0001193125-19-303572.txt : 20200113 0001193125-19-303572.hdr.sgml : 20200113 20191129194234 ACCESSION NUMBER: 0001193125-19-303572 CONFORMED SUBMISSION TYPE: N-6/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20191202 DATE AS OF CHANGE: 20191202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL SEPARATE ACCOUNT VL-R CENTRAL INDEX KEY: 0001051485 IRS NUMBER: 250598210 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-6/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-234480 FILM NUMBER: 191261914 BUSINESS ADDRESS: STREET 1: 2727-A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 713-522-1111 MAIL ADDRESS: STREET 1: 2727-A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019 FORMER COMPANY: FORMER CONFORMED NAME: AGL SEPARATE ACCOUNT VL R DATE OF NAME CHANGE: 19990907 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GENERAL LIFE INSURANCE CO SEPARATE ACCOUNT VL R DATE OF NAME CHANGE: 19971216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL SEPARATE ACCOUNT VL-R CENTRAL INDEX KEY: 0001051485 IRS NUMBER: 250598210 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-6/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-08561 FILM NUMBER: 191261913 BUSINESS ADDRESS: STREET 1: 2727-A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 713-522-1111 MAIL ADDRESS: STREET 1: 2727-A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019 FORMER COMPANY: FORMER CONFORMED NAME: AGL SEPARATE ACCOUNT VL R DATE OF NAME CHANGE: 19990907 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GENERAL LIFE INSURANCE CO SEPARATE ACCOUNT VL R DATE OF NAME CHANGE: 19971216 0001051485 S000000574 AGL SEPARATE ACCOUNT VL-R C000217273 AGL EquiBuilder III VUL (fka American Franklin) Policy No. T1735 N-6/A 1 d792352dn6a.txt N-6/A Registration Nos. 333-234480 811-08561 As filed with the Securities and Exchange Commission on December 2, 2019 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-6 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-effective Amendment No. [1] Post-Effective Amendment No. [ ]
and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [198]
AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R (Exact Name of Registrant) AMERICAN GENERAL LIFE INSURANCE COMPANY (Name of Depositor) 2727-A Allen Parkway, Houston, Texas 77019 (Address of Depositor's Principal Executive Offices) (Zip Code) Depositor's Telephone Number, including Area Code: (800) 871-2000 AMERICAN HOME ASSURANCE COMPANY (Name of Guarantor) 175 Water Street, 18/th/ Floor, New York, New York 10038 (Address of Guarantor's Principal Offices) (Zip Code) Guarantor's Telephone Number, Including Area Code: (212) 770-7000 Manda Ghaferi, Esq. American General Life Insurance Company 21650 Oxnard Street, Suite 750 Woodland Hills, California 91367 (Name and Address of Agent for Service for Depositor, Registrant and Guarantor) Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement. Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. It is proposed that this filing will become effective (check appropriate box) [_]immediately upon filing pursuant to paragraph (b) of Rule 485 [_]on __________ pursuant to paragraph (b) of Rule 485 [_]60 days after filing pursuant to paragraph (a)(1) of Rule 485 [_]on (date) pursuant to paragraph (a)(1) of Rule 485 If appropriate, check the following box: [_]This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Title of Securities Being Registered: (i) Units of interest in American General Life Insurance Company Separate Account VL-R under EquiBuilder III flexible premium variable universal life insurance Policies and (ii) guarantee related to insurance obligations under the variable universal life insurance policies. NOTE Registrant is filing this Registration Statement for the purpose of registering interests under the American General Life Insurance Company ("AGL") EquiBuilder III Flexible Premium Variable Universal Life Insurance Policies (the "Policies) on a new Form N-6 Registration Statement and adding supplements to the prospectus and SAI describing the policy. The Policies were previously registered on Form N-6 Registration Statement File No. 333-102299 and funded by American General Life Insurance Company Separate Account VUL-2 ("Separate Account VUL-2") (File No. 811-06366). At the close of business on November 29, 2019, Separate Account VUL-2 was consolidated with and into American General Life Insurance Company Separate Account VL-R. Parts A and B, the Prospectus and Statement of Additional Information dated May 1, 2019, as supplemented, included in Post-Effective Amendment No. 20 under the Securities Act of 1933 ("1933 Act") and Amendment No. 37 under the Investment Company Act of 1940 ("1940 Act") to Form N-6 Registration Statement File Nos. 333-102299 and 811-06366, as filed on April 30, 2019, are hereby incorporated by reference. EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICIES ISSUED THROUGH AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R BY AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENT DATED DECEMBER 2, 2019 TO THE PROSPECTUS DATED DECEMBER 2, 2019, AS SUPPLEMENTED American General Life Insurance Company ("AGL") is amending the prospectus for the EquiBuilder III flexible premium variable universal life insurance Policy (the "Policies") for the purpose of providing information regarding the consolidation of its American General Life Insurance Company Separate Account VUL-2 ("Separate Account VUL-2") with American General Life Insurance Company Separate Account VL-R ("Separate Account VL-R"). AGL no longer sells the Policies. The following paragraph is added to the section of the prospectus entitled "General Information" after the subsection entitled "American General Life Insurance Company": Separate Account Consolidation Effective after the close of business on November 29, 2019, AGL consolidated Separate Account VUL-2 with Separate Account VL-R, with Separate Account VL-R being the surviving Separate Account after such consolidation (the "Consolidation"). Accordingly, all references to Separate Account VUL-2 are hereby replaced with Separate Account VL-R. The Consolidation did not affect the terms of, or the rights and obligations under your Policy, other than to reflect the change to the name of the separate account. The number of units and the accumulation values for the variable investment divisions in which you invest, and the variable investment divisions available under the Policy did not change as a result of the Consolidation. Your accumulation value immediately after the Consolidation was the same as the value immediately before the Consolidation. The Consolidation did not result in any adverse tax consequences for any Policy Owners. Until we amend all forms related to the Policies, some forms may still refer to the prior name of the separate account. The purpose of the Consolidation was to reduce the ongoing administrative costs, independent accountant fees, and inefficiencies associated with maintaining multiple Separate Accounts, each with its own recordkeeping and reporting requirements. The heading of the section "Separate Account VUL-2" under "General Information" is hereby changed to: Separate Account VL-R The following replaces the third and fourth paragraphs under the section of the prospectus renamed "General Information - Separate Account VL-R": We hold the Mutual Fund shares in which any of your accumulation value is invested in Separate Account VL-R (the "Separate Account"). The Company established Separate Account VL-R under the laws of the State of Texas on May 6, 1997. The Separate Account is registered as a unit investment trust with the SEC under the Investment Company Act of 1940 (the "1940 Act"). The Policies were previously issued through AGL Separate Account VUL-2. Prior to December 31, 2002, AGL Separate Account VUL-2 was a separate account of American Franklin, created on April 9, 1991 under Illinois insurance law. On December 31, 2002, and in conjunction with the merger of AGL and American Franklin, Separate Account VUL-2 became a separate account of AGL under Texas law. Effective on the close of business November 29, 2019, AGL Separate Account VUL-2 was consolidated into Separate Account VL-R. The Separate Account also issues interests under EquiBuilder II variable universal life insurance policies, which have policy features that are similar to those of EquiBuilder III Policies but which have a different sales charge structure. The following information about the American Home Assurance Company ("American Home" or "Guarantor") Guarantee is added as the fourth paragraph under the section entitled "General Information - Guarantee of Insurance Obligations" of the prospectus: Guarantees for Policies issued prior to the Consolidation will continue after the Consolidation. As a result, the Consolidation of Separate Account VUL-2 into Separate Account VL-R will not impact the insurance obligations under the Guarantee. If you have any questions, or would like to receive a copy of the prospectus and/or Statement of Additional Information, please call the Administrative Service Center at 1-800-340-2765. EQUIBUILDER III not a deposit or other obligation of, nor are they guaranteed or endorsed FLEXIBLE PREMIUM VARIABLE UNIVERSAL by, any bank or depository LIFE INSURANCE POLICIES issued by institution. An investment in a American General Life Insurance variable universal life insurance Company through its Separate Policy is subject to investment Account VL-R risks, including possible loss of principal invested. This prospectus is dated December 2, 2019 There is no guaranteed cash surrender value for amounts allocated to the This prospectus describes variable investment divisions. EquiBuilder