-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F1iEJWzT+PpwflCWUPH9Pu5ATWAk0kg74/MGdLN2sJilXdcyMJ158lUjBck5L9/t czcdww40LKUBhGcWZeJOAw== /in/edgar/work/0000899243-00-002192/0000899243-00-002192.txt : 20001011 0000899243-00-002192.hdr.sgml : 20001011 ACCESSION NUMBER: 0000899243-00-002192 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20001010 EFFECTIVENESS DATE: 20001010 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL SEPARATE ACCOUNT VL R CENTRAL INDEX KEY: 0001051485 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 250598210 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 333-87307 FILM NUMBER: 737036 BUSINESS ADDRESS: STREET 1: 2727 A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019-2191 BUSINESS PHONE: 7135221111 MAIL ADDRESS: STREET 1: 2727 A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019-2191 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GENERAL LIFE INSURANCE CO SEPARATE ACCOUNT VL R DATE OF NAME CHANGE: 19971216 485BPOS 1 0001.txt AGL SEPARATE ACCOUNT VL-R (THE ONE VUL SOLUTION) Registration No. 333-87307 As filed with the Securities and Exchange Commission on October 10, 2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R (Exact Name of Trust) AMERICAN GENERAL LIFE INSURANCE COMPANY (Exact Name of Depositor) 2727-A Allen Parkway Houston, Texas 77019-2191 (Complete Address of Depositor's Principal Executive Offices) Pauletta P. Cohn, Esq. Deputy General Counsel American General Life Companies 2929 Allen Parkway Houston, Texas 77019-2191 (Name and Complete Address of Agent for Service) Title and Amount of Securities Being Registered: An Indefinite Amount of Units of Interest in American General Life Insurance Company Separate Account VL-R Under Variable Life Insurance Policies Amount of Filing Fee: None required. It is proposed that this filing will become effective on October 23, 2000 pursuant to paragraph (b) of Rule 485. Registrant elects to be governed by Rule 63-e(T)(b)(13)(i)(A) under the Investment Company Act of 1940, with respect to the Variable Life Insurance Policies described in the Prospectus. AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R RECONCILIATION AND TIE BETWEEN ITEMS IN FORM N-8B-2 AND THE PROSPECTUS (PURSUANT TO INSTRUCTION 4 OF FORM S-6) CROSS REFERENCE SHEET ITEM NO. OF FORM N-8B-2* PROSPECTUS CAPTION - -------------------------------------------------------------------------------- 1 Additional Information: Separate Account VL-R. 2 Additional Information: AGL. 3 Inapplicable. 4 Additional Information: Distribution of Policies. 5, 6 Additional Information: Separate Account VL-R. 7 Inapplicable.** 8 Inapplicable.** 9 Additional Information: Legal Matters. 10(a) Additional Information: Your Beneficiary, Assigning Your Policy. 10(b) Basic Questions You May Have: How will the value of my investment in a Policy change over time? 10(c)(d) Basic Questions You May Have: How can I change my Policy's insurance coverage? How can I access my investment in a Policy? Can I choose the form in which AGL pays out any proceeds from my Policy? Additional Information: Payment of Policy Proceeds. 10(e) Basic Questions You May Have: Must I invest any minimum amount in a policy? 10(f) Additional Information: Voting Privileges. 10(g)(1), 10(g)(4), 10(h)(3), 10(h)(2) Basic Questions You May Have: To what extent will AGL vary the terms and conditions of the Policies in particular cases? Additional Information: Voting Privileges; Additional Rights That We Have. 10(g)(3), 10(g)(4), 10(h)(3), 10(h)(4) Inapplicable.** 10(i) Additional Information: Separate Account VL-R; Tax Effects. 11 Basic Questions You May Have: How will the value of my investment in a Policy change over time? Additional Information: Separate Account VL-R. 12(a) Additional Information: Separate Account VL-R; Front Cover. 12(b) Inapplicable.** 12(c), 12(d) Inapplicable.** 12(e) Inapplicable, because the Separate Account did not commence operations until 1998. 13(a) Basic Questions You May Have: What charges will AGL deduct from my investment in a Policy? What charges and expenses will the Mutual Funds from the amounts I invest through my Policy? Additional Information: More About Policy Charges. 13(b) Illustrations of Hypothetical Policy Benefits. 13(c) Inapplicable.** 13(d) Basic Questions You May Have: To what extent will AGL vary the terms and conditions of the Policy in particular cases? 13(e), 13(f), 13(g) None. 14 Basic Questions You May Have: How can I invest money in a Policy? 15 Basic Questions You May Have: How can I invest money in a Policy? How do I communicate with AGL? 16 Basic Questions You May Have: How will the value of my investment in a Policy change over time? ITEM NO. ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- 17(a), 17(b) Captions referenced under Items 10(c), 10(d), and 10(e). 17(c) Inapplicable.** 18(a) Captions referred to under Item 16. 18(b), 18(d) Inapplicable.** 18(c) Additional Information: Separate Account VL-R. 19 Additional Information: Separate Account VL-R; Our Reports to Policy Owners. 20(a), 20(b), 20(c), 20(d), 20(e), 20(f) Inapplicable.** 21(a), 21(b) Basic Questions You May Have: How can I access my investment in a Policy? Additional Information: Payment of Policy Proceeds. 21(c) Inapplicable.** 22 Additional Information: Payment of Policy Proceeds-Delay to Challenge Coverage. 23 Inapplicable.** 24 Basic Questions You May Have; Additional Information. 25 Additional Information: AGL. 26 Inapplicable, because the Separate Account did not commence operations until 1998. 27 Additional Information: AGL. 28 Additional Information: AGL's Management. 29 Additional Information: AGL. 30, 31, 32, 33, 34 Inapplicable, because the Separate Account did not commence operations until 1998. 35 Inapplicable.** 36 Inapplicable.** 37 None. 38, 39 Additional Information: Distribution of the Policies. 40 Inapplicable, because the Separate Account did not commence operations until 1998. 41(a) Additional Information: Distribution of the Policies. 41(b), 41(c) Inapplicable** 41,43 Inapplicable, because the Separate Account did not commence operations or issue any securities until 1998. 44(a)(1), 44(a)(2), 44(a)(3) Basic Questions You May Have: How will the value of my investment in a Policy change over time? 44(a)(4) Additional Information: Tax Effects--Our taxes. 44(a)(5), 44(a)(6) Basic Questions You May Have: What charges will AGL deduct from my investment in a Policy? 44(b) Inapplicable.** 44(c) Caption referenced in 13(d) above. 45 Inapplicable, because the Separate Account did not commence operations until 1998. 46(a) Captions referenced in 44(a) above. 46(b) Inapplicable.** 47, 48, 49 None. 50 Inapplicable.** 51 Inapplicable.** 52(a), 52(c) Basic Questions You May Have: To what extent can AGL vary the terms and conditions of the Policy in particular cases? Additional Information: Additional Rights That We Have. 52(b), 52(d) None. 53(a) Additional Information: Tax Effects--Our taxes. 53(b), 54 Inapplicable.** 55 Illustrations of Hypothetical Policy Benefits. 56-59 Inapplicable.** * Registrant includes this Reconciliation and Tie in its Registration Statement in compliance with Instruction 4 as to the Prospectus as set out in Form S-6. Separate Account VL-R (Account) has previously filed a notice of registration as an investment company on Form N-8A under the Investment Company Act of 1940 (Act), and a Form N-8B-2 Registration Statement. Pursuant to Sections 8 and 30(b)(1) of the Act, Rule 30a-1 under the Act, and Forms N-8B-2 and N-SAR under that Act, the Account will keep its Form N-8B-2 Registration Statement current through the filing of periodic reports required by the Securities and Exchange Commission (Commission). ** Not required pursuant to either Instruction 1(a) as to the Prospectus as set out in Form S-6 or the administrative practice of the Commission and its staff of adapting the disclosure requirements of the Commission's registration statement forms in recognition of the differences between variable life insurance policies and other periodic payment plan certificates issued by investment companies and between separate accounts organized as management companies and unit investment trusts. THE ONE(R)VUL SOLUTION(SM) Contract Prospectus Variable Universal Life October 23, 2000 Issued by American General Life Insurance Company The One VUL Solution is not a deposit or obligation of, or guaranteed or endorsed by Bank One Corporation or any of its affiliates or correspondents or any other agency. The One VUL Solution is not insured by the FDIC or any other agency. The One VUL Solution is subject to investment risks and possible loss of the principal invested. THE ONE(R) VUL SOLUTION(SM) Flexible Premium Variable Life Insurance Policy (the "Policy") Issued by American General Life Insurance Company ("AGL") HOME OFFICE: (Express Delivery) (US Mail) 2727-A Allen Parkway Variable Universal Life Houston, Texas 77019-2191 Administration PHONE: 1-888-436-5255 P.O. Box 4880 or: 1-713-831-3443 Houston, Texas 77210-4880 or: 1-888- 436-5258 (hearing impaired) FAX: 1-877-445-3098 This booklet is called the "prospectus." Investment options. You may use AGL's Separate Account VL-R ("Separate Account") to invest in the following variable investment options and change your selections from time to time: - ------------------------------------------------------------------------------------------------------------------------------- AIM Variable Insurance Funds Franklin Templeton Variable Kemper Variable Series Insurance Products Trust . AIM V.I. Capital Appreciation . Franklin Small Cap Fund . Kemper International Portfolio Fund - Class 2/1/ . Kemper Small Cap Value . AIM V.I. International Equity . Templeton Developing portfolio Fund Markets Securities Fund - Class 2/2/ . AIM V.I. Government Securities Fund . AIM V.I. High Yield Fund A I M Advisors, Inc.* /1/ Franklin Advisers Inc.* Scudder Kemper Investments, Inc.* /2/ Templeton Asset Management, Ltd.* - ------------------------------------------------------------------------------------------------------------------------------- MFS Variable Insurance Trust North American Funds One Group(R) Investment Trust Variable Product Series I . Growth With Income Series . Money Market Fund . One Group Investment Trust Equity Index Portfolio . One Group Investment Trust Mid Cap Growth Portfolio . One Group Investment Trust Large Cap Growth Portfolio . One Group Investment Trust Government Bond Portfolio . One Group Investment Trust Diversified Equity Portfolio Massachusetts Financial Services American General Advisers* Company* Banc One Investment Advisors Corporation* - ------------------------------------------------------------------------------------------------------------------------------- Oppenheimer Variable Account Putnam Variable Trust - Van Kampen Life Investment Funds Class IB Shares Trust . Oppenheimer High Income . Putnam VT Vista Fund . Emerging Growth Portfolio Fund/VA OppenheimerFunds, Inc.* Putnam Investment Management, Van Kampen Asset Management Inc.* Inc.* - -------------------------------------------------------------------------------------------------------------------------------
*The Investment Adviser of the investment option Separate prospectuses contain more information about the mutual funds ("Funds" or "Mutual Funds") in which we invest the accumulation value that you allocate to any of the above-listed investment options. The formal name of each such Fund is set forth in the chart that appears on page 1. Your investment results in any such option will depend on those of the related Fund. You should be sure you also read the prospectus of the Mutual Fund for any such investment option you may be interested in. You can request free copies of any or all of the Mutual Fund prospectuses from your AGL representative or from us at our Home Office listed on page 1. Other choices you have. During the insured person's lifetime, you may, within limits: (1) request an increase in the amount of insurance, (2) borrow or withdraw amounts you have invested, (3) choose when and how much you invest, and (4) choose whether your accumulation value under your Policy, upon the insured person's death, will be added to the insurance proceeds we otherwise will pay to the beneficiary. Charges and expenses. We deduct charges and expenses from the amounts you invest. These are described beginning on page 7. Right to return. If for any reason you are not satisfied with your Policy, you may return it to us and we will refund you the greater of (i) any premium payments received by us or (ii) your accumulation value plus any charges that have been deducted. To exercise your right to return your Policy, you must mail it directly to the Home Office address shown on the first page of this prospectus or return it to the AGL representative through whom you purchased the Policy within 10 days after you receive it. In a few states, this period may be longer. Because you have this right, we will invest your initial net premium payment in the money market investment option from the date your investment performance begins until the first business day that is at least 15 days later. Then we will automatically allocate your investment among the available investment options in the ratios you have chosen. Any additional premium we receive during the 15-day period will also be invested in the money market division and allocated to the investment options at the same time as your initial net premium. We have designed this prospectus to provide you with information that you should have before investing in the Policies. It also contains information that will be helpful to you in exercising the various options you will have once you own a Policy. Please read the prospectus carefully and keep it for future reference. Neither the Securities and Exchange Commission ("SEC") nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The Policies are not available in all states. The Policies are not deposits or obligations of, or guaranteed or endorsed by Bank One Corporation or any of its affiliates or correspondents or any other agency. The Policies are not insured by the FDIC or any other agency. They are subject to investment risks and possible loss of principal invested. This prospectus is dated October 23, 2000. 2 GUIDE TO THIS PROSPECTUS This prospectus contains information that you should know before you purchase The One VUL Solution policy ("Policy") or exercise any of your rights or privileges under a Policy. Basic Information. Here are the page numbers in this prospectus where you may find answers to most of your questions:
Page to see in this Prospectus ---------- Basic Questions You May Have - ----------------------------- . How can I invest money in a Policy?......................................................... 4 . How will the value of my investment in a Policy change over time?........................... 5 . What is the basic amount of insurance ("death benefit") that AGL pays when the insured person dies?................................................. 6 . What charges will AGL deduct from my investment in a Policy?................................ 7 . What charges and expenses will the Mutual Funds deduct from amounts I invest through my Policy?......................................................... 9 . Must I invest any minimum amount in a Policy?............................................... 12 . How can I change my Policy's investment options?............................................ 12 . How can I change my Policy's insurance coverage?............................................ 13 . What additional rider benefits might I select?.............................................. 13 . How can I access my investment in a Policy?................................................. 14 . Can I choose the form in which AGL pays out proceeds from my Policy?........................ 16 . To what extent can AGL vary the terms and conditions of the Policy in particular cases?........................................................................ 17 . How will my Policy be treated for income tax purposes?...................................... 18 . How do I communicate with AGL?.............................................................. 18
Illustrations of a hypothetical Policy. Starting on page 20, we have included some examples of how the values of a sample Policy would change over time, based on certain assumptions we have made. Because your circumstances may vary considerably from our assumptions, your AGL representative will also provide you with a similar sample illustration that is more tailored to your own circumstances and wishes. Underwriting. We will issue the Policy using either simplified underwriting or full underwriting based on our established guidelines. See the discussion regarding our underwriting process on page 17. Additional information. You may find the answers to any other questions you have under "Additional Information" beginning on page 26 or in our Policy. A table of contents for the "Additional Information" portion of this prospectus also appears on page 26. You can 3 obtain copies of our form of Policy from (and direct any other questions to) your AGL representative or our Home Office (shown on the first page of this prospectus). Financial statements. We have included certain financial statements of AGL. These begin on page Q-1. Special words and phrases. If you want more information about any words or phrases that you read in this prospectus, you may wish to refer to the Index of Words and Phrases that appears at the back of this prospectus. That index will tell you on what page you can read more about many of the words and phrases that we use. BASIC QUESTIONS YOU MAY HAVE How can I invest money in a Policy? Premium payments. We call the investments you make in a Policy "premiums" or "premium payments." The amount we require as your initial premium varies depending on the specifics of your Policy and the insured person. We can refuse to accept a subsequent premium payment that is less than $50. Otherwise, with a few exceptions mentioned below, you can make premium payments at any time and in any amount. Premium payments we receive after your right to return expires, as discussed on page 2, will be allocated upon receipt to the available investment options you have chosen. Limits on premium payments. Federal tax law limits your ability to make certain very large amounts of premium payments (relative to the amount of your Policy's insurance coverage) and may impose penalties on amounts you take out of your Policy if you do not observe certain additional requirements. We will monitor your premium payments, however, to be sure that you do not exceed permitted amounts or inadvertently incur any tax penalties. Also, in certain limited circumstances (if your Policy is determined to be a "modified endowment contract" or if additional premiums cause the death benefit to increase more than the accumulation value), we may refuse to accept an additional premium if the insured person does not provide us with adequate evidence that he/she continues to meet our requirements for issuing insurance. These tax law requirements and a discussion of modified endowment contracts are summarized further under "Tax Effects" beginning on page 27. Ways to pay premiums. You may pay premiums by check or money order drawn on a U.S. bank in U.S. dollars and made payable to "American General Life Insurance Company," or "AGL." Premiums after the initial premium must be sent directly to our Home Office. We also accept premium payments by bank draft, wire, or by exchange from another insurance company. You may obtain further information about how to make premium payments by any of these methods from your AGL representative or from our Home Office shown on the first page of this prospectus. 4 Dollar cost averaging. Dollar cost averaging is an investment strategy designed to reduce the risks that result from market fluctuations. The strategy spreads the allocation of your accumulation value over a period of time. This allows you to reduce the risk of investing most of your funds at a time when prices are high. The success of this strategy depends on market trends and is not guaranteed. Under dollar cost averaging, we automatically make transfers of your accumulation value from the money market investment option to one or more of the other investment options that you choose. You tell us whether you want these transfers to be made monthly, quarterly, semi-annually or annually. We make the transfers as of the end of the valuation period that contains the day of the month that you select other than the 29th, 30th or 31st day of the month. The term "valuation period" is described on page 36. You must have at least $5,000 of accumulation value to start dollar cost averaging and each transfer under the program must be at least $100. You cannot participate in dollar cost averaging while also using automatic rebalancing (discussed below). Dollar cost averaging ceases upon your request, or if your accumulation value in the money market option becomes exhausted. We do not charge you for using this feature. Automatic rebalancing. This feature automatically rebalances the proportion of your accumulation value in each investment option under your Policy to correspond to your then current premium allocation designation. You tell us whether you want us to do the rebalancing quarterly, semi-annually or annually. The date automatic rebalancing occurs will be based on the date of issue of your Policy. For example, if your Policy is dated January 17, and you have requested automatic rebalancing on a quarterly basis, automatic rebalancing will start on April 17, and will occur quarterly thereafter. Automatic rebalancing will occur as of the end of the valuation period that contains the date of the month your Policy was issued. You must have a total accumulation value of at least $5,000 to begin automatic rebalancing. You cannot participate in this program while also participating in dollar cost averaging (discussed above). Rebalancing ends upon your request. We do not charge you for using this feature. How will the value of my investment in a Policy change over time? Your accumulation value. From each premium payment you make, we deduct the charges that we describe on page 7 under "Deductions from each premium payment." We invest the rest in one or more of the investment options listed on the first page of this prospectus. We call the amount that is at any time invested under your Policy (including any loan collateral we are holding for your Policy loans) your "accumulation value." Your investment options. We invest the accumulation value that you have allocated to any investment option in shares of a corresponding Mutual Fund. Over time, your accumulation value in any investment option will increase or decrease by the same amount as if you had invested in the related Fund's shares directly (and reinvested all dividends and distributions from the Fund in additional Fund shares); except that your accumulation value will also be reduced by 5 certain charges that we deduct. We describe these charges beginning on page 7 under "What charges will AGL deduct from my investment in a Policy?" You can review other important information about the Mutual Funds that you can choose in the separate prospectuses for those Funds. You can request additional free copies of these prospectuses from your AGL representative or from our Home Office. Our Home Office address and telephone numbers are shown on the first page of this prospectus. Policies are "non-participating." You will not be entitled to any dividends from AGL. What is the basic amount of insurance ("death benefit") that AGL pays when the insured person dies? Your specified amount of insurance. In your application to buy The One VUL Solution Policy, you will tell us how much life insurance coverage you want on the life of the insured person. We call this the "specified amount" of insurance. Your death benefit. The basic death benefit we will pay is reduced by any outstanding Policy loans (increased by any unearned loan interest we may have already charged). You also choose whether the basic death benefit we will pay is . Option 1 - The specified amount on the date of the insured person's death; or . Option 2 - The specified amount plus the Policy's accumulation value on the date of death. Under Option 2, your death benefit will tend to be higher than under Option 1. However, the monthly insurance charge we deduct will also be higher to compensate us for our additional risk. Because of this, your accumulation value will tend to be higher under Option 1 than under Option 2. We will automatically pay an alternative basic death benefit if it is higher than the basic Option 1 or Option 2 death benefit (whichever you have selected). The alternative basic death benefit is computed by multiplying your Policy's accumulation value on the insured person's date of death by the following percentages: 6 TABLE OF ALTERNATIVE BASIC DEATH BENEFITS AS A PERCENTAGE MULTIPLE OF POLICY ACCUMULATION VALUE Insured's Insured's Age on % of Age on % of Policy Accumulation Policy Accumulation Anniversary* Value Anniversary Value ------------ ----- ----------- ----- 0-40 250 60 130 41 243 61 128 42 236 62 126 43 229 63 124 44 222 64 122 45 215 65 120 46 209 66 119 47 203 67 118 48 197 68 117 49 191 69 116 50 185 70 115 51 178 71 113 52 171 72 111 53 164 73 109 54 157 74 107 55 150 75-90 105 56 146 91 104 57 142 92 103 58 138 93 102 59 134 94 101 95+ 100 ________ * Nearest birthday at the beginning of the Policy year in which the insured person dies. What charges will AGL deduct from my investment in a Policy? Deductions from each premium payment. There is currently no deduction from each premium payment you make. However, we have the right at any time to assess a charge not to exceed more than 1.5% on all future premium payments for the costs associated with the issuance of the Policy and administrative services we perform. Daily Charge. We will deduct a daily charge based on either the guaranteed rate or the current rate (if lower than the guaranteed rate) for the costs associated with the mortality and expense risks we assume under the Policy. . The guaranteed daily charge will be at an annual effective rate of .90% for the first 10 Policy Years, .65% for Policy Years 11 - 20 and .40% thereafter. The guaranteed daily deduction charges are .15% higher than the current daily charges. 7 The guaranteed daily deduction charges are the maximums we may charge; we may charge less, but we can never charge more. . The current daily charge will be at an annual effective rate of .75% of your accumulation value that is then being invested in any of the investment options. After a Policy has been in effect for 10 years, we intend to reduce the rate of the current charge to .50%, and after 20 years, we intend to further reduce the current charge to .25%. We may change the applicable current charge at any time as long as the charge does not exceed the guaranteed daily charge. Monthly insurance charge. Every month we will deduct from your accumulation value a charge based on the cost of insurance rates applicable to your Policy on the date of the deduction and our "amount at risk" on that date. Our amount at risk is the difference between (a) the death benefit that would be payable before reduction by policy loans if the insured person died on that date and (b) the then total accumulation value under the Policy. For otherwise identical Policies, a greater amount at risk results in a higher monthly insurance charge. The current monthly insurance charge has been designed primarily to provide funds out of which we can make payments of death benefits under the Policy as insured persons die. For otherwise identical Policies, a higher cost of insurance rate also results in a higher monthly insurance charge. Our cost of insurance rates are guaranteed not to exceed those that will be specified in your Policy. We will offer the Policy on a simplified issue method based on our established guidelines, including that the specified amount of the Policy cannot exceed $250,000. Our cost of insurance rates will generally be higher for a simplified issue Policy. In general, our cost of insurance rates increase with the insured person's age. The longer you own your Policy, the higher the cost of insurance rate will be. Also our cost of insurance rates will generally be lower if the insured person is a female than if a male (except in Montana where such costs cannot be based on gender). Similarly, our current cost of insurance rates are generally lower for non- smokers than smokers. Insured persons who present particular health, occupational or non-work related risks may be charged higher cost of insurance rates and other additional charges based on the specified amount of insurance coverage under their Policy. Our cost of insurance rates also generally lower for non-smokers than for some period of time than they would be under an otherwise identical policy purchased more recently on the same insured person. Partial Surrender Fee. The fee for each partial surrender you make will be the lesser of 2% of the amount withdrawn or $25 to cover administrative services. This charge will be 8 deducted from the remaining accumulation value in the investment options in the same ratio as the requested partial surrender. Charge for taxes. We can make a charge in the future for federal or state taxes we incur or reserves we set aside for taxes in connection with the Policies. This would reduce the investment experience of your accumulation value. Allocation of charges. You may choose the investment options from which we deduct all monthly charges. If you do not have enough accumulation value in the investment options, we will deduct these charges in proportion to the amount of accumulation value you then have in each investment option. For a further discussion regarding the charges we will deduct from your investment in a Policy, see "More About Policy Charges" on page 34. What charges and expenses will the Mutual Funds deduct from amounts I invest through my Policy? Each Mutual Fund pays its investment management fees and other operating expenses. Because they reduce the investment return of a Fund, these fees and expenses also will reduce indirectly the return you will earn on any accumulation value that you have invested in that Fund. The charges and expenses that we show in the following table are for each Fund's most recent fiscal year ended, unless we indicate otherwise. The Mutual Funds' Annual Expenses (as a percentage of average net assets).
