1/2 (for a Qualified Contract).
Election of Annuity Payment Option. During your lifetime and that of the
Annuitant and prior to the Maturity Date, you may choose an Annuity Payment
Option. You may change the option, but a Request specifying a change of option
and the written consent of any irrevocable Beneficiary must be received by our
Variable Annuity Service Center at least 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 10 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 seven Contract Years and if an Annuity
Payment Option of less than five years is elected, then the surrender charge
will be deducted.
Taxes. All or part of each Annuity Payment will be taxable. (See "Certain
Federal Income Tax Consequences.") We may be required by state law to pay a
Premium Tax on the amount applied to an Annuity Payment Option and we will
deduct a charge for the amount of any such Premium Taxes.
Annuity Payment Options
The Contract provides four Annuity Payment Options which are described below.
Three of these
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are offered as either a fixed annuity or a variable annuity (Option I 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 you specify 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. Any remaining balance in the DCA
Fixed Account will be transferred to the JPVF Money Market Sub-account where it
will be used to provide a variable annuity unless you specify otherwise.
Variable Annuity Payments will be based on the Variable Sub-account(s) that you
select, or on the allocation of the Separate Account Value among the Variable
Sub-accounts.
If the amount of the Annuity Payments will depend on the age of the Annuitant,
we reserve the right to ask for satisfactory proof of the Annuitant's age. If
Annuity Payments are contingent upon the survival of the Annuitant, we may
require evidence satisfactory to us that such Annuitant is living. We may delay
making Annuity Payments until satisfactory proof is received.
On the Maturity Date, the sum of (i) the Capital Developer Account Value, (ii)
the Separate Account Value, and (iii) any remaining balance in the DCA Fixed
Account, plus or minus (iv) any Market Value Adjustment to the Capital
Developer Account Value, minus (v) any applicable Surrender Charge, minus (vi)
any Premium Tax, will be applied to provide for Annuity Payments under the
selected Annuity Payment Option.
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 purchase rate specified in the Contract to the portion of the Contract
Value allocated to the Fixed Annuity Option that you select. However, if the
Company's annuity purchase rates in effect on the Maturity Date would result in
higher Annuity Payments, then those more favorable rates will be used.
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 Variable Sub-accounts. 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 Sub-account 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 Sub-account 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.
You should consult the Statement of Additional Information for more detailed
information as to how we determine Variable Annuity Payments.
You may choose to receive Annuity Payments under any one of the Annuity Payment
Options described below. In addition, we may consent to other plans of payment
before the Maturity Date. Additionally, you may also elect to receive the
Contract Value less any applicable Surrender Charge as of the Maturity Date in
a lump sum payment.
Note Carefully: Under Annuity Payment 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 Payment Option I--Income for Specified Period (Available as a Fixed
Annuity Payment Option only)--We make Periodic Payments for the period you have
chosen. The specified period must be at least 5 years and cannot be more than
30 years.
Annuity Payment Option II--Life Income--We make payments for as long as the
Annuitant lives with optional guaranteed periods (Life Income with Period
Certain). If the Annuitant dies before all of the guaranteed payments have been
made, we will
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pay the remaining guaranteed payments to the Beneficiary.
Annuity Payment Option III--(1) Joint and Last Survivor Life Income
Payments--We make payments 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 Payment 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 Sub-account to another Variable
Sub-account within the Separate Account. (See "Transfers.") 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, we have not
received a proper written election not to have federal income taxes withheld,
we 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.")
Except as otherwise agreed to by you and the Company, Annuity Payments will be
payable monthly. If your Contract Value is less than $2,000 (or an amount that
would provide monthly Annuity Payments of less than $20 under any Annuity
Payment Option) on the Maturity Date, we will pay you a lump sum. We may
require proof from the Payee of the Annuitant's survival as a condition of
future payments.
In some states, the Contracts offered by this Prospectus contain annuity tables
that provide for different benefit payments to men and women of the same age.
We will use these sex-distinct tables, where permitted, for non-qualified
Contracts and IRAs. We will use unisex tables for Qualified Contracts (other
than IRAs). You may request a copy of these tables from us.
Death Benefit
Death of Contract Owner Prior to Maturity Date. If you die before the Maturity
Date, a Death Benefit will be paid to the Beneficiary, if living. The Death
Benefit is payable upon our receipt of Due Proof of Death, as well as proof
that the death occurred during the Accumulation Period. Upon our 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 we have 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 us within 90 days following
the date we receive Due Proof of Death, 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 your Issue Age (age when
the Contract was issued). If you die and your 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,"
with interest compounded at 4% per year (However, we will no longer credit
this interest beginning on the earlier of (1) the date of your death or (2)
the date you reach age 75);
(B) the Contract Value as of the most recent fifth Contract Anniversary
occurring while the you were living and before your 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 we have sufficient information to make the
Death Benefit payment.
For purposes of (A), 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 immediately prior to) the Partial Withdrawal; and
(b) is the Death Benefit on the date of (but immediately prior to) the Partial
Withdrawal.
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If you die and your Issue Age is greater than age 75, the amount of the Death
Benefit is equal to the Contract Value on the date we receive Due Proof of
Death, election of a payment option, and return of the Contract.
If you are 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 we have
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 our 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 your or
the Beneficiary's election, as described below. The Beneficiary may elect to
use the lump sum payment to establish an account through our retained asset
program ("Performance Plus Account"). The Performance Plus Account allows the
Beneficiary to write one or more checks up to the amount of Death Benefit
proceeds credited to the account plus any applicable interest. The amount in
the Performance Plus Account will earn interest at the floating 13 week U.S.
Treasury Bill rate, determined quarterly, from the date the claim is processed
until the date the checks are cleared. We guarantee that the interest rate will
never be less than an annual rate of 2%, compounded monthly. The Contract Value
will be calculated as of the date the we receive Due Proof of Death and all
requirements necessary to make the payment at our Variable Annuity Service
Center. The Contract will end on such date.
IRS Required Distribution. Federal tax law requires that if you die before the
Maturity Date, then the entire value of the Contract must generally be
distributed within five years of the date of your death. Special rules may
apply to your 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.")
Death of Annuitant Prior to Maturity Date. If you are not the Annuitant and the
Annuitant dies prior to the Maturity Date, you may name a new Annuitant. If no
new Annuitant is named, you become the new Annuitant.
If you are 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, we 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 you die after the
Maturity Date and before the Annuitant, we 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 you die and the Beneficiary is your
surviving spouse, your spouse may choose not to receive the Death Benefit and
may continue the Contract and become the Contract Owner. The excess, if any, of
the Death Benefit over the Contract Value will be added to the Contract Value.
In this situation, if you were also the Annuitant, your spouse will be the new
Annuitant. If your spouse chooses to continue the Contract, no Death Benefit
will be paid because of your death.
Payment of Death Benefit to Beneficiary. Instead of accepting the Death
Benefit, the Beneficiary (after your death) can choose by Request to receive
Annuity Payments based on his or her life expectancy.
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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 your death (as determined for federal tax purposes), and must
begin within one year of your 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 our Variable Annuity
Service Center. When the Variable Annuity Service Center records the change, it
will take effect as of the date we received your Request at our Variable
Annuity 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. We will comply with
all state and federal laws requiring notification of the change in Beneficiary.
If you die and you have not named a Beneficiary, or your named Beneficiary
predeceased you and you did not name a new Beneficiary, your estate will be the
Beneficiary. If your contract is owned by joint owners and one of the joint
owners dies, the surviving joint owner will be the deemed Beneficiary. Joint
owners are permitted only if they are spouses.
Change of Contract Owner
You may change the Contract Owner while the Annuitant is alive by sending a
Request to our Variable Annuity Service Center. The change will be effective on
the date we record the Request, but will be subject to any payment made or
action taken by us before recording the change. When the change takes effect,
all rights of ownership in the Contract will pass to the new Contract Owner.
Changing the Contract Owner does not change the Annuitant, or the Beneficiary.
Changing the Contract Owner may have tax implications (See "Certain Federal
Income Tax Consequences"). We will comply with all state and federal laws
requiring notification of the change in Contract Owner. The Annuitant named in
the application cannot 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, if you are a participant in the ORP, you (or your estate if
you have 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 4O3(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
- --------------------------------------------------------------------------------
We will make certain charges and deductions under the Contract in order to
compensate us for incurring expenses in distributing the Contract, bearing
mortality and expense risks under the Contract, and administering the Separate
Account and the Contracts. The Company may also deduct charges for transfers,
Premium Taxes, and other federal, state or local taxes. In addition, certain
deductions are made from the assets of the Funds for management fees and
expenses.
Surrender Charge
We incur expenses relating to the sale of Contracts, including commissions to
registered representatives and other promotional expenses. The Surrender
Charge, which is a contingent deferred sales charge, is intended to allow as to
recoup these distribution
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expenses. In connection with a Partial Withdrawal, Full Surrender,
annuitization within the first Contract Year, or an Annuity Payment Option of
less than five years during the first seven Contract Years, we will impose the
Surrender Charge on the amount withdrawn or surrendered, net of any Market
Value Adjustment and before any deductions for the Annual Administrative Fee or
Premium Taxes. 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+
- --------------------- ---- ---- ---- ---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender Charge..... 6% 6% 6% 5% 4% 3% 2% 0%
</TABLE>
The Surrender Charge will not be applied under the following circumstances:
1. If you cancel the Contract during the free look period.
2. If you choose to annuitize the Contract after the first Contract Year and
you choose an Annuity Payment Option of longer than five years.
3. Payment of the Death Benefit.
4. On any Free Surrender Amount. (See below.)
5. To comply with the minimum distribution requirements of the Internal Revenue
Code.
6. If, after 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 us 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.
7. If you are diagnosed as suffering from an illness that reduces your life
expectancy to 12 months or less from the date of diagnosis. We reserve the
right to require, at our expense, a second opinion from a physician
acceptable to both of us.
We 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. We may waive or reduce the Surrender Charge for Contracts sold to certain
groups (See "Reduction in Charges for Certain Groups.")
We anticipate that the Surrender Charge will not generate sufficient funds to
pay the cost of distributing the Contracts.
We guarantee that the aggregate surrender charge will never exceed 8.5% of the
total premium payments you make under the Contract.
Free Surrender Amount. We impose a Surrender Charge on partial withdrawals and
full surrenders (and certain annuitizations) in the first seven Contract Years.
However, you are entitled to withdraw up to 10% of the Contract Value each year
without a Surrender Charge. This free surrender amount is equal to 10% of the
Contract Value as of the date of the withdrawal, less the sum of free surrender
amounts previously taken during the Contract Year, and will not be less than
zero. 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 seven 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.
Mortality and Expense Risk Charge
We impose a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Contracts. This charge is 1.25% annually
of the daily value of net assets in each Variable Sub-Account. The Mortality
and Expense Risk Charge is reflected in the Accumulation Unit value or Annuity
Unit value for each Variable Sub-account. 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 we assume arise from our contractual obligations to make
Annuity Payments. Thus, you are
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assured that neither the Annuitant's own longevity nor an unanticipated
improvement in general life expectancy will adversely affect the Annuity
Payments that you will receive under the Contract.
We also bear substantial risk in connection with the Death Benefit. During the
Accumulation Period, if your Age is less than 75, we will pay a Death Benefit
that could be greater than the Contract Value. Otherwise, the Death Benefit is
based on the Contract Value. The Death Benefit is paid without imposition of a
Surrender Charge or application of the Market Value Adjustment.
The expense risk we assume is the risk that our actual expenses in
administering the Contract and the Separate Account will exceed the amount we
receive through the Annual Administrative Fee and the Administrative Expense
Charge.
Administrative Expense Charge
We deduct a daily charge equal to a percentage of the net assets in each
Variable Sub-account for administering the Separate Account. The effective
annual rate of this charge is 0.15% of the daily value of net asset in each
Variable Sub-account. We guarantee that the amount of this charge will not
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 cost of administering your Contract, we deduct an Annual
Administrative Fee from the Contract Value of your 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. We guarantee that this fee will not increase.
We do not anticipate realizing any profit from this charge. The Annual
Administrative Fee will be deducted pro rata from your Investment Options in
the same proportion that the amount of your Contract Value in each Investment
Option bears to your total Contract Value. We will waive the Annual
Administrative Fee if, on the last day of that Contract Year, your Contract
Value is $30,000 or greater or if 100% of your Contract Value is allocated to
the Capital Developer Account. No Annual Administrative Fee is deducted after
the Maturity Date.
We may waive or reduce the Annual Administrative Fee for Contracts sold to
certain groups. (See "Reduction in Charges for Certain Groups.")
Transfer Charge
We may impose a fee equal to $10 for each transfer in excess of 15 during any
Contract Year. Although we reserve the right to impose a $10 fee, we currently
have no plans to do so.
Premium Taxes
We may be required to pay Premium Taxes in certain states. Depending upon
applicable state law, we will deduct the Premium Taxes if we are required to
pay them. This may occur, for example, at the time you pay a premium, Surrender
the Contract or make a Partial Withdrawal or when the Contract reaches the
Maturity Date or a Death Benefit is paid. We may elect to defer the deduction
of Premium Taxes that would otherwise be deducted from Premium Payments until a
later time. Premium Taxes may range from 0% to 3.5% of Premium Payments or
Contract Value.
Federal, State and Local Taxes
No charges are currently made for federal, state, or local taxes other than
state Premium Taxes. However, we reserve the right to deduct charges in the
future for such taxes or other economic burden resulting from the application
of any tax laws that we determine to be attributable to the Contracts.
Other Expenses Including Investment Advisory Fees
You indirectly bear the charges and expenses of the Funds whose shares are held
by the Variable Sub-accounts to which you allocate your Contract Value. The net
assets of each Fund will reflect deductions in connection with the investment
advisory fees and other expenses.
For more information concerning the investment advisory fees and other charges
against the Funds, see the prospectuses for the Funds, current copies of which
accompany this Prospectus.
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
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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.
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.
You may purchase the Contract on a non-qualified basis ("Non-qualified
Contract") or for use 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
(Traditional IRA), 408A (Roth IRA), or 457 of the Internal Revenue Code of
1986, as amended (the "Code"). Information regarding the tax treatment of a
Traditional IRA or a Roth IRA is contained in a separate IRA Disclosure
Statement available from the Company. 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, in some cases 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.
If you purchase this Contract as a Non-Qualified Contract, it is intended that
the Contract will be owned and administered to satisfy the requirements of
Section 72 of the Code. If you purchase this Contract as a Qualified Contract,
it is intended that the Contract will be owned and administered to satisfy the
requirements of the provisions of the Code that apply to that type of Qualified
Contract. The following discussion is based on the assumption that the Contract
satisfies whichever Federal income tax rules apply to the Contract.
At the time you pay the initial Premium Payment, you must specify whether a
Non-Qualified Contract or a Qualified Contract is being purchased. If your
initial Premium Payment is derived from an exchange or surrender of another
annuity contract, we may require that you provide us with information as to the
Federal income tax status of the previous annuity contract. We will require you
to purchase separate Contracts if you desire to invest monies qualifying for
different annuity tax treatment under the Code. We would require the minimum
initial Premium Payment on each contract. Additional Premium Payments under
your Contract must qualify for the same Federal income tax treatment as your
initial Premium Payment under the Contract. We will not accept an additional
Premium Payment under your Contract if the Federal income tax treatment of such
Premium Payment would be different from that of your initial Premium Payment.