III flexible premium variable universal life insurance If the cash surrender value (the cash policies (the "Policy" or "Policies") value reduced by any loan balance) is issued by American General Life insufficient to cover the charges due Insurance Company ("AGL"). under the Policy, the Policy may EquiBuilder III Policies are designed terminate without value. to provide life insurance coverage with flexibility in death benefits, Buying this Policy might not be a premium payments and investment good way of replacing your existing choices. We use "you" and "your" to insurance or adding more insurance if refer to an EquiBuilder III Policy you already own a flexible premium Owner. AGL no longer sells variable universal life insurance EquiBuilder III Policies. Policy. You may wish to consult with your insurance representative or We deposit your net premium in your financial advisor. Policy Account. You may allocate amounts to our Guaranteed Interest Neither the SEC nor any state Division (which is part of our securities commission has approved or General Account and pays interest at disapproved these securities or a declared rate) or to one or more of passed upon the adequacy or accuracy the variable investment divisions of of this prospectus. Any Separate Account VL-R (the "Separate representation to the contrary is a Account"), or both. (For the first criminal offense. fifteen days after we issue your Policy, we require premiums to be The Policies are not available in all invested in the Fidelity(R) VIP states. This prospectus does not Government Money Market division.) offer the Policies in any jurisdiction where they cannot be Beginning on January 1, 2021, we will lawfully sold. You should rely only no longer send you paper copies of on the information contained in this the shareholder reports for Funds prospectus, or on sales materials we available as investment options under have approved or that we have your Policy unless you specifically referred you to. We have not request paper copies from us. authorized anyone to provide you with Instead, the reports will be information that is different. available on a website, and we will notify you by mail each time a report THIS PROSPECTUS GENERALLY DESCRIBES is posted. The notice will provide ONLY THE VARIABLE PORTION OF THE the website links to access the POLICY, EXCEPT WHERE THE GUARANTEED reports, as well as instructions for INTEREST DIVISION IS SPECIFICALLY requesting paper copies. If you wish MENTIONED. to continue receiving your reports in paper free of charge from us, please The variable investment divisions call VUL Customer Service at each purchase shares of a 1-800-340-2765 (or for hearing corresponding portfolio of the impaired 1-888-436-5256) or write to Fidelity(R) Variable Insurance the Company at: VUL Administration, Products ("Fidelity(R) VIP"), the P. O. Box 305600, Nashville, MFS(R) Variable Insurance Trust Tennessee 37230-5600. Your election ("MFS(R) VIT"), or the MFS(R) to receive the reports in paper will Variable Insurance Trust II ("MFS(R)/ apply to all investment options /VIT II") (each available portfolio available under your Policy. referred to in this prospectus as, a "Fund," and collectively, the If you have already elected to "Funds") as listed on page 2. The receive shareholder reports prospectuses of the Funds describe electronically, you will not be the investment objectives, policies affected by this change and you need and risks of each Fund. not take any action. If you wish to receive shareholder reports and other Your investment in the Funds through SEC disclosure documents from the the variable investment divisions is Company electronically, please call not guaranteed and involves varying VUL Customer Service at the telephone degrees of risk. Net premiums and numbers above or log into eService at Policy Account value you direct to www.aig.com/eservice. After you sign the Guaranteed Interest Division on, select "My Profile" and edit your earns interest at a rate guaranteed communication preference. Once you've by us. subscribed to VUL eDelivery, you will get a change confirmation email. You should read the prospectuses of the Funds underlying the variable EquiBuilder III Policies are not investment divisions that may insured by the FDIC, the Federal interest you. You can request free Reserve Board or any similar agency. copies from your AGL representative They are or from our Administrative Center shown under "Contact Information" on page 5. VARIABLE INVESTMENT OPTIONS The Funds available through this Policy are: . Fidelity(R) VIP Asset . Fidelity(R) VIP High Income Manager/SM/ Portfolio - Portfolio - Initial Class Initial Class . Fidelity(R) VIP Index 500 . Fidelity(R) VIP Asset Manager: Portfolio - Initial Class Growth(R) Portfolio - Initial Class . Fidelity(R) VIP Investment Grade Bond Portfolio - Initial . Fidelity(R) VIP Contrafund/SM/ Class Portfolio - Initial Class . Fidelity(R) VIP Overseas . Fidelity(R) VIP Equity-Income Portfolio - Initial Class Portfolio/SM/ - Initial Class . MFS(R) VIT II Core Equity . Fidelity(R) VIP Government Portfolio - Initial Class Money Market Portfolio - Initial Class . MFS(R) VIT Growth Series - Initial Class . Fidelity(R) VIP Growth Portfolio - Initial Class . MFS(R) VIT Investors Trust Series - Initial Class . MFS(R) VIT Research Series - Initial Class . MFS(R) VIT Total Return Series - Initial Class . MFS(R) VIT Utilities Series - Initial Class Each of these Funds is available through a variable investment division. TABLE OF CONTENTS CONTACT INFORMATION................................................... 5 POLICY BENEFITS/RISKS SUMMARY......................................... 6 POLICY BENEFITS....................................................... 6 Death Benefit...................................................... 6 Death Benefit Proceeds......................................... 6 Death Benefit Option A and Option B............................ 6 Death Benefit Option A...................................... 6 Death Benefit Option B...................................... 6 Accelerated Benefit Settlement Option Rider.................... 6 Surrenders, Partial Surrenders, Transfers, and Policy Loans........ 6 Surrenders..................................................... 6 Partial Surrenders............................................. 7 Transfers...................................................... 7 Policy Loans................................................... 7 Premiums........................................................... 7 Flexibility of Premiums........................................ 7 Free Look...................................................... 7 The Policy......................................................... 7 Ownership Rights............................................... 7
2 Separate Account................................................................. 7 Guaranteed Interest Division..................................................... 8 Policy Account Value............................................................. 8 Payment Options.................................................................. 8 Tax Benefits..................................................................... 8 Supplemental Benefits and Riders..................................................... 8 POLICY RISKS............................................................................ 8 Investment Risk...................................................................... 8 Risk of Lapse........................................................................ 9 Tax Risks............................................................................ 9 Partial Surrender and Surrender Risks................................................ 9 Policy Loan Risks.................................................................... 10 PORTFOLIO RISKS......................................................................... 10 TABLES OF CHARGES....................................................................... 11 GENERAL INFORMATION..................................................................... 17 American General Life Insurance Company.............................................. 17 Separate Account Consolidation....................................................... 17 Separate Account VL-R................................................................ 17 Guarantee of Insurance Obligations................................................... 18 Communication with AGL............................................................... 19 Administrative Center............................................................ 19 eDelivery, eService, Telephone Transactions and Written Transactions............. 19 eDelivery..................................................................... 19 eService...................................................................... 19 eService Transactions, Telephone Transactions and Written Transactions........ 19 One-time Premium Payments Using eService......................................... 20 Telephone Transactions........................................................... 20 General.......................................................................... 21 Variable Investment Divisions........................................................ 21 Voting Rights of a Policy Owner...................................................... 22 The Guaranteed Interest Division..................................................... 23 Illustrations........................................................................ 24 POLICY FEATURES......................................................................... 