Fund Other Fund Total Fund Management Operating Operating Fees (After Expenses (After Expenses (After Expense 12b-1 Expense Expense Name of Fund Reimbursement) Fees Reimbursement) Reimbursement) ------------ -------------- ---- -------------- -------------- The following funds of AIM Variable Insurance Funds:/1/ AIM V.I. International Equity Fund 0.75% 0.22% 0.97% AIM V.I. High Yield Fund/2/ 0.35% 0.79% 1.14% AIM V.I. Government Securities 0.50% 0.40% 0.90% Fund AIM V.I. Capital Appreciation Fund 0.62% 0.11% 0.73%
The following funds of Franklin Templeton Variable Insurance Products Trust /1/ 9
Fund Other Fund Total Fund Management Operating Operating Fees (After Expenses (After Expenses (After Expense 12b-1 Expense Expense Name of Fund Reimbursement) Fees Reimbursement) Reimbursement) ------------ -------------- ---- -------------- -------------- Franklin Small Cap Fund - Class 2/3,4/ 0.55% 0.25% 0.27% 1.07% Templeton Developing Markets Securities Fund - Class 2/4/ 1.25% 0.25% 0.31% 1.81% The following funds of Kemper Variable Series/1/ Kemper International Portfolio 0.75% 0.19% 0.94% Kemper Small Cap Value Portfolio/2/ 0.75% 0.08% 0.83% The following fund of MFS Variable Insurance Trust/1/ Growth With Income Series/2/ 0.74% 0.13% 0.87% The following fund of North American Funds Variable Product Series I:/1/ Money Market Fund 0.50% 0.07% 0.57% The following funds of One Group Investment Trust One Group Investment Trust Equity Index Portfolio/2/ 0.27% 0.28% 0.55% One Group Investment Trust Mid Cap Growth Portfolio 0.65% 0.27% 0.92% One Group Investment Trust Large Cap Growth Portfolio 0.65% 0.23% 0.88% One Group Investment Trust Government Bond Portfolio 0.45% 0.28% 0.73% One Group Investment Trust Diversified Equity Portfolio/5/ 0.72% 0.23% 0.95% The following fund of Oppenheimer Variable Account Funds/1/ Oppenheimer High Income Fund/VA 0.74% 0.01% 0.75%
10
Fund Other Fund Total Fund Management Operating Operating Fees (After Expenses (After Expenses (After Expense 12b-1 Expense Expense Name of Fund Reimbursement) Fees Reimbursement) Reimbursement) ------------- ------------- ----- ------------- ------------- The following fund of Putnam Variable Trust - Class IB Shares Putnam VT Vista Fund/4/ 0.65% 0.15% 0.10% 0.90% The following fund of Van Kampen Life Investment Trust/1/ Emerging Growth Portfolio/2/ 0.61% 0.18% 0.85%
/1/ Certain of the Mutual Funds' advisers or administrators have entered into arrangements under which they pay certain amounts to AGL. The fees do not have a direct relationship to the Mutual Funds' Annual Expenses, and do not increase the amount of charges you pay under your Policy. (See "Certain arrangements" under "More About Policy Charges.") /2/ If certain expense reimbursements from the investment adviser were terminated, management fees and other expenses for the fiscal year ended in 1999 would have been as set out in the following table.
Other Total Fund Fund Fund Management Operating Operating Name of Fund Fees Expenses Expenses ------------ ---- -------- -------- AIM V.I. High Yield Fund............................................. 0.63% 0.79% 1.42% Kemper Small Cap Value Portfolio..................................... 0.75% 0.09% 0.84% One Group Equity Index Portfolio..................................... 0.30% 0.28% 0.58% Van Kampen Emerging Growth Portfolio................................. 0.70% 0.18% 0.88%
/3/ On February 8, 2000, shareholders approved a proposal to merge the funds of Templeton Variable Series Fund into similar corresponding funds of Franklin Templeton Variable Insurance Products Trust (the "Reorganization"). This Reorganization was completed May 1, 2000. /4/ The prospectus for Putnam Variable Trust - Class IB Shares under "Distribution Plan" discusses this fund's 12b-1 fee. The prospectus for Franklin Templeton Variable Insurance Products Trust under "Distribution and Services (12b-1) Fees" discuss each fund's 12b-1 fees. /5/ Figures reflect estimates which have been restated to reflect estimates of current fees for the One Group Investment Trust's fiscal year ending December 31, 2000. If certain expense reimbursements from the investment adviser were terminated, estimates for management fees and other expenses for the fiscal year ending December 31, 2000 would be as set forth in the following table.
Other Total Fund Fund Fund Management Operating Operating Name of Fund Fees Expenses Expenses ------------ ---- -------- -------- One Group Diversified Equity Portfolio ....... 0.74% 0.23% 0.97%
11 Must I invest any minimum amount in a Policy? Planned periodic premiums. Page 3 of your Policy will specify a "Planned Periodic Premium." This is the amount that you (within limits) choose to have us bill you. Our current practice is to bill quarterly, semi-annually or annually. However, payment of these or any other specific amounts of premiums is not mandatory. After payment of your initial premium, you need only invest enough to ensure your Policy's cash surrender value stays above zero. The less you invest, the more likely it is that your Policy's cash surrender value could fall to zero, as a result of the deductions we periodically make from your accumulation value. Policy lapse and reinstatement. If your Policy's cash surrender value does fall to zero, we will notify you and give you a grace period of 61 days to pay at least the amount we estimate is necessary to keep your Policy in force for a reasonable time. If we do not receive your payment by the end of the grace period, your Policy will end without value and all coverage under your Policy will cease. Although you can apply to have your Policy "reinstated," you must do this within 5 years (or, if earlier, before the Policy's maturity date), and you must present evidence that the insured person still meets our requirements for issuing coverage. Also, you will have to pay enough premium to keep your Policy in force for two months as well as pay or reinstate any indebtedness. In the Policy, you will find additional information about the values and terms of a Policy after it is reinstated. How can I change my Policy's investment options? Future premium payments. You may at any time change the investment options in which future premiums you pay will be invested. Your allocation must, however, be in whole percentages that total 100%. Transfers of existing accumulation value. You may also transfer your existing accumulation value from one investment option under the Policy to another free of charge. You may make transfers at any time. Unless you are transferring the entire amount you have in an investment option, each transfer must be at least $500. See "Additional Rights That We Have" on page 41. Market Timing. The Policy is not designed for professional market timing organizations or other entities using programmed and frequent transfers. We may not unilaterally terminate or discontinue transfer privileges. However, we reserve the right to suspend such privileges for a reasonable period. 12 How can I change my Policy's insurance coverage? Increase in coverage. You may at any time request an increase in the specified amount of coverage under your Policy. You must, however, provide us with satisfactory evidence that the insured person continues to meet our requirements for issuing insurance coverage. We treat an increase in specified amount in many respects as if it were the issuance of a new Policy. The monthly insurance charge for the increase will be based on the age and risk class of the insured person at the time of the increase. Decrease in Coverage. After the first Policy year, you may request a reduction in the specified amount of coverage, but not below certain minimums. After any decrease, the death benefit amount cannot be less than the greater of (i) $50,000, and (ii) any death benefit amount which, upon comparing such amounts to the sums already paid, would result in an excess of premium payments. Change of death benefit option. You may at any time request us to change your coverage from death benefit Option 1 to 2 or vice-versa. . If you change from Option 1 to 2, we also automatically reduce your Policy's specified amount of insurance by the amount of your Policy's accumulation value (but not below zero) at the time of the change. . If you change from Option 2 to 1, we automatically increase your Policy's specified amount by the amount of your Policy's accumulation value. Tax consequences of changes in insurance coverage. Please read "Tax Effects" starting on page 27 of this prospectus to learn about possible tax consequences of changing your insurance coverage under your Policy. What additional rider benefits might I select? You can request that your Policy include the maturity extension rider benefit described below. Eligibility for and changes in this benefit are subject to our rules and procedures as in effect from time to time. More details are included in the form of the rider, which we suggest that you review if you choose this benefit. Maturity Extension Rider ------------------------ . This rider permits you to extend the Policy's maturity date beyond what it otherwise would be. The rider provides for a death benefit after the original maturity date that is equal to the accumulation value on the date of death. With 13 this rider, all accumulation value that is in the Separate Account can remain there. . In this rider, only the insurance coverage associated with the base policy will be extended beyond the original maturity date. No additional premium payments, new loans, monthly insurance charge, or changes in specified amount will be allowed after the original maturity date. There is no charge for this rider except for a flat monthly charge of no more than $10 each month after the original maturity date. . Extension of the maturity date beyond the insured person's age 100 may result in the current taxation of increases in your Policy's accumulation value as a result of interest or investment experience after that time. You should consult a qualified tax adviser before making such an extension. How can I access my investment in a Policy? Full surrender. You may at any time, without charge, surrender your Policy in full. If you do, we will pay you the accumulation value, less any Policy loans. We call this amount your "cash surrender value." Partial surrender. You may, at any time after the first Policy year, make a partial surrender of your Policy's cash surrender value. A partial surrender must be at least $500. If the Option 1 death benefit is then in effect, we will also automatically reduce your Policy's specified amount of insurance by the amount of your withdrawal and any related charges. You may choose the investment option or options from which money that you withdraw will be taken. Otherwise, we will allocate the withdrawal in the same proportions as then apply for deducting monthly charges under your Policy or, if that is not possible, in proportion to the amount of accumulation value you then have in each investment option. Exchange of Policy in certain states. Certain states require that a policy owner be given the right to exchange the Policy for a fixed benefit life insurance policy, within either 18 or 24 months from the date of issue. This right is subject to various conditions imposed by the states and us. In such states, this right has been more fully described in your Policy or related endorsements to comply with the applicable state requirements. Partial surrender fee. The fee for each partial surrender you make will be the lesser of 2% of the amount withdrawn or $25 to cover administrative services. This charge will be deducted from the remaining accumulation value in the investment options in the same ratio as the requested partial surrender. 14 Policy loans. You may at any time borrow from us an amount equal to your Policy's cash surrender value less the interest that will be payable on your loan through your next Policy anniversary. This rule is not applicable in all states. The minimum amount of each loan is $500. We remove from your investment options an amount equal to your loan and hold that amount as additional collateral for the loan. We will credit your Policy with interest on this collateral amount at a guaranteed effective annual rate of at least 4% (rather than any amount you could otherwise earn in one of our investment options). We can use interest rates greater than the guaranteed rates used to calculate accumulation values of amounts allocated to the declared fixed interest account. Interest which we apply to that portion of the declared fixed interest account will be at an annual effective rate of not less than 4.0% nor more than 4.75%. Loan interest is payable annually, on the Policy anniversary, in advance, at a rate of 4.54%. Any amount not paid by its due date will automatically be added to the loan balance as an additional loan. Interest you pay on Policy loans will not, in most cases, be deductible on your tax returns. You may choose which of your investment options the loan will be taken from. If you do not so specify, we will allocate the loan in the same way that charges under your Policy are being allocated. If this is not possible, we will make the loan pro-rata from each investment option that you then are using. You may repay all or part (but not less than $500 unless it is the final payment) of your loan at any time before the death of the insured while the Policy is in force. You must designate any loan repayment as such. Otherwise, we will treat it as a premium payment instead. We will invest any additional loan repayments you make in the investment options you request. In the absence of such a request we will invest the repayment in the same proportion as you then have selected for premium payments that we receive from you. Any unpaid loan (increased by any unearned loan interest we may have already charged) will be deducted from the proceeds we pay following the insured person's death. Preferred loan interest rate. We will credit a higher interest rate, but not more than 4.75%, on an amount of the collateral securing Policy loans taken out after the first 10 Policy years. The maximum amount of new loans that will receive this preferred loan interest rate for any year is: . 10% of your Policy's accumulation value (including any loan collateral we are holding for your Policy loans) at the beginning of the Policy year; or . if less, your Policy's maximum remaining loan value at that anniversary. We intend to set the rate of interest we credit to your preferred collateral amount equal to the loan interest rate you are paying, resulting in a zero net cost of borrowing for that amount. We have full discretion to vary the preferred rate, provided that it will always be greater than the rate we are then crediting in connection with regular Policy loans, and will never be less than an 15 effective annual rate of 4.5%. Because we first offered the Policies in 2000, we have not yet applied the preferred loan interest rate to any Policy loan amounts. Maturity of your Policy. If the insured person is still living on the "Maturity Date" shown on page 3 of your Policy, we will automatically pay you the cash surrender value of the Policy, and the Policy will end. The maturity date is the Policy anniversary nearest the insured person's 100th birthday. Can I choose the form in which AGL pays out the proceeds from my Policy? Choosing a payment option. You may choose to receive the full proceeds from the Policy as a single sum. This includes proceeds that become payable upon the death of the insured person, full surrender or the maturity date. Alternatively, you may elect that all or part of such proceeds be applied to one or more of the following payment options: . Option 1 - Equal monthly payments for a specified period of time. . Option 2 - Equal monthly payments of a specified amount until all amounts are paid out. . Option 3 - Equal monthly payments for the payee's life, but with payments guaranteed for a specified number of years. These payments are based on annuity rates that are set forth in the Policy or, at the payee's request, the annuity rates that we then are using. . Option 4 - Proceeds left to accumulate with interest. Additional payment options may also be available with our consent. We have the right to reject any payment option, if the payee is a corporation or other entity. You can read more about each of these options in the Policy and in the separate form of payment contract that we issue when any such option takes effect. Within 60 days after the insured person's death, any payee entitled to receive proceeds as a single sum may elect one or more payment options. Interest rates that we credit under each option will be at least 3%. Change of payment option. You may change any payment option you have elected at any time while the Policy is in force and before the start date of the payment option. Tax impact. If a payment option is chosen, you or your beneficiary may have tax consequences. You should consult with a qualified tax adviser before deciding whether to elect one or more payment options. 16 To what extent can AGL vary the terms and conditions of the Policy in particular cases? Listed below are some variations we may make in the terms and conditions of a Policy. Any variations will be made only in accordance with uniform rules that we establish. Underwriting. We use two underwriting methods to issue a Policy, simplified underwriting and full underwriting, which are described below. We reserve the right to request additional information or reject an application for any reason under either underwriting procedure. . Simplified Underwriting - Any Policy with a specified amount of $250,000 or lower must be issued based on simplified underwriting. Our guidelines include that the proposed insured must answer limited health questions and certain medical records are required. The Policy specified amount is limited to $250,000, and any requested increases in specified amount are considered under full underwriting only. Additionally, a proposed insured who is rejected under simplified underwriting cannot be considered for full underwriting. . Full Underwriting - Any Policy that has a specified amount of over $250,000 must be issued based on full underwriting. Our guidelines include medical exams or tests and other satisfactory evidence of insurability. Policies purchased through "internal rollovers." We maintain published rules that describe the procedures necessary to replace the other life insurance we issue with a Policy. Not all types of other insurance we issue are eligible to be replaced with a Policy. Our published rules may be changed from time to time, but are evenly applied to all our customers. Policies purchased through term life conversions. We maintain rules about how to convert term insurance to The One VUL Solution Policy. This is referred to as a term conversion. Term conversions are available to owners of term life insurance we have issued. Any right to a term conversion is stated in the term life insurance policy. Again, our published rules about term conversions may be changed from time to time, but are evenly applied to all our customers. State law requirements. AGL is subject to the insurance laws and regulations in every jurisdiction in which The One VUL Solution Policies are sold. As a result, various time periods and other terms and conditions described in this prospectus may vary depending on where you reside. These variations will be reflected in your Policy and related endorsements. Variations in expenses or risks. AGL may vary the charges and other terms of the Policy where special circumstances result in sales, administrative or other expenses, mortality risks or other risks that are different from those normally associated with the Policy. 17 How will my Policy be treated for income tax purposes? Generally, death benefits paid under a Policy are not subject to income tax, and earnings on your accumulation value are not subject to income tax as long as we do not pay them out to you. If we do pay any amount of your Policy's accumulation value upon surrender, partial surrender, or maturity of your Policy, all or part of that distribution may be treated as a return of the premiums you paid, which is not subject to income tax. Amounts you receive as Policy loans are not taxable to you, unless you have paid such a large amount of premiums that your Policy becomes what the tax law calls a "modified endowment contract." In that case, the loan will be taxed as if it were a partial surrender. Furthermore, loans, partial surrenders and other distributions from a modified endowment contract may require you to pay additional taxes and penalties that otherwise would not apply. For further information about the tax consequences of owning a Policy, please read "Tax Effects" starting on page 27. How do I communicate with AGL? When we refer to "you," we mean the person who is authorized to take any action with respect to a Policy. Generally, this is the owner named in the Policy. Where a Policy has more than one owner, each owner generally must join in any requested action, except for transfers and changes in the allocation of future premiums or changes among the investment options. General. You should mail or express checks and money orders for premium payments and loan repayments directly to our Home Office. The following requests must be made in writing and signed by you: . transfer of accumulation value; . loan; . full surrender; . partial surrender; . change of beneficiary or contingent beneficiary; . change of allocation percentages for premium payments; . loan repayments or charges; 18 . change of death benefit option or manner of death benefit payment; . changes in specified amount; . addition or cancellation of, or other action with respect to, election of a payment option for Policy proceeds; . tax withholding elections; and . telephone transaction privileges. You should mail or express these requests to our Home Office at the appropriate address shown on the first page of this prospectus. You should also communicate notice of the insured person's death, and related documentation, to our Home Office. We have special forms which should be used for loans, assignments, partial and full surrenders, changes of owner or beneficiary, and all other contractual changes. You will be asked to return your Policy when you request a full surrender. You may obtain these forms from our Home Office or from your AGL representative. Each communication must include your name, Policy number and, if you are not the insured person, that person's name. We cannot process any requested action that does not include all required information. Telephone transactions. If you have a completed telephone authorization form on file with us, you may make transfers, or change the allocation of future premium payments or deduction of charges, by telephone, subject to the terms of the form. We will honor telephone instructions from any person who provides the correct information, so there is a risk of possible loss to you if unauthorized persons use this service in your name. Our current procedure is that only the owner or your AGL representative may make a transfer request by phone. We are not liable for any acts or omissions based upon instructions that we reasonably believe to be genuine. Our procedures include verification of the Policy number, the identity of the caller, both the insured person's and owner's names, and a form of personal identification from the caller. We will mail you a prompt written confirmation of the transaction. If (a) many people seek to make telephone requests at or about the same time, or (b) our recording equipment malfunctions, it may be impossible for you to make a telephone request at the time you wish. You should submit a written request if you cannot make a telephone transfer. Also, if, due to malfunction or other circumstances, the recording of your telephone request is incomplete or not fully comprehensible, we will not process the transaction. The phone number for telephone requests is 1-888-436-5255. 19 ILLUSTRATIONS OF HYPOTHETICAL POLICY BENEFITS To help explain how our Policy works, we have prepared the following tables:
Page to see in this Prospectus ---------- Death Benefit Option 1 - Simplified Underwriting/Current Charges............................ 22 Death Benefit Option 1 - Full Underwriting/Current Charges.................................. 23 Death Benefit Option 1 - Simplified Underwriting/Guaranteed Maximum Charges.................................................................................. 24 Death Benefit Option 1 - Full Underwriting/Guaranteed Maximum Charges....................... 25
The tables show how death benefits, accumulation values, and cash surrender values ("Policy benefits") under a sample The One VUL Solution Policy would change over time if the investment options had constant hypothetical gross annual investment returns of 0%, 6% or 12% over the years covered by each table. The tables are for a 45 year-old male non-tobacco user. A single premium payment of $56,279 for an initial $250,000 or $250,001 of specified amount of coverage is assumed to be paid at issue. The illustrations assume no Policy loan has been taken. As illustrated, this Policy would be classified as a modified endowment contract (See "Tax Effects" in Additional Information for further discussion). Although the tables below do not include an example of a Policy with an Option 2 death benefit, such a Policy would have higher death benefits and lower cash surrender values. Separate tables are included to show both current and guaranteed maximum charges under both simplified underwriting and full underwriting. We have used the maximum specified amount of $250,000 for the simplified underwriting table and the minimum specified amount of $250,001 for the full underwriting table to show the applicable investment results. . The charges assumed in the current charge tables include a daily charge at an annual effective rate of .75% for the first 10 Policy years, .50% for Policy years 11 - 20, and .25% thereafter and current monthly insurance charges. . The guaranteed maximum charge tables assume that these charges will include a daily charge at an annual effective rate of .90% for the first 10 Policy years, .65% for Policy years 11 - 20, and .40% thereafter, and an additional charge of 1.5% of every premium and guaranteed maximum insurance charges. The charges assumed by both the current and guaranteed maximum charge tables also include Mutual Fund expenses of .91% of aggregate Mutual Fund assets. This Percentage is the arithmetic 21 average of the advisory fees payable with respect to each Mutual Fund, after all reimbursements, plus the arithmetic average of all other operating expenses of each such Fund 20 after all reimbursements, as reflected on pages 9 -11 of this prospectus. We expect the reimbursement arrangements to continue in the future. If the reimbursement arrangements were not currently in effect, the arithmetic average of Mutual Fund expenses would equal .93% of aggregate Mutual Fund assets. Individual illustrations. On request, we will furnish you with a comparable illustration based on your Policy's characteristics. If you request illustrations more than once in any Policy year, we may charge $25 for the illustration. 21 The One VUL Solution Single Premium $ 56,279 Initial Specified Amount $ 250,000 eath Benefit Option 1 Male Age 45 Simplified Underwriting Nonsmoker Assuming Current Charges
End of Death Benefit Accumulation Value Cash Surrender Value Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Year Annual Investment Return of Annual Investment Return of Annual Investment Return of 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,000 250,000 250,000 54,511 57,836 61,167 54,511 57,836 61,167 2 250,000 250,000 250,000 52,659 59,362 66,475 52,659 59,362 66,475 3 250,000 250,000 250,000 50,758 60,891 72,288 50,758 60,891 72,288 4 250,000 250,000 250,000 48,889 62,505 78,740 48,889 62,505 78,740 5 250,000 250,000 250,000 46,967 64,127 85,828 46,967 64,127 85,828 6 250,000 250,000 250,000 45,023 65,787 93,649 45,023 65,787 93,649 7 250,000 250,000 250,000 42,998 67,436 102,243 42,998 67,436 102,243 8 250,000 250,000 250,000 41,051 69,218 111,820 41,051 69,218 111,820 9 250,000 250,000 250,000 39,097 71,064 122,426 39,097 71,064 122,426 10 250,000 250,000 250,000 37,110 72,955 134,159 37,110 72,955 134,159 15 250,000 250,000 291,647 27,749 84,920 217,647 27,749 84,920 217,647 20 250,000 250,000 433,220 16,105 98,375 355,099 16,105 98,375 355,099
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 22 The One VUL Solution Single Premium $ 56,279 Initial Specified Amount $ 250,001 Death Benefit Option 1 Male Age 45 Full Underwriting Nonsmoker Assuming Current Charges
End of Death Benefit Accumulation Value Cash Surrender Value Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Year Annual Investment Return of Annual Investment Return of Annual Investment Return of 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,001 250,001 250,001 54,995 58,332 61,675 54,995 58,332 61,675 2 250,001 250,001 250,001 53,625 60,373 67,531 53,625 60,373 67,531 3 250,001 250,001 250,001 52,313 62,543 74,039 52,313 62,543 74,039 4 250,001 250,001 250,001 50,941 64,737 81,159 50,941 64,737 81,159 5 250,001 250,001 250,001 49,523 66,969 88,972 49,523 66,969 88,972 6 250,001 250,001 250,001 48,067 69,251 97,565 48,067 69,251 97,565 7 250,001 250,001 250,001 46,578 71,591 107,030 46,578 71,591 107,030 8 250,001 250,001 250,001 45,051 73,989 117,461 45,051 73,989 117,461 9 250,001 250,001 250,001 43,476 76,439 128,961 43,476 76,439 128,961 10 250,001 250,001 250,001 41,822 78,922 141,634 41,822 78,922 141,634 15 250,001 250,001 308,953 32,941 93,281 230,562 32,941 93,281 230,562 20 250,001 250,001 458,927 21,164 109,299 376,170 21,164 109,299 376,170
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 23 The One VUL Solution Single Premium $ 56,279 Initial Specified Amount $ 250,000 Death Benefit Option 1 Male Age 45 Simplified Underwriting Nonsmoker Assuming Guaranteed Charges
End of Death Benefit Accumulation Value Cash Surrender Value Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Year Annual Investment Return of Annual Investment Return of Annual Investment Return of 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,000 250,000 250,000 53,560 56,830 60,105 53,560 56,830 60,105 2 250,000 250,000 250,000 51,641 58,218 65,199 51,641 58,218 65,199 3 250,000 250,000 250,000 49,676 59,602 70,766 49,676 59,602 70,766 4 250,000 250,000 250,000 47,640 60,956 76,837 47,640 60,956 76,837 5 250,000 250,000 250,000 45,531 62,283 83,474 45,531 62,283 83,474 6 250,000 250,000 250,000 43,350 63,581 90,744 43,350 63,581 90,744 7 250,000 250,000 250,000 41,069 64,827 98,702 41,069 64,827 98,702 8 250,000 250,000 250,000 38,662 65,998 107,416 38,662 65,998 107,416 9 250,000 250,000 250,000 36,127 67,093 116,982 36,127 67,093 116,982 10 250,000 250,000 250,000 33,436 68,085 127,491 33,436 68,085 127,491 15 250,000 250,000 269,930 17,236 71,865 201,440 17,236 71,865 201,440 20 0 250,000 392,494 0 69,729 321,716 0 69,729 321,716
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 24 The One VUL Solution Single Premium $ 56,279 Initial Specified Amount $ 250,001 Death Benefit Option 1 Male Age 45 Full Underwriting Nonsmoker Assuming Guaranteed Charges
End of Death Benefit Accumulation Value Cash Surrender Value Policy Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Year Annual Investment Return of Annual Investment Return of Annual Investment Return of 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,001 250,001 250,001 53,561 56,830 60,105 53,561 56,830 60,105 2 250,001 250,001 250,001 51,641 58,219 65,199 51,641 58,219 65,199 3 250,001 250,001 250,001 49,676 59,602 70,766 49,676 59,602 70,766 4 250,001 250,001 250,001 47,640 60,956 76,838 47,640 60,956 76,838 5 250,001 250,001 250,001 45,531 62,283 83,474 45,531 62,283 83,474 6 250,001 250,001 250,001 43,350 63,581 90,744 43,350 63,581 90,744 7 250,001 250,001 250,001 41,069 64,827 98,703 41,069 64,827 98,703 8 250,001 250,001 250,001 38,662 65,999 107,416 38,662 65,999 107,416 9 250,001 250,001 250,001 36,127 67,093 116,982 36,127 67,093 116,982 10 250,001 250,001 250,001 33,436 68,085 127,492 33,436 68,085 127,492 15 250,001 250,001 287,628 17,236 71,866 201,441 17,236 71,866 201,441 20 0 250,001 392,495 0 69,730 321,717 0 69,730 321,717
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 25 ADDITIONAL INFORMATION A general overview of the Policy appears at pages 1 - 25. The additional information that follows gives more details, but generally does not repeat what is set forth above.