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Taxation of Annuities
In General. Section 72 of the Code governs taxation of annuities in general. We
believe that if you are an individual (a "natural" person under the tax rules),
you will not be taxed on increases in the value of a Contract until a
distribution occurs (e.g., Partial Withdrawals, Full Surrenders or Annuity
Payments under the Annuity Payment Option elected). Any change in ownership,
assignment, pledge, or agreement to assign or pledge any portion of your
Contract Value (and in the case of a Qualified Contract, any portion of your
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. Unlike direct investments in
mutual funds, no amounts invested in a variable annuity will produce any
capital gains or losses.
If the owner of any Non-qualified annuity contract is not an individual or
other "natural" person (e.g., a corporation or a certain type of trust), the
owner generally must include in income any increase in the excess of the
contract's value over the "investment in the contract" (discussed below) during
the taxable year. There are some exceptions to this rule, and if you are not a
natural person you may wish to discuss these with a competent tax advisor.
Possible Changes in Taxation. In past years, legislation has been proposed that
would have adversely modified the Federal taxation of certain annuities.
Although as of the date of this prospectus Congress has not passed 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 apply to your
Contract even though it was purchased prior to the change in the tax laws or
rules.
Surrenders and Partial Withdrawals from Qualified Contracts. 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 account 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 with after tax contributions. For a Contract issued in
connection with qualified plans, the "investment in the contract" can be zero.
As explained in the separate Disclosure Statement for Roth IRAs, special tax
rules apply to distributions from Roth IRAs and Roth Conversion IRAs.
Surrenders and Partial Withdrawals from Non-Qualified Contracts. 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 is before any surrender charge, and includes any
positive Market Value Adjustment which results from such a Partial Withdrawal.
Full Surrenders are treated as taxable income to the extent that the amount
received exceeds the "investment in the contract."
Annuity Payments. If you elect to receive payments over a period of years, over
your life expectancy, or over the life expectancies of yourself and another
individual, part of each payment you receive will be a return of your
"investment in the contract" and part of each payment will be taxable income.
In general, the amount of each payment that is a return of your "investment in
the contract" is calculated by dividing your total "investment in the contract"
by the total number of expected payments. For example, if your "investment in
the contract" is $6,000, and you elect to receive 60 monthly annuity payments,
$100 of each payment will be a return of your "investment in the contract" and
will not be subject to Federal income taxes ($6,000 / 60 = $100). If payments
are being made over your life expectancy, or the joint life expectancy of you
and your spouse, there are IRS tables which are used to determine how many
annuity payments are expected to be made. After you have received the expected
number of payments, you will have received tax-free your entire "investment in
the contract." Any additional payments will be fully taxable. If you die before
you have received your entire "investment in the contract" and there are no
additional payments after you die, there is a special tax rule that allows you
a deduction for the unrecovered "investment in the contract" on your last
income tax return. If some payments continue to your beneficiary after your
death, your beneficiary can recover any remaining "investment in the contract"
over the additional payments being made.
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Penalty Tax. For Non-Qualified Contracts and for most Qualified Contracts
(there are special rules for Roth IRAs) there may be a 10% Federal penalty tax
on any premature distributions. The 10% penalty applies only to the portion of
the distribution that is treated as taxable income. In general, however, there
is no penalty tax on distributions from a Qualified or a Non-Qualified
Contract: (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 a Non-Qualified
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. For distributions from
Qualified Contracts, in addition to all of the above exceptions to the 10%
penalty tax, the following additional exceptions to the penalty may apply: (1)
made to an employee after separation from service after age 55 from a
retirement plan other than an IRA; (2) made to pay certain uninsured medical
expenses; (3) made to certain unemployed individuals to pay health insurance
premiums; (4) made to pay for certain higher education expenses; or (5) made to
a first-time home buyer ($10,000 lifetime limit).
Death Benefit Proceeds. The Code requires that both Qualified and Non-Qualified
Contracts make certain distributions if the owner of the Contract dies. If you
die before periodic annuity payments have started, the entire value of the
annuity must either (i) be paid out, in full, within five years of your death,
or (ii) annuity payments must start within one year of your death. If your
surviving spouse becomes the owner of the Contract, your spouse has the option
of continuing the Contract as if he or she had been the original purchaser. If
you die after periodic annuity payments have started, payments must continue to
be made under a method that will distribute the balance in the Contract at
least as rapidly as the method being used prior to your death. A non-spousal
beneficiary may not elect, or continue to use, a settlement option unless that
settlement option will result in distributions that comply with the Code.
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.
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.
Gifts, 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, including the immediate taxation of the entire gain in the
Contract. If you are thinking about any such gift, transfer, assignment or
exchange of a Contract, you should contact a competent tax adviser to discuss
the potential tax effects of such transaction.
Generation-Skipping Transfers. We may be required to determine whether the
Death Benefit or any other payment constitutes a "direct skip" that may be
subject to the Generation-Skipping Transfer Tax, as defined in Section 2612 of
the Code. A direct skip occurs, for example, if you make a gift to your
grandchild instead of your living child. If the Generation-Skipping Transfer
Tax applies to a distribution, we are required to calculate and withhold from
any payment the amount of such tax and pay it to the IRS.
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
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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. If you are
considering the purchase of more than one annuity contract in a calendar year,
you 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. If you
have provided the Company with your taxpayer identification number (i.e., your
Social Security number), you may elect not to have tax withheld from
distributions. Withholding is mandatory for certain distributions from 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 our 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. You
should consult a competent tax advisor 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, distributions that do not satisfy
specified requirements, and certain other transactions with respect to
qualified plans. Therefore, no attempt is made to provide more than general
information about the use of the Contract with the various types of qualified
plans. Contract Owners, Annuitants and Beneficiaries are cautioned that the
rights of any person to any benefits under Qualified Contracts may be subject
to the terms and conditions of the plans themselves, regardless of the terms
and conditions of the Contract. Some retirement plans are subject to
distribution and other requirements that are not incorporated into our Contract
administration procedures. Contract Owners, Participants and Beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts comply with applicable law.
Following are brief descriptions of the various types of qualified plans in
connection with which we will issue the Contract. Contracts for all types of
qualified plans may not be available in all states. When issued in connection
with a qualified plan, the Contract will be amended as necessary to conform to
the requirements of the Code.
Qualified Pension and Profit Sharing Plans. Sections 401(a) of the Code permits
corporate employers to establish various types of retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "HR. 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. If you are considering the purchase of a Contract for use with
such a plan, you should seek competent advice regarding the suitability of the
proposed plan documents and the Contract to your 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 "Traditional IRA").
Traditional 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 a Traditional IRA. The sale of a Contract for use
with a Traditional IRA may be subject to special disclosure requirements of the
Internal Revenue Service. Purchasers of a Contract for use with Traditional IRAs
will be provided with supplemental information required by the Internal Revenue
Service or other appropriate agency. Such purchasers
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will have the right to revoke their purchase within 7 days of the earlier of
the establishment of the Traditional IRA or their purchase. You should seek
competent advice as to the suitability of the Contract for use with Traditional
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 Traditional IRA qualification requirements.
Section 408A of the Code permits eligible individuals to contribute to a Roth
IRA. Purchasers of a Contract for use with Roth 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 Roth IRA or
their purchase. You should seek competent advice as to the suitability of the
Contract for use with Roth 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 Roth IRA qualification
requirements.
Tax-Sheltered Annuities. Section 403(b) of the Code permits public school
employees and employees of certain types of religious, charitable, educational,
and scientific organizations specified in Section 501(c)(3) of the Code to
purchase annuity contracts and, subject to certain limitations, exclude the
amount of premiums from gross income for tax purposes. However, these payments
may be subject to FICA (Social Security) taxes. These annuity contracts are
commonly referred to as "Tax-Sheltered Annuities." Subject to certain
exceptions, withdrawals under Tax-Sheltered Annuities which are attributable to
contributions made pursuant to salary reduction agreements are prohibited unless
made after you attain age 59-1/2, upon your separation from service, upon your
death or disability, or for an amount not greater than the total of such
contributions in the case of hardship.
Section 457 Deferred Compensation ("Section 457") Plans. Under Section 457 of
the Code, employees of (and independent contractors who perform services for)
certain state and local governmental units or certain tax-exempt employers may
participate in a Section 457 plan of their employer allowing them to defer part
of their salary or other compensation. The amount deferred and any income on
such amount will not be taxable until paid or otherwise made available to the
employee. The maximum amount that can be deferred under a Section 457 plan in
any tax year is ordinarily one-third of the employee's includable compensation,
up to $7,500. Includable compensation means earnings for services rendered to
the employer which is includable in the employee's gross income, but excluding
any contributions under the Section 457 plan or a Tax-Sheltered Annuity. During
the last three years before an individual attains normal retirement age,
additional "catch-up" deferrals are permitted.
The deferred amounts will be used by the employer to purchase the Contract. The
Contract will be issued to the employer, and all Contract Values will be subject
to the claims of the employer's creditors. The employee has no rights or vested
interest in the Contract and is only entitled to payment in accordance with the
Section 457 plan provisions. The plans may permit participants to specify the
form of investment for their deferred compensation account. Depending on the
terms of the particular plan, the employer may be 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.
alexander hamilton life insurance company of america
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The Company, 100 N. Greene St., Greensboro, North Carolina 27401, 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, 1998, the Company had assets of over $9.1
billion on a GAAP basis. The Company is wholly-owned by Jefferson-Pilot
Corporation, a $24.3 billion asset company based in Greensboro, North Carolina.
Jefferson-Pilot Corporation is in the insurance business through
Jefferson-Pilot Life Insurance Company, Jefferson Pilot Financial Insurance
Company, and Jefferson Pilot LifeAmerica Insurance Company, and in the
communications business through televi-
35
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sion 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."
The 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 Company owns the assets of the Separate Account. The Separate Account will
not be charged with liabilities arising out of other separate accounts the
Company may have or out of any other business of the Company 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 Sub-account
are credited to or charged against that Variable Sub-account without regard to
other income, gains or losses of the Company. Therefore, the investment
performance of any Variable Sub-account should be entirely independent of the
investment performance of the Company's general account assets or any other
separate account maintained by the Company.
Year 2000 Matter
The year 2000 issue relates to the way computer systems and programs define
calendar dates. By using only two digit dates, they could fail or make
miscalculations due to the inability to distinguish between dates in the 1900's
and in the 2000's. The potential problem also exists in some systems and
equipment not typically thought of as "computer-related" (referred to as
"non-IT") which contain hardware or software that must handle dates.
In 1995, Our parent, Jefferson-Pilot Corporation (the "Company"), began work on
a project to ensure the Year 2000 compliance of all systems, non-IT embedded
software equipment, and all Company key vendors and service providers. The
target completion date for the project is September 30, 1999.
The Company has completed the assessment and strategy phases for mainframe
applications, operating systems and hardware. The Company's new business and
policyholder administration systems and the general ledger are on the
mainframe. Currently, the majority of all mainframe systems have been tested to
confirm that their performance will not be affected by dates extending after
1999 and are compliant. With respect to significant policyholder systems, the
majority of the testing has been completed. For other mainframe systems the
project is on schedule.
For the majority of its non-IT related systems and equipment, the Company has
been advised by vendors that systems and equipment are currently Year 2000
compliant. The Company is obtaining written documentation regarding compliance.
Completion for non-IT systems and equipment is scheduled for September 1999.
The most significant category of key business partners is financial
institutions. Their critical functions include safeguarding and managing
investment portfolios, processing of the Company's operating bank accounts, and
sales/distribution. Other partner categories include insurance agents and
marketing organizations, suppliers of communication services, utilities,
materials and supplies. The Company has conducted surveys of all its software
and hardware vendors and testing is underway. Critical business partners have
been identified and surveys initiated. Results of these surveys are being
analyzed and appropriate testing or other due diligence conducted in the second
and third quarters of 1999.
The Company expects its critical policyholder systems to be compliant by the
end of the second quarter of 1999.
From Year 2000 problems, the Company could experience an interruption in its
ability to collect and process premiums, process claim payments, safeguard and
manage its invested assets and operating cash accounts, accurately maintain
policyholder information, accurately maintain accounting records, issue new
policies and/or perform adequate customer service. While the Company believes
the occurrence of such a situation is unlikely, a possible worst case scenario
might include one or more of the Company's significant policyholder systems
being non-compliant, resulting in a material disruption to the Company's
operations.
Although the Company plans completion of certification of all internal systems
and non-IT equipment well in advance of 2000, the Company recognizes the need
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to plan for unanticipated problems resulting from failure of internal systems
or equipment or from failures of the Company's business partners, providers,
suppliers or other critical third parties. The Company began work on
contingency plans for all mission critical functions in the first quarter of
1999.
distributor of the contracts
- --------------------------------------------------------------------------------
Jefferson Pilot Variable Corporation (formerly Jefferson-Pilot Investor
Services, Inc.) is the principal underwriter of the Contracts. Jefferson Pilot
Variable Corporation will enter into one or more contracts with various
broker-dealers for the distribution of the Contracts. Commissions paid on
Contract sales may vary and, in certain circumstances, commissions may be paid
in installments over time. Jefferson Pilot Variable Corporation, a wholly owned
subsidiary of Jefferson-Pilot Corporation, is a member of the NASD. Its mailing
address is One Granite Place, Concord, NH 03301. There may be other
underwriters in the future.
In addition to the payment of commissions, we 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, we are the "shareholder" of the
Funds and as such, we have certain voting rights. As a general matter, you do
not have a direct right to vote the shares of the Funds held by the Variable
Sub-accounts to which you have allocated your Contract Value. Under current
law, however, and prior to the Maturity Date, you are entitled to give us
instructions on how to vote those shares on certain matters. We will notify
when your instructions are needed. We will also provide proxy materials or
other information to assist you in understanding the matters being voted on. We
will determine the number of shares for which you may give voting instructions
as of the record date set by the relevant Fund holding the shareholder meeting.
The number of votes that you have the right to instruct will be calculated
separately for each Variable Sub-account. The number of votes that you have the
right to instruct for a particular Variable Sub-account will be determined by
dividing your Contract Value in the Variable Sub-account by the net asset value
per share of the corresponding Fund in which the Variable Sub-account 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 Sub-account by the net asset value per share of the corresponding
Fund. Fractional shares will be counted.
If you send us written voting instructions, we will follow your instructions in
voting the Fund shares attributable to your Contract. If you do not send us
written instructions, we will vote the shares attributable to your Contract in
the same proportions as we vote the shares for which we have received
instructions from other Contract Owners. 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.
We reserve the right to restrict or eliminate any of your voting rights when we
are permitted by law to do so.
The above description reflects our view of currently applicable law. If the law
changes or our interpretation of the law changes, we may decided that we are
permitted to vote Fund shares without obtaining voting instructions from our
Contract Owners and we may elect to do so.
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additional information about the separate account
- --------------------------------------------------------------------------------
Addition, Deletion, or Substitution of Investments
We reserve the right to transfer assets of the Separate Account, which we
determine 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.