24 Age.................................................................................. 24 Death Benefits....................................................................... 24 Maturity Benefit..................................................................... 25 Policy Issuance Information.......................................................... 25 Right to Examine..................................................................... 26 Flexible Premium Payments............................................................ 26 Premium Payments and Transaction Requests in Good Order.............................. 27 Changes in EquiBuilder III Policies.................................................. 27 Changing the Face Amount of Insurance................................................ 28 Changing Death Benefit Options....................................................... 29 When Face Amount and Death Benefit Changes Go Into Effect............................ 29 Reports To Policy Owners............................................................. 29 Policy Periods, Anniversaries, Dates and Ages........................................ 29 ADDITIONAL BENEFIT RIDERS............................................................... 30 Disability Waiver Benefit Rider...................................................... 30 Accidental Death Benefit Rider....................................................... 31 Children's Term Insurance Rider...................................................... 31 Term Insurance on an Additional Insured Person Rider................................. 31 Accelerated Benefit Settlement Option Rider.......................................... 31 POLICY ACCOUNT TRANSACTIONS............................................................. 31 eDelivery, eService, Telephone Transactions and Written Transactions................. 32 Changing Premium and Deduction Allocation Percentages................................ 32
3 Transfers of Policy Account Value Among Investment Divisions............ 32 Market Timing........................................................... 32 Restrictions Initiated By the Funds and Information Sharing Obligations. 34 Transfers from the Guaranteed Interest Division......................... 34 Borrowing from the Policy Account....................................... 34 Loan Requests........................................................... 34 Policy Loan Interest.................................................... 35 When Interest is Due.................................................... 35 Repaying the Loan....................................................... 35 The Effects of a Policy Loan on the Policy Account...................... 36 Withdrawing Money from the Policy Account............................... 37 Surrendering the Policy for Its Net Cash Surrender Value................ 38 POLICY PAYMENTS............................................................ 38 Payment Options......................................................... 38 Income Payments for a Fixed Period.................................. 39 Life Income with Payments Guaranteed for a Fixed Term of Years...... 39 Proceeds at Interest................................................ 39 Fixed Amount........................................................ 39 The Beneficiary......................................................... 39 Assignment of a Policy.................................................. 40 Payment of Proceeds..................................................... 40 Delay Required under Applicable Law..................................... 41 ADDITIONAL RIGHTS THAT WE HAVE............................................. 41 VARIATIONS IN POLICY OR INVESTMENT DIVISION TERMS AND CONDITIONS........... 41 Policies Purchased Through "Internal Rollovers"..................... 42 State Law Requirements.............................................. 42 Expenses or Risks................................................... 42 Underlying Investments.............................................. 42 CHARGES UNDER THE POLICY................................................... 42 Transaction Fees........................................................ 42 Premium Expense Charge.............................................. 42 Statutory Premium Taxes............................................. 43 Surrender Charge (for full surrenders).............................. 43 Surrender Charge (for Face Amount decreases)........................ 44 Partial Surrender Processing Fee.................................... 44 Face Amount Increase Charge......................................... 45 Transfers........................................................... 45 Policy Owner Additional Illustration Charge......................... 45 Periodic Charges........................................................ 45 Administrative Charge............................................... 45 Cost of Insurance Charge............................................ 45 Mortality and Expense Risk Charge................................... 46 Fees and Expenses and Money Market Investment Division.............. 46 Optional Rider Charges.............................................. 46 Annual Fund Expenses.................................................... 46 Allocation of Policy Account Charges.................................... 46 POLICY ACCOUNT VALUE....................................................... 47 Amounts in the Variable Investment Divisions............................ 47 Business Day and Close of Business...................................... 47 Determination of the Unit Value......................................... 48 POLICY LAPSE AND REINSTATEMENT............................................. 48 Lapse of the Policy..................................................... 48 Reinstatement of the Policy............................................. 49 FEDERAL TAX CONSIDERATIONS................................................. 49 Tax Effects............................................................. 50
4 General............................................................................. 50 Testing for Modified Endowment Contract Status.......................................... 50 Other Effects of Policy Changes......................................................... 51 Rider Benefits.......................................................................... 51 Taxation of Pre-Death Distributions if Your Policy is not a Modified Endowment Contract. 51 Taxation of Pre-Death Distributions if Your Policy is a Modified Endowment Contract..... 52 Policy Lapses and Reinstatements........................................................ 53 Diversification and Investor Control.................................................... 53 Estate and Generation Skipping Taxes.................................................... 54 Life Insurance in Split Dollar Arrangements............................................. 54 Pension and Profit-Sharing Plans........................................................ 54 Other Employee Benefit Programs......................................................... 55 ERISA................................................................................... 55 Our Taxes............................................................................... 55 When We Withhold Income Taxes........................................................... 56 Other tax withholding................................................................... 56 Foreign Account Tax Compliance ("FATCA")................................................ 56 Tax Changes............................................................................. 56 BUSINESS DISRUPTION AND CYBER SECURITY RISKS............................................... 57 LEGAL PROCEEDINGS.......................................................................... 57 FINANCIAL STATEMENTS....................................................................... 57 Rule 12h-7 disclosure............................................................... 57 REGISTRATION STATEMENTS.................................................................... 58 DEFINITIONS................................................................................ 59
CONTACT INFORMATION ---------------------------------------------------------------------------------------------------------- Addresses and telephone numbers: Here is how you can contact us about the EquiBuilder III policies. ---------------------------------------------------------------------------------------------------------- ADMINISTRATIVE CENTER: HOME OFFICE: PREMIUM PAYMENTS: ---------------------------------------------------------------------------------------------------------- (Express Delivery) (U.S. Mail) 2727-A Allen Parkway (Express Delivery) VUL Administration VUL Houston, American General Life 340 Seven Springs Way Administration Texas 77019-2191 Insurance Company MC430 P.O. Box 305600 1-713-831-3443 Payment Processing Center Brentwood, Tennessee Nashville, 1-800-340-2765 8430 W. Bryn Mawr Avenue 37027-5098 Tennessee 3/rd/ Floor Lockbox 0993 1-713-831-3443, 37230-5600 Chicago, IL 60631 1-800-340-2765 (U.S. Mail) (Hearing Impaired) Payment Processing Center 1-888-436-5256 P.O. Box 0993 Fax: 1-844-430-2639 Carol Stream, IL 60132-0993 (Except premium payments) ----------------------------------------------------------------------------------------------------------