Page to see in this Contents of Additional Information Prospectus - ---------------------------------- ---------- AGL............................................................................................... 27 Separate Account VL-R............................................................................. 27 Tax Effects....................................................................................... 27 Voting Privileges................................................................................. 33 Your Beneficiary.................................................................................. 34 Assigning Your Policy............................................................................. 34 More About Policy Charges......................................................................... 34 Effective Date of Policy and Related Transactions................................................. 36 Distribution of the Policies...................................................................... 38 Payment of Policy Proceeds........................................................................ 39 Adjustments to Death Benefit...................................................................... 40 Additional Rights That We Have.................................................................... 41 Performance Information........................................................................... 42 Our Reports to Policy Owners...................................................................... 42 AGL's Management.................................................................................. 43 Principal Underwriter's Management................................................................ 46 Legal Matters..................................................................................... 47 Accounting and Auditing Experts................................................................... 48 Actuarial Expert.................................................................................. 48 Services Agreement................................................................................ 48 Certain Potential Conflicts....................................................................... 48
Special words and phrases. If you want more information about any words or phrases that you read in this prospectus, you may wish to refer to the Index of Words and Phrases that appears at the end of this prospectus (page 50, which follows all of the financial pages). That index will tell you on what page you can read more about many of the words and phrases that we use. 26 AGL We are American General Life Insurance Company ("AGL"). AGL is a stock life insurance company organized under the laws of Texas. AGL is a successor in interest to a company originally organized under the laws of Delaware on January 10, 1917. AGL is an indirect, wholly-owned subsidiary of American General Corporation (formerly American General Insurance Company), a diversified financial services holding company engaged primarily in the insurance business. The commitments under the Policies are AGL's, and American General Corporation has no legal obligation to back those commitments. AGL is a member of the Insurance Marketplace Standards Association ("IMSA"). IMSA is a voluntary membership organization created by the life insurance industry to promote ethical market conduct for individual life insurance and annuity products. AGL's membership in IMSA applies only to AGL and not its products. Separate Account VL-R We hold the Mutual Fund shares in which any of your accumulation value is invested in Separate Account VL-R. Separate Account VL-R is a "separate account," as defined by the SEC and is registered as a unit investment trust with the SEC under the Investment Company Act of 1940, as amended. We created Separate Account VL-R on May 6, 1997 under Texas law. For record keeping and financial reporting purposes, Separate Account VL-R is divided into 64 separate "divisions," 18 of which correspond to the 18 variable investment options available under the Policy. The remaining 46 divisions, and some of these 18 divisions, represent investment options available under other variable life policies we offer. We hold the Mutual Fund shares in which we invest your accumulation value for an investment option in the division that corresponds to that investment option. The assets in Separate Account VL-R are our property. The assets in Separate Account VL-R would be available only to satisfy the claims of owners of the Policies, to the extent they have allocated their accumulation value to Separate Account VL-R. Our other creditors could reach only those Separate Account VL-R assets (if any) that are in excess of the amount of our reserves and other contract liabilities under the Policies with respect to Separate Account VL-R. Tax Effects This discussion is based on current federal income tax law and interpretations. It assumes that the policy owner is a natural person who is a U.S. citizen and resident. The tax effects on corporate taxpayers, non-U.S. residents or non-U.S. citizens, may be different. This discussion is general in nature, and should not be considered tax advice, for which you should consult a qualified tax adviser. 27 General. The One VUL Solution Policy will be treated as "life insurance" for federal income tax purposes (a) if it meets the definition of life insurance under Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code") and (b) for as long as the investments made by the underlying Mutual Funds satisfy certain investment diversification requirements under Section 817(h) of the Code. We believe that the Policy will meet these requirements and that: . the death benefit received by the beneficiary under your Policy will not be subject to federal income tax; and . increases in your Policy's accumulation value as a result of interest or investment experience will not be subject to federal income tax unless and until there is a distribution from your Policy, such as a surrender or a partial surrender. The federal income tax consequences of a distribution from your Policy can be affected by whether your Policy is determined to be a "modified endowment contract" (which is discussed below). In all cases, however, the character of all income that is described below as taxable to the payee will be ordinary income (as opposed to capital gain). Testing for modified endowment contract status. Your Policy will be a "modified endowment contract" if, at any time during the first seven Policy years, you have paid a cumulative amount of premiums that exceeds the premiums that would have been paid by that time under a similar fixed-benefit insurance policy that was designed (based on certain assumptions mandated under the Code) to provide for paid-up future benefits after the payment of seven level annual premiums. This is called the "seven-pay" test. Whenever there is a "material change" under a policy, the policy will generally be (a) treated as a new contract for purposes of determining whether the policy is a modified endowment contract and (b) subjected to a new seven-pay period and a new seven-pay limit. The new seven-pay limit would be determined taking into account, under a prescribed formula, the accumulation value of the policy at the time of such change. A materially changed policy would be considered a modified endowment contract if it failed to satisfy the new seven- pay limit. A material change for these purposes could occur as a result of a change in death benefit option. A material change will occur as a result of an increase in your Policy's specified amount of coverage, and certain other changes. If your Policy's benefits are reduced during the first seven Policy years (or within seven years after a material change), the calculated seven-pay premium limit will be redetermined based on the reduced level of benefits and applied retroactively for purposes of the seven-pay test. (Such a reduction in benefits could include, for example, a decrease in the specified amount resulting from a partial surrender). If the premiums previously paid are greater than the recalculated seven-payment premium level limit, the Policy will become a modified endowment 28 contract. A life insurance policy that is 29 received in exchange for a modified endowment contract will also be considered a modified endowment contract. Other effects of Policy changes. Changes made to your Policy (for example, a decrease in benefits or a lapse or reinstatement of your Policy) may also have other effects on your Policy. Such effects may include impacting the maximum amount of premiums that can be paid under your Policy, as well as the maximum amount of accumulation value that may be maintained under your Policy. Taxation of pre-death distributions if your Policy is not a modified --- endowment contract. As long as your Policy remains in force during the insured person's lifetime and not as a non-modified endowment contract, a Policy loan will be treated as indebtedness, and no part of the loan proceeds will be subject to current federal income tax. Interest on the Policy loan generally will not be tax deductible. After the first 15 Policy years, the proceeds from a partial surrender will not be subject to federal income tax except to the extent such proceeds exceed your "basis" in your Policy. (Your basis generally will equal the premiums you have paid, less the amount of any previous distributions from your Policy that were not taxable.) During the first 15 Policy years, the proceeds from a partial surrender could be subject to federal income tax, under a complex formula, to the extent that your accumulation value exceeds your basis in your Policy. On the maturity date or upon full surrender, any excess in the amount of proceeds we pay (including amounts we use to discharge any Policy loan) over your basis in the Policy, will be subject to federal income tax. In addition, if a Policy ends after a grace period while there is a policy loan, the cancellation of such loan and accrued loan interest will be treated as a distribution and could be subject to tax under the above rules. Finally, if you make an assignment of rights or benefits under your Policy you may be deemed to have received a distribution from your Policy, all or part of which may be taxable. Taxation of pre-death distributions if your Policy is a modified endowment contract. If your Policy is a modified endowment contract, any distribution from your Policy during the insured person's lifetime will be taxed on an "income- first" basis. Distributions for this purpose include a loan (including any increase in the loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan) or partial surrender. Any such distributions will be considered taxable income to you to the extent your accumulation value exceeds your basis in the Policy. For modified endowment contracts, your basis is similar to the basis described above for other policies, except that it also would be increased by the amount of any prior loan under your Policy that was considered taxable income to you. For purposes of determining the taxable portion of any distribution, all modified endowment contracts issued by the same insurer (or its affiliate) to the same owner (excluding certain qualified plans) during any calendar year are aggregated. The Treasury Department has authority to prescribe 30 additional rules to prevent avoidance of "income-first" taxation on distributions from modified endowment contracts. 29 A 10% penalty tax also will apply to the taxable portion of most distributions from a policy that is a modified endowment contract. The penalty tax will not, however, apply to distributions: . to taxpayers 59 1/2 years of age or older; . in the case of a disability (as defined in the Code); or . received as part of a series of substantially equal periodic annuity payments for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his or her beneficiary. If your Policy ends after a grace period while there is a Policy loan, the cancellation of the loan will be treated as a distribution to the extent not previously treated as such and could be subject to tax, including the 10% penalty tax, as described above. In addition, on the maturity date or upon a full surrender, any excess of the proceeds we pay (including any amounts we use to discharge any Policy loan) over your basis in the Policy, will be subject to federal income tax and, unless an exception applies, the 10% penalty tax. Distributions that occur during a Policy year in which your Policy becomes a modified endowment contract, and during any subsequent Policy years, will be taxed as described in the two preceding paragraphs. In addition, distributions from a policy within two years before it becomes a modified endowment contract also will be subject to tax in this manner. This means that a distribution made from a policy that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. The Treasury Department has been authorized to prescribe rules which would treat similarly other distributions made in anticipation of a policy becoming a modified endowment contract. Policy lapses and reinstatements. A Policy which has lapsed may have the tax consequences described above, even though you may be able to reinstate that Policy. For tax purposes, some reinstatements may be treated as the purchase of a new insurance contract. Diversification. Under Section 817(h) of the Code, the Treasury Department has issued regulations that implement investment diversification requirements. Our failure to comply with these regulations would disqualify your Policy as a life insurance policy under Section 7702 of the Code. If this were to occur, you would be subject to federal income tax on the income under the Policy for the period of the disqualification and for subsequent periods. Also, if the insured died during such period of disqualification or subsequent periods, a portion of the death benefit proceeds would be taxable to the beneficiary. Separate Account VL-R, through the Mutual Funds, intends to comply with these 31 requirements. Although we do not have direct control over the investments or activities of the Mutual Funds, we will enter into agreements with them requiring the Mutual Funds to comply with the diversification requirements of the Section 817(h) Treasury Regulations. 30 In connection with the issuance of then temporary diversification regulations, the Treasury Department stated that it anticipated the issuance of guidelines prescribing the circumstances in which the ability of a policy owner to direct his or her investment to particular Mutual Funds within Separate Account VL-R may cause the policy owner, rather than the insurance company, to be treated as the owner of the assets in the account. Due to the lack of specific guidance on investor control, there is some uncertainty about when a policy owner is considered the owner of the assets for tax purposes. If you were considered the owner of the assets of Separate Account VL-R, income and gains from the account would be included in your gross income for federal income tax purposes. Under current law, however, we believe that AGL, and not the owner of a Policy, would be considered the owner of the assets of Separate Account VL-R. Estate and generation skipping taxes. If the insured person is the Policy's owner, the death benefit under The One VUL Solution Policy will generally be includable in the owner's estate for purposes of federal estate tax. If the owner is not the insured person, under certain conditions, only an amount approximately equal to the cash surrender value of the Policy would be includable. The federal estate tax is integrated with the federal gift tax under a unified rate schedule and unified credit. The Taxpayer Relief Act of 1997 gradually raises the value of the credit to $1,000,000. In addition, an unlimited marital deduction may be available for federal estate tax purposes. As a general rule, if a "transfer" is made to a person two or more generations younger than the Policy's owner, a generation skipping tax may be payable at rates similar to the maximum estate tax rate in effect at the time. The generation skipping tax provisions generally apply to "transfers" that would be subject to the gift and estate tax rules. Individuals are generally allowed an aggregate generation skipping tax exemption of $1 million. Because these rules are complex, you should consult with a qualified tax adviser for specific information, especially where benefits are passing to younger generations. The particular situation of each policy owner, insured person or beneficiary will determine how ownership or receipt of Policy proceeds will be treated for purposes of federal estate and generation skipping taxes, as well as state and local estate, inheritance and other taxes. Life Insurance in Split Dollar Arrangements. The Internal Revenue Service ("IRS") has released a technical advice memorandum ("TAM") on the taxability of the insurance policies used in certain split dollar arrangements. A TAM provides advice as to the internal revenue laws, regulations, and related statutes with respect to a specific set of facts and a specific taxpayer. In the TAM, among other things, the IRS concluded that an employee was subject to current taxation on the excess of the cash surrender value of the policy over the premiums to be returned to the employer. Purchasers of life 32 insurance policies to be used in split dollar arrangements are strongly advised to consult with a qualified tax adviser to determine the tax treatment resulting from such an arrangement. 31 Pension and profit-sharing plans. If a life insurance policy is purchased by a trust or other entity that forms part of a pension or profit-sharing plan qualified under Section 401(a) of the Code for the benefit of participants covered under the plan, the federal income tax treatment of such policies will be somewhat different from that described above. The reasonable net premium cost for such amount of insurance that is purchased as part of a pension or profit-sharing plan is required to be included annually in the plan participant's gross income. This cost (generally referred to as the "P.S. 58" cost) is reported to the participant annually. If the plan participant dies while covered by the plan and the policy proceeds are paid to the participant's beneficiary, then the excess of the death benefit over the policy's accumulation value will not be subject to federal income tax. However, the policy's accumulation value will generally be taxable to the extent it exceeds the participant's cost basis in the policy. The participant's cost basis will generally include the costs of insurance previously reported as income to the participant. Special rules may apply if the participant had borrowed from the policy or was an owner-employee under the plan. There are limits on the amounts of life insurance that may be purchased on behalf of a participant in a pension or profit-sharing plan. Complex rules, in addition to those discussed above, apply whenever life insurance is purchased by a tax qualified plan. You should consult a qualified tax adviser. Other employee benefit programs. Complex rules may also apply when a policy is held by an employer or a trust, or acquired by an employee, in connection with the provision of other employee benefits. These policy owners must consider whether the policy was applied for by or issued to a person having an insurable interest under applicable state law and with the insured person's consent. The lack of an insurable interest or consent may, among other things, affect the qualification of the policy as life insurance for federal income tax purposes and the right of the beneficiary to receive a death benefit. ERISA. Employers and employer-created trusts may be subject to reporting, disclosure and fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended. You should consult a qualified legal adviser. Our taxes. We report the operations of Separate Account VL-R in our federal income tax return, but we currently pay no income tax on Separate Account VL-R's investment income and capital gains, because these items are, for tax purposes, reflected in our variable life insurance policy reserves. We currently make no charge to any Separate Account VL-R division for taxes. We reserve the right to make a charge in the future for taxes incurred; for example, a charge to Separate Account VL-R for income taxes we incur that are allocable to the Policy. We may have to pay state, local or other taxes in addition to applicable taxes based on premiums. At present, these taxes are not substantial. If they increase, we may make charges for such taxes when they are attributable to Separate Account VL-R or allocable to the Policy. 32 Certain Mutual Funds in which your accumulation value is invested may elect to pass through to AGL taxes withheld by foreign taxing jurisdictions on foreign source income. Such an election will result in additional taxable income and income tax to AGL. The amount of additional income tax, however, may be more than offset by credits for the foreign taxes withheld which are also passed through. These credits may provide a benefit to AGL. When we withhold income taxes. Generally, unless you provide us with an election to the contrary before we make the distribution, we are required to withhold income tax from any proceeds we distribute as part of a taxable transaction under your Policy. In some cases, where generation skipping taxes may apply, we may also be required to withhold for such taxes unless we are provided satisfactory written notification that no such taxes are due. In the case of non-resident aliens who own a policy, the withholding rules may be different. With respect to distributions from modified endowment contracts, nonresident aliens are generally subject to federal income tax withholding at a statutory rate of 30% of the distributed amount. In some cases, the non-resident alien may be subject to lower or even no withholding if the United States has entered into a tax treaty with his or her country of residence. Tax changes. The U.S. Congress frequently considers legislation that, if enacted, could change the tax treatment of life insurance policies. In addition, the Treasury Department may amend existing regulations, issue regulations on the qualification of life insurance and modified endowment contracts, or adopt new interpretations of existing law. State and local tax law or, if you are not a U.S. citizen and resident, foreign tax law, may also affect the tax consequences to you, the insured person or your beneficiary, and are subject to change. Any changes in federal, state, local or foreign tax law or interpretation could have a retroactive effect. We suggest you consult a qualified tax adviser. Voting Privileges We are the legal owner of the Funds' shares held in Separate Account VL-R. However, you may be asked to instruct us how to vote the Fund shares held in the various Mutual Funds that are attributable to your Policy at meetings of shareholders of the Funds. The number of votes for which you may give directions will be determined as of the record date for the meeting. The number of votes that you may direct related to a particular Fund is equal to (a) your accumulation value invested in that Fund divided by (b) the net asset value of one share of that Fund. Fractional votes will be recognized. We will vote all shares of each Fund that we hold of record, including any shares we own on our own behalf, in the same proportions as those shares for which we have received instructions from owners participating in that Fund through Separate Account VL-R. 33 If you are asked to give us voting instructions, you will be sent the proxy material and a form for providing such instructions. Should we determine that we are no longer required to send the owner such materials, we will vote the shares as we determine in our sole discretion. In certain cases, we may disregard instructions relating to changes in a Fund's investment manager or its investment policies. We will advise you if we do and explain the reasons in our next report to policy owners. AGL reserves the right to modify these procedures in any manner that the laws in effect from time to time allow. Your Beneficiary You name your beneficiary when you apply for a Policy. The beneficiary is entitled to the insurance benefits of the Policy. You may change the beneficiary during the insured person's lifetime. We also require the consent of any irrevocably named beneficiary. A new beneficiary designation is effective as of the date you sign it, but will not affect any payments we may make before we receive it. If no beneficiary is living when the insured person dies, we will pay the insurance proceeds to the owner or the owner's estate. Assigning Your Policy You may assign (transfer) your rights in a Policy to someone else as collateral for a loan or for some other reason. We will not be bound by an assignment unless it is received in writing. You must provide us with two copies of the assignment. We are not responsible for any payment we make or any action taken before we receive a complete notice of the assignment in good order. We are also not responsible for the validity of the assignment. An absolute assignment is a change of ownership. Because there may be unfavorable tax consequences, including recognition of taxable income and the loss of income tax-free treatment for any death benefit payable to the beneficiary, you should consult a qualified tax adviser before making an assignment. More About Policy Charges Purpose of our charges. The charges under the Policy are designed to cover, in total, our direct and indirect costs of selling, administering and providing benefits under the Policy. They are also designed, in total, to compensate us for the risks we assume and services that we provide under the Policy. These include: . mortality risks (such as the risk that insured persons will, on average, die before we expect, thereby increasing the amount of claims we must pay); . investment risks (such as the risk that adverse investment performance will make it more difficult for us to reduce the amount of our daily charge for revenues below what we anticipate); 34 . sales risks (such as the risk that the number of Policies we sell and the premiums we receive net of withdrawals, are less than we expect, thereby depriving us of expected economies of scale); . regulatory risks (such as the risk that tax or other regulations may be changed in ways adverse to issuers of variable life insurance policies); and . expense risks (such as the risk that the costs of administrative services that the Policy requires us to provide will exceed what we currently project). If the charges that we collect from the Policy exceed our total costs in connection with the Policy, we will earn a profit. Otherwise we will incur a loss. The current monthly insurance charge has been designed primarily to provide funds out of which we can make payments of death benefits under the Policy as insured persons die. Any excess from the charges discussed above is primarily intended to: . offset other expenses in connection with the Policies (such as the costs of processing applications for Policies and other unreimbursed administrative expenses, costs of paying marketing and distribution expenses for the Policies, and costs of paying death claims if the mortality experience of insured persons is worse than we expect); . compensate us for the risk we assume under the Policies; or . otherwise be retained by us as profit. Although the paragraphs above describe the primary purposes for which charges under the Policies have been designed, these purposes are subject to considerable change over the life of a Policy. We can retain or use the revenues from any charge or charge increase for any purpose. Change of tobacco use. If the person insured under your Policy is a tobacco user, you may apply to us for an improved risk class if the insured person meets our then applicable requirements for demonstrating that he or she has stopped tobacco use for a sufficient period. Gender neutral Policy. Our cost of insurance charge rates in Montana will not be greater than the comparable male rates illustrated in this prospectus. Congress and the legislatures of various states have from time to time considered legislation that would require insurance rates to be the same for males and females of the same age, rating class and tobacco user status. In addition, employers and employee organizations 35 should consider, in consultation with counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase of life insurance policies in connection with an employment-related insurance or benefit