We further reserve 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 are
no longer available for investment or if in our judgment further investment in
any Fund should become inappropriate in view of the purposes of the Separate
Account, we may redeem the shares, if any, of that Fund and substitute shares
of another Fund or of another registered open-end management investment
company. We will not substitute any shares attributable to a Contract's
interest in a Variable Sub-account of the Separate Account without notice and
prior approval of the SEC and state insurance authorities, if required by law.
We also reserve the right to establish additional Variable Sub-accounts of the
Separate Account, each of which would invest in shares corresponding to a new
investment portfolio of the existing Funds or in shares of another investment
company. Subject to applicable law and any required SEC approval, we, may, in
our sole discretion, establish new Variable Sub-accounts, eliminate one or more
Variable Sub-accounts, or combine Variable Sub-accounts if marketing needs, tax
considerations or investment conditions warrant. Any new Variable Sub-accounts
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, we may by appropriate
endorsement change the Contract to reflect the substitution or change. If we
deem it to be in the best interest of Contract Owners and Annuitants, and
subject to any approvals that may be required under applicable law, the
Separate Account may be operated as a management investment company under the
1940 Act; it may be deregistered under the Act if registration is no longer
required; or it may be combined with other separate accounts of the Company.
Further, we reserve the right, when permitted by law, to manage the Separate
Account under the direction of a committee at any time. We will notify you of
our 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 we may use the yield of the JPVF Money Market Variable
Sub-account and total returns of other Variable Sub-accounts in advertisements
and sales literature. Performance data is not intended to and does not indicate
future performance.
JPVF Money Market Variable Sub-account Yield. The yield of the JPVF Money
Market Variable Sub-account refers to the annualized income generated by an
investment in that Variable Sub-account 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
sub-account 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 Sub-account Yield. We may from time-to-time advertise or
disclose the current annualized yield of one or more of the Variable Sub-
accounts of the Separate Account (except the JPVF Money Market Variable
Sub-account) for 30-day periods. The annualized yield of a Variable Sub-account
refers to income generated by the Variable Sub-account over a specific 30-day
period. Because the yield is annualized, the yield generated by a Variable
Sub-account 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 Sub-account less Variable Sub-account
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,
38
<PAGE>
and (iv) multiplying that result by 2. Expenses attributable to the Variable
Sub-account 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 Sub-account 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 Sub-accounts 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 Sub-account's
actual yield is affected by the types and quality of its investments and its
operating expenses.
Total Return. Total returns for the Sub-accounts may be calculated pursuant to
a standardized formula or in non-standardized manners. The standardized total
return of the Variable Sub-accounts refers to return quotations assuming an
investment has been held in the Variable Sub-account for various periods of
time including, but not limited to. one year, five years, and ten years (if the
Variable Sub-account has been in operation for those periods), and a period
measured from the date the Variable Sub-account commenced operations. The total
return quotations will represent the average annual compounded rates of return
that would equate an initial investment of $1,000 to the redemption value of
that investment as of the last day of each of the periods for which total
return quotations are provided. Accordingly, the total return quotations will
reflect not only income but also changes in principal value (that is, changes
in the Accumulation Unit values), whereas the yield figures will only reflect
income. In addition, the standardized total return quotations will reflect the
Surrender Charge imposed on Partial Withdrawals and Full Surrenders, but the
standardized yield figures will not.
In addition, we may from time-to-time also disclose total return in
non-standard formats and cumulative total return for the Variable Sub-accounts.
The non-standard average annual total return and cumulative total return would
not reflect the Surrender Charge, which if reflected would lower the
performance figures for periods of less than seven years.
We may from time-to-time also disclose standard total returns and non-standard
total returns for the Variable Sub-accounts 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, we may compare the performance of the
Variable Sub-accounts 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 Sub-account'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 Sub-account'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 Sub-account.
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. A Fund's total returns should
not be expected to be the same as the returns of other funds, whether or not
both funds have the same portfolio managers and/or similar names. Current yield
is not fixed and varies
39
<PAGE>
with changes in investment income and Accumulation Unit values. The JPVF Money
Market Variable Sub-account yield will be affected if it experiences a net
inflow of new money which it invests at interest rates different from those
being earned on its then-current investments. An investor's principal in a
Variable Sub-account and a Variable Sub-account'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
We may from time-to-time publish (in advertisements, sales literature and
reports to you) the ratings and other information assigned to us 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 our financial strength and/or claims-paying ability and 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, our
claims-paying ability 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 our financial capacity to meet the obligations of our insurance and
annuity policies in accordance with their terms. Such ratings do not reflect
the investment performance of the Separate Account or the degree of risk
associated with an investment in the Separate Account.
general contract provisions
- --------------------------------------------------------------------------------
Entire Contract
The entire contract consists of the Contract, any attached riders and
endorsements, and the attached copy of the application. Only the Company's
President, or one of its Executive Vice Presidents may change the Contract. The
change must be in writing. No change will be made in the Contract unless you
agree to it in writing. No agent is authorized to change the Contract or to
change or waive any provisions of the Contract.
Reliance on Information Provided in Application
In issuing the Contract, we will rely on the statements made in the
application. We deem all such statements to be representations and not
warranties. We assume that these statements are true and complete to the best
of the knowledge and belief of those who made them. We 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.
Variations in Contract Provisions
Certain provisions of your Contract may vary from the descriptions in this
Prospectus in order to comply with different state laws. Any such variations
will be included in your Contract or in riders or endorsements to your
Contract.
The Company's Ability to Contest the Contract
We 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, we 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 Con-
40
<PAGE>
tract 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 us with a copy of the assignment. We
are not responsible for the validity of any assignment. An assignment will be
subject to any payment previously made by us or any other action we may take
before recording the assignment.
State law such as those governing marital property may affect your ability to
encumber the Contract.
Nonparticipating
The Contract is nonparticipating and will not share in any surplus earnings of
the Company. No dividends are payable on the contract.
Non-Business Days
If the due date for any activity required by the Contract falls on a
non-business day for the Company, performance will be rendered on the first
business day following the due date.
Regulatory Requirements
All interest guarantees, surrender benefits, and amounts payable at death will
not be less than the minimum benefits approved under the laws and regulations
of the state in which the Contract is delivered.
We 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
- --------------------------------------------------------------------------------
We are not involved in any litigation that is of material importance in
relation to our general account assets. In addition, there are no legal
proceedings to which the Separate Account is a party.
available information
- --------------------------------------------------------------------------------
We have 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 Statement. 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, (telephone no. 202-942-8090), at prescribed rates or may be found at the
SEC's Web Site at http://www.sec.gov.
41
<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>
<S> <C>
Page
----
More information About the Contract .................................... B-3
Determination of Variable Sub-account Accumulation Unit Values ......... B-3
Calculation of Annuity Unit Value ...................................... B-4
Annuity Period Transfer Formulas ....................................... B-5
Administration ......................................................... B-6
Records and Reports .................................................... B-6
Custody of Assets ...................................................... B-6
Principal Underwriter .................................................. B-6
Performance Data and Calculations ...................................... B-7
Money Market Variable Sub-account Yields ............................... B-7
Other Variable Sub-account Yield ....................................... B-7
Variable Sub-account Total Return Calculations: Standardized ........... B-9
Other Performance Data: Non-Standardized ............................... B-10
Other Information ...................................................... B-12
Federal Tax Matters .................................................... B-13
Taxation of the Company ................................................ B-13
Tax Status of the Contracts ............................................ B-13
Legal Matters .......................................................... B-15
Other Information ...................................................... B-15
Experts ................................................................ B-15
Financial Statements ................................................... B-15
</TABLE>
42
<PAGE>
ALEXANDER HAMILTON VARIABLE ANNUITY SEPARATE ACCOUNT
Offered by
ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA
100 N. Greene St.
Greensboro, North Carolina 27401
------------
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, 1999 by calling 1-800-289-1776, or by writing to the Company at its
Variable Annuity Service Center, One Granite Place, P.O. Box 515, Concord, New
Hampshire 03302-0515. 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 JEFFERSON PILOT
VARIABLE FUND, INC.; THE VARIABLE INSURANCE PRODUCTS FUND; THE VARIABLE
INSURANCE PRODUCTS FUND II; THE MFS VARIABLE INSURANCE TRUST; AND THE
OPPENHEIMER VARIABLE ACCOUNT FUNDS.
Dated: May 1, 1999
Page 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
More Information About the Contract...................................... 3
Determination of Variable Sub-account Accumulation Unit Values........... 3
Calculation of Annuity Unit Value ....................................... 4
Annuity Period Transfer Formulas......................................... 5
Administration........................................................... 6
Records and Reports...................................................... 6
Custody of Assets........................................................ 6
Principal Underwriter.................................................... 6
Performance Data and Calculations........................................ 7
Money Market Variable Sub-account Yield.............................. 7
Other Variable Sub-account Yields.................................... 7
Variable Sub-account Total Return Calculations: Standardized ........ 9
Other Performance Data: Non-Standardized ........................... 10
Other Information................................................... 12
Federal Tax Matters......................................................13
Taxation of the Company...............................................13
Tax Status of the Contracts...........................................13
Legal Matters............................................................15
Other Information........................................................15
Experts..................................................................15
Financial Statements.....................................................15
</TABLE>
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.
Page 2
<PAGE>
MORE INFORMATION ABOUT THE CONTRACT
DETERMINATION OF VARIABLE SUB-ACCOUNT 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 Sub-account by dividing
the Net Premium Payment allocated to (or the amount withdrawn from) the Variable
Sub-account 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 Sub-accounts credited to the Contract on
the applicable Valuation Day.
ACCUMULATION UNIT VALUE. The value of an Accumulation Unit in a
Variable Sub-account 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
Sub-account for the Valuation Period just ended. The value of an Accumulation
Unit in each of the initial seven Variable Sub-accounts was arbitrarily
established at the inception of the Separate Account's operation. The value was
established at $10 for each of the eighteen Variable Sub-accounts except the
Money Market Variable Sub-account, for which the value was established at $1,
the JPVF Growth Sub-account, for which the value was established at $14.655, the
JPVF High Yield Bond Sub-account, for which the value was established at
$11.909, and the JPVF International Equity Sub-account, for which the value was
established at $11.371.
A VALUATION DAY is any day on which the New York Stock Exchange is open
for trading except for normal federal holiday closing or when the SEC has
determined that a state of emergency exists. In addition, the Company will be
closed on the following local or regional business holidays which shall not
constitute a Valuation Day: Good Friday, the Friday following Thanksgiving, and
the day before or following Christmas Day.
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.
NET INVESTMENT FACTOR. The Company calculates the Net Investment Factor
for a Valuation Period for each Variable Sub-account 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 Sub-account 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 Sub-account if the ex-dividend date occurs during
the Valuation Period.
Page 3
<PAGE>
(b) is the net asset value of a Fund share held in the Separate Account
for that Variable Sub-account determined as of the end of the
preceding Valuation Period.
(c) is a factor representing the Mortality and Expense Risk Charge 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 Sub-account.
The Net Investment Factor may be greater or less than one; therefore, the
Accumulation Unit value may increase or decrease.
CALCULATION OF ANNUITY UNIT VALUE
[bullet] 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 Sub-account is determined by multiplying the portion of
the Contract Value to be applied to the Variable Sub-account by
the variable annuity purchase rate specified in the Settlement
Option table in the Contract.
2. The number of Annuity Units credited in each Variable Sub-account
is then determined by dividing the dollar amount of the first
payment by the value of one Annuity Unit in that Variable
Sub-account 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.
[bullet] 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. The value of an Annuity Unit in a Variable Sub-account
on any Valuation Day is determined as follows:
1. The value of the Annuity Unit for the Variable Sub-account 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 variable annuity purchase rates.
The Net Investment Factor reflects the investment experience of the
applicable Fund and certain charges (See above for a detailed description of the
Net Investment Factor).
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<PAGE>
ANNUITY PERIOD TRANSFER FORMULAS
During the Annuity Period, you may transfer Separate Account Value from
one Variable Sub-account to another, subject to certain limitations. Interest
Rate Guarantee Periods are not available during the Annuity Period, thus none
will be available for transfers. (See "Transfers,". 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
Sub-account as follows:
= D/AUV1
2. Determine the numb er of Annuity Units remaining in such Variable
Sub-account (after the transfer):
= UNIT1 - D/AUV1
3. Determine the number of Annuity Units in the transferee Variable
Sub-account (after the transfer):
= UNIT2 + D/AUV2
4.Subsequent Annuity Payments will reflect the changes in Annuity Units
in each Variable Sub-account as of the next Annuity Payment's due
date.
Where:
(AUV1) is the Annuity Unit value of the Variable Sub-account that the
transfer is being made from.
(AUV2) is the Annuity Unit value of the Variable Sub-account that the
transfer is being made to.
(UNIT1) is the number of units in the Variable Sub-account that the
transfer is being made from, before the transfer.
(UNIT2) is the number of units in the Variable Sub-account that the
transfer is being made to, before the transfer.
(D) is the dollar amount being transferred.
Page 5
<PAGE>
ADMINISTRATION
The Company or its affiliates will be providing administrative
services. The services provided by the Company or its affiliates include
issuance and redemption of the Contract, maintenance of records concerning the
Contract and certain Contract Owner services.
If the Company or its affiliates do not continue to provide these
services, the Company 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.
CUSTODY OF ASSETS
The assets of each of the Variable Sub-accounts of the Separate Account
are held in the custody of Citibank,N.A. The assets of each of the Variable
Sub-accounts of the Separate Account are segregated and held separate and apart
from the assets of the other Variable Sub-accounts 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 Sub-accounts.
PRINCIPAL UNDERWRITER
During the year ended December 31, 1996 Jefferson Pilot Variable
Corporation ("JPVC") (formerly Jefferson-Pilot Investor Services, Inc.) was paid
$25,128.35 in brokerage commissions, and FMG Distributors, the principal
underwriter until being replaced by JPVC, was paid $25,367.11 in brokerage
commissions. FMG Distributors were also paid $41,666.67 for underwriting
activities for 1996. During the year ended December 31, 1997, JPVC received
$341,003 in brokerage commissions, of which it retained $66,407. During the year
ended December 31, 1998 JPVC received $4,442,409 in brokerage commissions, and
did not retain any of these commissions.
The Company, on its own behalf and on behalf of the Separate Account,
entered into a Principal Underwriter Agreement with JPVC dated November 1, 1996.
JPVC is a wholly-owned subsidiary of Jefferson-Pilot Corporation and is an
affiliate of the Company.
Page 6
<PAGE>
PERFORMANCE DATA AND CALCULATIONS
Money Market Variable Sub-account Yield
The Yield of the Money Market Variable Sub-account for a seven-day
period is calculated by a standardized method prescribed by rules of the
Securities and Exchange Commission. Under this method, the yield quotation is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one
Accumulation Unit of the Money Market Variable Sub-account at the beginning of
such seven-day period, subtracting a hypothetical charge reflecting deductions
from contract owner accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and multiplying the base period return by (365/7) with the resulting yield
figure carried to at least the nearest hundredth of one percent. The Separate
Account may also compute the Money Market Variable Sub-account's yield on an
annualized basis. 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
Sub-account 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 Sub-account 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 Sub-account
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
rates of return. The Money Market Variable Sub-account's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the JPVF Money Market Portfolio, the types and quality of
portfolio securities held by the JPVF Money Market Portfolio, and its operating
expenses. The yield figures do not reflect Surrender Charges or Premium Taxes.