5 POLICY BENEFITS/RISKS SUMMARY This summary describes the Policy's important benefits and risks. The sections in this prospectus following this summary discuss the Policy's benefits and other provisions in more detail. The definitions on page 59 of this prospectus define certain words and phrases used in this prospectus. AGL no longer sells EquiBuilder III Policies. POLICY BENEFITS You may currently allocate your Policy Account value among the 16 variable investment divisions available under the Policy, each of which invests in an underlying mutual fund portfolio, a Fund, and the Guaranteed Interest Division, which credits a specified rate of interest. Your Policy Account value will vary based on the investment performance of the variable investment divisions you choose and interest credited in the Guaranteed Interest Division. Death Benefit . Death Benefit Proceeds: We pay the death benefit (less any Policy loan and loan interest and any overdue charges) to the beneficiary when the Insured Person dies. We will increase the death benefit by the amount of any additional insurance provided by the applicable optional benefit rider(s). . Death Benefit Option A and Option B: You may choose between two death benefit options under the Policy. After the first Policy year, you may change death benefit options and the Face Amount (which is the amount of insurance you select) while the Policy is in force. We calculate the amount available under each death benefit option monthly and as of the Insured Person's date of death. . Death Benefit Option A is equal to the greater of: (1) the Face Amount; or (2) the "required minimum death benefit", which is the Policy Account value multiplied by a specified percentage set forth in the Policy. . Death Benefit Option B is equal to the greater of: (1) the Face Amount plus the Policy Account value; or (2) the required minimum death benefit. . Accelerated Benefit Settlement Option Rider: Under the Accelerated Benefit Settlement Option Rider, you may receive accelerated payment of part of your death benefit if the Insured Person develops a terminal illness or is confined to a nursing care facility. We will deduct a processing charge from the accelerated death benefit at the time it is paid. Federal tax law may require us to increase payment under either of the above death benefit options. See "Death Benefits" on page 24. Surrenders, Partial Surrenders, Transfers, and Policy Loans .. Surrenders: At any time while the Policy is in force, you may make a written request (by submitting our surrender form to us) to surrender your Policy and receive the net cash surrender value. The net cash surrender value is the cash surrender value less any outstanding loan and loan interest due. A surrender may have adverse tax consequences. 6 . Partial Surrenders: After the first Policy year, you may make a written request to withdraw part of the net cash surrender value. Partial surrenders may have adverse tax consequences. Partial surrenders are also subject to any surrender charge or fee that then applies. . Transfers: Within certain limits, you may make transfers among the variable investment divisions and the Guaranteed Interest Division. You may make up to four transfers of Policy Account value among the variable investment divisions in each Policy year without charge. We may assess a $25 charge for each transfer after the fourth transfer in a Policy year. Our current practice, however, is to assess the $25 charge for each transfer after the twelfth transfer in a Policy year. There are special limits on transfers involving the Guaranteed Interest Division. . Policy Loans: You may take a loan (minimum $500) from your Policy at any time. The maximum loan amount you may take is 90% of the cash surrender value of the Policy on the business day we receive your request for a loan. We charge you a maximum annual interest rate on your loan equal to the greater of 5 1/2% or the Monthly Average Corporate yield published by Moody's Investor Services, Inc. as described under "Policy Account Transactions - Policy Loan Interest," on page 35. We credit interest on loaned amounts; we guarantee that the annual earned interest rate will not be lower than 4 1/2%. After the tenth Policy year, you may take a Preferred Loan from your Policy. Loans may have adverse tax consequences. Premiums . Flexibility of Premiums: After you pay the initial premium, you can pay subsequent premiums at any time (prior to the Policy maturity) and in any amount (but not less than $100). You can select a premium payment plan to pay planned periodic premiums monthly, quarterly, semiannually, or annually. You are not required to pay premiums according to the plan. You may also choose to have premiums automatically deducted from your bank account or other source under our automatic payment plan. Under certain circumstances, we may limit the amount of a premium payment or reject a premium payment. . Free Look: When you receive your Policy, the free look period begins. You may return your Policy during this period and receive a refund. We will refund an amount equal to the greater of: (1) the premiums paid; or (2) the Policy Account value plus any amount deducted from premiums prior to allocation to the Policy Account. The free look period generally expires upon the later of: (1) 10 days after you receive the Policy; or (2) 45 days after you signed Part I of the application. This period will be longer if required by state law. The Policy . Ownership Rights: While the Insured Person is living, you, as the owner of the Policy, may exercise all of the rights and options described in the Policy. These rights include selecting and changing the beneficiary, changing the owner, and assigning the Policy. . Separate Account: You may direct the money in your Policy to any of the variable investment divisions of the Separate Account. Each variable investment division invests exclusively in one of the Funds listed on the cover of this prospectus. The value of your investment division depends on the investment results of the related Fund. We do not guarantee any minimum cash value for amounts allocated to the variable investment divisions. If the Fund investments go down, the value of a Policy can decline. 7 . Guaranteed Interest Division: You may place money in the Guaranteed Interest Division where it earns interest at the rate of 4 1/2% annually. We may declare higher rates of interest, but are not obligated to do so. . Policy Account Value: Policy Account value is the sum of your amounts in the variable investment divisions and the Guaranteed Interest Division. Policy Account value varies from day to day, depending on the investment performance of the variable investment divisions you choose, interest we credit to the Guaranteed Interest Division, charges we deduct, and any other transactions (e.g., transfers, partial surrenders and loans). We do not guarantee a minimum Policy Account value. . Payment Options: There are several ways of receiving proceeds under the death benefit, surrender, and maturity provisions of the Policy, other than in a lump sum. None of these options vary with the investment performance of the Separate Account. More detailed information concerning these settlement options is available on request from our Administrative Center shown under "Contact Information" on page 5. Also see "Payment Options" on page 38. . Tax Benefits: The Policy is designed to afford the tax treatment normally accorded life insurance policies under federal tax law. Generally, under federal tax law, the death benefit under a qualifying life insurance policy is excludable from the gross income of the beneficiary. In addition, this means that under a qualifying life insurance policy, cash value builds up on a tax deferred basis and transfers of cash value among the available investment options under the policy may be made tax free. Under a qualifying life insurance policy that is not a modified endowment contract ("MEC"), the proceeds from Policy loans would not be taxed. If the Policy is not a MEC, distributions after the 15th Policy year generally will be treated first as a return of basis or investment in the Policy and then as taxable income. Moreover, loans will generally not be treated as distributions. Finally, neither distributions nor loans from a Policy that is not a MEC are subject to the 10% penalty tax. Supplemental Benefits and Riders You may be eligible to add an additional rider benefit to your Policy. We offer several riders that provide supplemental benefits under the Policy, such as the Accidental Death Benefit Rider, which provides an additional death benefit payable if the Insured Person dies from bodily injury that results from an accident. We generally deduct any monthly charges for these riders from Policy Account value as part of the monthly deduction. Eligibility for and changes in these benefits are subject to our rules and procedures as well as Internal Revenue Service ("IRS") guidance and rules that pertain to the Internal Revenue Code's definition of life insurance as in effect from time to time. Your insurance representative can help you determine whether any of these riders are suitable for you. Not all riders are available in all states. Please contact us for further details. POLICY RISKS Investment Risk The Policy is not suitable as a short-term investment. We designed the Policy to meet long-term financial goals. In the Policy's early years, if the total charges exceed total premiums paid or if your investment choices perform poorly, your Policy may not have any cash surrender value. The surrender charge is large enough in the Policy's early years so that if you fully surrender your Policy you may receive no cash surrender value. If you take multiple partial surrenders, your accumulation value may not cover required charges and your Policy would lapse. 