plan. In a 1983 decision, the United States Supreme Court held that, under Title VII, optional annuity benefits under a deferred compensation plan could not vary on the basis of gender. Cost of insurance rates. Because of specified amount increases, different cost of insurance rates may apply to different increments of specified amount under your Policy. If so, we attribute your accumulation value first to the oldest increments of specified amount to compute our net amount at risk at each cost of insurance rate. See "Monthly Insurance Charge" beginning on page 7. Certain arrangements. Most of the distributors or advisers of the Mutual Funds listed on page 1 of this prospectus make certain payments to us, on a quarterly basis, for certain administrative, Policy, and Policy owner support expenses. These amounts will be reasonable for the services performed and are not designed to result in a profit. These amounts are paid by the distributors or the advisers, and will not be paid by the Mutual Funds, the divisions or Policy owners. No payments have yet been made under these arrangements, because the number of Policies issued does not require a payment. Effective Date of Policy and Related Transactions Valuation dates, times, and periods. We generally compute values under a Policy on each day that the New York Stock Exchange is open for business. We call each such day a "valuation date." We compute policy values as of 3:00 p.m., Central time, on each valuation date. We call this our "close of business." We call the time from the close of business on one valuation date to the close of business of the next valuation date a "valuation period." Date of receipt. Generally we consider that we have received a premium payment or another communication from you on the day we actually receive it in full and proper order at our Home Office. If we receive it after the close of business on any valuation date, however, we consider that we have received it on the day following that valuation date. Commencement of insurance coverage. After you apply for a Policy, it can sometimes take up to several weeks for us to gather and evaluate all the information we need to decide whether to issue a Policy to you and, if so, what the insured person's insurance rate class should be. We will not pay a death benefit under a Policy unless (a) it has been delivered to and accepted by the owner and at least the initial premium has been paid, and (b) at the time of such delivery and payment, there have been no adverse developments in the insured person's health or risk of death. However, if you pay at least the minimum first premium payment with your application for a Policy, we will provide temporary coverage of up to $500,000 provided the 36 insured person meets certain medical and risk requirements. The terms and conditions of this coverage are described in our "Limited Temporary Life Insurance Agreement." You can obtain a copy from our Home Office by writing to the address shown on the first page of this prospectus or from your AGL representative. Date of issue; Policy months and years. We prepare the Policy only after we approve an application for a Policy and assign an appropriate insurance rate class. The day we begin to deduct charges will appear on page 3 of your Policy and is called the "date of issue." Policy months and years are measured from the date of issue. To preserve a younger age at issue for the insured person, we may assign a date of issue to a Policy that is up to 6 months earlier than otherwise would apply. Monthly deduction days. Each charge that we deduct monthly is assessed against your accumulation value at the close of business on the date of issue and at the end of each subsequent valuation period that includes the first day of a Policy month. We call these "monthly deduction days." Commencement of investment performance. We begin to credit an investment return to the accumulation value resulting from your initial premium payment on the later of (a) the date of issue, or (b) the date all requirements needed to place the Policy in force have been satisfied, including underwriting approval and receipt in the Home Office of the necessary premium. In the case of a backdated Policy, we do not credit an investment return to the accumulation value resulting from your initial premium payment until the date stated in (b) above. Effective date of other premium payments and requests that you make. Premium payments (after the first) and transactions made in response to your requests and elections are generally effected at the end of the valuation period in which we receive the payment, request or election and based on prices and values computed as of that same time. Exceptions to this general rule are as follows: . Increases you request in the specified amount of insurance, and reinstatements of a Policy that has lapsed take effect on the Policy's monthly deduction day on or next following our approval of the transaction; . We may return premium payments if we determine that such premiums would cause your Policy to become a modified endowment contract or to cease to qualify as life insurance under federal income tax law or exceed the maximum net amount at risk; . If you exercise the right to return your Policy described on the second page of this prospectus, your coverage will end when you mail us your Policy or deliver it to your AGL representative; and 37 . If you pay a premium in connection with a request which requires our approval, your payment will be applied when received rather than following the effective date of the change requested so long as your coverage is in force and the amount paid will not cause you to exceed premium limitations under the Code. If we do not approve your request, no premium will be refunded to you except to the extent necessary to cure any violation of the maximum premium limitations under the Code. We will not apply this procedure to premiums you pay in connection with reinstatement requests. Distribution of the Policies American General Securities Incorporated ("AGSI") is the principal underwriter of the Policies. AGSI is a wholly-owned subsidiary of AGL. AGL, in turn, is a wholly-owned subsidiary of American General Corporation ("American General"). AGSI's principal office is at 2727 Allen Parkway, Houston, Texas 77019. AGSI was organized as a Texas corporation on March 8, 1983 and is a registered broker-dealer under the Securities Exchange Act of 1934, as amended ("1934 Act") and is a member of the National Association of Securities Dealers, Inc. ("NASD"). AGSI is also the principal underwriter for AGL's Separate Accounts A and D, and Separate Account E of American General Life Insurance Company of New York, which is a wholly-owned subsidiary of AGL. These separate accounts are registered investment companies. AGSI, as the principal underwriter, is not paid any fees on the Policies. We and AGSI have entered into an exclusive sales agreement with Banc One Securities Corporation ("BOSC"). The Policies will be sold by registered representatives of BOSC. These registered representatives are also required to be authorized under applicable state regulations as life insurance agents to sell variable life insurance and are appointed by AGL as an AGL representative for the Policies. BOSC is a member of the NASD. We pay compensation directly to BOSC for the promotion and sales of the Policies. The compensation payable to BOSC for the sales of the Policies may vary with the sales agreement, but is generally not expected to exceed the amounts described below: A. For a Policy issued based on simplified underwriting: . 1.2% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 1 through 10; and . .95% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 11 through 15. 38 B. For a Policy issued based on full underwriting: . 2.5% of the Policy's accumulation value (reduced by any outstanding loan) in Policy year 1; . 1.0% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 2 through 10; . 0.50% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 11 through 20; and . 0.25% annually of the Policy's accumulation value (reduced by any outstanding loan) after Policy year 20. The maximum value of any alternative amounts we may pay for sales of the Policies is expected to be equivalent over time to the amounts described above. For example, we may pay BOSC compensation in a lump sum which will not exceed the aggregate compensation described above. We pay a comparable amount of compensation to BOSC with respect to any increase in the specified amount of coverage that you request. In addition, we may pay BOSC expense allowances, bonuses, wholesaler fees and training allowances. We pay the compensation directly to BOSC. We pay the compensation from our own resources which does not result in any additional charge to you that is not described on page ___ of the prospectus. BOSC may compensate its registered representative or employee who acts as agent in selling you a Policy. Payment of Policy Proceeds General. We will pay any death benefit, maturity benefit, cash surrender value or loan proceeds within seven days after we receive the last required form or request (and any other documents that may be required for payment of a death benefit). If we do not have information about the desired manner of payment within 60 days after the date we receive notification of the insured person's death, we will pay the proceeds as a single sum, normally within seven days thereafter. Delay for check clearance. We reserve the right to defer payment of that portion of your accumulation value that is attributable to a premium payment made by check for a reasonable period of time (not to exceed 15 days) to allow the check to clear the banking system. 39 Delay of Separate Account VL-R proceeds. We reserve the right to defer payment of any death benefit, loan or other distribution that comes from that portion of your accumulation value that is allocated to Separate Account VL-R, if: . the New York Stock Exchange is closed other than customary weekend and holiday closings, or trading on the New York Stock Exchange is restricted; . an emergency exists, as a result of which disposal of securities is not reasonably practicable or it is not reasonably practicable to fairly determine the accumulation value; or . the SEC by order permits the delay for the protection of owners. Transfers and allocations of accumulation value among the investment options may also be postponed under these circumstances. If we need to defer calculation of Separate Account VL-R values for any of the foregoing reasons, all delayed transactions will be processed at the next values that we do compute. Delay to challenge coverage. We may challenge the validity of your insurance Policy based on any material misstatements in your application and any application for a change in coverage. However, . We cannot challenge the Policy after it has been in effect, during the insured person's lifetime, for two years from the date the Policy was issued or restored after termination. (Some states may require that we measure this time in some other way.) . We cannot challenge any Policy change that requires evidence of insurability (such as an increase in specified amount) after the change has been in effect for two years during the insured person's lifetime. Adjustments to Death Benefit Suicide. If the insured commits suicide during the first two Policy years, we will limit the death benefit proceeds to the total of all premiums that have been paid to the time of death minus any outstanding Policy loans (plus credit for any unearned interest) and any partial surrenders. A new two year period begins if you increase the specified amount. You can increase the specified amount only if the insured is living at the time of the increase. In this case, if the insured commits suicide during the first two years following the increase, we will refund the monthly insurance deductions attributable to the increase. The death benefit will then be based on the specified amount in effect before the increase. Some states require that we compute differently these periods for non-contestability following a suicide. 40 Wrong age or gender. If the age or gender of the insured person was misstated on your application for a Policy (or for any increase in benefits), we will adjust any death benefit to be what the monthly insurance charge deducted for the current month would have purchased based on the correct information. Death during grace period. If the insured person dies during the Policy's grace period, we will deduct any overdue monthly charges from the insurance proceeds. Additional Rights That We Have We have the right at any time to: . transfer the entire balance in an investment option in accordance with any transfer request you make that would reduce your accumulation value for that option to below $500; . transfer the entire balance in proportion to any other investment options you then are using, if the accumulation value in an investment option is below $ 500 for any other reason; . end the automatic rebalancing feature if your accumulation value falls below $5,000; . change interest rates and charges, as long as we stay within the minimum and maximum charges permitted in your Policy; . change the underlying Mutual Fund that any investment option uses; . add, delete or limit investment options, combine two or more investment options, or withdraw assets relating to The One VUL Solution from one investment option and put them into another; . operate Separate Account VL-R under the direction of a committee or discharge such a committee at any time; . change our guidelines for the simplified and full underwriting methods; . operate Separate Account VL-R, or one or more investment options, in any other form the law allows, including a form that allows us to make direct investments. Separate Account VL-R may be charged an advisory fee if its investments are made directly rather than through another investment company. In that case, we may make any legal investments we wish; or 41 . make other changes in the Policy that in our judgment are necessary or appropriate to ensure that the Policy continues to qualify for tax treatment as life insurance, or that do not reduce any cash surrender value, death benefit, accumulation value, or other accrued rights or benefits. You will be notified as required by law if there are any material changes in the underlying investments of an investment option that you are using. We intend to comply with all applicable laws in making any changes and, if necessary, we will seek Policy owner approval. Performance Information From time to time, we may quote performance information for the divisions of Separate Account VL-R in advertisements, sales literature, or reports to owners or prospective investors. We may quote performance information in any manner permitted under applicable law. We may, for example, present such information as a change in a hypothetical owner's cash value or death benefit. We also may present the yield or total return of the division based on a hypothetical investment in a Policy. The performance information shown may cover various periods of time, including periods beginning with the commencement of the operations of the division or the Mutual Funds in which it invests. The performance information shown may reflect the deduction of one or more charges, such as the premium charge, and we generally expect to exclude costs of insurance charges because of the individual nature of these charges. We may compare a division's performance to that of other variable life separate accounts or investment products, as well as to generally accepted indices or analyses, such as those provided by research firms and rating services. In addition, we may use performance ratings that may be reported periodically in financial publications, such as Money Magazine, Forbes, Business Week, Fortune, Financial Planning and The Wall Street Journal. We also may advertise ratings of AGL's financial strength or claims-paying ability as determined by firms that analyze and rate insurance companies and by nationally recognized statistical rating organizations. Performance information for any division reflects the performance of a hypothetical Policy and are not illustrative of how actual investment performance would affect the benefits under your Policy. You should not consider such performance information to be an estimate or guarantee of future performance. Our Reports to Policy Owners Shortly after the end of each Policy year, we will mail you a report that includes information about your Policy's current death benefit, accumulation value, cash surrender value and policy loans. We will send you notices to confirm premium payments, transfers and certain other Policy transactions. We will mail to you at your last known address of record, these and 42 any other reports and communications required by law. You should give us prompt written notice of any address change. AGL's Management The directors, executive officers, and (to the extent responsible for variable life operations) the other principal officers of AGL are listed below. Name Business Experience Within Past Five Years - -------------------------------------------------------------------------------- Rodney O. Martin, Jr. Director of American General Life Insurance Company since August 1996. Chairman of the Board and CEO of American General Life Insurance Company since April 2000. President and CEO (August 1996-July 1998). President of American General Life Insurance Company of New York (November 1995-August 1996). Vice President Agencies, with Connecticut Mutual Life Insurance Company, Hartford, Connecticut (1990-1995). Donald W. Britton Director of the Board of American General Life Insurance Company since April 1999. President of American General Life Insurance Company since April 2000. President of First Colony Life, Lynchburg, Virginia (1996 -April 1999) and Executive Vice President of First Colony Life (1992 - 1996). David A. Fravel Director of American General Life Insurance Company since November 1996. Elected Executive Vice President in April 1998. Previously held position of Senior Vice President of American General Life Insurance Company since November 1996. Senior Vice President of Massachusetts Mutual, Springfield, Missouri (March 1996-June 1996); Vice President, New Business, Connecticut Mutual Life Insurance Company, Hartford, Connecticut (December 1978-March 1996). David L. Herzog Director, Executive Vice President and Chief Financial Officer of American General Life Insurance Company since March 2000. Vice President of General American, St. Louis, Missouri (June 1991 -February 2000). 43 Name Business Experience Within Past Five Years - -------------------------------------------------------------------------------- John V. LaGrasse Director of American General Life Insurance Company since August 1996. Chief Technology Officer of American General Life Insurance Company since April, 2000. Elected Executive Vice President in July 1998. Previously held position of Senior Vice President of American General Life Insurance Company since August 1996. Director of Citicorp Insurance Services, Inc., Dover, Delaware (1986-1996). Paul L. Mistretta Executive Vice President of American General Life Insurance Company since July 1999. Senior Vice President of First Colony Life Insurance, Lynchburg, Virginia (1992 - July 1999). Brian D. Murphy Executive Vice President of American General Life Insurance Company since July 1999. Previously held position of Senior Vice President-Insurance Operations of American General Life Insurance Company since April 1998. Vice President-Sales, Phoenix Home Life, Hartford, CT (January 1997-April 1998). Vice President of Underwriting and Issue, Phoenix Home Life (July 1994-January 1997). Various positions with Mutual of New York, Syracuse, NY, including Agent, Agency Manager, Marketing Life and Disability Income Underwriting Management, (1978-July 1994). Don M. Ward Executive Vice President of American General Life Insurance Company since April 2000. Senior Vice President of American General Life Insurance Company since February 1998. Vice President of Pacific Life Insurance Company, Newport Beach, CA (1991-February 1998). Thomas M. Zurek Director and Executive Vice President of American General Life Insurance Company since April 1999. Elected General Counsel in December 1998. Previously held various positions with American General Life Insurance Company including Senior Vice President since December 1998 and Vice President since October 1998. In February 1998 named as Senior Vice President and Deputy General Counsel of American General Corporation. Attorney Shareholder with Nyemaster, Goode, Voigts, West, Hansell & O'Brien, Des Moines, Iowa (June 1992 - February 1998). 44 Name Business Experience Within Past Five Years - -------------------------------------------------------------------------------- Wayne A. Barnard Senior Vice President of American General Life Insurance Company since November 1997. Previously held various positions with American General Life Insurance Company including Vice President since February 1991. Robert M. Beuerlein Senior Vice President and Chief Actuary of American General Life Insurance Company since September 1999. Previously held position of Vice President of American General Life Insurance Company since December 1998. Director, Senior Vice President and Chief Actuary of The Franklin Life Insurance Company, Springfield, Illinois (January 1991 -June 1999). David J. Dietz Senior Vice President - Corporate Markets Group of American General Life Insurance Company since January 1999. President and Chief Executive Officer - Individual Insurance Operations of The United States Life Insurance Company in the City of New York since September, 1997. President of Prudential Select Life, Newark, New Jersey (August 1990 - September 1997). William Guterding Senior Vice President of American General Life Insurance Company since April 1999. Senior Vice President and Chief Underwriting Officer of The United States Life Insurance Company in the City of New York since October, 1980. Robert F. Herbert, Jr. Senior Vice President and Treasurer of American General Life Insurance Company since May 1996, and Controller since February 1991. Simon J. Leech Senior Vice President for American General Life Insurance Company since July 1997. Previously held various positions with American General Life Insurance Company since 1981, including Director of Policy Owners' Service Department in 1993, and Vice President-Policy Administration in 1995. Royce G. Imhoff, II Director for American General Life Insurance Company since November 1997. Previously held various positions with American General Life Insurance Company including Vice President since August 1996 and Regional Director since 1992. 45 The principal business address of each person listed above is our Home Office; except that the street number for Messrs. Fravel, LaGrasse, Martin, Herzog, Britton, Mistretta, Barnard and Zurek is 2929 Allen Parkway, the street number for Mr. Ward is 2727 Allen Parkway, the street number for Mr. Guterding is 125 Maiden Lane, New York, New York. Principal Underwriter's Management The directors and principal officers of the principal underwriter are: Position and Offices with Underwriter, Name and Principal American General Business Address Securities Incorporated - ---------------- ----------------------- F. Paul Kovach, Jr. Director and Chairman, American General Securities Incorporated President and Chief Executive 2727 Allen Parkway Officer Houston, TX 77019 Rodney O. Martin, Jr. Director and Vice Chairman American General Life Companies 2929 Allen Parkway Houston, TX 77019 Donald W. Britton Director and Assistant American General Life Companies Vice President 2929 Allen Parkway Houston, TX 77019 Royce G. Imhoff, II Director American General Life Companies 2727-A Allen Parkway Houston, Texas 77019 Alice T. Kane Director American General Retirement Services 125 Maiden Lane New York, New York 10038 46 Position and Offices with Underwriter, Name and Principal American General Business Address Securities Incorporated - ---------------- ----------------------- John A. Kalbaugh Vice President - American General Life Companies Chief Marketing Officer 2727 Allen Parkway Houston, TX 77019 Sander J. Ressler Vice President, 2727 Allen Parkway Chief Compliance Officer and Houston, TX 77019 Secretary Don M. Ward Vice President American General Life Companies 2727 Allen Parkway Houston, TX 77019 Pauletta P. Cohn Assistant Secretary American General Life Companies 2727 Allen Parkway Houston, TX 77019 Robert F. Herbert, Jr. Assistant Treasurer American General Life Companies 2727-A Allen Parkway Houston, Texas 77019 D. Lynne Walters Assistant Tax Officer 2929 Allen Parkway Houston, TX 77019 Legal Matters We are not involved in any legal proceedings that would be considered material with respect to a policy owner's interest in Separate Account VL-R. Pauletta P. Cohn, Esquire, Deputy General Counsel of the American General Life Companies, an affiliate of AGL, has opined as to the validity of the Policies. 47 Accounting and Auditing Experts The consolidated balance sheets of AGL as of December 31, 1999 and 1998 and the related consolidated statements of income, statements of comprehensive income, statements of shareholders' equity, and statements of cash flows for the years ended December 31, 1999, 1998 and 1997 included in this prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere in this prospectus, and are included in this prospectus in reliance upon such report of Ernst & Young LLP given on the authority of such firm as experts in accounting and auditing. The address of Ernst & Young LLP is One Houston Center, 1221 McKinney, Suite 2400, Houston, Texas 77010-2007. Actuarial Expert Actuarial matters have been examined by Robert M. Beuerlein, who is Senior Vice President and Chief Actuary of AGL. His opinion on actuarial matters is filed as an exhibit to the registration statement we have filed with the SEC in connection with the Policies. Services Agreements American General Life Companies ("AGLC") is party to an existing general services agreement with AGL. AGLC, an affiliate of AGL, is a corporation incorporated in Delaware on November 24, 1997. Pursuant to this agreement, AGLC provides services to AGL, including most of the administrative, data processing, systems, customer services, product development, actuarial, auditing, accounting and legal services for AGL and The One VUL Solution Policies. We have entered into various services agreements with most of the advisers or administrators for the Mutual Funds. We receive fees for the administrative services we perform. These fees do not result in any additional charges under the Policies that are not described under "What charges will AGL deduct from my investment in a Policy?" Certain Potential Conflicts The Mutual Funds sell shares to separate accounts of insurance companies (and may sell in the future, certain qualified plans), both affiliated and not affiliated with AGL. We currently do not foresee any disadvantages to you arising out of such sales. Differences in treatment under tax and other laws, as well as other considerations, could cause the interests of various owners to conflict. For example, violation of the federal tax laws by one separate account investing in the Funds could cause the contracts funded through another separate account to lose their tax-deferred status, unless remedial action were taken. However, each Mutual Fund has advised us that its board of trustees (or directors) intends to monitor events to identify any material irreconcilable conflicts that possibly may arise and to determine what action, if any, should be taken in response. If we believe that a Fund's response to any such event insufficiently protects 48 our policy owners, we will see to it that appropriate action is taken to do so as well as report any material irreconcilable conflicts that we know exist to each Mutual Fund as soon as a conflict arises. If it becomes necessary for any separate account to replace shares of any Mutual Fund in which it invests, that Fund may have to liquidate securities in its portfolio on a disadvantageous basis. FINANCIAL STATEMENTS The financial statements of AGL contained in this prospectus should be considered to bear only upon the ability of AGL to meet its obligations under The One VUL Solution Policies. They should not be considered as bearing upon the investment experience of Separate Account VL-R. No financial statements of Separate Account VL-R are included because, at December 31, 1999, none of the Divisions of Separate Account VL-R were available under The One VUL Solution Policies.