Other Variable Sub-account Yields
The yield of Variable Sub-accounts other than the Money Market Variable
Sub-account based on a thirty-day period is calculated by a standardized method
prescribed by rules of the Securities and Exchange Commission. The yield is
computed by dividing the net investment income per Accumulation Unit earned
during the period by the maximum offering price per unit on the last day of the
period, according to the following formula:
Page 7
<PAGE>
6
(a-b+1)
YIELD = 2[ ----- -1]
cd
Where:
a = net investment income earned during the period by the portfolio company
attributable to shares owned by the Sub-account.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Accumulation Units outstanding during the
period.
d = the maximum offering price per Accumulation Unit on the last day of the
period.
The Company may from time to time advertise or disclose the current
annualized yield of one or more of the Variable Sub-accounts of the Separate
Account (except the Money Market Variable Sub-account) for 30-day periods. The
annualized yield of a Variable Sub-account refers to income generated by the
Variable Sub-account over a specific 30-day period. Because the yield is
annualized, the yield generated by a Variable Sub-account 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 Sub-account for the 30-day period
attributable to the Variable Sub-account's unit.
b = Expenses of the Variable Sub-account 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 Sub-account 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 6% to 2% of the amount
withdrawn based on the Contract Year of Surrender. The yield on amounts held in
the Variable Sub-accounts 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
Sub-account's actual yield is affected by the types and quality of the Funds'
investments and its operating expenses.
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<PAGE>
Variable Sub-account Total Return Calculations: Standardized
The Company may from time to time also disclose average annual total
returns for one or more of the Variable Sub-accounts 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 Sub-account 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 sub-accounts for the period ended December
31, 1998.
<TABLE>
<CAPTION>
Since
1998 Inception
<S> <C> <C>
JPVF Money Market Sub-account* -5.61% -1.95%
JPVF Balanced Sub-account* 6.32% 10.01%
JPVF Growth and Income account* 1.63% 6.90%
JPVF Capital Growth Sub-account* 25.58% 21.94%
JPVF Small Company Sub-account** -21.94% -21.94%
JPVF Emerging Growth Sub-account* 20.39% 13.47%
JPVF World Growth Stock Sub-account* -7.51% -0.69%
JPVF Growth Sub-account** 18.27% 18.27%
JPVF High Yield Bond Sub-account** -10.51% -10.51%
JPVF International Equity Sub-account** 4.40% 4.40%
MFS Research Series Sub-account** 9.00% 9.00%
MFS Utilities Series Sub-account** 6.89% 6.89%
Oppenheimer Bond Sub-account* -3.79% -0.30%
Oppenheimer Strategic Bond Sub-account** -8.92% -8.92%
VIP Equity-Income Sub-account** 3.36% 3.36%
VIP Growth Sub-account** 20.27% 20.27%
VIP II Contrafund Sub-account** 13.32% 13.32%
VIP II Index 500 Sub-account** 18.68% 18.68%
</TABLE>
Page 9
<PAGE>
* Performance information reflects the substitution of the funds in which
these Variable Sub-accounts invest which occurred on December 5, 1997. The
above numbers reflect the performance of the Alexander Hamilton Variable
Insurance Trust ("AHVIT") and the Federated Prime Money Fund II for the
period prior to the date of the substitution and reflect the performance of
the Jefferson Pilot Variable Fund, Inc. and the Oppenheimer Bond Fund for
the period after the date of the substitution. In the substitution, the
Oppenheimer Bond Fund was substituted for two of the AHVIT Funds and the
pre-substitution performance numbers for the Oppenheimer Bond Sub-account
reflect the performance of only one of such AHVIT Funds. The inception date
for these Variable Sub-accounts was February 27, 1996.
** These Sub-accounts were added to the Contract as of January 1, 1998.
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 varies from the standard
format calculation described above in that it will NOT take either Surrender
Charges or the Annual Administrative Fee into account and will be based on an
average contract size of $30,000.
The standardized performance calculation described above is based on
the inception date of each Variable Sub-account. However, for the
non-standardized performance calculation, if a Fund was in existence prior to
the inception date of the corresponding Variable Sub-account, the performance
for the Variable Sub-account will be calculated on a hypothetical basis by
applying the Mortality and Expense Risk Charge and the Administrative Expense
Charge to the historical performance of the corresponding Fund as if the
Contract has been in existence back to the inception date of the Fund.
Page 10
<PAGE>
The following table shows the non-standardized average annual total return for
the Allegiance Variable Annuity Sub-accounts for the periods ended December 31,
1998.
<TABLE>
<CAPTION>
Since
Sub-Accounts 1 Year 3 Years 5 Years 10 Years Inception*
- ------------ ------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
JPVF Money Market 3.41% 3.33% 3.09% 3.31% 3.53% (8/1/85)
JPVF Balanced 16.11% 13.23% 11.25% N/A 10.73% (5/1/92)
JPVF Growth and Income 11.11% 19.60% 16.31% N/A 15.31% (5/1/92)
JPVF Capital Growth 36.60% 27.00% 22.26% N/A 24.17% (5/1/92)
JPVF Small Company -12.97% 6.79% 10.58% 11.33% 10.84% (4/18/86)
JPVF Emerging Growth 31.08% 21.99% N/A N/A 26.81% (5/1/95)
JPVF World Growth Stock 1.40% 10.67% 8.25% 10.74% 10.27% (8/1/85)
JPVF Growth N/A N/A N/A N/A 29.34% (1/1/98)
JPVF High Yield Bond N/A N/A N/A N/A -0.49% (1/1/98)
JPVF International Equity N/A N/A N/A N/A 20.00% (1/1/98)
MFS Research Series 21.69% 20.27% N/A N/A 20.79% (7/26/95)
MFS Utilities Series 16.52% 20.89% N/A N/A 23.64% (1/3/95)
Oppenheimer Bond 5.35% 5.43% 5.51% 7.75% 8.12% (4/3/85)
Oppenheimer Strategic Bond 1.48% 6.31% 5.33% N/A 5.29% (5/3/93)
VIP Equity-Income 10.10% 16.11% 17.09% 14.00% 12.82% (10/9/86)
VIP Growth 37.46% 23.63% 19.97% 17.72% 15.70% (10/9/86)
VIP II Contrafund 28.12% 23.30% N/A N/A 26.83% (1/3/95)
VIP II Index 500 26.58% 26.09% 21.99% N/A 19.52% (8/27/92)
</TABLE>
* The date listed next to each performance figure in this column is the
inception date of the Fund underlying each corresponding Variable
Sub-account.
The Company may from time to time also disclose cumulative total
returns in conjunction with the standard format described above. Cumulative
total return figures represent the cumulative change in value of an investment
in a Sub-account over the indicated periods. The cumulative returns will be
calculated using the following formula, assuming no Surrender Charge or Annual
Administrative Fee.
ERV - P
CTR = -------
P
Where:
CTR = the cumulative total return net of a Variable Sub-account'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 $30,000
Premium Payment made at the beginning of the one, five, or ten-year (or
other) period.
P = a hypothetical initial Premium Payment of $30,000.
Page 11
<PAGE>
The following table shows the Non-Standardized Cumulative Total Return
for the Allegiance Variable Annuity Sub-accounts for the period ended December
31, 1998.
<TABLE>
<CAPTION>
Since
Sub-Accounts 1 Year Inception*
<S> <C> <C> <C>
JPVF Money Market 3.41% 59.36% (8/1/85)
JPVF Balanced 16.11% 97.37% (5/1/92)
JPVF Growth and Income 11.11% 158.65% (5/1/92)
JPVF Capital Growth 36.60% 323.73% (5/1/92)
JPVF Small Company -12.97% 270.07% (4/18/86)
JPVF Emerging Growth 31.08% 139.19% (5/1/95)
JPVF World Growth Stock 1.40% 271.41% (8/1/85)
JPVF Growth N/A 29.34% (1/1/98)
JPVF High Yield Bond N/A -0.49% (1/1/98)
JPVF International Equity N/A 20.00% (1/1/98)
MFS Research Series 21.69% 91.33% (7/26/95)
MFS Utilities Series 16.52% 133.41% (1/3/95)
Oppenheimer Bond 5.35% 192.50% (4/3/85)
Oppenheimer Strategic Bond 1.48% 33.94% (5/3/93)
VIP Equity-Income 10.10% 337.31% (10/9/86)
VIP Growth 37.46% 495.72% (10/9/86)
VIP II Contrafund 28.12% 158.42% (1/3/95)
VIP II Index 500 26.58% 210.22% (8/27/92)
</TABLE>
* The date listed next to each performance figure in this column is the
inception date of the Fund underlying each corresponding Variable
Sub-account.
All non-standard performance data will only be advertised if the standard total
return performance data is also included in the advertisement.
Other Information
The following is a partial list of those publications which may be
cited in advertising or sales literature describing investment results or other
data relative to one or more of the Variable Sub-accounts. 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
Page 12
<PAGE>
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>
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, 408A
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.
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.
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
Funds, intends to comply with the diversification
Page 13
<PAGE>
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 sub-accounts 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 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 (other than Roth IRAs)
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").
Page 14
<PAGE>
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 Jorden Burt Boros Cicchetti Berenson & Johnson of Washington D.C.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and
Exchange Commission, under the Securities Act of 1933, as amended, with respect
to the Contracts discussed in this Statement of Additional Information. Not all
of the information set forth in the Registration Statement, 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.
EXPERTS
The financial statements of The Alexander Hamilton Variable Annuity
Separate Account of Alexander Hamilton Life Insurance Company of America as of
December 31, 1998, and for the year then ended, appearing in this Statement of
Additional Information and this Registration Statement have been audited by
Ernst & Young, LLP independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The statutory-basis financial statements of Alexander Hamilton Life
Insurance Company of America as of December 31, 1998, and for each of the years
in the three-year period ended December 31, 1998, appearing in this Statement of
Additional Information and this Registration Statement have been audited
by Ernst & Young, LLP independent auditors, as set forth in their report thereon
(which contains an adverse opinion with respect to conformity with generally
accepted accounting principles) appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
FINANCIAL STATEMENTS
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.
Page 15
<PAGE>
Audited Financial Statements
The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton Life
Insurance Company of America
Year ended December 31, 1998
with Report of Independent Auditors
1
<PAGE>
The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America
Audited Financial Statements
Year ended December 31, 1998
Contents
<TABLE>
<S> <C>
Report of Independent Auditors .............. 44
Audited Financial Statements
Statement of Assets and Liabilities ......... 45
Statement of Operations ..................... 46
Statements of Changes in Net Assets ......... 47
Notes to Financial Statements ............... 48
</TABLE>
2
<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, 1998, and the related statement
of operations and the changes in net assets for year then ended, and the
statement of changes in net assets for the year ended December 31, 1997 and for
the period from February 8, 1996 to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton Life Insurance Company of America
at December 31, 1998, and the results of its operations and the changes in its
net assets for the year then ended, and the changes in its net assets for the
year ended December 31, 1997 and for the period from February 8, 1996 to
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
April 9, 1999
3
<PAGE>
The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America
Statement of Assets and Liabilities
Year ended December 31, 1998
<TABLE>
<CAPTION>
JPVF JPVF
World Money
Growth Stock Market
Sub-account Sub-account
------------ ------------
<S> <C> <C>
ASSETS
Investments at cost ................... $ 3,104,485 $ 9,598,590
============ ============
Investments at market value ........... $ 2,754,134 $ 9,387,348
Accrued investment income ............. 233,318 317,262
Net premiums receivable (payable) ..... 2,840 9,558
------------ ------------
Total Net Assets .................... $ 2,990,292 $ 9,714,168
============ ============
SHARES OUTSTANDING .................... 125,750.135 904,990.874
NET ASSET VALUE PER SHARE ............. $ 21.90 $ 10.37
<CAPTION>
JPVF JPVF JPVF
Emerging International JPVF High Yield
Growth Equity Growth Bond
Sub-account Sub-account Sub-account Sub-account
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments at cost ................... $ 5,198,444 $ 1,752,965 $ 598,992 $ 1,469,139
============ ============ =========== ============
Investments at market value ........... $ 6,373,267 $ 1,856,012 $ 701,462 $ 1,376,906
Accrued investment income ............. 31,176 6,363 0 87,291
Net premiums receivable (payable) ..... (9,263) 7,573 (56) (661)
------------ ------------ ----------- ------------
Total Net Assets .................... $ 6,395,180 $ 1,869,948 $ 701,406 $ 1,463,536
============ ============ =========== ============
SHARES OUTSTANDING .................... 276,565.422 153,077.888 53,490.356 145,122.652
NET ASSET VALUE PER SHARE ............. $ 23.04 $ 12.12 $ 13.11 $ 9.49
</TABLE>
<TABLE>
<CAPTION>
JPVF
Small Oppenheimer
Company Bond
Sub-account Sub-account
----------- ------------
<S> <C> <C>
ASSETS
Investments at cost ................... $ 1,383,511 $ 3,764,719
=========== ============
Investments at market value ........... $ 1,210,657 $ 3,865,254
Accrued investment income ............. 119,466 0
Net premiums receivable (payable) ..... 1,454 5,826
----------- ------------
Total Net Assets .................... $ 1,331,577 $ 3,871,080
=========== ============
SHARES OUTSTANDING .................... 74,681.179 313,738.180
NET ASSET VALUE PER SHARE ............. $ 16.24 $ 12.32
<CAPTION>
MFS JPVF Oppenheimer
MFS Utilities Growth & Strategic
Research Series Income Bond
Sub-account Sub-account Sub-account Sub-account
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Investments at cost ................... $ 2,437,904 $ 3,511,087 $ 6,111,385 $ 1,337,149
============ ============ ============ ============
Investments at market value ........... $ 2,742,135 $ 3,786,836 $ 6,383,135 $ 1,344,306
Accrued investment income ............. 0 0 49,645 0
Net premiums receivable (payable) ..... (6,341) (517) 37,161 (205)
------------ ------------ ------------ ------------
Total Net Assets .................... $ 2,735,794 $ 3,786,319 $ 6,469,941 $ 1,344,101
============ ============ ============ ============
SHARES OUTSTANDING .................... 143,944.117 191,061.340 333,875.075 262,559.872
NET ASSET VALUE PER SHARE ............. $ 19.05 $ 19.82 $ 19.12 $ 5.12
</TABLE>
<TABLE>
<CAPTION>
JPVF
Capital Fidelity VIP
Growth Growth
Sub-account Sub-account
------------ -----------
<S> <C> <C>
ASSETS
Investments at cost ................... $ 11,285,685 $ 3,728,612
============ ===========
Investments at market value ........... $ 12,848,070 $ 4,395,503
Accrued investment income ............. 661,103 0
Net premiums receivable (payable) ..... 76,132 (670)
------------ -----------
Total Net Assets .................... $ 13,585,305 $ 4,394,833
============ ===========
SHARES OUTSTANDING .................... 460,585.394 97,960.849
NET ASSET VALUE PER SHARE ............. $ 27.90 $ 44.87
<CAPTION>
Fidelity VIP Fidelity Fidelity
Equity- JPVF VIP II VIP II
Income Balanced Contrafund Index 500
Sub-account Sub-account Sub-account Sub-account
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Investments at cost ................... $ 4,564,181 $ 5,158,025 $ 2,719,395 $ 8,433,862
============ ============ ============ ===========
Investments at market value ........... $ 4,808,398 $ 5,237,282 $ 3,150,111 $ 9,518,438
Accrued investment income ............. 0 460,900 0 0
Net premiums receivable (payable) ..... (943) 40,113 (7,647) 4,900
------------ ------------ ------------ -----------
Total Net Assets .................... $ 4,807,455 $ 5,738,295 $ 3,142,464 $ 9,523,338
============ ============ ============ ===========
SHARES OUTSTANDING .................... 189,158.071 411,914.520 128,891.631 67,387.169
NET ASSET VALUE PER SHARE ............. $ 25.42 $ 12.71 $ 24.44 $ 141.25
</TABLE>
4
<PAGE>
The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America
Statement of Operations
Year ended December 31, 1998
<TABLE>
<S> <C>
Investment income:
Dividend income ............................................ $ 661,340
Capital gain distribution from investment companies ........ 1,426,686
----------
2,088,026
----------
Expenses:
Mortality and expense fee (Note 3) ......................... (577,942)
Administrative charges ..................................... (3,014)
----------
Net investment income ........................................ 1,507,070
----------
Realized and unrealized gains on investments:
Net realized gain on investments ........................... (82,026)
Unrealized appreciation of investments ..................... 5,522,576
----------
Net gain on investments ...................................... 5,440,550
----------
Net increase in net assets from operations ................... $6,947,620
==========
</TABLE>
See accompanying notes.