8 If you invest your Policy Account value in one or more variable investment divisions, then you will be subject to the risk that investment performance will be unfavorable. You will also be subject to the risk that the Policy Account value will decrease because of the unfavorable performance and the resulting higher insurance charges. You could lose everything you invest. You will also be subject to the risk that the investment performance of the variable investment divisions you choose may be less favorable than that of other variable investment divisions, and in order to keep the Policy in force may be required to pay more premiums than originally planned. We do not guarantee a minimum Policy Account value. If you allocate net premiums to the Guaranteed Interest Division, then we credit your Policy Account value (in the Guaranteed Interest Division) with a declared rate of interest, but you assume the risk that the rate may decrease, although it will never be lower than a guaranteed minimum annual effective rate of 4 1/2%. Risk of Lapse If your net cash surrender value is not enough to pay the charges deducted against Policy Account value each month, your Policy may enter a 61-day grace period. We will notify you that the Policy will lapse (terminate without value) at the end of the grace period unless you make a sufficient payment during the grace period. Your Policy may also lapse if outstanding Policy loans plus any accrued interest payable exceeds the net cash surrender value. Your Policy will not lapse at the end of a grace period if you make a premium payment equal to at least the estimated monthly charges under the Policy for three Policy months, plus any loan interest due, before the end of the grace period. You may reinstate a lapsed Policy, subject to certain conditions. Tax Risks We anticipate that the Policy should generally qualify as a life insurance contract under federal tax law. However, due to limited guidance under federal tax law, there is some uncertainty about the application of the federal tax law to the Policy, particularly if you pay the full amount of premiums permitted under the Policy. Please consult a tax advisor about these consequences. Depending on the total amount of premiums you pay, the Policy may be treated as a MEC under federal tax laws. If a Policy is treated as a MEC, then surrenders, partial surrenders, and loans under the Policy will be taxable as ordinary income to the extent there are earnings in the Policy. In addition, a 10% penalty tax may be imposed on surrenders, partial surrenders, and loans taken before you reach age 59 1/2. See "Federal Tax Considerations" on page 49. You should consult a qualified tax advisor for assistance in all Policy-related tax matters. Partial Surrender and Surrender Risks The surrender charge under the Policy applies for the first 10 Policy years after the Register Date in the event you surrender the Policy or decrease the Face Amount. The surrender charge may be considerable. Any outstanding loan balance reduces the amount available to you upon a surrender or partial surrender. It is possible that you will receive no net cash surrender value if you surrender your Policy in the first few Policy years. You should purchase the Policy only if you have the financial ability to keep it in force for a substantial period of time. You should not purchase the Policy if you intend to surrender all or part of the Policy Account value in the near future. We designed the Policy to help meet long-term financial goals. 9 Even if you do not ask to surrender your Policy, surrender charges may play a role in determining whether your Policy will lapse (terminate without value), because surrender charges affect the net cash surrender value which is a measure we use to determine whether your Policy will enter a grace period (and possibly lapse). See "Risk of Lapse," on page 9. A surrender or partial surrender may have adverse tax consequences. Policy Loan Risks A Policy loan, whether or not repaid, will affect Policy Account value over time because we subtract the amount of the loan from the variable investment divisions and/or Guaranteed Interest Division as collateral, and this loan collateral does not participate in the investment performance of the variable investment divisions or receive any excess interest credited to the Guaranteed Interest Division. We reduce the amount we pay on the Insured Person's death by the amount of any Policy loan and your Policy may lapse (terminate without value) if outstanding Policy loans plus any accrued interest payable reduce the cash surrender value to zero. If you surrender the Policy or allow it to lapse while a Policy loan remains outstanding, the amount of the loan, to the extent it has not been previously taxed, is treated as a distribution from the Policy and may be subject to federal income tax. PORTFOLIO RISKS A discussion of the risks of each Fund may be found in its prospectus. Please refer to the Funds' prospectuses for more information. You may request a copy of any or all of the Fund prospectuses by contacting us at the Administrative Center shown under "Contact Information" on page 5. There is no assurance that any of the Funds will achieve its stated investment objective. 10 TABLES OF CHARGES The following tables describe the fees and expenses that are payable, when buying, owning and surrendering a Policy. No Policy Owner will be charged more than the amount we show under the "Maximum Guaranteed Charge" columns. The first tables describe the fees and expenses that are payable at the time that you (1) buy a Policy, (2) surrender a Policy during the first ten Policy years, (3) change a Policy's Face Amount, or (4) transfer Policy Account value between investment divisions.
Transaction Fees ---------------------------------------------------------------------------------------------------------------------------- When Charge is Maximum Guaranteed Charge Deducted Charge Current Charge ----------------------------------------------------------------------------------------------------------------------------- Premium Expense Charge Upon receipt of each 5% of each premium payment 5% of each premium premium payment up to the Target Premium for a payment up to the Policy year/1/ Target Premium for a Policy year/1/ ----------------------------------------------------------------------------------------------------------------------------- Statutory Premium Taxes/2/ Upon receipt of each 3.5% of each premium 3.5% of each premium premium payment payment payment ----------------------------------------------------------------------------------------------------------------------------- Surrender Charge/3/ Upon a full surrender or During Policy years 1-10, 50% Capped at a total limit lapse in the first 10 Policy of one Target Premium, with of 50% of one Target years. the maximum surrender Premium, but charge decreasing 20% calculated as follows: Also, in the event of a annually following the 6/th/ decrease in Face Amount Policy year . 25% of premiums before the end of the 10/th/ paid during the Policy year, we deduct a first Policy year charge that is a portion of up to one Target the surrender charge. Premium; and . 9.0% of additional premiums paid in Policy years 110, less any surrender charge previously deducted for a decrease in Face Amount -----------------------------------------------------------------------------------------------------------------------------
-------- /1/ The Target Premium is a hypothetical annual premium which is based on the age, sex and risk class of the Insured Person, the initial Face Amount of the Policy and the types and amounts of any additional benefits included in the Policy. The Target Premium for your Policy is shown on the Policy Information page of the Policy. /2/ Statutory premium tax rates vary by state. For example, the highest premium tax rate, 3.5%, is in the state of Nevada, while the lowest premium tax rate, 0.50%, is in the state of Illinois. Certain local jurisdictions may assess additional premium taxes, which will increase the tax rate. /3/ We assess a surrender charge only during the first 10 Policy years. 11
Transaction Fees -------------------------------------------------------------------------------------------------------------------------- When Charge is Maximum Guaranteed Charge Deducted Charge Current Charge --------------------------------------------------------------------------------------------------------------------------- Partial Surrender Processing Fee Upon partial surrender The lesser of $25 or 2.0% of $10 the partial surrender amount --------------------------------------------------------------------------------------------------------------------------- Face Amount Increase Charge Upon each Face Amount $1.50 for each $1,000 of Face $1.50 for each $1,000 of increase Amount increase, up to $300 Face Amount Increase, up to $300 --------------------------------------------------------------------------------------------------------------------------- Transfer Fee Upon transfer $25 for each transfer/1/ $25 for each transfer/2/ --------------------------------------------------------------------------------------------------------------------------- Policy Owner Additional Illustration Upon a Policy Owner's $25 for each illustration $0 Charge additional illustration request after the first request illustration request in any Policy year ---------------------------------------------------------------------------------------------------------------------------
-------- /1/ At a maximum, we will charge $25 for each transfer after the fourth transfer in a Policy year. /2/ Currently, the first 12 transfers in a Policy year are free of charge. 12 The next table describes the fees and expenses that you will pay during the time that you own the Policy, not including Fund fees and expenses.