Consolidated Financial Statements of Page to American General Life Insurance Company See in this - --------------------------------------- Prospectus ---------- Unaudited Balance Sheet as of June 30, 2000.............................................. Q-1 Unaudited Income Statement for the six months ended June 30, 2000........................ Q-3 Report of Ernst & Young, LLP Independent Auditors........................................ F-1 Consolidated Balance Sheets as of December 31, 1999 and 1998............................. F-2 Consolidated Income Statements for the years ended December 31, 1999, 1998 and 1997...................................................... F-4 Consolidated Statements of Comprehensive Income for the years ended December 31, 1999, 1998 and 1997.................................. F-5 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997................................................ F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................................................ F-7 Notes to Consolidated Financial Statements............................................... F-8
49 American General Life Insurance Company Consolidated Balance Sheet (Unaudited) June 30 2000 ------------ (In Thousands) Assets Investments: Fixed maturity securities, at fair value (amortized cost - $27,397,632) $ 26,486,802 Equity securities, at fair value (cost - $269,013) 276,251 Mortgage loans on real estate 1,955,401 Policy loans 1,262,556 Investment real estate 129,185 Other long-term investments 202,551 Short-term investments 1,036,782 ------------ Total investments 31,349,528 Cash 62,715 Investment in Parent Company (cost - $7,958) 42,676 Indebtedness from affiliates 44,248 Accrued investment income 475,107 Accounts receivable 228,854 Deferred policy acquisition costs 2,120,995 Property and equipment 69,419 Other assets 251,246 Assets held in separate accounts 24,640,270 ------------ Total assets $ 59,285,058 ============ Q-1 American General Life Insurance Company Consolidated Balance Sheet (Unaudited) June 30 2000 ------------- (In Thousands) Liabilities and shareholders' equity Liabilities: Future policy benefits $ 29,527,010 Other policy claims and benefits payable 52,437 Other policyholders' funds 372,669 Federal income taxes 288,307 Indebtedness to affiliates 4,690 Other liabilities 1,473,684 Liabilities related to separate accounts 24,640,270 ------------- Total liabilities 56,359,067 Shareholders' equity: Common stock, $10 par value, 600,000 shares authorized, issued, and outstanding 6,000 Preferred stock, $100 par value, 8,500 shares authorized, issued, and outstanding 850 Additional paid-in capital 1,372,378 Accumulated other comprehensive income/(loss) (428,386) Retained earnings 1,975,149 ------------- Total shareholders' equity 2,925,991 ------------- Total liabilities and shareholders' equity $ 59,285,058 ============= Q-2 American General Life Insurance Company Consolidated Income Statement (Unaudited) Six months ended June 30 2000 -------------- (In Thousands) Revenues: Premiums and other considerations $ 325,542 Net investment income 1,169,590 Net realized investment loss (62,863) Other 65,461 -------------- Total revenues 1,497,730 Benefits and expenses: Benefits 884,923 Operating costs and expenses 284,589 -------------- Total benefits and expenses 1,169,512 -------------- Income before income tax expense 328,218 Income tax expense 110,407 -------------- Net income $ 217,811 ============== Q-3 [LETTERHEAD OF ERNST & YOUNG] Report of Independent Auditors Board of Directors and Stockholder American General Life Insurance Company We have audited the accompanying consolidated balance sheets of American General Life Insurance Company (an indirectly wholly-owned subsidiary of American General Corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American General Life Insurance Company and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP ------------------------------ Ernst & Young LLP March 1,2000 F-1 American General Life Insurance Company Consolidated Balance Sheets DECEMBER 31 1999 1998 ----------------------------- (In Thousands) ASSETS Investments: Fixed maturity securities, at fair value (amortized cost - $27,725,167 in 1999 and $27,029,409 $28,906,261 $27,425,605 in 1998) Equity securities, at fair value (cost - $198,640 in 1999 and $193,368 in 1998) 237,065 211,684 Mortgage loans on real estate 1,918,956 1,557,268 Policy loans 1,234,729 1,170,686 Investment real estate 125,563 119,520 Other long-term investments 129,155 86,194 Short-term investments 123,779 222,949 ---------------------------- Total investments 30,798,656 32,274,562 Cash 45,983 117,675 Investment in Parent Company (cost - $8,597 in 1999 and 1998) 53,083 54,570 Indebtedness from affiliates 75,195 161,096 Accrued investment income 482,652 459,961 Accounts receivable 186,592 196,596 Deferred policy acquisition costs 1,956,653 1,087,718 Property and equipment 78,908 66,197 Other assets 250,299 206,318 Assets held in separate accounts 23,232,419 15,616,020 ---------------------------- Total assets $57,160,440 $50,240,713 ============================ See accompanying notes. F-2 American General Life Insurance Company Consolidated Balance Sheets DECEMBER 31 1999 1998 ----------------------------- (In Thousands) LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits $29,901,842 $29,353,022 Other policy claims and benefits payable 53,326 54,278 Other policyholders' funds 371,632 398,587 Federal income taxes 375,332 677,315 Indebtedness to affiliates 7,086 18,173 Other liabilities 372,416 554,783 Liabilities related to separate accounts 23,232,419 15,616,020 ---------------------------- Total liabilities 54,314,053 46,672,178 Shareholder's equity: Common stock, $10 par value, 600,000 shares authorized, issued, and outstanding 6,000 6,000 Preferred stock, $100 par value, 8,500 shares authorized, issued, and outstanding 850 850 Additional paid-in capital 1,371,687 1,368,089 Accumulated other comprehensive (loss) income (356,865) 679,107 Retained earnings 1,824,715 1,514,489 ---------------------------- Total shareholder's equity 2,846,387 3,568,535 ---------------------------- Total liabilities and shareholder's equity $57,160,440 $50,240,713 ============================ See accompanying notes. F-3 American General Life Insurance Company Consolidated Statements of Income YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------------------------- (In Thousands) Revenues: Premiums and other considerations $ 540,029 $ 470,238 $ 428,721 Net investment income 2,348,196 2,316,933 2,198,623 Net realized investment gains 5,351 (33,785) 29,865 (losses) Other 82,581 69,602 53,370 ----------------------------------------- Total revenues 2,976,157 2,822,988 2,710,579 Benefits and expenses: Benefits 1,719,375 1,788,417 1,757,504 Operating costs and expenses 495,606 467,067 379,012 Interest expense 74 15 782 Litigation settlement - 97,096 - ----------------------------------------- Total benefits and expenses 2,215,055 2,352,595 2,137,298 ----------------------------------------- Income before income tax expense 761,102 470,393 573,281 Income tax expense 263,196 153,719 198,724 ------------------------------------------ Net income $ 497,906 $ 316,674 $ 374,557 ========================================== See accompanying notes. F-4 American General Life Insurance Company Consolidated Statements of Comprehensive Income YEAR ENDED DECEMBER 31 1999 1998 1997 ---------------------------------------- (In Thousands) Net income $ 497,906 $ 316,674 $ 374,557 Other comprehensive income: Gross change in unrealized gains (losses) on securities (pretax: ($1,581,500) $341,000; $318,700) (1,027,977) 222,245 207,124 Less: gains (losses) realized in 7,995 (29,336) (1,251) net income ---------------------------------------- Change in net unrealized gains (losses) on securities (pretax: ($1,593,800) $387,000; $320,600) (1,035,972) 251,581 208,375 ---------------------------------------- Comprehensive (loss) income $ (538,066) $ 568,255 $ 582,932 ======================================== See accompanying notes. F-5 American General Life Insurance Company Consolidated Statements of Shareholder's Equity YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------------------------- (In Thousands) Common stock: Balance at beginning of year $ 6,000 $ 6,000 $ 6,000 Change during year - - - ------------------------------------------- Balance at end of year 6,000 6,000 6,000 Preferred stock: Balance at beginning of year 850 850 850 Change during year - - - ------------------------------------------- Balance at end of year 850 850 850 Additional paid-in capital: Balance at beginning of year 1,368,089 1,184,743 933,342 Capital contribution from Parent Company - 182,284 250,000 Other changes during year 3,598 1,062 1,401 ------------------------------------------- Balance at end of year 1,371,687 1,368,089 1,184,743 Accumulated other comprehensive (loss) income: Balance at beginning of year 679,107 427,526 219,151 Change in unrealized gains (losses) on securities (1,035,972) 251,581 208,375 ------------------------------------------ Balance at end of year (356,865) 679,107 427,526 Retained earnings: Balance at beginning of year 1,514,489 1,442,495 1,469,618 Net income 497,906 316,674 374,557 Dividends paid (187,680) (244,680) (401,680) ------------------------------------------ Balance at end of year 1,824,715 1,514,489 1,442,495 ------------------------------------------- Total shareholder's equity $2,846,387 $3,568,535 $3,061,614 =========================================== See accompanying notes. F-6 American General Life Insurance Company Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1999 1998 1997 -------------------------------------------------------------------- (In Thousands) OPERATING ACTIVITIES Net income $ 497,906 $ 316,674 $ 374,557 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Change in accounts receivable 10,004 11,613 (37,752) Change in future policy benefits and other policy claims (2,422,221) (866,428) (1,143,736) Amortization of policy acquisition costs 101,066 125,062 115,467 Policy acquisition costs deferred (307,854) (244,196) (219,339) Change in other policyholders' funds (26,955) 273 21,639 Provision for deferred income tax expense 85,257 15,872 13,264 Depreciation 24,066 19,418 16,893 Amortization (30,894) (26,775) (28,276) Change in indebtedness to/from affiliates 74,814 (51,116) (8,695) Change in amounts payable to brokers (43,321) (894) 31,769 Net loss (gain) on sale of investments 45,379 37,016 (29,865) Other, net (170,413) 57,307 30,409 -------------------------------------------------------------------- Net cash used in operating activities (2,163,166) (606,174) (863,665) INVESTING ACTIVITIES Purchases of investments and loans made (44,508,908) (28,231,615) (29,638,861) Sales or maturities of investments and receipts from repayment of loans 43,879,377 26,656,897 28,300,238 Sales and purchases of property, equipment, and software, net (87,656) (105,907) (9,230) -------------------------------------------------------------------- Net cash used in investing activities (717,187) (1,680,625) (1,347,853) FINANCING ACTIVITIES Policyholder account deposits 5,747,658 4,688,831 4,187,191 Policyholder account withdrawals (2,754,915) (2,322,307) (1,759,660) Dividends paid (187,680) (244,680) (401,680) Capital contribution from Parent - 182,284 250,000 Other 3,598 1,062 1,401 -------------------------------------------------------------------- Net cash provided by financing activities 2,808,661 2,305,190 2,277,252 -------------------------------------------------------------------- (Decrease) increase in cash (71,692) 18,391 65,734 Cash at beginning of year 117,675 99,284 33,550 -------------------------------------------------------------------- Cash at end of year $ 45,983 $ 117,675 $ 99,284 ====================================================================
Interest paid amounted to approximately $2,026,000, $420,000, and $1,004,000, in 1999, 1998, and 1997, respectively. See accompanying notes. F-7 American General Life Insurance Company Notes to Consolidated Financial Statements December 31, 1999 NATURE OF OPERATIONS American General Life Insurance Company (the "Company") is a wholly-owned subsidiary of AGC Life Insurance Company, which is a wholly-owned subsidiary of American General Corporation (the "Parent Company"). The Company's wholly-owned life insurance subsidiaries are American General Life Insurance Company of New York ("AGNY") and The Variable Annuity Life Insurance Company ("VALIC"). During 1998, the Company formed a new wholly-owned subsidiary, American General Life Companies ("AGLC"), to provide management services to certain life insurance subsidiaries of the Parent Company. The Company offers a complete portfolio of the standard forms of universal life, variable universal life, interest-sensitive whole life, term life, structured settlements, and fixed and variable annuities throughout the United States. In addition, a variety of equity products is sold through its wholly-owned broker/dealer, American General Securities, Inc. The Company serves the estate planning needs of middle- and upper-income households and the life insurance needs of small- to medium-sized businesses. AGNY offers a broad array of traditional and interest-sensitive insurance, in addition to individual annuity products. VALIC provides tax-deferred retirement annuities and employer- sponsored retirement plans to employees of health care, educational, public sector, and other not-for-profit organizations throughout the United States. 1. ACCOUNTING POLICIES 1.1 PREPARATION OF FINANCIAL STATEMENTS The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of the Company and its wholly-owned subsidiaries. Transactions with the Parent Company and other subsidiaries of the Parent Company are not eliminated from the financial statements of the Company. All other material intercompany transactions have been eliminated in consolidation. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from those estimates. F-8 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.2 STATUTORY ACCOUNTING The Company and its wholly-owned life insurance subsidiaries are required to file financial statements with state regulatory authorities. State insurance laws and regulations prescribe accounting practices for calculating statutory net income and equity. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. The use of such permitted practices by the Company and its wholly-owned life insurance subsidiaries did not have a material effect on statutory equity at December 31, 1999. Statutory financial statements differ from GAAP. Significant differences were as follows (in thousands):
1999 1998 1997 -------------------------------------------------------- Net income: Statutory net income (1999 balance is unaudited) $ 350,294 $ 259,903 $ 327,813 Deferred policy acquisition costs and cost of insurance purchased 200,285 116,597 103,872 Deferred income taxes (86,456) (53,358) (13,264) Adjustments to policy reserves 23,110 52,445 (30,162) Goodwill amortization (2,437) (2,033) (2,067) Net realized gain on investments 2,246 41,488 20,139 Litigation settlement - (63,112) - Other, net 10,864 (35,256) (31,774) -------------------------------------------------------- GAAP net income $ 497,906 $ 316,674 $ 374,557 ======================================================== Shareholders' equity: Statutory capital and surplus (1999 balance is unaudited) $1,753,570 $1,670,412 $1,636,327 Deferred policy acquisition costs and cost of insurance purchased 1,975,667 1,109,831 835,031 Deferred income taxes (350,258) (698,350) (535,703) Adjustments to policy reserves (202,150) (274,532) (319,680) Acquisition-related goodwill 52,317 54,754 51,424 Asset valuation reserve ("AVR") 351,904 310,564 255,975 Interest maintenance reserve ("IMR") 53,226 27,323 9,596 Investment valuation differences (683,500) 1,487,658 1,272,339 Surplus from separate accounts (180,362) (174,447) (150,928) Other, net 75,973 55,322 7,233 -------------------------------------------------------- Total GAAP shareholders' equity $2,846,387 $3,568,535 $3,061,614 ========================================================
F-9 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.2 STATUTORY ACCOUNTING (CONTINUED) The more significant differences between GAAP and statutory accounting principles are that under GAAP: (a) acquisition costs related to acquiring new business are deferred and amortized (generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality, and expense margins), rather than being charged to operations as incurred; (b) future policy benefits are based on estimates of mortality, interest, and withdrawals generally representing the Company's experience, which may differ from those based on statutory mortality and interest requirements without consideration of withdrawals; (c) deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse; (d) certain assets (principally furniture and equipment, agents' debit balances, computer software, and certain other receivables) are reported as assets rather than being charged to retained earnings; (e) acquisitions are accounted for using the purchase method of accounting rather than being accounted for as equity investments; and (f) fixed maturity investments are carried at fair value rather than amortized cost. In addition, statutory accounting principles require life insurance companies to establish an AVR and an IMR. The AVR is designed to address the credit-related risk for bonds, preferred stocks, derivative instruments, and mortgages and market risk for common stocks, real estate, and other invested assets. The IMR is composed of investment- and liability-related realized gains and losses that result from interest rate fluctuations. These realized gains and losses, net of tax, are amortized into income over the expected remaining life of the asset sold or the liability released. 1.3 INSURANCE CONTRACTS The insurance contracts accounted for in these financial statements include primarily long-duration contracts. Long-duration contracts include traditional whole life, endowment, guaranteed renewable term life, universal life, limited payment, and investment contracts. Long-duration contracts generally require the performance of various functions and services over a period of more than one year. The contract provisions generally cannot be changed or canceled by the insurer during the contract period; however, most new contracts written by the Company allow the insurer to revise certain elements used in determining premium rates or policy benefits, subject to guarantees stated in the contracts. At December 31, 1999 and 1998, insurance investment contracts of $25.9 million and $24.1 million, respectively, were included in the Company's liabilities. F-10 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.4 INVESTMENTS FIXED MATURITY AND EQUITY SECURITIES All fixed maturity and equity securities were classified as available-for-sale and recorded at fair value at December 31, 1999 and 1998. After adjusting related balance sheet accounts as if the unrealized gains (losses) had been realized, the net adjustment is recorded in accumulated other comprehensive income within shareholders' equity. If the fair value of a security classified as available-for-sale declines below its cost and this decline is considered to be other than temporary, the security is reduced to its fair value, and the reduction is recorded as a realized loss. During 1999, the Company maintained a trading portfolio of certain fixed maturity securities. Trading securities are recorded at fair value. Unrealized and realized gains (losses) are included in net investment income. The Company held no trading securities at December 31, 1999, and trading securities did not have a material effect on net investment income in 1999. MORTGAGE LOANS Mortgage loans are reported at amortized cost, net of an allowance for losses. The allowance for losses covers all non-performing loans and loans for which management has a concern based on its assessment of risk factors, such as potential non-payment or non-monetary default. The allowance is based on a loan- specific review and a formula that reflects past results and current trends. Loans for which the Company determines that collection of all amounts due under the contractual terms is not probable are considered to be impaired. The Company generally looks to the underlying collateral for repayment of impaired loans. Therefore, impaired loans are considered to be collateral dependent and are reported at the lower of amortized cost or fair value of the underlying collateral, less estimated cost to sell. POLICY LOANS Policy loans are reported at unpaid principal balance. F-11 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.4 INVESTMENTS (CONTINUED) INVESTMENT REAL ESTATE Investment real estate is classified as held for investment or available for sale, based on management's intent. Real estate held for investment is carried at cost, less accumulated depreciation and impairment write-downs. Real estate available for sale is carried at the lower of cost (less accumulated depreciation, if applicable) or fair value less cost to sell. INVESTMENT INCOME Interest on fixed maturity securities and performing and restructured mortgage loans is recorded as income when earned and is adjusted for any amortization of premium or discount. Interest and any amortization of premium or discount on delinquent mortgage loans is recorded as income only when actual interest payments are received. Dividends are recorded as income on ex-dividend dates. REALIZED INVESTMENT GAINS Realized investment gains (losses) are recognized using the specific- identification method. 1.5 SEPARATE ACCOUNTS Separate Accounts are assets and liabilities associated with certain contracts, principally annuities; for which the investment risk lies solely with the contract holder. Therefore, the Company's liability for these accounts equals the value of the account assets. Investment income, realized investment gains (losses), and policyholder account deposits and withdrawals related to separate accounts are excluded from the consolidated statements of income, comprehensive income, and cash flows. Assets held in Separate Accounts are primarily shares in mutual funds, which are carried at fair value based on the quoted net asset value per share. F-12 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.6 DEFERRED POLICY ACQUISITION COSTS ("DPAC") AND COST OF INSURANCE PURCHASED ("CIP") Certain costs of writing an insurance policy, including commissions, underwriting, and marketing expenses, are deferred and reported as DPAC. CIP represents the cost assigned to insurance contracts in force that are acquired through the purchase of a block of business. At December 31, 1999, CIP of $19.0 million was reported within other assets. DPAC and CIP associated with interest-sensitive life contracts, insurance investment contracts, and participating life insurance contracts is charged to expense in relation to the estimated gross profits of those contracts. DPAC and CIP associated with all other insurance contracts is charged to expense over the premium-paying period or as the premiums are earned over the life of the contract. DPAC and CIP are adjusted for the impact on estimated future gross profits as if net unrealized gains (losses) on securities had been realized at the balance sheet date. The impact of this adjustment is included in accumulated other comprehensive income within shareholder's equity. The Company reviews the carrying amount of DPAC and CIP on at least an annual basis. Management considers estimated future gross profits or future premiums, expected mortality, interest earned and credited rates, persistency, and expenses in determining whether the carrying amount is recoverable. 1.7 PREMIUM RECOGNITION Most receipts for annuities and interest-sensitive life insurance policies are classified as deposits instead of revenue. Revenues for these contracts consist of mortality, expense, and surrender charges. Policy charges that compensate the Company for future services are deferred and recognized in income over the period earned, using the same assumptions used to amortize DPAC (see Note 1.6). For limited-payment contracts, net premiums are recorded as revenue, and the difference between the gross premium received and the net premium is deferred and recognized in a constant relationship to insurance in force. For all other contracts, premiums are recognized when due. F-13 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.8 OTHER ASSETS Acquisition-related goodwill, which is included in other assets, is charged to expense in equal amounts over 40 years. The carrying value of goodwill is regularly reviewed by management for indicators of impairment in value. If facts and circumstances suggest that goodwill is impaired, other than temporarily, the Company assesses the fair value of the underlying assets and reduces goodwill accordingly. 1.9 POLICY AND CONTRACT CLAIMS RESERVES Substantially all of the Company's insurance and annuity liabilities relate to long duration contracts. The contracts normally cannot be changed or canceled by the Company during the contract period. For interest-sensitive life insurance and investment contracts, reserves equal the sum of the policy account balance and deferred revenue charges. Reserves for other contracts are based on estimates of the cost of future policy benefits. Reserves are determined using the net level premium method. Interest assumptions used to compute reserves ranged from 2.5% to 13.5% at December 31, 1999. 1.10 REINSURANCE The Company limits its exposure to loss on any single insured to $2.5 million by ceding additional risks through reinsurance contracts with other insurers. The Company diversifies its risk of reinsurance loss by using a number of reinsurers that have strong claims-paying ability ratings. If the reinsurer could not meet its obligations, the Company would reassume the liability. The likelihood of a material reinsurance liability being reassumed by the Company is considered to be remote. A receivable is recorded for the portion of benefits paid and insurance liabilities that have been reinsured. Reinsurance recoveries on ceded reinsurance contracts were $28 million, $63 million, and $25 million, during 1999, 1998, and 1997, respectively. The cost of reinsurance is recognized over the life of the reinsured policies using assumptions consistent with those used to account for the underlying policies. Benefits paid and future policy benefits related to ceded insurance contracts are recorded as reinsurance receivables. F-14 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.11 PARTICIPATING POLICY CONTRACTS Participating life insurance accounted for approximately 1% and 2% of life insurance in force at December 31, 1999 and 1998, respectively. The portion of earnings allocated to participating policyholders that cannot be expected to inure to shareholders is excluded from net income and shareholder's equity. Dividends to be paid on participating life insurance contracts are determined annually based on estimates of the contracts' earnings. Policyholder dividends were $4.6 million in 1999. 1.12 INCOME TAXES The Company and its life insurance subsidiaries, together with certain other life insurance subsidiaries of the Parent Company, are included in a life/non- life consolidated tax return with the Parent Company and its noninsurance subsidiaries. The Company participates in a tax sharing agreement with other companies included in the consolidated tax return. Under this agreement, tax payments are made to the Parent Company as if the companies filed separate tax returns; and companies incurring operating and/or capital losses are reimbursed for the use of these losses by the consolidated return group. Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment. State income taxes are included in income tax expense. A valuation allowance for deferred tax assets is provided if it is more likely than not that some portion of the deferred tax asset will not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset is included in income. Changes related to fluctuations in fair value of available-for-sale securities are included in the consolidated statements of comprehensive income and accumulated other comprehensive income in shareholder's equity. F-15 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.13 ACCOUNTING CHANGES In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 133, Accounting for Derivative Instruments and Hedging Activities, which requires all derivative instruments to be recognized at fair value in the balance sheet. Changes in the fair value of a derivative instrument will be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. The Company will adopt SFAS 133 on January 1, 2001. The Company does not expect adoption to have a material impact on the Company's results of operations and financial position. 2. INVESTMENTS 2.1 INVESTMENT INCOME Investment income by type of investment was as follows: 1999 1998 1997 ------------------------------------------- (In Thousands) Investment income: Fixed maturities $2,118,794 $2,101,730 $1,966,528 Equity securities 17,227 1,813 1,067 Mortgage loans on real estate 134,878 148,447 157,035 Investment real estate 20,553 23,139 22,157 Policy loans 69,684 66,573 62,939 Other long-term investments 7,539 3,837 3,135 Short-term investments 24,874 15,492 8,626 Investment income from affiliates 8,695 10,536 11,094 ------------------------------------------- Gross investment income 2,402,244 2,371,567 2,232,581 Investment expenses 54,048 54,634 33,958 ------------------------------------------- Net investment income $2,348,196 $2,316,933 $2,198,623 =========================================== The carrying value of investments that produced no investment income during 1999 was less than 0.2% of total invested assets. The ultimate disposition of these investments is not expected to have a material effect on the Company's results of operations and financial position. F-16 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS (CONTINUED) 2.2 NET REALIZED INVESTMENT GAINS (LOSSES) Realized gains (losses) by type of investment were as follows: 1999 1998 1997 ------------------------------------------- (In Thousands) Fixed maturities: Gross gains $ 118,427 $ 20,109 $ 42,966 Gross losses (102,299) (62,657) (34,456) ------------------------------------------- Total fixed maturities 16,128 (42,548) 8,510 Equity securities 793 645 1,971 Other investments (11,570) 8,118 19,384 ------------------------------------------- Net realized investment gains (losses) 5,351 (33,785) 29,865 before tax Income tax expense (benefit) 1,874 (11,826) 10,452 Net realized investment gains (losses) $ 3,477 $(21,959) $ 19,413 after tax =========================================== F-17 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES All fixed maturity and equity securities are classified as available-for-sale and reported at fair value (see Note 1.4). Amortized cost and fair value at December 31, 1999 and 1998 were as follows: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE -------------------------------------------------- (In Thousands) DECEMBER 31, 1999 Fixed maturity securities: Corporate securities: Investment-grade $19,455,518 $134,003 $(704,194) $18,885,326 Below investment-grade 1,368,494 11,863 (114,260) 1,266,098 Mortgage-backed securities* 6,195,003 45,022 (74,746) 6,165,279 U.S. government obligations 276,621 15,217 (2,376) 289,462 Foreign governments 245,782 5,774 (1,767) 249,789 State and political 154,034 499 (10,836) 143,697 subdivisions Redeemable preferred stocks 29,715 43 - 29,758 ------------------------------------------------- Total fixed maturity $27,725,167 $212,421 $(908,179) $27,029,409 securities ================================================== Equity securities $ 198,640 $ 39,381 $ (956) $ 237,065 ================================================== Investment in Parent Company $ 8,597 $ 44,486 $ - $ 53,083 ================================================== * Primarily include pass-through securities guaranteed by and mortgage obligations ("CMOs") collateralized by the U.S. government and government agencies. F-18 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED) GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ------------------------------------------------- (In Thousands) DECEMBER 31, 1998 Fixed maturity securities: Corporate securities: Investment-grade $18,800,553 $1,129,504 $(26,353) $19,903,703 Below investment-grade 1,409,198 33,910 (45,789) 1,397,320 Mortgage-backed securities* 6,359,242 294,331 (870) 6,652,703 U.S. government obligations 417,822 69,321 (178) 486,965 Foreign governments 331,699 24,625 (2,437) 353,887 State and political 86,778 4,796 (187) 91,387 subdivisions Redeemable preferred stocks 20,313 - (17) 20,296 ------------------------------------------------- Total fixed maturity $27,425,605 $1,556,487 $(75,831) $28,906,261 securities ================================================= Equity securities $ 193,368 $ 19,426 $ (1,110) $ 211,684 ================================================= Investment in Parent Company $ 8,597 $ 45,973 $ - $ 54,570 ================================================= * Primarily include pass-through securities guaranteed by and mortgage obligations ("CMOs") collateralized by the U.S. government and government agencies. F-19 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED) Net unrealized gains (losses) on securities included in accumulated comprehensive income in shareholders' equity at December 31 were as follows: 1999 1998 ------------------------------- (In Thousands) Gross unrealized gains $ 296,288 $1,621,883 Gross unrealized losses (909,135) (76,941) DPAC and other fair value adjustments 200,353 (488,120) Deferred federal income taxes 55,631 (377,718) Net unrealized (losses) gains on securities $(356,863) $ 679,104 =============================== The contractual maturities of fixed maturity securities at December 31, 1999 were as follows: 1999 1998 -------------------------------------------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE -------------------------------------------------------- (In thousands) (In thousands) Fixed maturity securities, excluding mortgage-backed securities: Due in one year or $ 810,124 $ 813,683 $ 531,496 $ 536,264 less Due after one year through five years 5,380,557 5,394,918 5,550,665 5,812,581 Due after five years through ten years 8,350,207 8,080,065 9,229,980 9,747,761 Due after ten years 6,988,799 6,575,461 5,754,220 6,156,950 Mortgage-backed 6,195,480 6,165,282 6,359,244 6,652,705 securities -------------------------------------------------------- Total fixed maturity $27,725,167 $27,029,409 $27,425,605 $28,906,261 securities ======================================================== Actual maturities may differ from contractual maturities, since borrowers may have the right to call or prepay obligations. In addition, corporate requirements and investment strategies may result in the sale of investments before maturity. Proceeds from sales of fixed maturities were $12.3 billion, $5.4 billion, and $14.8 billion during 1999, 1998, and 1997, respectively. F-20 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS (CONTINUED) 2.4 MORTGAGE LOANS ON REAL ESTATE Diversification of the geographic location and type of property collateralizing mortgage loans reduces the concentration of credit risk. For new loans, the Company requires loan-to-value ratios of 75% or less, based on management's credit assessment of the borrower. The mortgage loan portfolio was distributed as follows at December 31, 1999 and 1998: OUTSTANDING PERCENT OF PERCENT AMOUNT TOTAL NONPERFORMING ---------------------------------------------- (In Millions) DECEMBER 31, 1999 Geographic distribution: South Atlantic $ 470 24.6% 0.2% Pacific 363 18.9 7.8 West South Central 185 9.6 0.0 East South Central 144 7.5 0.0 East North Central 256 13.3 0.0 Mid-Atlantic 323 16.8 0.9 Mountain 107 5.6 13.8 West North Central 43 2.2 0.0 New England 44 2.3 0.0 Allowance for losses (16) (0.8) 0.0 ------------------------------- Total $1,919 100.0% 2.4% =============================== Property type: Retail $ 628 32.6% 2.5% Office 746 38.9 4.2 Industrial 302 15.7 0.0 Apartments 189 9.9 0.0 Hotel/motel 46 2.4 0.0 Other 24 1.3 0.2 Allowance for losses (16) (0.8) 0.0 ------------------------------- Total $1,919 100.0% 2.4% =============================== F-21 American General Life Insurance Company Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS (CONTINUED) 2.4 MORTGAGE LOANS ON REAL ESTATE (CONTINUED) OUTSTANDING PERCENT OF PERCENT AMOUNT TOTAL NONPERFORMING ---------------------------------------------- (In Millions) DECEMBER 31, 1998 Geographic distribution: South Atlantic $ 429 27.6% 0.2% Pacific 320 20.6 10.4 Mid-Atlantic 326 20.9 4.1 East North Central 178 11.4 - Mountain 95 6.1 - West South Central 118 7.5 - East South Central 46 3.0 - West North Central 33 2.1 - New England 25 1.6 - Allowance for losses (13) (0.8) - ------------------------------- Total $1,557 100.00% 3.1% =============================== Property type: Office $ 593 38.1% 7.0% Retail 423 27.1 0.2 Industrial 292 18.8 - Apartments 178 11.4 2.9 Hotel/motel 38 2.4 - Other 46 3.0 - Allowance for losses (13) (0.8) - ------------------------------- Total $1,557 100% 3.1% =============================== Impaired mortgage loans on real estate and related interest income is not material. F-22 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.5 INVESTMENT SUMMARY Investments of the Company were as follows:
DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------------------------------------------------------------------------------- CARRYING CARRYING COST FAIR VALUE AMOUNT COST FAIR VALUE AMOUNT ----------------------------------------------------------------------------------------- (In Thousands) (In Thousands) Fixed maturities: Bonds: United States government and government agencies $ 276,621 $ 289,462 $ 289,462 $ 417,822 $ 486,965 $ 486,965 and authorities States, municipalities, and political 154,034 143,697 143,697 86,778 91,387 91,387 subdivisions Foreign governments 245,782 249,789 249,789 331,699 353,887 353,887 Public utilities 1,468,758 1,465,129 1,465,129 1,777,172 1,895,326 1,895,326 Mortgage-backed 6,195,003 6,165,279 6,165,279 6,359,242 6,652,703 6,652,703 securities All other corporate 19,355,254 18,686,295 18,686,295 18,432,579 19,405,697 19,405,697 bonds** Redeemable preferred 29,715 29,758 29,758 20,313 20,296 20,296 stocks --------------------------------------------------------------------------------------------- Total fixed maturities 27,725,167 27,029,409 27,029,409 27,425,605 28,906,261 28,906,261 Equity securities: Common stocks: Banks, trust, and insurance companies - - - - - - Industrial, miscellaneous, and 180,849 219,089 219,089 176,321 211,684 211,684 other Nonredeemable preferred stocks 17,791 17,976 17,976 17,047 - - --------------------------------------------------------------------------------------------- Total equity securities 198,640 237,065 237,065 193,368 211,684 211,684 Mortgage loans on real 1,918,956 1,829,212 1,918,956 1,557,268 1,607,599 1,557,268 estate* Investment real estate 125,563 XXXXXXX 125,563 119,520 xxxxxxx 119,520 Policy loans 1,234,729 1,205,056 1,234,729 1,170,686 1,252,409 1,170,686 Other long-term investments 129,155 XXXXXXX 129,155 86,194 xxxxxxx 86,194 Short-term investments 123,779 XXXXXXX 123,779 222,949 xxxxxxx 222,949 --------------------------------------------------------------------------------------------- Total investments $31,455,989 $ XXXXXXX $ 30,798,656 $ 30,775,590 $ xxxxxxx $ 32,274,562 ============================================================================================
* Amount is net of allowance for losses of $16 million and $13 million at December 31, 1999 and 1998, respectively. ** Includes derivative financial instruments with negative fair values of $4.7 million and $1.0 million and positive fair values of $2.3 million and $24.3 million at December 31, 1999 and 1998, respectively. F-23 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 3. DEFERRED POLICY ACQUISITIONS COSTS The balance of DPAC at December 31 and the components of the change reported in operating costs and expenses for the years then ended were as follows: 1999 1998 1997 -------------------------------------- (In Thousands) Balance at January 1 $1,087,718 $ 835,031 $1,042,783 Capitalization 307,854 244,196 219,339 Amortization (101,066) (125,062) (115,467) Effect of realized and unrealized gains (losses) on securities 662,147 133,553 (311,624) -------------------------------------- Balance at December 31 $1,956,653 $1,087,718 $ 835,031 ======================================= 4. OTHER ASSETS Other assets consisted of the following: DECEMBER 31 1999 1998 ------------------------------ (In Thousands) Goodwill $ 52,317 $ 54,754 American General Corporation CBO (Collateralized Bond Obligation) 98-1 Ltd. - 9,740 Cost of insurance purchased ("CIP") 19,014 22,113 Computer software 117,571 78,775 Other 61,397 40,936 ------------------------------ Total other assets $250,299 $206,318 ============================== F-24 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 4. OTHER ASSETS (CONTINUED) A rollforward of CIP for the year ended December 31, 1999, was as follows: 1999 ------------ (In Thousands) Balance at January 1 $ 22,113 Acquisition of business - Accretion of interest at 5.02% 926 Amortization (4,025) --------- Balance at December 31 $ 19,014 ========= 5. FEDERAL INCOME TAXES 5.1 TAX LIABILITIES Income tax liabilities were as follows: DECEMBER 31 1999 1998 ----------------------------- (In Thousands) Current tax (receivable) payable $ 25,074 $ (21,035) Deferred tax liabilities, applicable to: Net income 405,889 320,632 Net unrealized investment gains (55,631) 377,718 ----------------------------- Total deferred tax liabilities 350,258 698,350 ----------------------------- Total current and deferred tax liabilities $375,332 $677,315 ============================= F-25 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. FEDERAL INCOME TAXES (CONTINUED) 5.1 TAX LIABILITIES (CONTINUED) Components of deferred tax liabilities and assets at December 31 were as follows: 1999 1998 -------------------------- (In Thousands) Deferred tax liabilities applicable to: Deferred policy acquisition costs $ 601,678 $ 307,025 Basis differential of investments - 590,661 Other 171,763 150,189 --------------------------- Total deferred tax liabilities 773,441 1,047,875 Deferred tax assets applicable to: Policy reserves (215,465) (212,459) Basis differential of investments (158,421) - Other (141,236) (137,066) -------------------------- Total deferred tax assets before valuation allowance (515,122) (349,525) Valuation allowance 91,939 - -------------------------- Total deferred tax assets, net of valuation allowance (423,183) (349,525) -------------------------- Net deferred tax liabilities $ 350,258 $ 698,350 ========================== A portion of life insurance income earned prior to 1984 is not taxable unless it exceeds certain statutory limitations, is distributed as dividends, or unless the income tax deferred status of such amount is modified by future tax legislation. Such income, accumulated in policyholders' surplus accounts, totaled $88.2 million at December 31, 1999. At current corporate rates, the maximum amount of tax on such income is approximately $30.9 million. Deferred income taxes on these accumulations are not required because no distributions are expected. F-26 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. FEDERAL INCOME TAXES (CONTINUED) 5.1 TAX LIABILITIES (CONTINUED) Components of income tax expense for the years were as follows: 1999 1998 1997 ------------------------------------- (In Thousands) Current expense $176,725 $134,344 $185,460 Deferred expense (benefit): Deferred policy acquisition cost 65,377 33,230 27,644 Policy reserves (22,654) 2,189 (27,496) Basis differential of investments (4,729) 11,969 3,769 Litigation settlement 22,641 (33,983) - Year 2000 - (9,653) - Internally developed software 18,654 - - Other, net 7,182 15,623 9,347 ------------------------------------- Total deferred expense 86,471 19,375 13,264 ------------------------------------- Income tax expense $263,196 $153,719 $198,724 ===================================== 5.2 TAX EXPENSE A reconciliation between the income tax expense computed by applying the federal income tax rate (35%) to income before taxes and the income tax expense reported in the financial statement is presented below. 1999 1998 1997 ------------------------------------- (In Thousands) Income tax at statutory percentage of GAAP pretax income $266,386 $164,638 $200,649 Tax-exempt investment income (16,423) (11,278) (9,493) Goodwill 853 712 723 Other 12,380 (353) 6,845 ------------------------------------- Income tax expense $263,196 $153,719 $198,724 ===================================== F-27 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. FEDERAL INCOME TAXES (CONTINUED) 5.3 TAXES PAID Income taxes paid amounted to approximately $126 million, $159 million, and $168 million in 1999, 1998, and 1997, respectively. 5.4 TAX RETURN EXAMINATIONS The Parent Company and the majority of its subsidiaries file a consolidated federal income tax return. The Internal Revenue Service ("IRS") has completed examinations of the Parent Company's tax returns through 1992. The IRS is currently examining tax returns for 1993 through 1996. In addition, the tax returns of companies recently acquired are also being examined. Although the final outcome of any issues raised in examination is uncertain, the Parent Company believes that the ultimate liability, including interest, will not materially exceed amounts recorded in the consolidated financial statements. 6. TRANSACTIONS WITH AFFILIATES Affiliated notes and accounts receivable were as follows:
DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------------------------------------------------ PAR VALUE BOOK VALUE PAR VALUE BOOK VALUE ------------------------------------------------------------ (In Thousands) American General Corporation, 9 3/8%, $ 4,725 $ 3,410 $ 4,725 $ 3,345 due 2008 American General Corporation, Promissory notes, due 2004 12,232 12,232 14,679 14,679 American General Corporation, Restricted Subordinated Note, 13 1/2%, due 2002 27,378 27,378 29,435 29,435 ------------------------------------------------------------ Total notes receivable from affiliates 44,335 43,020 48,839 47,459 Accounts receivable from affiliates - 32,175 - 113,637 ------------------------------------------------------------ Indebtedness from $44,335 $75,195 $48,839 $161,096 affiliates ============================================================
F-28 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. TRANSACTIONS WITH AFFILIATES (CONTINUED) Various American General companies provide services to the Company, principally mortgage servicing and investment management services, provided by American General Investment Management Corporation on a fee basis. The Company paid approximately $55,318,000, $46,921,000, and $33,916,000 for such services in 1999, 1998, and 1997, respectively. Accounts payable for such services at December 31, 1999 and 1998 were not material. The Company rents facilities and provides services on an allocated cost basis to various American General companies. Beginning in 1998, amounts received by the Company from affiliates include amounts received by its wholly-owned, non-life insurance subsidiary, American General Life Companies ("AGLC"). AGLC provides shared services, including technology, to a number of American General Corporation's life insurance subsidiaries. The Company received approximately $138,885,000, $66,550,000, and $6,455,000 for such services and rent in 1999, 1998, and 1997, respectively. Accounts receivable for rent and services at December 31, 1999 and 1998 were not material. The Company has 8,500 shares of $100 par value cumulative preferred stock authorized and outstanding with an $80 dividend rate, redeemable at $1,000 per share after December 31, 2000. The holder of this stock, The Franklin Life Insurance Company ("Franklin"), an affiliated company, is entitled to one vote per share, voting together with the holders of common stock. 7. STOCK-BASED COMPENSATION Certain officers of the Company participate in American General Corporation's stock and incentive plans which provide for the award of stock options, restricted stock awards, performance awards, and incentive awards to key employees. Stock options constitute the majority of such awards. American General Corporation follows the intrinsic value method of accounting for stock options as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Therefore, the expense related to stock options is measured as the excess of the market price of the stock at the measurement date over the exercise price. The measurement date is the first date on which both the number of shares that the employee is entitled to receive and the exercise price are known. Under the stock option plans, no expense is recognized, since the market price equals the exercise price at the measurement date. F-29 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 7. STOCK-BASED COMPENSATION (CONTINUED) Under an alternative accounting method of accounting under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, compensation expense arising from stock options would be measured at the estimated fair value of the options at the date of grant. Had compensation expense for the stock options been determined using this method, net income would have been as follows:
1999 1998 1997 --------------------------------------------- (In Thousands) Net income as reported $497,906 $316,674 $374,557 Net income pro forma $495,331 $315,078 $373,328
The average fair values of the options granted during 1999, 1998, and 1997 were $17.06, $15.38, and $10.33, respectively. The fair value of each option was estimated at the date of grant using a Black-Scholes option pricing model. The weighted average assumptions used to estimate the fair value of the stock options were as follows:
1999 1998 1997 ----------------------------------------------- Dividend yield 2.5% 2.5% 3.0% Expected volatility 24.4% 23.0% 22.0% Risk-free interest rate 4.95% 5.76% 6.4% Expected life 6 years 6 years 6 years
8. BENEFIT PLANS 8.1 PENSION PLANS The Company has non-contributory defined benefit pension plans covering most employees. Pension benefits are based on the participant's compensation and length of credited service. Equity and fixed maturity securities were 71% and 26%, respectively, of the plans' assets at the plans' most recent balance sheet dates. Additionally, 1% of plan assets were invested in general investment accounts of the Parent Company's subsidiaries through deposit administration insurance contracts. F-30 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. BENEFIT PLANS (CONTINUED) 8.1 PENSION PLANS (CONTINUED) The benefit plans have purchased annuity contracts from American General Corporation's subsidiaries to provide benefits for certain retirees. These contracts are expected to provide future annual benefits to certain retirees of American General Corporation and its subsidiaries of approximately $59 million. The components of pension expense and underlying assumptions were as follows:
1999 1998 1997 ----------------------------------------------- (In Thousands) Service cost $ 3,575 $ 3,693 $ 1,891 Interest cost 7,440 6,289 2,929 Expected return on plan assets (12,670) (9,322) (5,469) Amortization (820) (557) 195 Pension (income) expense $ (2,475) $ 103 $ (454) =============================================== Discount rate on benefit obligation 7.75% 7.00% 7.25% Rate of increase in compensation levels 4.25% 4.25% 4.00% Expected long-term rate of return on plan assets 10.35% 10.25% 10.00%
The Company's funding policy is to contribute annually no more than the maximum deductible for federal income tax purposes. The funded status of the plans and the prepaid pension expense included in other assets at December 31 were as follows:
1999 1998 ------------------------------- (In Thousands) Projected benefit obligation (PBO) $100,600 $ 96,554 Plan assets at fair value 145,863 120,898 ------------------------------- Plan assets at fair value in excess of PBO 45,263 24,344 Other unrecognized items, net (26,076) (10,176) ------------------------------- Prepaid pension expense $ 19,187 $ 14,168 ===============================
F-31 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. BENEFIT PLANS (CONTINUED) 8.1 PENSION PLANS (CONTINUED) The change in PBO was as follows:
1999 1998 ------------------------------- (In Thousands) PBO at January 1 $ 96,554 $43,393 Service and interest costs 11,015 9,982 Benefits paid (4,919) (1,954) Actuarial loss (12,036) 17,089 Amendments, transfers, and acquisitions 9,986 28,044 ------------------------------- PBO at December 31 $100,600 $96,554 ===============================
The change in the fair value of plan assets was as follows:
1999 1998 ------------------------------- (In Thousands) Fair value of plan assets at January 1 $120,898 $ 80,102 Actual return on plan assets 17,934 12,269 Benefits paid (4,919) (1,954) Acquisitions and other 11,950 30,481 ------------------------------- Fair value of plan assets at December 31 $145,863 $120,898 ===============================
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has life, medical, supplemental major medical, and dental plans for certain retired employees and agents. Most plans are contributory, with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. The Company has reserved the right to change or eliminate these benefits at any time. F-32 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 8. BENEFIT PLANS (CONTINUED) 8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) The life plans are insured through December 31, 1999. A portion of the retiree medical and dental plans is funded through a voluntary employees' beneficiary association ("VEBA"); the remainder is unfunded and self-insured. All of the retiree medical and dental plans' assets held in the VEBA were invested in readily marketable securities at its most recent balance sheet date. Postretirement benefit expense in 1999, 1998, and 1997 was $254,000, $60,000, and $601,000, respectively. The accrued liability for postretirement benefits was $18.8 million and $19.2 million at December 31, 1999 and 1998, respectively. These liabilities were discounted at the same rates used for the pension plans. 9. DERIVATIVE FINANCIAL INSTRUMENTS 9.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS The Company's use of derivative financial instruments is generally limited to reducing its exposure to interest rate and currency exchange risk by utilizing interest rate and currency swap agreements, and options to enter into interest rate swap agreements (called swaptions). The Company accounts for these derivative and financial instruments as hedges. Hedge accounting requires a high correlation between changes in fair values or cash flows of the derivative financial instrument and the specific item being hedged, both at inception and throughout the life of the hedge. 9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS Interest rate swap agreements are used to convert specific investment securities from a floating to a fixed rate basis, or vice versa, and to hedge against the risk of declining interest rates on anticipated security purchases. Interest rate swap agreements are also used to convert a portion of floating -rate borrowings to a fixed rate and to hedge against the risk of rising interest rates on anticipated debt issuances. Currency swap agreements are used to convert cash flows from specific investment securities denominated in foreign currencies into U.S. dollars at specific exchange rates and to hedge against currency rate fluctuation on anticipated security purchases. F-33 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED) The difference between amounts paid and received on swap agreements is recorded on an accrual basis as an adjustment to net investment income or interest expense, as appropriate, over the periods covered by the agreements. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair values of swap agreements are recognized in the consolidated balance sheets if the hedge investments are carried at fair value or if they hedge anticipated purchases of such investments. In this event, changes in the fair value of a swap agreement are reported in net unrealized gains on securities included in other accumulated comprehensive income in shareholders' equity, consistent with the treatment of the related investment security. The fair values of swap agreements hedging debt are not recognized in the consolidated balance sheet. For swap agreements hedging anticipated investment purchases or debt issuances, the net swap settlement amount or unrealized gain or loss is deferred and included in the measurement of the anticipated transaction when it occurs. Swap agreements generally have terms of two to ten years. Any gain or loss from early termination of a swap agreement is deferred and amortized into income over the remaining term of the related investment or debt. If the underlying investment or debt is extinguished or sold, any related gain or loss on swap agreements is recognized in income. F-34 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED) Interest rate and currency swap agreements related to investment securities at December 31 were as follows:
1999 1998 ------------------------------- (Dollars in Millions) Interest rate swap agreements to receive fixed rate: Notional amount $ 160 $ 369 Average receive rate 6.73% 6.06% Average pay rate 6.55% 5.48% Currency swap agreements (receive U.S. dollars/pay Canadian dollars): Notional amount (in U.S. dollars) $ 124 $ 124 Average exchange rate 1.50 1.50 Currency swap agreements (receive U.S. dollars/pay Australian dollars): Notional amount (in U.S. dollars) $ 23 $ - Average exchange rate 0.65 -
9.3 CALL SWAPTIONS Options to enter into interest rate swap agreements are used to limit the Company's exposure to reduced spreads between investment yields and interest crediting rates should interest rates decline significantly over prolonged periods. During such periods, the spread between investment yields and interest crediting rates may be reduced as a result of certain limitations on the Company's ability to manage interest crediting rates. Call swaptions allow the Company to enter into interest rate swap agreements to receive fixed rates and pay lower floating rates, effectively increasing the spread between investment yields and interest crediting rates. F-35 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 9.3 CALL SWAPTIONS (CONTINUED) Premiums paid to purchase call swaptions are included in investments and are amortized to net investment income over the exercise period of the swaptions. If a call swaption is terminated, any gain is deferred and amortized to insurance and annuity benefits over the expected life of the insurance and annuity contracts and any unamortized premium is charged to income. If a call swaption ceases to be an effective hedge, any related gain or loss is recognized in income. Swaptions at December 31 were as follows:
1999 1998 ------------------------------- (Dollars in Billions) Call swaptions: Notional amount $3.78 $1.76 Average strike rate 4.52% 3.97% Put swaptions: Notional amount $2.14 $1.05 Average strike rate 8.60% 8.33%
9.4 CREDIT AND MARKET RISK Derivative financial instruments expose the Company to credit risk in the event of non-performance by counterparties. The Company limits this exposure by entering into agreements with counterparties having high credit ratings and by regularly monitoring the ratings. The Company does not expect any counterparty to fail to meet its obligation; however, non-performance would not have a material impact on the Company's consolidated results of operations or financial position. The Company's exposure to market risk is mitigated by the offsetting effects of changes in the value of the agreements and the related items being hedged. F-36 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts and fair values for certain of the Company's financial instruments at December 31 are presented below. Care should be exercised in drawing conclusions based on fair value, since (1) the fair values presented do not include the value associated with all the Company's assets and liabilities, and (2) the reporting of investments at fair value without a corresponding evaluation of related policyholders liabilities can be misinterpreted. The following methods and assumptions were used to estimate the fair value of financial instruments: FIXED MATURITY AND EQUITY SECURITIES Fair values of fixed maturity and equity securities were based on quoted market prices, where available. For investments not actively traded, fair values were estimated using values obtained from independent pricing services or, in the case of some private placements, by discounting expected future cash flows using a current market rate applicable to yield, credit quality, and average life of investments. MORTGAGE LOANS ON REAL ESTATE Fair value of mortgage loans was estimated primarily using discounted cash flows, based on contractual maturities and risk-adjusted discount rates. POLICY LOANS Fair value of policy loans was estimated using discounted cash flows and actuarially determined assumptions, incorporating market rates. INVESTMENT IN PARENT COMPANY The fair value of the investment in Parent Company is based on quoted market prices of American General Corporation common stock. INSURANCE INVESTMENT CONTRACTS Fair value of insurance investment contracts was estimated using cash flows discounted at market interest rates. F-37 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) INDEBTEDNESS FROM AFFILIATES Indebtedness from affiliates is composed of accounts receivable and notes receivable from affiliates. Due to the short-term nature of accounts receivable, fair value is assumed to equal carrying value. Fair value of notes receivable was estimated using discounted cash flows based on contractual maturities and discount rates that were based on U.S. Treasury rates for similar maturity ranges. 11. DIVIDENDS PAID American General Life Insurance Company paid $187 million, $244 million, and $401 million, in dividends on common stock to AGC Life Insurance Company in 1999, 1998, and 1997, respectively. The Company also paid $680 thousand per year in dividends on preferred stock to an affiliate, The Franklin Life Insurance Company, in 1999, 1998, and 1997. 12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES The Company and its insurance subsidiaries are restricted by state insurance laws as to the amounts they may pay as dividends without prior approval from their respective state insurance departments. At December 31, 1999, approximately $2.6 billion of consolidated shareholder's equity represents net assets of the Company, which cannot be transferred, in the form of dividends, loans, or advances to the Parent Company. Approximately $1.9 billion of consolidated shareholders' equity is similarly restricted as to transfer from its subsidiaries to the Company. Generally, the net assets of the Company's subsidiaries available for transfer to the Parent are limited to the amounts that the subsidiaries' net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements. However, payments of such amounts as dividends may be subject to approval by regulatory authorities and are generally limited to the greater of 10% of policyholders' surplus or the previous year's statutory net gain from operations. The Company has various leases, substantially all of which are for office space and facilities. Rentals under financing leases, contingent rentals, and future minimum rental commitments and rental expense under operating leases are not material. F-38 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED) In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. On December 16, 1998, American General Corporation announced that certain of its life insurance subsidiaries had entered into agreements to resolve all pending market conduct class action lawsuits. In conjunction with the proposed settlements, the Company recorded a charge of $97.1 million ($63.1 million after-tax) in the fourth quarter of 1998. The charge covers the cost of policyholder benefits and other anticipated expenses resulting from the proposed settlements, as well as other administrative and legal costs. On December 31, 1998, the Company entered into an agreement with the Parent Company whereby the Company assigned, and the Parent Company assumed, $80.1 million of the liabilities of the Company related to the proposed resolution. The liabilities of American General Life Insurance Company of New York, which totaled $17.0 million, were not assumed by the Parent Company. As consideration for the assumption of the liabilities, the Company paid the Parent Company an amount equal to the liabilities recorded with respect to the proposed resolution of the litigation. The litigation liabilities were reduced by payments of $2.7 million, and the remaining balance of $94.4 million was included in other liabilities on the Company's balance sheet at December 31, 1998. All settlements were finalized in 1999. The Company is party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings, including those filed by individuals who have excluded themselves from the market conduct settlement, and lawsuits relating to policies not covered by the market conduct settlements, arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, the Company believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the Company's consolidated results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in jurisdictions like Alabama and Mississippi continues to create the potential for an unpredictable judgment in any given suit. F-39 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED) The increase in the number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in increased assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. At December 31, 1999 and 1998, the Company has accrued $8.6 million and $6.0 million, respectively, for guaranty fund assessments, net of $3.4 million and $3.7 million, respectively, of premium tax deductions. The Company has recorded receivables of $4.4 million and $6.2 million at December 31, 1999 and 1998, respectively, for expected recoveries against the payment of future premium taxes. Expenses incurred for guaranty fund assessments were $2.1 million, $3.6 million, and $2.1 million in 1999, 1998, and 1997, respectively. F-40 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 13. REINSURANCE Reinsurance transactions for the years ended December 31, 1999, 1998, and 1997 were as follows:
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER ASSUMED TO AMOUNT COMPANIES COMPANIES NET AMOUNT NET --------------------------------------------------------------------------- (In Thousands) DECEMBER 31, 1999 Life insurance in force $50,060,334 $17,056,734 $524,062 $33,527,662 1.56% ============================================================== Premiums: Life insurance and annuities $ 101,900 $ 49,530 $ 252 $ 52,622 0.48% Accident and health insurance 977 84 - 893 0.00% -------------------------------------------------------------- Total premiums $ 102,877 $ 49,614 $ 252 $ 53,515 0.47% =============================================================== DECEMBER 31, 1998 Life insurance in force $46,057,031 $13,288,183 $629,791 $33,398,639 1.89% ============================================================= Premiums: Life insurance and annuities $ 90,298 $ 42,235 $ 117 $ 48,180 0.24% Accident and health insurance 1,134 87 - 1,047 0.00% ------------------------------------------------------------ Total premiums $ 91,432 $ 42,322 $ 117 $ 49,227 0.24% ============================================================ DECEMBER 31, 1997 Life insurance in force $45,963,710 $10,926,255 $ 4,997 $35,042,452 0.01% ============================================================ Premiums: Life insurance and annuities $ 100,357 $ 37,294 $ 75 $ 63,138 0.12% Accident and health insurance 1,208 172 - 1,036 0.00% ------------------------------------------------------------ Total premiums $ 101,565 $ 37,466 $ 75 $ 64,174 0.12% ============================================================
Reinsurance recoverable on paid losses was approximately $8.0 million, $7.7 million, and $2.3 million at December 31, 1999, 1998, and 1997, respectively. Reinsurance recoverable on unpaid losses was approximately $10.5 million, $2.5 million, and $3.2 million at December 31, 1999, 1998, and 1997, respectively. F-41 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 14. YEAR 2000 CONTINGENCY (UNAUDITED) Currently, all of our major technology systems, programs, and applications, including those which rely on third parties, are operating smoothly following our transition into 2000. We have experienced no interruptions to normal business operations, including the processing of customer account data and transactions. We will continue to monitor our technology systems, including critical third-party dependencies, as necessary to maintain our Year 2000 readiness. We do not expect any future disruptions, if they occur, to have a material effect on the Company's results of operations, liquidity, or financial condition. 15. DIVISION OPERATIONS 15.1 NATURE OF OPERATIONS The Company manages its business operation through two divisions, which are based on products and services offered. RETIREMENT SERVICES The Retirement Services Division provides tax-deferred retirement annuities and employer-sponsored retirement plans to employees of educational, health care, public sector, and other not-for-profit organizations marketed nationwide through exclusive sales representatives. LIFE INSURANCE The Life Insurance division provides traditional, interest-sensitive, and variable life insurance and annuities to a broad spectrum of customers through multiple distribution channels focused on specific market segments. F-42 American General Life Insurance Company Notes to Consolidate Financial Statements (continued) 15. DIVISION OPERATIONS 15.2 DIVISION RESULTS Results of each division exclude goodwill amortization, net realized investment gains, and non-recurring items. Division earnings information was as follows:
REVENUES INCOME BEFORE TAXES EARNINGS ---------------------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 ---------------------------------------------------------------------------------------- In Millions Retirement Services $2,088 $1,987 $1,859 $ 567 $ 469 $ 398 $ 374 $ 315 $ 261 Life Insurance 883 870 822 191 162 147 123 107 97 --------------------------------------------------------------------------------------- Total divisions 2,971 2,857 2,681 758 631 545 497 422 358 Goodwill amortization - - - (2) (2) (2) (2) (2) (2) RG (L) 5 (34) 30 5 (34) 30 3 (22) 19 Nonrecurring items - - - - (125)(a) - - (81)(a) - ---------------------------------------------------------------------------------------- Total consolidated $2,976 $2,823 $2,711 $ 761 $ 470 $ 573 $ 498 $ 317 $ 375 =======================================================================================
(a) Includes $97 million pretax ($63 million after-tax) in litigation settlements and $28 million pretax ($18 million after-tax) in Year 2000 costs. Division balance sheet information was as follows:
ASSETS LIABILITIES -------------------------------------------------------- December 31 -------------------------------------------------------- In millions 1999 1998 1999 1998 -------------------------------------------------------- Retirement Services $47,323 $41,347 $45,359 $38,841 Life Insurance 9,837 8,894 8,955 7,831 -------------------------------------------------------- Total consolidated $57,160 $50,241 $54,314 $46,672 ========================================================
F-43 INDEX OF WORDS AND PHRASES This index should help you to locate more information about some of the terms and phrases used in this prospectus.
Page to See in this Defined Term Prospectus - ------------ ----------- accumulation value.......................................................... 5 AGLC........................................................................ 48 AGL......................................................................... 1 amount at risk.............................................................. 8 automatic rebalancing....................................................... 5 basis....................................................................... 29 beneficiary................................................................. 34 cash surrender value........................................................ 14 close of business........................................................... 36 Code........................................................................ 28 cost of insurance rates..................................................... 8 daily charge................................................................ 7 date of issue............................................................... 37 death benefit............................................................... 6 dollar cost averaging....................................................... 5 full surrender.............................................................. 14 Fund........................................................................ 2 investment option........................................................... 1 lapse....................................................................... 12 The One VUL Solution........................................................ 1 loan, loan interest......................................................... 15 maturity, maturity date..................................................... 16 modified endowment contract................................................. 28 monthly deduction day....................................................... 37 monthly insurance charge.................................................... 8 Mutual Fund................................................................. 2 option 1, 2................................................................. 6 partial surrender........................................................... 14 payment option.............................................................. 16
50
Page to See in this Defined Term Prospectus - ------------ ---------- planned periodic premium......................................... 12 Policy........................................................... 1 Policy loan...................................................... 15 Policy month, year............................................... 37 preferred loan interest.......................................... 15 premium payments................................................. 4 premiums......................................................... 4 prospectus....................................................... 1 reinstate, reinsurance........................................... 12 SEC.............................................................. 2 Separate Account................................................. 1 Separate Account VL-R............................................ 27 seven-pay test................................................... 28 specified amount................................................. 6 surrender........................................................ 14 telephone transactions........................................... 19 transfers........................................................ 12 valuation date, period........................................... 36
We have filed a registration statement relating to Separate Account VL-R and the Policy with the SEC. The registration statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus. If you would like the additional information, you may obtain it from the SEC's Website at http://www.sec.gov or main office in Washington, D.C. You will have to pay a fee for the material. You should rely only on the information contained in this prospectus or sales materials we have approved. We have not authorized anyone to provide you with information that is different. The policies are not available in all states. This prospectus is not an offer in any state to any person if the offer would be unlawful. 51 American General Life Insurance Company Member American General Financial Group 2727-A Allen Parkway, Houston, TX 77019 IMSA LOGO INSURANCE The One VUL Solution MARKETPLACE STANDARDS Policy form number: 99615 ASSOCIATION Issued by American General Life Insurance Company Membership in IMSA applies to American General Life, not its product Distributed by American General Securities Incorporated Member NASD and SIPC Member Amercian General Financial Group American General Financial Group is the marketing name for American General Corporation and its subsidiaries. The products of the life insurance company identified above are separately underwritten and independently supported by the life insurance company. American General Corporation has no responsibility for the financial condition or contractual obligations of this life insurance company. life PART II (OTHER INFORMATION) UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore, or hereafter duly adopted pursuant to authority conferred in that section. RULE 484 UNDERTAKING American General Life Insurance Company's Bylaws provide in Article VII, Section 1 for indemnification of directors, officers and employees of the Company. Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant 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. REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940 American General Life Insurance Company hereby represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and risks assumed by American General Life Insurance Company. II-1 CONTENTS OF REGISTRATION STATEMENT This Registration Statement contains the following papers and documents: The facing sheet. Cross-Reference Table. Prospectus, consisting of 51 pages of text, plus 43 financial pages of American General Life Insurance Company. The undertaking to file reports. The Rule 484 undertaking. Representation pursuant to Section 26(e)(2)(A). The signatures. Written Consents of the following persons: (a) Pauletta P. Cohn, Deputy General Counsel of American General Life Companies (b) American General Life Insurance Company's actuary (c) Independent Auditors Independent Auditors The following exhibits: 1. Exhibits required by Article IX, paragraph A of Form N-8B-2: (1)(a) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of Separate Account VL-R. (1) (1)(b) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of variable life insurance standards of suitability and conduct. (1) (2) Not applicable. (3)(a) Amended and Restated Distribution Agreement between American General Securities Incorporated and American General Life Insurance Company effective October 15, 1998. (4) (3)(b) Form of Selling Group Agreement. (13) (3)(c) Schedule of Commissions (incorporated by reference from the text included under the heading "Distribution of the Policies" in the prospectus that is filed as part of this amended Registration Statement). (4) Not applicable. II-2 (5) Specimen form of the "One VUL Solution" Variable Universal Life Insurance Policy (Policy Form No. 99615). (11) (6)(a) Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective December 31, 1991.(2) (6)(b) Bylaws of American General Life Insurance Company, adopted January 22, 1992. (3) (6)(c) Amendment to the Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective July 13, 1995. (5) (7) Not applicable. (8)(a)(i) Form of Participation Agreement by and Among AIM Variable Insurance Funds, Inc., AIM Distributors, Inc., American General Life Insurance Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated. (6) (8)(a)(ii) Form of Amendment Three to Participation Agreement by and among AIM Variable Insurance Funds, Inc., AIM Distributors, Inc., American General Life Insurance Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated dated as of February 1, 2000. (13) (8)(b)(i) Form of Participation Agreement by and between The Variable Annuity Life Insurance Company, American General Series Portfolio Company, American General Securities Incorporated and American General Life Insurance Company. (10) (8)(b)(ii) Amendment One to Participation Agreement by and between The Variable Annuity Life Insurance Company, American General Series Portfolio, American General Securities Incorporated and American General Life Insurance Company dated as of July 21, 1998. (8) (8)(c)(i) Form of Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (6) (8)(c)(ii) Form of Amendment Three to Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company dated as of February 1, 2000. (13) (8)(d)(i) Form of Participation Agreement Among Putnam Variable Trust, Putnam Mutual Funds Corp., and American General Life Insurance Company. (6) II-3 (8)(d)(ii) Form of Amendment One to Participation Agreement among Putnam Variable Trust, Putnam Mutual Funds Corp., and American General Life Insurance Company. (13) (8)(e)(i) Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (9) (8)(e)(ii) Amendment One to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (8) (8)(e)(iii) Form of Amendment Five to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen Life Investment Trust, Van Kampen Asset Management Inc. and Van Kampen Funds Inc. (13) (8)(f) Form of Participation Agreement by and among American General Life Insurance Company, Kemper Variable Series, Scudder Kemper Investments, Inc. and Kemper Distributors, Inc. (13) (8)(g) Form of Participation Agreement by and among American General Life Insurance Company, Oppenheimer Variable Account Funds, and OppenheimerFunds, Inc. (13) (8)(h) Form of Fund Participation Agreement by and among American General Life Insurance Company, Banc One Investment Advisors Corporation, One Group Investment Trust, and One Group Administrative Services, Inc. dated February 1, 2000. (13) (8)(i) Form of Participation Agreement by and among American General Life Insurance Company, Franklin Templeton Variable Insurance Products Trust and Franklin Templeton Distributors, Inc. (14) (8)(j) Form of Administrative Services Agreement between American General Life Insurance Company and fund distributor. (5) (8)(k) Form of Administrative Services Agreement between American General Life Insurance Company and Van Kampen Asset Management Inc. dated January 1, 2000. (13) II-4 (8)(l) Form of Services Agreement dated July 31, 1975, (limited to introduction and first two recitals, and sections 1-3) among various affiliates of American General Corporation, including American General Life Insurance Company and American General Life Companies. (7) (8)(m) Administrative Services Agreement dated as of June 1, 1998, between American General Life Insurance Company and AIM Advisors, Inc. (4) (8)(n) Form of Administrative Services Agreement by and between American General Life Insurance Company and OppenheimerFunds, Inc. (13). (8)(o) Form of Administrative Services Agreement between American General Life Insurance Company and Scudder Kemper Investments. (13) (8)(p) Form of Administrative Services Agreement by and between American General Life Insurance Company and Franklin Templeton Services, Inc., dated as of July 1, 1999. (Filed herewith) (9) Not applicable. (10)(a) Single Insured Life Insurance Application - Part A. (12) (10)(b) Single Insured Life Insurance Application - Part B. (12) (10)(c) Medical Exam Form Life Insurance Application. (12) (10)(d) Single Insured Simplified Life Insurance Application. (13) (10)(e) Variable Universal Life Insurance Supplemental Application. (13) (10)(f) Service Request Form. (13) Other Exhibits 2(a) Opinion and Consent of Pauletta P. Cohn, Deputy General Counsel of American General Life Companies. (13) 2(b) Opinion and Consent of American General Life Insurance Company's actuary. (13) 3 Not applicable. 