5
<PAGE>
The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period from
Year ended December 31, February 8, 1996
----------------------------- to
1998 1997 December 31, 1996
----------- ----------- -----------------
<S> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income $ 1,507,070 $ 849,663 $ 101,068
Net realized gain on investments (82,026) 142,844 23,618
Net unrealized appreciation (depreciation) on
investments 5,522,576 66,507 (7,957)
----------- ----------- ----------
Net increase in net assets resulting from
operations 6,947,620 1,059,014 116,729
Changes from principal transactions:
Net contract purchase payment 66,176,879 5,307,789 4,022,456
Benefits paid (1,230,447) (177,442) (10,070)
Net transfer of reserves from (to) sponsor 1,424,413 229,614 (1,523)
----------- ----------- ----------
Increase in net assets derived from principal
transactions 66,370,845 5,359,961 4,010,863
----------- ----------- ----------
Total increase (decrease) 73,318,465 6,418,975 4,127,592
Net asset at beginning of year 10,546,567 4,127,592
----------- -----------
Net assets at end of year $83,865,032 $10,546,567 $4,127,592
=========== =========== ==========
</TABLE>
See accompanying notes.
6
<PAGE>
The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America
Notes to Financial Statements
December 31, 1998
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.
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 Jefferson Pilot Variable Fund (JPVF) International Equity, World
Growth Stock, Emerging Growth, Capital Growth, Growth, Small Company, Growth and
Income, Balanced, High Yield Bond, and Money Market Portfolios, the Fidelity VIP
II Contrafund, VIP Growth Fund, VIP Equity-Income Fund and VIP II Index 500
Fund, the MFS Research Series and MFS Utilities Series, and the Oppenheimer
Strategic Bond and Bond Funds, 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. The investments in the eighteen sub-accounts are
carried in the Statement of Assets and Liabilities at net asset value, which is
market value at December 31, 1998.
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, 1998.
Investment transactions are accounted for on the date the order to buy or sell
is executed (trade date).
Investment 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. The aggregate costs of purchases and
proceeds from sales of investments (other than short-term securities) for the
year ended December 31, 1998, were $134,502,344 and $68,131,401 respectively.
Realized investment gains and losses on investments are determined using average
cost.
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.
7
<PAGE>
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 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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
JPVF World Growth Stock Sub-account
Units outstanding at beginning of period 123,760.115 101,024.252 0.000
Units purchased 214,946.488 166,600.224 127,401.544
Redemptions and charges (74,868.512) (143,864.361) (26,377.292)
---------------- --------------- ---------------
Units outstanding at end of period 263,838.091 123,760.115 101,024.252
================ =============== ===============
JPVF Money Market Sub-account
Units outstanding at beginning of period 1,052,016.838 480,731.823 0.000
Units purchased 48,629,131.723 7,287,822.529 5,484,943.240
Redemptions and charges (40,838,160.131) (6,716,537.514) (5,004,211.417)
---------------- --------------- ---------------
Units outstanding at end of period 8,842,988.430 1,052,016.838 480,731.823
================ =============== ===============
JPVF Emerging Growth Sub-account
Units outstanding at beginning of period 132,236.490 88,358.431 0.000
Units purchased 346,591.035 119,576.383 147,820.559
Redemptions and charges (87,499.559) (75,698.324) (59,462.128)
---------------- --------------- ---------------
Units outstanding at end of period 391,327.966 132,236.490 88,358.431
================ =============== ===============
JPVF International Equity Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 168,565.745 0.000 0.000
Redemptions and charges (24,374.913) 0.000 0.000
---------------- --------------- ---------------
Units outstanding at end of period 144,190.832 0.000 0.000
================ =============== ===============
JPVF Growth Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 47,847.606 0.000 0.000
Redemptions and charges (10,690.056) 0.000 0.000
---------------- --------------- ---------------
Units outstanding at end of period 37,157.550 0.000 0.000
================ =============== ===============
JPVF High Yield Bond Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 200,015.542 0.000 0.000
Redemptions and charges (74,855.516) 0.000 0.000
---------------- --------------- ---------------
Units outstanding at end of period 125,160.026 0.000 0.000
================ =============== ===============
</TABLE>
8
<PAGE>
7. Accumulation Units (continued)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
JPVF Small Company Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 173,898.811 0.000 0.000
Redemptions and charges (18,848.556) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 155,050.255 0.000 0.000
============= =========== ===========
MFS Research Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 334,137.582 0.000 0.000
Redemptions and charges (104,133.235) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 230,004.347 0.000 0.000
============= =========== ===========
MFS Utilities Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 541,941.392 0.000 0.000
Redemptions and charges (217,493.551) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 324,447.841 0.000 0.000
============= =========== ===========
JPVF Growth and Income Sub-account
Units outstanding at beginning of period 105,758.481 40,124.651 0.000
Units purchased 578,830.887 98,594.509 57,722.822
Redemptions and charges (217,845.662) (32,960.679) (17,598.171)
------------- ----------- -----------
Units outstanding at end of period 466,743.706 105,758.481 40,124.651
============= =========== ===========
Oppenheimer Bond Sub-account
Units outstanding at beginning of period 151,322.641 0.000 0.000
Units purchased 344,262.107 155,740.418 0.000
Redemptions and charges (158,905.716) (4,417.777) 0.000
------------- ----------- -----------
Units outstanding at end of period 336,679.032 151,322.641 0.000
============= =========== ===========
Oppenheimer Strategic Bond Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 169,211.618 0.000 0.000
Redemptions and charges (34,638.820) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 134,572.798 0.000 0.000
============= =========== ===========
JPVF Capital Growth Sub-account
Units outstanding at beginning of period 142,455.821 53,999.122 0.000
Units purchased 792,868.720 103,157.417 74,303.386
Redemptions and charges (250,607.263) (14,700.718) (20,304.264)
------------- ----------- -----------
Units outstanding at end of period 684,717.278 142,455.821 53,999.122
============= =========== ===========
Fidelity VIP Growth Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 428,001.694 0.000 0.000
Redemptions and charges (92,331.424) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 335,670.270 0.000 0.000
============= =========== ===========
Fidelity VIP Equity-Income Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 561,199.896 0.000 0.000
Redemptions and charges (135,537.131) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 425,662.765 0.000 0.000
============= =========== ===========
</TABLE>
9
<PAGE>
7. Accumulation Units (continued)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
JPVF Balanced Sub-account
Units outstanding at beginning of period 104,890.468 27,907.033 0.000
Units purchased 348,256.709 111,975.225 38,090.687
Redemptions and charges (70,275.338) (34,991.790) (10,183.654)
------------- ----------- -----------
Units outstanding at end of period 382,871.839 104,890.468 27,907.033
============= =========== ===========
Fidedity VIP II Contrafund Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 289,728.643 0.000 0.000
Redemptions and charges (35,349.349) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 254,379.294 0.000 0.000
============= =========== ===========
Fidelity VIP II Index 500 Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 1,080,961.110 0.000 0.000
Redemptions and charges (344,096.047) 0.000 0.000
------------- ----------- -----------
Units outstanding at end of period 736,865.063 0.000 0.000
============= =========== ===========
</TABLE>
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>
Unit Total
Accumulation Units Value Value
------------------ ---------- ----------
<S> <C> <C> <C>
JPVF World Growth Stock Sub-account
December 31, 1998
Qualified/non-qualified units 263,838.091 $11.333814 $2,990,292
----------
$2,990,292
==========
JPVF Money Market Sub-account
December 31, 1998
Qualified/non-qualified units 8,842,988.430 $ 1.098516 $9,714,164
----------
$9,714,164
==========
JPVF Emerging Growth Sub-account
December 31, 1998
Qualified/non-qualified units 391,327.966 $16.342251 $6,395,180
----------
$6,395,180
==========
JPVF International Equity Sub-account
December 31, 1998
Qualified/non-qualified units 144,190.832 $12.968566 $1,869,948
----------
$1,869,948
==========
JPVF Growth Sub-account
December 31, 1998
Qualified/non-qualified units 37,157.550 $18.876536 $ 701,406
----------
$ 701,406
==========
JPVF High Yield Bond Sub-account
December 31, 1998
Qualified/non-qualified units 125,160.026 $11.693315 $1,463,536
----------
$1,463,536
==========
</TABLE>
10
<PAGE>
8. Variable Annuity Contracts (continued)
<TABLE>
<CAPTION>
Unit Total
Accumulation Units Value Value
------------------ ---------- -----------
<S> <C> <C> <C>
JPVF Small Company Sub-account
December 31, 1998
Qualified/non-qualified units 155,050.255 $ 8.588036 $ 1,331,577
-----------
$ 1,331,577
===========
Oppenheimer Bond Sub-account
December 31, 1998
Qualified/non-qualified units 336,679.032 $11.497837 $ 3,871,081
-----------
$ 3,871,081
===========
MFS Research Sub-account
December 31, 1998
Qualified/non-qualified units 230,004.347 $11.894530 $ 2,735,794
-----------
$ 2,735,794
===========
MFS Utilities Series Sub-account
December 31, 1998
Qualified/non-qualified units 324,447.841 $11.670039 $ 3,786,319
-----------
$ 3,786,319
===========
JPVF Growth and Income Sub-account
December 31, 1998
Qualified/non-qualified units 466,743.706 $13.861872 $ 6,469,941
-----------
$ 6,469,941
===========
Oppenheimer Strategic Bond Sub-account
December 31, 1998
Qualified/non-qualified units 134,572.798 $ 9.987913 $ 1,344,101
-----------
$ 1,344,101
===========
JPVF Capital Growth Sub-account
December 31, 1998
Qualified/non-qualified units 684,717.278 $19.840751 $13,585,305
-----------
$13,585,305
===========
Fidelity VIP Growth Sub-account
December 31, 1998
Qualified/non-qualified units 335,670.270 $13.092707 $ 4,394,833
-----------
$ 4,394,833
===========
Fidelity VIP Equity-Income Sub-account
December 31, 1998
Qualified/non-qualified units 425,662.765 $11.294046 $ 4,807,455
-----------
$ 4,807,455
===========
JPVF Balanced Sub-account
December 31, 1998
Qualified/non-qualified units 382,871.839 $14.987508 $ 5,738,295
-----------
$ 5,738,295
===========
Fidelity VIP II Contrafund Sub-account
December 31, 1998
Qualified/non-qualified units 254,379.294 $12.353457 $ 3,142,464
-----------
$ 3,142,464
===========
Fidelity VIP II Index 500 Sub-account
December 31, 1998
Qualified/non-qualified units 736,865.063 $12.924128 $ 9,523,338
-----------
$ 9,523,338
===========
</TABLE>
9. Year 2000 Assessment (unaudited)
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 systems failures. Year 2000 issues arise
because some computer software and hardware (systems) were designed to
handle only a two digit year, not a four digit year. By using two digits, they
could fail or make miscalculations due to the inability to distinguish between
dates in the 1900's and in the 2000's
In order to minimize the impact of the year 2000 on the Company,
Jefferson-Pilot Corporation developed a centralized oversight and project
management process to facilitate the planning and conversion of all information
systems on behalf of the Company and its affiliates. The scope of the project
includes an assessment of the Company's material systems currently in place,
modification, testing and implementation of such systems as required, inquiry to
third-party providers with whom the Company has material business relationships
as to the state of their readiness, and the development of a contingency plan in
the event that material Year 2000 issues arise.
The target for completing all phases is September 30, 1999. The Company has
completed its assessment and modification phases of its plan and is actively
testing its systems and communicating with its business partners to assess these
companies' readiness. Although management does not anticipate a material effect
on its business operation as a result of the Year 2000 computer systems issues,
the Company is in the process of developing a contingency plan in the event that
material Year 2000 issues arise in the Company or third-party computer systems.
11
<PAGE>
Audited Financial Statements-
Statutory Basis
Alexander Hamilton Life Insurance Company of America
Years ended December 31, 1998 and 1997
with Report of Independent Auditors
<PAGE>
Alexander Hamilton Life Insurance Company of America
Audited Financial Statements - Statutory Basis
Years ended December 31, 1998 and 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors....................................... 1
Audited Financial Statements - Statutory Basis
Statements of Admitted Assets, Liabilities, Capital and Surplus...... 3
Statements of Operations ............................................ 4
Statements of Capital and Surplus.................................... 5
Statements of Cash Flow ............................................. 6
Notes to Financial Statements........................................ 8
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Alexander Hamilton Life Insurance Company of America
We have audited the accompanying statutory-basis statements of admitted assets,
liabilities, capital and surplus of Alexander Hamilton Life Insurance Company of
America (a wholly-owned subsidiary of Jefferson-Pilot corporation) as of
December 31, 1998 and 1997, and the related statutory-basis statements of
operations, capital and surplus, and cash flows for each of three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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.
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, 1998 and
1997, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1998.
However, 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, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices prescribed or
permitted by the Michigan Insurance Bureau.