Periodic Charges (other than Fund fees and expenses) ------------------------------------------------------------------------------------------------------------------------------ When Charge is Maximum Guaranteed Charge Deducted Charge Current Charge --------------------------------------------------------------------------------------------------------------------------------- Administrative Charge Monthly, at the $360 (deducted as $30 per $360 (deducted as $30 per beginning of each Policy month, during the first 12 month, during the first 12 month Policy months) Policy months) $144 (deducted as $12 per $108 (deducted as $9 per month, after the first 12 Policy month, after the first 12 months) Policy months) --------------------------------------------------------------------------------------------------------------------------------- Cost of Insurance Charge/1/ Maximum Charge/2/ Monthly, at the $27.50 per $1,000 of net $27.50 per $1,000 of net beginning of each Policy amount at risk/3/ amount at risk month --------------------------------------------------------------------------------------------------------------------------------- Minimum Charge/4/ Monthly, at the $0.056 per $1,000 of net $0.052 per $1,000 of net beginning of each Policy amount at risk amount at risk month --------------------------------------------------------------------------------------------------------------------------------- Example Charge for the first Monthly, at the $0.22 per $1,000 of net amount $0.11 per $1,000 of net Policy year - for a 38 year old beginning of each Policy at risk amount at risk male, non-tobacco user with a Face month Amount of $200,000 --------------------------------------------------------------------------------------------------------------------------------- Mortality and Expense Risk Fee Daily annual effective rate of 0.75% annual effective rate of of accumulation value invested 0.75% of accumulation value in variable investment divisions invested in variable investment divisions ---------------------------------------------------------------------------------------------------------------------------------
-------- /1/ The Cost of Insurance Charge will vary based on the Insured Person's sex, age, risk class, Policy year and Face Amount. The Cost of Insurance Charges shown in the table may not be typical of the charges you will pay. The Policy Information page of your Policy will indicate the guaranteed Cost of Insurance Charge applicable to your Policy. More detailed information concerning your Cost of Insurance Charge is available on request from our Administrative Center shown under "Contact Information" on page 5 of this prospectus. Also see "Illustrations" on page 24 of this prospectus. /2/ The Maximum Charge for both the maximum guaranteed charge and the current charge occurs during the 12 months following the policy anniversary nearest the insured person's 94/th/ birthday. The policy anniversary nearest the insured person's 95/th/ birthday is the Policy's maximum maturity date. The Maximum Charge is for a male, tobacco user, age 94, with a Face Amount of $100,000. /3/ The net amount at risk is the difference between the current death benefit under your Policy and the amount in your Policy Account. /4/ The Minimum Charge for both the maximum guaranteed charge and the current charge occurs in Policy year 1. The Minimum Charge is for a female, non-tobacco user, age 11 at the Policy's date of issue, with a Face Amount of $200,000. 13 The next tables describe the fees and expenses that you will pay if you choose an optional benefit rider during the time that you own the Policy.
Periodic Charges (optional benefit riders only) -------------------------------------------------------------------------------------------------------------------------- Optional Benefit Rider When Charge is Maximum Guaranteed Charge/1/ Deducted Charge Current Charge ----------------------------------------------------------------------------------------------------------------------------- Accelerated Benefit Settlement Option At the time the accelerated $200 $200 death benefit is paid ----------------------------------------------------------------------------------------------------------------------------- Accidental Death Benefit Maximum Charge - for a 69 year old Monthly, at the beginning of $1.80 per $1,000 of rider $1.80 per $1,000 of rider male or female, any risk class and each Policy month coverage amount per month coverage amount per any Face Amount month ----------------------------------------------------------------------------------------------------------------------------- Minimum Charge - for a 40 year old Monthly, at the beginning of $0.84 per $1,000 of rider $0.84 per $1,000 of rider male or female, any risk class and each Policy month coverage amount per month coverage amount per any Face Amount month ----------------------------------------------------------------------------------------------------------------------------- Example Charge - for a 38 year old Monthly, at the beginning of $0.84 per $1,000 of rider $0.84 per $1,000 of rider non-tobacco user, with a Face each Policy month coverage amount per month coverage amount per Amount of $200,000 for the first month Policy year ----------------------------------------------------------------------------------------------------------------------------- Children's Term Insurance Rider Monthly, at the beginning of $0.50 per $1,000 of rider $0.50 per $1,000 of rider each Policy month coverage amount per month coverage amount per month ----------------------------------------------------------------------------------------------------------------------------- Additional Insured Term Insurance Maximum Charge - for a 69 year old Monthly, at the beginning of $83.33 per $1,000 of rider $26.11 per $1,000 of male, non-tobacco user, with a each Policy month coverage amount per month rider coverage amount Face Amount of $200,000 for the per month first Policy year ----------------------------------------------------------------------------------------------------------------------------- Minimum Charge - for a 10 year old Monthly, at the beginning of $0.68 per $1,000 of rider $0.68 per $1,000 of rider female, non-tobacco user, any Face each Policy month coverage amount per month coverage amount per Amount month ----------------------------------------------------------------------------------------------------------------------------- Example Charge - for a 38 year old Monthly, at the beginning of $2.58 per $1,000 of rider $1.62 per $1,000 of rider male, non-tobacco user, with a each Policy month coverage amount per month coverage amount per Face Amount of $200,000 for the month first Policy year -----------------------------------------------------------------------------------------------------------------------------
-------- /1/ Charges for the Additional Insured Term Insurance rider varies based on the insured's sex, age, risk class and Face Amount. Charges for the Accidental Death Benefit rider vary based on the Insured Person's age. The rider charges shown in the table may not be typical of the charges you would pay. The Policy Information page of your Policy will indicate the rider charges applicable to you. More detailed information concerning the charges for the optional benefit riders is available on request from our Administrative Center, shown under "Contact Information" on page 5 of this prospectus, or from your AGL representative. 14
Periodic Charges (optional benefit riders only) ---------------------------------------------------------------------------------------------------------------- Optional Benefit Rider Maximum Guaranteed Charge When Charge is Deducted Charge Current Charge ----------------------------------------------------------------------------------------------------------------- Disability Waiver Benefit/1/ Maximum Charge - for a 59 year old male or female, any risk class and Monthly, at the beginning of 44% of total monthly 22% of total monthly any Face Amount each Policy month deduction deduction ----------------------------------------------------------------------------------------------------------------- Minimum Charge - for a 20 year old Monthly, at the beginning of 7% of total monthly 2% of total monthly male any risk class and any Face each Policy month deduction deduction Amount ----------------------------------------------------------------------------------------------------------------- Example Charge - for a 38 year old Monthly, at the beginning of 12% of total monthly 6.6% of total monthly male, any risk class, with a Face each Policy month deduction deduction Amount of $200,000 for the first Policy year -----------------------------------------------------------------------------------------------------------------
-------- /1/ Charges for the Disability Waiver Benefit rider varies based on the insured's sex, age, risk class and Face Amount. The rider charges shown in the table may not be typical of the charges you would pay. The Policy Information page of your Policy will indicate the rider charges applicable to you. More detailed information concerning the charges for the optional benefit riders is available on request from our Administrative Center, shown under "Contact Information" on page 5 of this prospectus, or from your AGL representative. Please consult your insurance representative or contact AGL for information about the charges for the optional benefit riders. 15 The next table describes the current Fund fees and expenses that you will pay periodically during the time that you own the Policy. The table shows the maximum and minimum Total Annual Fund Operating Expenses before contractual waiver or reimbursement for any of the Funds for the fiscal year ended December 31, 2017. Current and future expenses for the Funds may be higher or lower than those shown.