4 Not applicable. 5 Financial Data Schedule. (Not applicable) II-5 6 Consent of Independent Auditors. (Filed herewith) 7 Powers of Attorney. (Filed on Signature Pages) 27 Financial Data Schedule. (Inapplicable, because no financial statements of the Separate Account are being filed herewith) /1/ Incorporated by reference to initial filing of Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R filed on December 18, 1997. /2/ Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 33-43390) of American General Life Insurance Company Separate Account D filed on October 16, 1991. /3/ Incorporated by reference to Post-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 33-43390) of American General Life Insurance Company Separate Account D filed on April 30, 1992. /4/ Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D filed on January 15, 1999. /5/ Incorporated by reference to Pre-Effective Amendment No. 3 to Form S-6 Registration Statement (File No. 333-53909) of American General Life Insurance Company Separate Account VL-R filed on August 19, 1998. /6/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R filed on March 23, 1998. /7/ Incorporated by reference to Pre-Effective Amendment No. 23 to Form N-4 Registration Statement (File No. 33-44745) of American General Life Insurance Company Separate Account A filed on April 24, 1998. /8/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D filed on March 18, 1999. /9/ Incorporated by reference to Post-Effective Amendment No. 12 to Registrant's Form N-4 Registration Statement (File No. 33-43390) filed on April 30, 1997. /10/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 333-40637) of American General Life Insurance Company Separate Account D filed on February 12, 1998. /11/ Incorporated by reference to initial filing of Form S-6 Registration Statement (File No. 333-87307) of American General Life Insurance Company Separate Account VL-R filed on September 17, 1999. II-6 /12/ Incorporated by reference to initial filing of Form S-6 Registration Statement (File No. 333-89897) of American General Life Insurance Company Separate Account VL-R filed on October 29, 1999. /13/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6 Registration Statement (File No. 333-87307) of American General Life Insurance Company Separate Account VL-R filed on January 20, 2000. /14/ Incorporated by reference to Post-Effective Amendment No. 1 to Form S-6 Registration Statement (File No. 333-89897) of American General Life Insurance Company Separate Account VL-R filed on April 26, 2000. II-7 POWERS OF ATTORNEY Each person whose signature appears below hereby appoints Thomas M. Zurek, Robert F. Herbert, Jr. and Pauletta P. Cohn and each of them, any one of whom may act without the joinder of the others, as his/her attorney-in-fact to sign on his/her behalf and in the capacity stated below and to file all amendments to this Registration Statement, which amendment or amendments may make such changes and additions to this Registration Statement as such attorney-in-fact may deem necessary or appropriate. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, American General Life Insurance Company Separate Account VL-R, certifies that it meets all of the requirements for effectiveness of this amended registration statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this amended registration statement to be signed on its behalf by the undersigned thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Houston, and State of Texas, on the 9th day of October, 2000. AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R (Registrant) BY: AMERICAN GENERAL LIFE INSURANCE COMPANY (On behalf of the Registrant and itself) BY: /s/ ROBERT F. HERBERT, JR. ------------------------------------ Robert F. Herbert, Jr. Senior Vice President, Treasurer and Controller [SEAL] ATTEST: /s/ LAUREN W. JONES --------------------------- Lauren W. Jones Assistant Secretary Pursuant to the requirements of the Securities Act of 1933, this amended Registration Statement has been signed by the following officers and directors of American General Life Insurance Company in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ RODNEY O. MARTIN, JR. Director, Chairman and October 9, 2000 - ---------------------------- Chief Executive Officer Rodney O. Martin, Jr. /s/ DONALD W. BRITTON Director and President October 9, 2000 - ---------------------------- Donald W. Britton /s/ DAVID L. HERZOG Director, Executive Vice October 9, 2000 - ---------------------------- President and Chief Financial David L. Herzog Officer /s/ DAVID A. FRAVEL Director October 9, 2000 - ---------------------------- David A. Fravel /s/ ROYCE G. IMHOFF, II Director October 9, 2000 - ---------------------------- Royce G. Imhoff, II /s/ JOHN V. LAGRASSE Director October 9, 2000 - ---------------------------- John V. LaGrasse /s/ THOMAS M. ZUREK Director October 9, 2000 - ---------------------------- Thomas M. Zurek EXHIBIT INDEX: The following exhibits: 1. Exhibits required by Article IX, paragraph A of Form N-8B-2: (1)(a) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of Separate Account VL-R. (1) (1)(b) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of variable life insurance standards of suitability and conduct. (1) (2) Not applicable. (3)(a) Amended and Restated Distribution Agreement between American General Securities Incorporated and American General Life Insurance Company effective October 15, 1998. (4) (3)(b) Form of Selling Group Agreement. (13) (3)(c) Schedule of Commissions (incorporated by reference from the text included under the heading "Distribution of the Policies" in the prospectus that is filed as part of this amended Registration Statement). (4) Not applicable. (5) Specimen form of the "One VUL Solution" Variable Universal Life Insurance Policy (Policy Form No. 99615). (11) (6)(a) Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective December 31, 1991.(2) (6)(b) Bylaws of American General Life Insurance Company, adopted January 22, 1992. (3) (6)(c) Amendment to the Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective July 13, 1995. (5) (7) Not applicable. (8)(a)(i) Form of Participation Agreement by and Among AIM Variable Insurance Funds, Inc., AIM Distributors, Inc., American General Life Insurance E-1 Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated. (6) (8)(a)(ii) Form of Amendment Three to Participation Agreement by and among AIM Variable Insurance Funds, Inc., AIM Distributors, Inc., American General Life Insurance Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated dated as of February 1, 2000. (13) (8)(b)(i) Form of Participation Agreement by and between The Variable Annuity Life Insurance Company, American General Series Portfolio Company, American General Securities Incorporated and American General Life Insurance Company. (10) (8)(b)(ii) Amendment One to Participation Agreement by and between The Variable Annuity Life Insurance Company, American General Series Portfolio, American General Securities Incorporated and American General Life Insurance Company dated as of July 21, 1998. (8) (8)(c)(i) Form of Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (6) (8)(c)(ii) Form of Amendment Three to Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company dated as of February 1, 2000. (13) (8)(d)(i) Form of Participation Agreement Among Putnam Variable Trust, Putnam Mutual Funds Corp., and American General Life Insurance Company. (6) (8)(d)(ii) Form of Amendment One to Participation Agreement among Putnam Variable Trust, Putnam Mutual Funds Corp., and American General Life Insurance Company. (13) (8)(e)(i) Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (9) (8)(e)(ii) Amendment One to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment E-2 Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (8) (8)(e)(iii) Form of Amendment Five to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen Life Investment Trust, Van Kampen Asset Management Inc. and Van Kampen Funds Inc. (13) (8)(f) Form of Participation Agreement by and among American General Life Insurance Company, Kemper Variable Series, Scudder Kemper Investments, Inc. and Kemper Distributors, Inc. (13) (8)(g) Form of Participation Agreement by and among American General Life Insurance Company, Oppenheimer Variable Account Funds, and OppenheimerFunds, Inc. (13) (8)(h) Form of Fund Participation Agreement by and among American General Life Insurance Company, Banc One Investment Advisors Corporation, One Group Investment Trust, and One Group Administrative Services, Inc. dated February 1, 2000. (13) (8)(i) Form of Participation Agreement by and among American General Life Insurance Company, Franklin Templeton Variable Insurance Products Trust and Franklin Templeton Distributors, Inc. (14) (8)(j) Form of Administrative Services Agreement between American General Life Insurance Company and fund distributor. (5) (8)(k) Form of Administrative Services Agreement between American General Life Insurance Company and Van Kampen Asset Management Inc. dated January 1, 2000. (13) (8)(l) Form of Services Agreement dated July 31, 1975, (limited to introduction and first two recitals, and sections 1-3) among various affiliates of American General Corporation, including American General Life Insurance Company and American General Life Companies. (7) (8)(m) Administrative Services Agreement dated as of June 1, 1998, between American General Life Insurance Company and AIM Advisors, Inc. (4) (8)(n) Form of Administrative Services Agreement by and between American General Life Insurance Company and OppenheimerFunds, Inc. (13). E-3 (8)(o) Form of Administrative Services Agreement between American General Life Insurance Company and Scudder Kemper Investments. (13) (8)(p) Form of Administrative Services Agreement by and between American General Life Insurance Company and Franklin Templeton Services, Inc., dated as of July 1, 1999. (Filed herewith) (9) Not applicable. (10)(a) Single Insured Life Insurance Application - Part A. (12) (10)(b) Single Insured Life Insurance Application - Part B. (12) (10)(c) Medical Exam Form Life Insurance Application. (12) (10)(d) Single Insured Simplified Life Insurance Application. (13) (10)(e) Variable Universal Life Insurance Supplemental Application. (13) (10)(f) Service Request Form. (13) Other Exhibits 2(a) Opinion and Consent of Pauletta P. Cohn, Deputy General Counsel of American General Life Companies. (13) 2(b) Opinion and Consent of American General Life Insurance Company's actuary. (13) 3 Not applicable. 4 Not applicable. 5 Financial Data Schedule. (Not applicable) 6 Consent of Independent Auditors. (Filed herewith) 7 Powers of Attorney. (Filed on Signature Pages) 27 Financial Data Schedule. (Inapplicable, because no financial statements of the Separate Account are being filed herewith) E-4 /1/ Incorporated by reference to initial filing of Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R filed on December 18, 1997. /2/ Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 33-43390) of American General Life Insurance Company Separate Account D filed on October 16, 1991. /3/ Incorporated by reference to Post-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 33-43390) of American General Life Insurance Company Separate Account D filed on April 30, 1992. /4/ Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D filed on January 15, 1999. /5/ Incorporated by reference to Pre-Effective Amendment No. 3 to Form S-6 Registration Statement (File No. 333-53909) of American General Life Insurance Company Separate Account VL-R filed on August 19, 1998. /6/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R filed on March 23, 1998. /7/ Incorporated by reference to Pre-Effective Amendment No. 23 to Form N-4 Registration Statement (File No. 33-44745) of American General Life Insurance Company Separate Account A filed on April 24, 1998. /8/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D filed on March 18, 1999. /9/ Incorporated by reference to Post-Effective Amendment No. 12 to Registrant's Form N-4 Registration Statement (File No. 33-43390) filed on April 30, 1997. /10/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 333-40637) of American General Life Insurance Company Separate Account D filed on February 12, 1998. /11/ Incorporated by reference to initial filing of Form S-6 Registration Statement (File No. 333-87307) of American General Life Insurance Company Separate Account VL-R filed on September 17, 1999. /12/ Incorporated by reference to initial filing of Form S-6 Registration Statement (File No. 333-89897) of American General Life Insurance Company Separate Account VL-R filed on October 29, 1999. E-5 /13/ Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6 Registration Statement (File No. 333-87307) of American General Life Insurance Company Separate Account VL-R filed on January 20, 2000. /14/ Incorporated by reference to Post-Effective Amendment No. 1 to Form S-6 Registration Statement (File No. 333-89897) of American General Life Insurance Company Separate Account VL-R filed on April 26, 2000. E-6 EX-8.(P) 2 0002.txt FRANKLIN TEMPLETON AGREEMENT EXHIBIT (8)(p) ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT made as of July 1, 1999, by and between Franklin Templeton Services, Inc. (the "Fund Administrator"), and American General Life Insurance Company (the "Company"), concerning certain administrative services with respect to each series ("Fund" or "Funds") of Franklin Templeton Variable Insurance Products Trust (the "Trust"), which Funds are specified in the Participation Agreement, as may be amended from time to time, among the Company, the Trust, and Franklin Templeton Distributors, Inc. (the "Underwriter"), among others, dated May 17, 2000 (the "Participation Agreement"). 1. Administrative Services. Administrative services for the Company's Separate Accounts (the "Account" or "Accounts") which invest in the Funds pursuant to the Participation Agreement, and administrative services for purchasers of variable life and annuity contracts (the "Contracts") issued through the Accounts, are and shall be the responsibility of the Company. Administrative services with respect to the Funds in which the Accounts invest, and for purchasers of shares of the Funds, are and shall be the responsibility of the Fund Administrator or its affiliates. The Company has agreed to assist the Fund Administrator, as the Fund Administrator may request from time to time, with the provision of administrative services ("Administrative Services") to the Funds, on a sub- administration basis, as they may relate to the investment in the Funds by the Accounts. It is anticipated that the Administrative Services may include, but may not be limited to, the services listed on Schedule A. 2. Administrative Expense Payments. The Fund Administrator recognizes the Company, on behalf of the Accounts, as the shareholder of shares of the Funds purchased under the Participation Agreement on behalf of the Accounts. The Fund Administrator further recognizes that it will derive a substantial administrative convenience by virtue of having the Company be the shareholder of record of shares of the Funds purchased under the Participation Agreement, rather than multiple shareholders having record ownership of such shares. The Fund Administrator recognizes that the Company will provide administrative services necessary to facilitate investment in the Funds. In consideration of the Administrative Services provided by the Company and the administrative convenience resulting to the Fund Administrator described above, the Fund Administrator agrees to pay the Company a fee as set forth in Schedule B. 3. Computation of Administrative Expense Payments. As soon as practicable after the end of each quarter, the Company will send the Fund Administrator, at the address indicated in this Paragraph 3 and in the manner set forth below, a statement of the average daily net assets for the preceding quarter, of shares of the Fund as to which the fee stated in Schedule B is to be calculated. The Fund Administrator will calculate and pay the Company its fee within thirty (30) days after the end of the three-month periods ending in January, April, July and October. Such payment will be by wire transfer unless the amount thereof is less than $500. Wire transfers will be sent to the bank account and in the manner specified by the Company. Such wire transfer will be separate from wire transfers of redemption proceeds and distributions. Amounts less than $500 shall be paid by check or by another method acceptable to both parties. For purposes of this Paragraph 3, the average daily net asset value of the shares of a Fund will be based on the net assets reported by the Trust on behalf of each Fund to the Company. No adjustments will be made to such net assets to correct errors in the net asset value so reported for any day unless such error is corrected and the corrected net asset value per share is reported to the Company before 5:00 p.m. Eastern time on the first Business Day after the day to which the error relates. "Business Day" will mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the Securities and Exchange Commission. For purposes of this Paragraph 3, the address shall be Corporate Accounting, Franklin Resources, 777 Mariners Island Boulevard., San Mateo, California 94404; Attention: Mike Corcoran, Manager. 4. Confidentiality of Payment Rate. The Company acknowledges that the rate and amount of payments to be made to the Company under this Agreement are proprietary and confidential information of the Fund Administrator and its affiliates, and that disclosure of this information to third parties may cause damage to Fund Administrator or its affiliates. The Company agrees to take any and all reasonable actions to limit disclosure of this information to only those of its employees, officers, consultants and agents who need the information in order to perform their duties, and to notify such persons of the terms of this paragraph. In the event any other party seeks to compel disclosure of confidential information through judicial or administrative process, then the Company shall promptly give the Fund Administrator written notice of such demand and, if requested by the Fund Administrator, shall cooperate in the Fund Administrator's efforts to challenge or limit any such disclosure. Violation of the confidentiality provision shall be grounds for immediate termination of the Agreement by the Fund Administrator in its sole discretion. Nothing in this Agreement shall prevent the Company from disclosing the existence of this Agreement in the Contracts' prospectuses or elsewhere. 5. Nature of Payments. The parties to this Agreement recognize and agree that the Fund Administrator's payments to the Company relate to Administrative Services only and do not constitute payment in any manner for investment advisory services or for costs of distribution of Contracts or of shares of the Fund, and that these payments are not otherwise related to investment advisory or distribution services or expenses. The amount of the payments made by the Fund Administrator to the Company under this Agreement shall not be deemed to be conclusive with respect to actual administrative expenses incurred by the Company or savings of the Fund Administrator. 6. Term. This Agreement will remain in full force and effect from the date of this Agreement, for so long as any assets of the Funds are attributable to amounts invested by the Account under the Participation Agreement, unless terminated in accordance with Paragraph 8 of this Agreement. In accordance with the Participation Agreement, the fee under this Agreement will continue to be due and payable with respect to the shares attributable to Contracts existing and in effect on the date this Agreement is terminated pursuant to Paragraph 8, below. 7. Notice. Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may 2 from time to time specify in writing to the other party. The quarterly statements called for in Paragraph 3 above should be sent to the Fund Administrator at the address specified in Paragraph 3. If to the Company: American General Life Insurance Company 2929 Allen Parkway, WT3 -02 Houston, TX 77019 Attention: General Counsel If to the Fund Administrator: Franklin Templeton Services, Inc. 777 Mariners Island Boulevard San Mateo, California 94404 Attention: Leslie M. Kratter Vice President With a copy to: 777 Mariners Island Boulevard San Mateo, California 94404 Attention: Karen L. Skidmore Associate General Counsel 8. Termination. This Agreement may be terminated upon either: (1) thirty (30) days' written notice from one party to the other; or (2) upon cessation of investment by the Account in the Fund pursuant to the Participation Agreement. 9. Representation. The Company represents and agrees that it will maintain and preserve all records as required by law to be maintained and preserved in connection with providing the Administrative Services, and will otherwise comply with all laws, rules and regulations applicable to Administrative Services. 10. Amendment. This Agreement may be amended only upon mutual agreement of the parties hereto in writing. 11. Assignment. This Agreement shall not be assigned by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed; provided, however, that such limitation shall not apply should the Fund Administrator cease to be the fund administrator for the Trust and the successor fund administrator for the Trust is willing to assume Fund Administrator's responsibilities hereunder. 12. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original but all of which will together constitute one and the same instrument. 13. Entire Agreement. This Agreement, together with the attached Schedules, contains the entire agreement among the parties with respect to the matters dealt with herein, and supersedes any prior or inconsistent agreements, documents, understandings or arrangements among the parties with respect to the subject matter of this Agreement. 3 14. Indemnification. This Agreement will be subject to the indemnification provisions of Article V of the Participation Agreement. 15. Arbitration. In the event of a dispute concerning any provision of this Agreement, either party may require the dispute to be submitted to binding arbitration under the commercial arbitration rules of the American Arbitration Association. Each party will pay its own costs and expenses. Judgment upon any arbitration award may be entered by any court having jurisdiction. This Agreement shall be interpreted in accordance with the laws of the state of California and shall be subject to any applicable federal securities laws. 16. Trust Not a Party. The parties to this Agreement acknowledge and agree that the Trust is not directly or indirectly a party to this Agreement. If, however, the Trust shall be so deemed, the parties to this Agreement acknowledge and agree that any liabilities of the Trust arising, directly or indirectly, under this Agreement will be satisfied out of the assets of the Trust and that no trustee, officer, agent or holder of shares of beneficial interest of the Trust or any Fund will be personally liable for such liabilities. No Fund of the Trust will be liable for the obligations or liabilities of any other Fund. AMERICAN GENERAL LIFE INSURANCE COMPANY By: ---------------------------------- Name: Title: FRANKLIN TEMPLETON SERVICES, INC. By: ---------------------------------- Name: Title: 4 SCHEDULE A Maintenance of Books and Records - -------------------------------- . Assist as necessary to maintain book entry records on behalf of the Funds regarding issuance to, transfer within (via net purchase orders) and redemption by the Accounts of Fund shares. . Maintain general ledgers regarding the Accounts' holdings of Fund shares, coordinate and reconcile information, and coordinate maintenance of ledgers by financial institutions and other contract owner service providers. Communication with the Funds - ---------------------------- . Serve as the designee of the Funds for receipt of purchase and redemption orders from the Account and to transmit such orders, and payment therefor, to the Funds. . Coordinate with the Funds' agents respecting daily valuation of the Funds' shares and the Accounts' units. . Purchase Orders - Determine net amount available for investment in the Funds. - Deposit receipts at the Funds' custodians (generally by wire transfer). - Notify the custodians of the estimated amount required to pay dividends or distributions. . Redemption Orders - Determine net amount required for redemptions by the Funds. - Notify the custodian and Funds of cash required to meet payments. . Purchase and redeem shares of the Funds on behalf of the Accounts at the then- current price in accordance with the terms of each Fund's then current prospectus. . Assistance in enforcing procedures adopted on behalf of the Trust to reduce, discourage, or eliminate market timing transactions in a Fund's shares in order to reduce or eliminate adverse effects on a Fund or its shareholders. Processing Distributions from the Funds - --------------------------------------- . Process ordinary dividends and capital gains. . Reinvest the Funds' distributions. 5 Reports - ------- . Periodic information reporting to the Funds, including, but not limited to, furnishing registration statements, prospectuses, statements of additional information, reports, solicitations for instructions, sales or promotional materials and any other filings with the Securities and Exchange Commission with respect to the Accounts invested in the Funds. . Periodic information reporting about the Funds to contract owners, including necessary delivery of the Funds' prospectus and annual and semi-annual reports. Fund-related Contract Owner Services - ------------------------------------ . Maintain adequate fidelity bond or similar coverage for all Company officers, employees, investment advisors and other individuals or entities controlled by the Company who deal with the money and/or securities of the Funds. . Provide general information with respect to Fund inquiries (not including information about performance or related to sales). . Provide information regarding performance of the Funds and the subaccounts of the Accounts. . Oversee and assist the solicitation, counting and voting or contract owner voting interests in the Funds pursuant to Fund proxy statements. Other Administrative Support - ---------------------------- . Provide other administrative and legal compliance support for the Funds as mutually agreed upon by the Company and the Funds or the Fund Administrator. . Relieve the Funds of other usual or incidental administrative services provided to individual contract owners. 6 SCHEDULE B 7 EX-6 3 0003.txt CONSENT OF E&Y EXHIBIT 6 CONSENT OF INDEPENDENT AUDITORS We consent to the reference made to our firm under the caption "Accounting and Auditing Experts" and to the use of our report dated March 1, 2000, as to American General Life Insurance Company, in Post-Effective Amendment No. 1 to the Registration Statement (Form S-6 No. 333-87307 and 811-08561) of American General Life Insurance Company Separate Account VL-R. /s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP Houston, Texas October 9, 2000 -----END PRIVACY-ENHANCED MESSAGE-----