February 8, 1999
/s/ Ernst & Young LLP
---------------------
1
<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
1998 1997
----------------------------
<S> <C> <C>
Admitted Assets
Bonds $4,685,843 $4,712,314
Stocks 99,197 75,072
Mortgage loans 430,209 409,477
Real Estate:
Properties occupied by the Company - 6,554
Properties acquired in satisfaction of debt 143 165
Investment real estate 21,415 22,433
Policy loans 116,405 110,875
Cash and short-term investments (12,034) (1,932)
Due and uncollected premiums 1,233 1,885
Investment income due and accrued 74,293 73,734
Receivable from parent, subsidiaries and affiliates 12,983 9,654
Separate account assets 86,189 10,806
Other assets 70,666 76,183
----------------------------
Total admitted assets $5,586,542 $5,507,220
============================
Liabilities and Capital and Surplus
Liabilities:
Aggregate reserve for life policies $4,774,922 $4,829,913
Policy and contract claims 33,076 29,272
Interest maintenance reserve 45,771 39,076
Asset valuation reserve 55,449 58,616
Remittances and items not allocated 2,540 9,286
Borrowed money 63,934 23,285
Payable to parent, subsidiaries and affiliates 15,834 5,985
Separate account liabilities 86,189 10,806
Federal income taxes payable 1,474 5,014
Other liabilities 115,247 93,448
----------------------------
Total liabilities 5,194,436 5,104,701
Capital and Surplus:
Common capital stock 2,500 2,500
Preferred capital stock - 50,000
Surplus note 51,220 51,220
Gross paid-in and contributed surplus 94,987 94,987
Unassigned surplus 243,399 203,812
----------------------------
Total capital and surplus 392,106 402,519
----------------------------
Total liabilities and capital and surplus $5,586,542 $5,507,220
============================
</TABLE>
See accompanying notes.
2
<PAGE>
Alexander Hamilton Life Insurance Company of America
Statements of Operations - Statutory Basis
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums and annuity considerations $ 384,576 $ 486,049 $ 493,267
Considerations for supplementary
contracts
with life contingencies 676 787 1,781
Considerations for supplementary contracts
without life contingencies and dividend
accumulations 8,147 7,866 11,078
Net investment income 388,984 392,219 395,791
Amortization of interest maintenance 5,559 3,287 1,520
reserve
Commissions and expense allowances on 58 1,880 11,678
reinsurance ceded
Other income 6,148 6,682 6,391
-----------------------------------------
Total revenue 794,148 898,770 921,506
Benefits and expenses:
Death benefits 70,136 65,783 72,247
Annuity benefits 89,798 79,926 66,808
Disability benefits 371 328 3,048
Surrender benefits and other fund 435,777 476,012 444,540
withdrawals
(Decrease) increase in aggregate reserves (52,199) 88,152 (181,885)
Decrease in liability for premium and (161) (138) (143)
other deposit funds
Other policy benefits 11,208 10,100 2,748
-----------------------------------------
Total benefits 554,930 720,163 407,363
Commissions and other expenses:
Commissions on premiums and annuity 24,847 36,950 52,719
considerations
General insurance expenses 13,708 24,767 35,560
Insurance taxes, licenses and fees 7,276 9,409 14,009
Consideration for reinsurance - - 319,294
Net transfers to separate accounts 68,611 5,492 4,011
Other expenses (176) (546) 5,706
-----------------------------------------
Total commissions and other expenses 114,266 76,072 431,299
Income before dividends to policyholders,
federal income tax and net realized 124,952 102,535 82,844
capital (losses) gains
Dividends to policyholders 35 43 39
-----------------------------------------
Income before federal income tax and net 124,917 102,492 82,805
realized capital (losses) gains
Federal income tax (excluding capital
gains tax) 38,348 30,990 24,432
-----------------------------------------
Income before net realized capital (losses) 86,569 71,502 58,373
gains
Net realized capital (losses) gains - net of
tax and after-tax IMR transfer (581) 1,540 (9,948)
-----------------------------------------
Net income $ 85,988 $ 73,042 $ 48,425
=========================================
</TABLE>
See accompanying notes.
3
<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 December 31, 1995 $2,500 $50,000 $51,230 $94,987 $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
Change in surplus note - - (10) - 10 -
Other surplus adjustments - - - - (1,729) (1,729)
Change in surplus due to
reinsurance - - - - (10,519) (10,519)
Dividends to preferred stockholder - - - - (4,919) (4,919)
----------------------------------------------------------------
Balance at December 31, 1996 2,500 50,000 51,220 94,987 124,649 323,356
Net income - - - - 73,042 73,042
Change in net unrealized - - - -
capital gains (4,561) (4,561)
Change in non-admitted assets - - - - 98 98
Change in asset valuation reserve - - - - 14,089 14,089
Dividends to preferred stockholder - - - - (3,505) (3,505)
----------------------------------------------------------------
Balance at December 31, 1997 2,500 50,000 51,220 94,987 203,812 402,519
Net income - - - - 85,988 85,988
Change in net unrealized - - - -
capital gains 19,274 19,274
Change in non-admitted assets - - - - 2,077 2,077
Change in asset valuation reserve - - - - 3,167 3,167
Redemption of preferred
capital stock - (50,000) - - - (50,000)
Dividends to common stockholder - - - - (70,000) (70,000)
Dividends to preferred stockholder - - - - (919) (919)
================================================================
Balance at December 31, 1998 $2,500 $ - $51,220 $94,987 $243,399 $392,106
================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Alexander Hamilton Life Insurance Company of America
Statements of Cash Flow - Statutory Basis
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Operating activities
Premiums, policy proceeds and other considerations
received, net of reinsurance paid $393,608 $491,129 $ 513,506
Net investment income 398,362 399,875 407,051
Commission and expense allowances received on
reinsurance ceded 51 2,292 14,332
Benefits paid (606,305) (632,101) (594,961)
Insurance expenses paid (49,751) (80,257) (109,560)
Net transfers to separate accounts (68,509) (5,496) (4,011)
Dividends paid to policyholders (35) (43) (39)
Federal income taxes paid (41,147) (9,920) (38,643)
Other revenues received less other expenses (paid) 6,333 9,086 (317,638)
-----------------------------------------
Net cash provided by (used in) operations 32,607 174,565 (129,963)
Investing activities
Proceeds from sales, maturities, or
repayments of investments:
Bonds 838,565 983,516 1,164,669
Stocks 7,497 27,591 15,910
Mortgage loans 71,186 34,098 28,978
Real estate 5,155 5,661 2,778
Other invested assets 10,877 4,851 1,493
Miscellaneous proceeds 1,640 (432) 66
-----------------------------------------
Total investment proceeds 934,920 1,055,285 1,213,894
Taxes paid on capital gains or losses - - (196)
-----------------------------------------
Net proceeds from sales, maturities, or
repayments of investments 934,920 1,055,285 1,213,698
Cost of investments acquired:
Bonds (801,388) (1,045,602) (981,207)
Stocks (12,084) (3,000) (43,063)
Mortgage loans (92,735) (165,542) (148,622)
Real estate (189) (66) (343)
Other invested assets (11,035) (10,405) (2,122)
Miscellaneous applications - (270) (4,586)
-----------------------------------------
Total cost of investments acquired (917,431) (1,224,885) (1,179,943)
Net increase in policy loans (5,530) (13,943) (11,283)
-----------------------------------------
Net cash provided by (used in) investment activities 11,959 (183,543) 22,472
</TABLE>
5
<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
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Financing and miscellaneous activities
Other cash provided:
Capital and surplus paid-in $(50,000) $ - $ (10)
Borrowed money received (repaid) 40,427 (21,297) 44,959
Other sources 46,051 25,101 59,251
----------------------------------------
Total other cash provided 36,478 3,804 104,200
Other cash applied:
Dividends paid to stockholders (71,808) (3,477) (4,058)
Interest on indebtedness (7,411) (6,924) (8,940)
Other applications, net (11,927) (25,812) (26,887)
----------------------------------------
Total other cash applied (91,146) (36,213) (39,885)
Net cash (used in) provided by financing
and miscellaneous activities (54,668) (32,409) 64,315
----------------------------------------
Net decrease in cash and short-term investments (10,102) (41,387) (43,176)
Cash and short-term investments at beginning of
year (1,932) 39,455 82,631
----------------------------------------
Cash and short-term investments at end of year $(12,034) $ (1,932) $ 39,455
========================================
</TABLE>
See accompanying notes.
6
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis
December 31, 1998
1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Alexander Hamilton Life Insurance Company of America (the Company) is
wholly-owned by Jefferson-Pilot Corporation (the "Parent"). The Company is
principally engaged in the life insurance business and has a diversified base of
policyholders in all states except New York. Most of the Company's insurance
blocks have been closed. The only products currently being marketed include
certain Universal Life products, certain Fixed Annuity products being marketed
through financial institutions, and Variable Annuities. Renewal premiums will
continue while existing business remains in force.
Certain credit life and accident and health insurance, Periodic Payment Annuity
(PPA) business and Corporate Owned Life Insurance business written by the
Company has been fully reinsured back to affiliates of Household International,
Inc. (Household), the Company's previous owner, through coinsurance agreements.
Related trust agreements for the assets retained for this business are in place.
Use of Estimates and Assumptions
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").
7
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 are designated at purchase as held-to-maturity, trading, or
available-for-sale. Held-to-maturity fixed investments are 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 stockholder's equity for
those designated as available-for-sale.
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 are 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 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, consistent with the prior year, 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. The asset valuation reserve is determined by an NAIC
prescribed formula and is reported as a liability rather than unassigned
surplus. Under GAAP, realized capital gains and losses are reported in the
income statement on a pretax basis in the period that the asset giving rise to
the gain or loss is sold and valuation allowances are provided when there has
been a decline in value deemed other than temporary, in which case, the
provision for such declines are charged to earnings.
8
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Subsidiaries: The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as required under
GAAP.
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, are 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 are not recognized as premium revenue and benefits 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 required under GAAP.
Reinsurance: Policy and contract liabilities ceded to reinsurers have been
reported as reductions of the related reserves rather than as assets as 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 are
also included.
Federal Income Taxes: Deferred federal income taxes are not provided for
differences between the financial statement amounts and tax bases of assets and
liabilities.
9
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
Statement of Cash Flows: For purposes of the Statement of Cash Flow, cash is
combined with short-term investments, which includes investments with maturities
of less than one year at the date of acquisition. Under GAAP, cash is combined
with cash equivalents, which includes only investments with maturities of three
months or less at the date of acquisition.
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 and
prepayment assumptions are adjusted if subsequent experience varies
significantly from original assumptions.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
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.
10
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
The Company's insurance subsidiaries are carried as stock at amounts which are
equal to statutory capital and surplus, with changes in such capital and surplus
reported directly to unassigned surplus as an increase or decrease in net
unrealized investment income. Dividends from subsidiaries are included in net
investment income. The Company has a 100% interest in the following affiliates:
First Alexander Hamilton Life Insurance Company and AH(Michigan) Life Insurance
Company. During 1998, Alexander Hamilton Capital Management, Inc., a wholly-
owned subsidiary was merged into the Company.
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. Accumulated depreciation on real estate was $18 million
and $19 million in 1998 and 1997, respectively.
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.
11
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Premiums
Life insurance and annuity premiums are recognized as revenue when due. 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 1998 and 1997, 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 earnings, mean reserves are based on
the standard or substandard mortality rates increased by one to twenty-five
deaths per thousand.
At December 31, 1998, the Company had $2,981.4 million of insurance in force for
which the gross premiums are less than the net premiums according to the
standard of valuation set by the State of Michigan. Reserves to cover the gross
premium deficiencies on the above insurance totaled $25 million at December 31,
1998.
Tabular interest, tabular less actual reserve released and tabular cost have
been determined by formulas prescribed by the NAIC. For the determination of
tabular interest on funds not involving life contingencies, the tabular interest
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. Other benefit increases
are mostly excess interest credited to the funds. The liabilities related to
policyholder funds left on deposit with the Company generally are equal to fund
balances less applicable surrender charges.
12
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Claim and Claim Adjustment Expenses
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported claims
incurred through December 31. Reserves for unpaid claims are estimated using
individual case-basis valuations and statistical analyses. Those estimates are
subject to the effects of trends in claim severity and frequency. Although
considerable variability is inherent in such estimates, management 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. All the
Company's A&H liabilities are ceded under reinsurance agreements.
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.
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 the accompanying
financial statements. Fees charged on separate account policyholder deposits are
included in other income.
Reclassifications
Certain amounts for 1997 and 1996 have been reclassified to conform to the 1998
presentation. These reclassifications had no impact on net income or statutory
capital and surplus.
13
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
2. 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.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification 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. Codification will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for the Company, Michigan must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their statutory-basis
results to the Insurance Bureau. At this time it is unclear whether Michigan
will adopt Codification. Management has not yet determined the impact of
Codification to the Company's statutory-basis financial statements.
14
<PAGE>
3. Investments
The amortized cost and NAIC market 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, 1998
-----------------------------------------------------------------
NAIC
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Bonds:
U.S. Treasuries $ 8,073 $ 533 $ - $ 8,606
Agency Mortgage - Backed/CMOs 772,356 81 - 772,437
State & Municipal 352 11 - 363
Other Government Bonds 68,704 2,080 (214) 70,570
Corporate Bonds:
Asset-Backed Securities 247,429 - - 247,429
CMOs 608,964 - - 608,964
Other Corporate Bonds 2,946,798 69,627 (8,338) 3,008,087
Affiliate bonds 33,167 - - 33,167
-----------------------------------------------------------------
Total $4,685,843 $72,332 $(8,552) $4,749,623
=================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
NAIC
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Bonds:
U.S. Treasuries $ 9,221 $ 257 $ (5) $ 9,473
Agency Mortgage - Backed/CMOs 785,044 - - 785,044
State & Municipal 352 2 - 354
Other Government Bonds 85,690 1,570 (442) 86,818
Corporate Bonds:
Asset-Backed Securities 248,474 - - 248,474
CMOs 601,506 - - 601,506
Other Corporate Bonds 2,946,777 68,447 (1,138) 3,014,086
Affiliate Bonds 35,250 - - 35,250
-----------------------------------------------------------------
Total $4,712,314 $70,276 $(1,585) $4,781,005
=================================================================
</TABLE>
15
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
3. Investments (continued)
The carrying amount of bonds in the balance sheets at December 31, 1998 and 1997
($4,685,843 and $4,712,314, respectively) reflects NAIC adjustments of $(45) and
$0, respectively, to decrease amortized cost.
The amortized cost and NAIC market value of the Company's bonds at December 31,
1998, by contractual maturity, is as follows (in thousands):
<TABLE>
<CAPTION>
NAIC
Market
Amortized Cost Value
-------------------------------
<S> <C> <C>
Due in one year or less $ 234,651 $ 235,151
Due after one year through five years 1,238,780 1,270,951
Due after five years through ten years 754,757 776,332
Due after ten years 304,133 312,667
-------------------------------
2,532,321 2,595,101
Amounts not due at single maturity 2,153,522 2,154,522
-------------------------------
Total $4,685,843 $4,749,623
===============================
</TABLE>
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 1998, 1997 and 1996 were
$236.5 million, $620.9 million and $972.7 million. Gross gains of $6.8 million,
$14.9 million and $14.1 million, and gross losses of $4.5 million, $4.8 million
and $16.0 million were realized on those sales, respectively.