Annual Fund Fees and Expenses (expenses that are deducted from the Fund assets) ------------------------------------------------------------------------------- Charge Maximum Minimum ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses for all the funds (expenses that are deducted from portfolio assets include management fees, distribution (12b-1) fees, and other expenses)/1/ 0.86% 0.10% -------------------------------------------------------------------------------
Details concerning each Fund's specific fees and expenses are contained in the Fund's prospectus. -------- /1/ Currently 4 of the Funds have contractual reimbursements or fee waivers. These reimbursements or waivers expire on April 30, 2020. These contractual reimbursements or fee waivers do not change the maximum or minimum annual Fund fees and expenses reflected in the table. 16 GENERAL INFORMATION American General Life Insurance Company We are American General Life Insurance Company ("AGL" or the "Company"). AGL is a stock life insurance company organized under the laws of Texas. AGL's home office is 2727-A Allen Parkway, Houston, Texas 77019-2191. 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 International Group, Inc. ("AIG"), a Delaware corporation. AIG is a leading global insurance organization. AIG provides a wide range of property casualty insurance, life insurance, retirement products, and other financial services to commercial and individual customers in more than 80 countries and jurisdictions. AIG common stock is listed on the New York Stock Exchange. More information about AIG may be found in the regulatory filings AIG files from time to time with the U.S. Securities and Exchange Commission ("SEC") at www.sec.gov. AGL is regulated for the benefit of Policy Owners by the insurance regulator in its state of domicile and also by all state insurance departments where it is licensed to conduct business. AGL is required by its regulators to hold a specified amount of reserves in order to meet its contractual obligations to Policy Owners. Insurance regulations also require AGL to maintain additional surplus to protect against a financial impairment; the amount of which surplus is based on the risks inherent in AGL's operations. Separate Account Consolidation Effective after the close of business on November 29, 2019, AGL consolidated Separate Account VUL-2 with Separate Account VL-R, with Separate Account VL-R being the surviving Separate Account after such consolidation (the "Consolidation"). The Consolidation did not affect the terms of, or the rights and obligations under your Policy, other than to reflect the change to the name of the separate account. The number of units and the accumulation values for the variable investment divisions in which you invest, and the variable investment divisions available under the Policy did not change as a result of the Consolidation. Your accumulation value immediately after the Consolidation was the same as the value immediately before the Consolidation. The Consolidation did not result in any adverse tax consequences for any Policy Owners. The purpose of the Consolidation was to reduce the ongoing administrative costs, independent accountant fees, and inefficiencies associated with maintaining multiple Separate Accounts, each with its own recordkeeping and reporting requirements. Separate Account VL-R After we deduct certain amounts from each premium, we put the balance, called the "net premium," into the Policy Account established for each Policy. We credit the net premium to the Policy Account as of the date we receive it, or, if later, the Register Date. We credit the net premium to the Policy Account before deducting any charges against the Policy Account due on that date. See "Charges Under the Policy" beginning on page 42. 17 We will invest the Policy Account in the Fidelity(R) VIP Government Money Market division until the fifteenth day after we issue the Policy, or if that is not a business day, until the following business day. We will then allocate the Policy Account to the Guaranteed Interest Division or to one or more of the variable investment divisions, or both, according to your instructions in the Policy application. These instructions will apply to any subsequent premium until you provide us with new instructions. Premium allocation percentages may be any whole number from zero to 100, but the sum must equal 100. We hold the Mutual Fund shares in which any of your accumulation value is invested in Separate Account VL-R (the "Separate Account"). The Company established Separate Account VL-R under the laws of the State of Texas on May 6, 1997. The Separate Account is registered as a unit investment trust with the SEC under the Investment Company Act of 1940 (the "1940 Act"). The Policies were previously issued through AGL Separate Account VUL-2. Prior to December 31, 2002, AGL Separate Account VUL-2 was a separate account of American Franklin, created on April 9, 1991 under Illinois insurance law. On December 31, 2002, and in conjunction with the merger of AGL and American Franklin, Separate Account VUL-2 became a separate account of AGL under Texas law. Effective on the close of business November 29, 2019, AGL Separate Account VUL-2 was consolidated into Separate Account VL-R. The Separate Account also issues interests under EquiBuilder II variable universal life insurance policies, which have policy features that are similar to those of EquiBuilder III Policies but which have a different sales charge structure. The assets in the Separate Account are our property. The assets in the Separate Account may not be used to pay any liabilities of AGL other than those arising from the Policies. AGL is obligated to pay all amounts under the Policies due the Policy Owners. Income, gains and losses credited to, or charged against, the Separate Account reflect the Separate Account's own investment experience and not the investment experience of AGL's other assets. Guarantee of Insurance Obligations Insurance obligations under all Policies with a date of issue prior to December 29, 2006 at 4:00 p.m. Eastern time are guaranteed (the "Guarantee") by American Home Assurance Company ("American Home"), an affiliate of AGL. Insurance obligations include, without limitation, Policy values invested in the Guaranteed Interest Division, death benefits and Policy features that provide return of premium or protection against Policy lapse. The Guarantee does not guarantee Policy value or the investment performance of the variable investment divisions available under the Policies. The Guarantee provides that Policy Owners can enforce the Guarantee directly. As of December 29, 2006 at 4:00 p.m. Eastern time (the "Point of Termination"), the Guarantee was terminated for prospectively issued Policies. The Guarantee will not cover any Policies with a date of issue later than the Point of Termination. The Guarantee will continue to cover all other Policies until all insurance obligations under such Policies are satisfied in full. American Home is a stock property-casualty insurance company incorporated under the laws of the State of New York on February 7, 1899. American Home's principal executive office is located at 175 Water Street, 18/th/ Floor, New York, New York 10038. American Home is licensed in all 50 states 18 of the United States and the District of Columbia, as well as certain foreign jurisdictions, and engages in a broad range of insurance and reinsurance activities. American Home is an indirect wholly owned subsidiary of American International Group, Inc. Guarantees for Policies issued prior to the Consolidation will continue after the Consolidation. As a result, the Consolidation of Separate Account VUL-2 into Separate Account VL-R will not impact the insurance obligations under the Guarantee. Communication 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. Administrative Center. The Administrative Center provides service to all Policy Owners. See "Contact Information" on page 5 of this prospectus. For applicants, your AGL representative will tell you if you should use an address other than the Administrative Center address. All premium payments, requests, directions and other communications should be directed to the appropriate location. You should mail premium payments and loan repayments (or use express delivery, if you wish) directly to the appropriate address shown on your billing statement. If you do not receive a billing statement, send your premium directly to the address for premium payments shown under "Contact Information" on page 5. You should communicate notice of the insured person's death, including any related documentation, to our Administrative Center address. eDelivery, eService, Telephone Transactions and Written Transactions. There are several different ways to request and receive Policy services. eDelivery. Instead of receiving paper copies by mail of certain documents we are required to provide to you, including annual Policy and Fund prospectuses, you may select eDelivery. eDelivery allows you to receive notification by E-mail when new or updated documents are available that pertain to your Policy. You may then follow the link contained within the E-mail to view these documents on-line. You may find electronically received documents easier to review and retain than paper documents. To enroll for eDelivery, you can complete certain information at the time of your Policy application (with one required extra signature). If you prefer, you can go to www.aig.com/eservice and at the same time you enroll for eService, enroll for eDelivery. You do not have to enroll for eService to enroll for eDelivery unless you enroll on-line. You may select or