Bonds with a par value of $7.8 million were on deposit pursuant to regulatory
requirements at both December 31, 1998 and 1997. At December 31, 1998, the
Company held unrated or less-than-investment grade bonds of $324 million with an
aggregate fair value of $326 million. Those holdings amounted to approximately
6.9% of the Company's investments in bonds and 5.8% of the Company's total
admitted assets.
16
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
The gross unrealized gains and losses on, and the cost and NAIC market value of,
investments in common stocks and preferred stocks are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross NAIC
Unrealized Unrealized Market
Cost Gains (Losses) Value
-------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998
Redeemable preferred stocks $ 10,050 $ 1,165 $ - $ 11,215
Nonredeemable preferred stocks 10,042 38 (128) 9,952
Common stocks 51,551 27,656 (102) 79,105
-------------------------------------------------
Total $ 71,643 $ 28,859 $ (230) $100,272
=================================================
At December 31, 1997
Redeemable preferred stocks $ 15,050 $ 1,298 $ - $ 16,348
Common stocks 51,788 15,758 (7,524) 60,022
-------------------------------------------------
Total $ 66,838 $ 17,056 $ (7,524) $ 76,370
=================================================
</TABLE>
During 1998, the maximum and minimum lending rates for new mortgage loans were
9.2% and 6.77% for commercial loans. No residential loans were originated in
1998. 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,
1998, the Company held no mortgages with interest overdue beyond one year. At
December 31, 1998, there were no amounts of mortgage principal that were
non-admitted, no mortgage loans with interest overdue beyond one year, no
mortgage loans were subject to prior liens, and no mortgage loans 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. The Company did not reduce
interest rates on any of its outstanding loans. All properties covered by
mortgage loans have fire insurance at least equal to the excess of the loan over
the maximum loan that would be allowed on the land without the building.
The Company's mortgage loan portfolio is comprised primarily of conventional
real estate mortgages collateralized by apartment (19%), industrial (21%),
retail (31%), office (19%) and other commercial properties (9%). 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 27%, 33% and 12% of the stated mortgage loan
balances as of December 31, 1998 are due from borrowers in South Atlantic
states, West South Central states, and Mountain states, respectively. No other
geographic region represents as much as 10% of mortgage loans at December 31,
1998.
17
<PAGE>
3. Investments (continued)
Major categories of the Company's net investment income are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Income:
Bonds $353,078 $359,219 $376,753
Preferred stocks 1,529 2,681 2,815
Common stocks 120 349 592
Mortgage loans 33,947 29,153 18,229
Real estate 4,254 4,896 4,754
Derivative investments (474) (418) (260)
Policy loans 7,175 6,456 5,942
Cash and short-term investments 742 1,603 1,550
Other invested assets 1,997 2,623 1,207
------------------------------------------
Total investment income 402,368 406,562 411,582
Expenses:
Depreciation 787 1,453 1,634
Other 12,597 12,890 14,157
------------------------------------------
Total investment expenses 13,384 14,343 15,791
------------------------------------------
Net investment income $388,984 $392,219 $395,791
==========================================
</TABLE>
The Company does not include amounts for the occupancy of Company-owned
properties in real estate income. Non-admitted accrued investment income
amounted to $0 and $257 at December 31, 1998 and 1997.
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):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Realized capital gains (losses) $11,674 $13,296 $ (5,165)
Less amount transferred to IMR 12,255 11,756 7,057
-------------------------------------
(581) 1,540 (12,222)
Less federal income taxes before effect of
transfer to IMR - - 196
Plus federal income taxes on amounts
transferred to IMR - - 2,470
-------------------------------------
Net realized capital (losses) gains $ (581) $ 1,540 $ (9,948)
=====================================
</TABLE>
The Company participates in a securities lending program. The Company generally
receives cash collateral in an amount that is in excess of the market value of
the securities loaned. Market values of securities loaned and collateral are
monitored daily, and additional collateral is obtained as necessary. At December
31, 1998, the market value of securities loaned and collateral received amounted
to $43.0 million and $45.5 million, respectively. There was no outstanding
securities lending at December 31, 1997.
18
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
4. 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):
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------
<S> <C> <C>
Receive-fixed swaps held as hedges of direct investments:
Notional amount $80.0 $114.1
Average rate received 7.14% 6.59%
Average rate paid 5.55% 5.88%
Receive-fixed swaps held to modify annuity crediting rates:
Notional amount $12.5 $12.5
Average rate received 6.78% 6.78%
Average rate paid 5.31% 5.72%
</TABLE>
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.
Gains or losses realized on closed or terminated agreements accounted for as
hedges are deferred and amortized to investment income on a straight line basis
over the shorter of the lives of the agreements or the expected remaining lives
of the underlying assets or liabilities. The net deferred gains (losses) on the
interest rate swaps were $320 thousand and $(270) thousand as of December 31,
1998 and 1997.
Interest rate swaps are also 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.
19
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
4. Use of Derivatives (continued)
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.
5. Subsidiaries
The Company wholly-owns two insurance subsidiaries. First Alexander Hamilton
Life Insurance Company (FAHL) 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) reinsured 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.
Statutory-basis financial information of the Company's two insurance company
subsidiaries is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Summary statutory First Alexander Hamilton AH (Michigan) Life
basis balance sheets Life Insurance Company Insurance Company
--------------------------------------------------------------
December 31
--------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments $491,137 $491,549 $704,378 $759,445
Other assets 7,670 8,085 10,911 10,987
--------------------------------------------------------------
Total admitted assets $498,807 $499,634 $715,289 $770,432
==============================================================
Insurance reserves $453,610 $457,320 $660,931 $725,909
Other liabilities 5,966 6,890 16,383 17,479
Capital and surplus 39,231 35,424 37,975 27,044
--------------------------------------------------------------
Total liabilities and
capital and surplus $498,807 $499,634 $715,289 $770,432
==============================================================
</TABLE>
20
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
5. Subsidiaries (continued)
<TABLE>
<CAPTION>
Summary statutory basis First Alexander Hamilton AH (Michigan) Life
statements of income Life Insurance Company Insurance Company
---------------------------------------------------------
Year Ended December 31
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $73,437 $89,544 $55,062 $58,702
Expenses 69,730 83,415 44,868 56,290
---------------------------------------------------------
Net Income $ 3,707 $ 6,129 $10,194 $ 2,412
=========================================================
</TABLE>
The cost of the Company's investment in the common stock of its subsidiaries was
$49.5 million and $51.8 million at December 31, 1998 and 1997, respectively.
None of the Company's insurance subsidiaries paid dividends to the Company in
any year presented.
6. 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 $250 thousand to $1.5 million
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. The
principal effects of these transactions with the assuming companies are
summarized as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Premiums $53.0 $94.5 $264.4
(Decrease) increase in aggregate reserves
ceded (234.3) (53.8) 416.5
Policy benefits 194.5 179.3 200.1
Commissions 0.1 1.9 11.7
</TABLE>
21
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
6. Reinsurance (continued)
Amounts payable or recoverable for reinsurance on policy and contract
liabilities are not subject to periodic or maximum limits. At December 31, 1998,
the Company's reinsurance recoverables are not material and no individual
reinsurer owed the Company an amount that was equal to or greater than 2% of the
Company's surplus.
In 1998, 1997, and 1996 the Company did not commute any ceded reinsurance. In
1998 and 1997, the Company did not enter into any new agreements that reinsured
policies or contracts that were in-force or had existing reserves as of the
effective date of such agreements. In September 1996, certain annuity business
was reinsured to AH(M) with the Company transferring $319.3 million in assets
and $349.2 million in reserves.
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, 1998.
Neither 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). 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 in which the amount of losses paid or accrued
through December 31, 1998 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.
7. Federal Income Taxes
The Company is included in the consolidated life/non-life federal income tax
return with its subsidiaries FAHL and AH(M). 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 $1.3
million and $914 thousand at December 31, 1998 and 1997, respectively.
22
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
7. 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.
The AHL Group had tax capital loss carryforwards of $940 thousand and $6 million
in the 1998 and 1997 tax years, respectively, which can be carried forward into
the next five years.
The AHL Group paid federal income taxes in the 1998, 1997 and 1996 tax years of
$41 million, $31 million and $24 million, respectively.
8. 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
4.00% to 6.00%.
The policy reserves for immediate annuities issued prior to 1986 are calculated
using the 1971 Individual Annuity Mortality Table and interest rates between
7.50% 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 2.50% to 6.00%. For policies issued
after 1988, the 1980 CSO Table with 4.00% 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 3.00% to 5.50%.
23
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
8. Policy Liabilities (continued)
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>
1998 1997
--------------------------------------------
Amount Percent Amount Percent
--------------------------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal (with
adjustment):
At book value less current surrender charge $ 808.3 20.2% $1,009.5 23.9%
At market value 86.4 2.2 10.8 .3
--------------------------------------------
Total with adjustment or at market value 894.7 22.4 1,020.3 24.2
Subject to discretionary withdrawal (without
adjustment):
At book value with minimal or no
charge or adjustment 1,773.8 44.3 1,805.8 42.8
Not subject to discretionary withdrawal 1,331.2 33.3 1,393.0 33.0
--------------------------------------------
Total annuity reserves and deposit fund
liabilities--before reinsurance 3,999.7 100.0% 4,219.1 100.0%
Less reinsurance ceded 1,600.8 ===== 1,694.5 =====
------- -------
Total annuity actuarial reserves and deposit
fund liabilities (net) $2,398.9 $2,524.6
======== ========
</TABLE>
The annuity reserves not subject to discretionary withdrawal are comprised
primarily of periodic payment annuities.
The year end liability for unpaid claims and claim adjustment expenses for
accident and health insurance is included in the aggregate reserve for accident
and health policies and policy and contract claims in the Statements of Admitted
Assets, Liabilities, 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.
24
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
9. Borrowed Money
At December 31, 1998, the Company had short-term notes payable of $15.7 million
with its Parent. The notes, which were for short-term cash management purposes,
mature within 30 days of issuance at interest rates of approximately 5.62%. At
December 31, 1997, the Company had similar short-term notes payable of $23.2
million with its Parent at interest rates of 5.9% to 6.5%. Also, at December 31,
1998, the Company had $48.0 million outstanding under a reverse repurchase
agreement, plus accrued interest. The agreement matures January 29, 1999.
Interest expense was $1.8 million, $1.5 million and $3.3 million in 1998, 1997
and 1996.
10. 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, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Total
--------
<S> <C>
Premiums, deposits and other
considerations $ 69,864
========
Reserves for accounts with
assets at market value $ 86,291
========
Reserves by withdrawal
characteristics:
Subject to discretionary
withdrawal at market value $ 83,865
Subject to discretionary
withdrawal with MV
adjustment 2,426
--------
$ 86,291
========
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<S> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $69,966
Transfers from separate accounts (1,460)
Other 105
--------
Transfers to separate accounts as reported in the
Summary of Operations of the Life, Accident &
Health Annual Statement $68,611
========
</TABLE>
25
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
11. 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 and 600,000 shares Series B Common Shares (500,000 shares outstanding),
par value $1 per share. During 1998, the Company's preferred stock was redeemed
by the holder.
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, 1998, the maximum dividend amount payable by the Company without
the Commissioners approval is $83.6 million.
The Company holds a surplus note with GARCO Capital Corp., an affiliate. 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. A
summary of the terms of this surplus note follows:
<TABLE>
<CAPTION>
Interest
Paid Total
Date Interest Amount of Current Current Interest Accrued Date of
Issued Rate 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 $19,533,656 $1,220,000 9/30/24
</TABLE>
The Company accrues interest as an increase to the note balance in surplus.
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, 1998, the
Company meets the RBC requirements.
26
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
12. Benefit Plans
Pension Plans
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 issued by
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
plans are administered by Jefferson-Pilot Corporation.
Pension expense for all years presented was not significant.
Defined Contribution Plan
The Company participates in Jefferson Pilot Corporation's defined contribution
retirement plan covering most employees and full time agents. The Company
matches a portion of participant contributions and makes profit sharing
contributions to a fund which acquires and holds shares of Jefferson-Pilot
Corporation's common stock for the account of participants. Plan assets are
invested under a group variable annuity contract issued by Jefferson Pilot. Plan
expense for all years presented was not significant.
Other Postretirement Benefit Plans
The Company sponsors contributory health care and life insurance benefit plans
for eligible retired employees, qualifying retired agents and certain surviving
spouses. The Company contributes to a welfare benefit trust from which future
benefits will be paid. The Company accrues the cost of providing postretirement
benefits other than pensions during the employees' active service period. Plan
expense for all years presented was not significant. Information regarding the
funded status of the plans is not material.
27
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
12. Benefit Plans (continued)
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 $52.4 million and $48.7 million at
December 1998 and 1997, 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
$45.2 million and $40.9 million at December 31, 1998 and 1997, respectively.
The trust is included with other assets.
13. 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.
14. Related Parties
The Company paid dividends totaling $70 million to Jefferson-Pilot Corporation,
the parent company, during 1998. There were no dividends paid to Jefferson-Pilot
Corporation in 1997 or 1996. In addition, the Company pays Jefferson-Pilot Life
Insurance Company, an affiliate, for certain expenses incurred on the Company's
behalf. The total amounts paid for these expenses were $15.7 million, $32.4
million and $17.7 million in 1998, 1997, and 1996, respectively. Costs are
allocated to the Company based on cost allocations arrangements based on GAAP.
At December 31, 1998 and 1997, the Company held in its investment portfolio
bonds with a par value of $33.2 million and $35.3 million issued by
Jefferson-Pilot Communications Company, an affiliate. Interest earned on these
bonds totaled $2.4 million in 1998, $2.0 million in 1997 and $768 thousand in
1996.
As discussed in Note 6, the Company reinsured certain annuity business with
AH(M), an affiliate, in 1996. In addition to the reinsurance discussed in Note
6, business reinsured by a third party was transferred to AH(M) in 1996. Reserve
credits from AH(M) were $660.9 million and $725.9 million in 1998 and 1997,
respectively.
The Company has a concession agreement with its affiliate broker/dealer,
Jefferson Pilot Variable Corporation ("JPVC"). The agreement calls for the
Company to pay JPVC for sales of the Company's variable annuity contracts. The
amount paid is based on sales and contracts in force. During 1998, the expense
recorded related to this agreement was $4.5 million. The expense in prior years
was not significant.
28
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
15. Fair Values of Financial Instruments
The carrying values and fair values of the Company's investments in bonds,
stocks, mortgage loans, policy loans, annuity contracts, borrowed money, and
derivatives at December 31 are summarized as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Bonds $4,686 $4,838 $4,712 $4,848
Stocks 99 100 75 76
Mortgage loans 430 455 409 411
Policy loans 116 116 111 111
Financial Liabilities
Annuity contract liabilities in
accumulation phase (2,311) (2,247) (2,479) (2,444)
Borrowed money (64) (64) (23) (23)
Off-Balance-Sheet Financial
Instruments
Interest rate swaps - 7 - 3
</TABLE>
The following methods and assumptions were used by the Company in estimating the
"fair value" disclosures for financial instruments in the accompanying financial
statements and notes thereto:
Cash, Short-term Investments, Accounts Receivable from Agents, Reinsurers
and Others, and Accounts Payable: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate
their fair values due to their short term maturity or availability.
Investment Securities: Fair values for fixed maturity securities
(including redeemable preferred stock) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services, or, in the case of private placements, are estimated by
discounting the expected future cash flows using current market rates
applicable to the coupon rate, credit, and maturity of the investments. The
fair values for equity securities are based on quoted market prices, where
available; for equity securities that are not actively traded, estimated
fair values are based on values of issues of comparable yield and quality.
Separate Accounts: The assets and liabilities related to separate accounts
are reported at fair value in the accompanying Statements of Assets,
Liabilities, Capital and Surplus.
29
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
15. Fair Values of Financial Instruments (continued)
Mortgage Loans: The fair values for mortgage loans and policy loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for similar loans to borrowers with similar credit ratings. Loans
with similar characteristics are aggregated for purposes of the calculations.
Policy Loans: The fair values for policy loans on universal life-type and
annuity products approximate carrying values due to the variable interest rates
charged on those loans.
Investment Contracts: Annuity contracts issued by the Company do not generally
have defined maturities. Fair values of the Company's liabilities under annuity
contracts, are estimated to equal the cash surrender values of the underlying
contracts.
Borrowed Money: The fair values for the Company's liability for borrowed money
approximates its carrying amounts, which amounts include accrued interest.
Interest Rate Swaps: The fair value of the interest rate swap that hedges
annuity contract deposits have been estimated based on prices provided by the
counterparties.
Surplus Note: The determination of the fair value of the surplus note is not
practicable due to the restrictions on repayment of principal and interest
amounts.
30
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
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 Statements of Admitted Assets,
Liabilities, Capital and Surplus, approximates $9.5 million as of December 31,
1998.
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.
The Company is a defendant in a proposed class action suit. The suit alleges
deceptive practices, fraudulent and negligent misrepresentation and breach of
contract in the sale of certain life insurance policies using policy
illustrations which plaintiffs claim were misleading. Unspecified compensatory
and punitive damages, costs and equitable relief are sought in the case. While
management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome in the case, management
believes that it has made appropriate disclosures to policyholders as a matter
of practice, and intends to vigorously defend its position.
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 liquidity, although it could have
a material adverse effect on the results of operations for a specific period.
17. Subsequent Events
Effective January 1, 1999, AH(M) was merged into the Company. This transaction
has no impact on total surplus of the Company.
31
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
18. Year 2000 Conversion Costs (Unaudited)
The Company's administrative and financial reporting systems are shared among
numerous insurance affiliates within the consolidated Jefferson-Pilot
Corporation group ("JP").
Like most if not all companies, JP faces certain risks associated with the
coming of the year 2000. The year 2000 issue relates to the way computer systems
and programs define calendar dates. By using only two digit dates, they could
fail or make miscalculations due to the inability to distinguish between dates
in the 1900's and in the 2000's. Also, many systems and equipment that are not
typically thought of as "computer-related"(referred to as "non-IT") contain
embedded hardware or software that must handle dates and may not properly
perform with dates after 1999.
JP began work on the Year 2000 compliance issue in 1995. The scope of the
project includes: ensuring the compliance of all applications, operating systems
and hardware on mainframe, PC and LAN platforms; addressing issues related to
non-IT embedded software and equipment; and addressing the compliance of key
vendors and service providers to JP (business partners).
The project has four phases: assessment of systems and equipment affected by the
Year 2000 issue; definition of strategies to address affected systems and
equipment; remediation of affected systems and equipment; and certification that
each is Year 2000 compliant. To certify that all IT systems (internally
developed or purchased) are Year 2000 compliant, each system is tested using a
standard testing methodology which includes regression testing, millennium
testing, millennium leap year testing and cross over year testing. Certification
testing is performed on each system as soon as remediation is completed.
The target for completion of all phases and categories is September 30, 1999. JP
has completed the assessment and strategy phases for mainframe applications,
operating systems and hardware and is executing the remediation and
certification phases. JP's new business and policyholder administration systems
and the general ledger are on the mainframe. JP has determined that
approximately 62% of all mainframe systems are compliant. JP does not deem a
system to be compliant until the completion of remediation and certification to
confirm that its performance will not be affected by dates extending after 1999.
With respect to significant policyholder systems, all required remediation has
been completed on all systems. The majority of these systems, including all
systems which support products JP is currently marketing, have been certified as
Year 2000 compliant. Completion of certification of remaining systems for some
closed blocks of business is expected by April 1999. Other non-policyholder
mainframe systems have either been certified or are on schedule. For PC and LAN
systems, JP has completed the strategy phases and is executing the assessment,
remediation and certification phases concurrently and intends to complete these
phases during the third quarter of 1999.
32
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
18. Year 2000 Conversion Costs (Unaudited) (continued)
For the majority of JP's non-IT related systems and equipment, JP has been
advised by vendors that the systems and equipment are currently Year 2000
compliant. Written documentation regarding compliance is being obtained. Where
feasible, certification testing will be conducted for systems and equipment that
are material to operations. Some systems and equipment, such as electrical power
supply, are not feasible for JP to certify. Completion for non-IT systems and
equipment is scheduled for September 1999.
The most significant category of key business partners is financial
institutions. Their critical functions include safeguarding and managing
investment portfolios, processing of JP's operating bank accounts, and
sales/distribution. All of JP's business partner financial institutions that
have responded to JP's inquiries have indicated they are on schedule for Year
2000 compliance. JP continues to follow up with business partner financial
institutions that have not yet responded. Other partner categories include
insurance agents and marketing organizations, and suppliers of communication
services, utilities, materials and supplies. JP has conducted surveys of all its
software and hardware vendors, and certification is underway. In addition to
financial institutions, other critical business partners have been identified
and surveys initiated. Results of these surveys are being analyzed in the first
quarter of 1999 and appropriate testing or other due diligence will be conducted
in the second and third quarters of 1999.
JP has not had an independent review of its Year 2000 risks or estimates.
However, experts have been engaged to assist in developing estimates and to
complete remediation work on specific portions of the project.
Since inception of the project, JP has incurred external costs of $7 million and
internal costs of $7 million. The current estimate, based on actual experience
to date, of total project expense is $24 million, with remaining external costs
of $5 million and internal costs of $5 million. Costs are included in various
budgets and expensed as incurred. Expected total costs are less than earlier
estimates due in part to refinements in estimates as more projects near
completion. In addition, remediation/certification costs on projects completed
to date have been lower than originally estimated. Total 1998 costs were $8
million. There has not been a material adverse impact on JP's operations as a
result of IT projects being deferred due to resource constraints caused by the
Year 2000 project.
JP has investments in publicly and privately placed securities and loans. JP may
be exposed to credit risk to the extent that related borrowers are materially
adversely impacted by the Year 2000 issue. Portfolio diversification reduces the
overall risk. JP is in compliance with the NAIC Securities Valuation Office's
Due Diligence Guidelines for analyzing these risks.
33
<PAGE>
Alexander Hamilton Life Insurance Company of America
Notes to Financial Statements - Statutory Basis (continued)
18. Year 2000 Conversion Costs (Unaudited) (continued)
Although JP expects to certify that its critical policyholder systems are
compliant by the end of April 1999, there is no guarantee that these results
will be achieved. Specific factors that give rise to this uncertainty include a
possible loss of technical resources to perform the work (not yet encountered),
failure to identify all susceptible systems, non-compliance by third parties
whose systems and operations impact JP, and other similar uncertainties.
Specifically, from Year 2000 problems, JP could experience an interruption in
its ability to collect and process premiums, process claim payments, safeguard
and manage its invested assets and operating cash accounts, accurately maintain
policyholder information, accurately maintain accounting records, issue new
policies and/or perform adequate customer service.
While JP believes the occurrence of such a situation is unlikely, a possible
worst case scenario might include one or more of JP's significant policyholder
systems being non-compliant. Such an event could result in a material disruption
to JP's operations. Should the worst case scenario occur, it could, depending on
its duration, have a material impact on JP's results of operations and liquidity
and ultimately on its financial position. JP is on schedule to complete
certification of all internal systems and non-IT equipment well in advance of
January 1, 2000. JP recognizes the need to plan for unanticipated problems
resulting from failure of internal systems or equipment or from failures by JP's
business partners, providers, suppliers or other critical third parties. JP has
begun work on contingency plans for all mission critical functions.
34
<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.4/
(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 Life
Insurance Company of America, Fidelity Distributors
Corporation and Variable Insurance Products Fund.4/
C-1
<PAGE>
(b) Participation Agreement by and between the Alexander Hamilton
Life Insurance Company of America, Fidelity Distributors
Corporation and Variable Insurance Products Fund II.4/
(c) Participation Agreement by and between Alexander Hamilton Life
Insurance Company of America, Massachusetts Financial Services
Company and MFS Variable Insurance Trust.4/
(d) Participation Agreement by and between Alexander Hamilton Life
Insurance Company of America, OppenheimerFunds, Inc. and
Oppenheimer Variable Account Funds.5/
(9) Opinion and Consent of Counsel.2/
(10) Consent of Independent Auditors
(11) Not Applicable.
(12) Not Applicable.
(13) Schedule of Computation of Performance.4/
(14) Not Applicable.
1/ Incorporated by reference to the initial Registration Statement on Form
N-4 for the Alexander Hamilton Variable Annuity Separate Account filed on
February 24, 1994 (Registration No. 33-75714).
2/ Incorporated by reference to the 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/ Incorporated by reference to the Post-Effective Amendment No. 2 to the
Registration Statement on Form N-4 for the Alexander Hamilton Variable
Annuity Separate Account filed on May 2, 1997 (Registration No. 33-75714).
4/ Incorporated by reference to the Post-Effective Amendment No. 4 to the
Registration Statement on Form N-4 for the Alexander Hamilton Variable
Annuity Separate Account filed on February 26, 1998 (Registration No.
33-75714).
5/ Incorporated by reference to the Post-Effective Amendment No. 5 to the
Registration Statement on Form N-4 for the Alexander Hamilton Variable
Annuity Separate Account filed on April 20, 1998 (Registration No.
33-75714).
C-2
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
Name and Principal Position and Offices
Business Address with Depositor
- ---------------- --------------
<S> <C>
David A. Stonecipher Director; Chairman of the
Board and Chief Executive Officer
Kenneth C. Mlekush Director; President
Dennis R. Glass Director; Executive Vice
President and Treasurer
John D. Hopkins Director; Executive Vice
President and General Counsel
James T. Ponder Director; Executive
Vice President
E. Jay Yelton Director; Executive Vice
President
Charles C. Cornelio Executive Vice President
Leslie L. Durland Executive Vice President
Reggie D. Adamson Senior Vice President-
Finance
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
Russell C. Simpson Vice President
Robert A. Reed Vice President and
Secretary
Cynthia K. Swank Vice President and Controller
John A. Weston Vice President
One Granite Place
Concord, NH 03301
Donna L. Drew Director; Assistant Vice President
1000 Town Ctr.
Suite 1070A
Southfield, MI 48075
</TABLE>
*/ 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:
<TABLE>
<CAPTION>
Organized % Voting
Under Stock
Names of Subsidiaries Laws of: Owned by
Parent
<S> <C> <C>
Jefferson-Pilot Life Insurance Company North Carolina 100%
Jefferson Pilot Variable Corporation North Carolina 100%
Jefferson-Pilot Communications Company North Carolina 100%
Alexander Hamilton Life Insurance Company
of America Michigan 100%
AH (Michigan) Life Insurance Company Michigan 100%
First Alexander Hamilton Life Insurance Company New York 100%
Jefferson Pilot Financial Insurance Company New Hampshire 100%
Jefferson Pilot LifeAmerica Insurance Company New Jersey 100%
Jefferson Pilot Securities Corporation New Hampshire 100%
</TABLE>
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 February 12, 1999, there were 2,018 Owners of the Contracts, 992 of
which owned non-qualified Contracts and 1,026 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 Variable Corporation also acts as principal underwriter for
the following:
- JPF Separate Account A of Jefferson Pilot Financial Insurance Company
- JPF Separate Account C of Jefferson Pilot Financial Insurance Company
- JPF Separate Account B of Jefferson Pilot LifeAmerica Insurance Company
- JPF Separate Account D of Jefferson Pilot LifeAmerica Insurance Company
- Jefferson Pilot Variable Fund, Inc.
(b) The Directors and Officers of Jefferson Pilot Variable Corporation, the
principal underwriter for the Registrant, are as follows:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND
BUSINESS ADDRESS OFFICES WITH UNDERWRITER
- ---------------- ------------------------
<S> <C>
Ronald R. Angarella Director and President
David K. Booth Vice President, Marketing
Richard M. Nummi Assistant Vice President, Compliance
Charles C. Cornelio Director
Kevin Haddad Compliance Officer
100 N. Greene Street
Greensboro, NC 27401
Carol R. Hardiman Director
Shari J. Lease Secretary
John A. Weston Chief Financial Officer
Stafford Moser Assistant Vice President, Marketing
100 N. Greene Street
Greensboro, NC 27401
</TABLE>
Address (except as otherwise noted):
One Granite Place
Concord, NH 03301
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NAME OF NET UNDERWRITING
PRINCIPAL DISCOUNTS AND COMPENSATION BROKERAGE
UNDERWRITER COMMISSIONS ON REDEMPTION COMMISSIONS COMPENSATION
<S> <C> <C> <C> <C> <C>
1998 Jefferson Pilot $ 0 $ 0 $ 0 $ 0
Variable
Corporation
</TABLE>
C-6
<PAGE>
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, at 100 North Green St., Greensboro, North Carolina 27401 and One
Granite Place, Concord, New Hampshire 03301.
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
Additional 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. 7 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greensboro,
State of North Carolina on this 13th day of April, 1999.
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, Chief Executive Officer
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
David A. Stonecipher Director; Chairman of the Board, and April 13, 1999
Chief Executive Officer
/s/ Kenneth C. Mlekush
Kenneth C. Mlekush Director; President April 12, 1999
/s/ Dennis R. Glass
Dennis R. Glass Director; Executive Vice President April 12, 1999
and Treasurer
/s/ John D. Hopkins
John D. Hopkins Director; Executive Vice President April 12, 1999
and General Counsel
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ James T. Ponder
James T. Ponder Director; Executive Vice President April 12, 1999
/s/ E. Jay Yelton
E. Jay Yelton Director; Executive Vice President April 12, 1999
/s/ Donna L. Drew
Donna L. Drew Director; Assistant Vice President April 9, 1999
</TABLE>
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Page
No. Exhibit No
- ------- -------------- ----
<S> <C> <C>
(10) Consent of Independent Auditors ................
</TABLE>
Exhibit 10
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports on The Alexander Hamilton Variable Annuity Separate Account
dated April 9, 1999, and the Alexander Hamilton Life Insurance Company of
America dated February 8, 1999, in Post-Effective Amendment No. 7 (Form N-4, No.
33-75714) under the Securities Act of 1933 and Amendment No. 8 (Form N-4, No.
811-8374) under the Investment Company Act of 1940 and related Statement of
Additional Information of The Allegiance Variable Annuity issued by Alexander
Hamilton Life Insurance Company of America.
/s/ Ernst & Young LLP
Greensboro, North Carolina
April 14, 1999