cancel eDelivery at any time. There is no charge for eDelivery. eService. You may enroll for eService to have access to on-line services for your Policy. These services include transferring values among investment options and changing allocations for future premiums. You can also view Policy statements. If you have elected eService, you may choose to handle certain Policy requests by eService, in writing or by telephone. We expect to expand the list of available eService transactions in the future. To enroll for eService, go to www.aig.com/eservice, click the eService login link, and complete the on line enrollment pages. You may select or cancel the use of eService at any time. There is no charge for eService. eService Transactions, Telephone Transactions and Written Transactions. Certain transaction requests currently must be made in writing. You must make the following requests in 19 writing (unless you are permitted to make the requests by eService or by telephone. See "Telephone transactions" on page 20). . transfer of accumulation value;* . change of allocation percentages for premium payments; * . change of allocation percentages for Policy deductions; * . telephone transaction privileges; * . loan;* . full surrender; . partial surrender;* . premium payments;** . change of beneficiary or contingent beneficiary; . loan repayments or loan interest payments;** . change of death benefit Option or manner of death benefit payment; . change in specified amount; . addition or cancellation of, or other action with respect to any benefit riders; . election of a payment Option for Policy proceeds; and . tax withholding elections. -------- * These transactions are permitted by eService, by telephone or in writing. ** These transactions are permitted by eService or in writing. 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 Administrative Center, shown under "Contact Information" on page 5, 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. One-time Premium Payments Using eService. You may use eService to schedule one-time premium payments for your Policy. The earliest scheduled payment date available is the next business day. For the purposes of eService one-time premium payments only, a business day is a day the United States Federal Reserve System ("Federal Reserve") is open. If payment scheduling is completed after 4:00 p.m. Eastern time, then the earliest scheduled payment date available is the second business day after the date the payment scheduling is completed. Generally, your payment will be applied to your Policy on the scheduled payment date, and it will be allocated to your chosen variable investment divisions based upon the prices set after 4:00 p.m. Eastern time on the scheduled payment date. See "Business Day and Close of Business" on page 47. Premium payments may not be scheduled for Federal Reserve holidays, even if the New York Stock Exchange ("NYSE") is open. If the NYSE is closed on your scheduled payment date, your payment will be allocated to your chosen variable investment divisions based upon the prices set after 4:00 p.m. Eastern time on the first day the NYSE is open following your scheduled payment date. 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 20 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 promptly mail a 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 request. Also, if due to malfunction or other circumstances your telephone request is incomplete or not fully comprehensible, we will not process the transaction. The phone number for telephone requests is 1-800-340-2765. General. It is your responsibility to carefully review all documents you receive from us and immediately notify the Administrative Center of any potential inaccuracies. We will follow up on all inquiries. Depending on the facts and circumstances, we may retroactively adjust your Policy, provided you notify us of your concern within 30 days of receiving the transaction confirmation, statement or other document. Any other adjustments we deem warranted are made as of the time we receive notice of the potential error. If you fail to notify the Administrative Center of any potential mistakes or inaccuracies within 30 days of receiving any document, we will deem you to have ratified the transaction. Variable Investment Divisions We divided the Separate Account into variable investment divisions, each of which invests in shares of a corresponding Fund of Fidelity(R) VIP, MFS(R) VIT and MFS(R) VIT II. One or more of the Funds may sell its shares to other funds. Currently, you may invest premium payments in variable investment divisions investing in the following Funds.
Investment Adviser Series Fund Descriptions (sub-adviser, if applicable) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Asset Manager/SM/ - High total return with Fidelity Management & Research Initial Class reduced risk Company (FMR) (FMR Co., Inc.) (Fidelity Investments Money Management, Inc.) (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Asset Manager: Maximize total return Fidelity Management & Research Growth(R) - Initial Class Company (FMR) (FMR Co., Inc.) (Fidelity Investments Money Management, Inc.) (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Contrafund/SM/ - Long-term capital Fidelity Management & Research Initial Class appreciation Company (FMR) (FMR Co., Inc.) (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Equity-Income/SM/ - Reasonable income Fidelity Management & Research Initial Class and potential capital Company (FMR) (FMR Co., Inc.) appreciation (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Government Money High level of current Fidelity Management & Research Market - Initial Class income consistent Company (FMR) (Fidelity Investments with preservation of Money Management, Inc.) capital and liquidity (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Growth - Initial Class Capital appreciation Fidelity Management & Research Company (FMR) (FMR Co., Inc.) (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP High Income - Initial High level of current Fidelity Management & Research Class income while Company (FMR) (FMR Co., Inc.) considering growth (Other affiliates of FMR) of capital -----------------------------------------------------------------------------------------------------
21
Investment Adviser Series Fund Descriptions (sub-adviser, if applicable) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Index 500 - Initial Total return of Fidelity Management & Research Class common stocks Company (FMR) (FMR Co., Inc.) (Geode publicly traded in the Capital Management, LLC) United States, as represented by the Standard & Poor's 500(R) Index ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Investment Grade Bond High level of current Fidelity Management & Research Initial Class income consistent Company (FMR) (Fidelity Investments with preservation of Money Management, Inc.) capital (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- Fidelity(R) VIP Overseas - Initial Long-term growth of Fidelity Management & Research Class capital Company (FMR) (FMR Co., Inc.) (Other affiliates of FMR) ----------------------------------------------------------------------------------------------------- MFS(R) VIT II Core Equity - Initial Capital appreciation Massachusetts Financial Services Class Company ("MFS") ----------------------------------------------------------------------------------------------------- MFS(R) VIT Growth - Initial Class Capital appreciation MFS ----------------------------------------------------------------------------------------------------- MFS(R) VIT Investors Trust - Initial Capital appreciation MFS Class ----------------------------------------------------------------------------------------------------- MFS(R) VIT Research - Initial Class Capital appreciation MFS ----------------------------------------------------------------------------------------------------- MFS(R) VIT Total Return - Initial Total return MFS Class ----------------------------------------------------------------------------------------------------- MFS(R) VIT Utilities - Initial Class Total return MFS -----------------------------------------------------------------------------------------------------
From time to time, certain Fund names are changed. When we are notified of a name change, we will make changes so that the new name is properly shown. However, until we complete the changes, we may provide you with various forms, reports and confirmations that reflect a Fund's prior name. You can learn more about the Funds, their investment policies, risks, expenses and all other aspects of their operations by reading their prospectuses. You should carefully read the Funds' prospectuses before you select any investment division. We do not guarantee that any Fund will achieve its objective. In addition, no single Fund or investment division, by itself, constitutes a balanced investment plan. A Fund's prospectus may be supplemented by the Fund's Investment Adviser. Please check the EquiBuilder III webpage at www.aig.com/individual/insurance/life/variable-universal-life/equibuilder-3 to view your Fund prospectuses and their supplements. Affiliates of the Funds compensate us for administering the Funds as variable funding options for the EquiBuilder III Policies. Currently, Massachusetts Financial Services Company, the investment adviser for MFS(R) VIT and MFS(R) VIT II, and Fidelity Management & Research Company ("FMR"), the investment adviser for Fidelity(R) VIP, pay us fees on an annualized basis, of a maximum of 0.35% of the aggregate net assets of each Fund attributable to the EquiBuilder III Policies and certain other variable contracts we issue. This fee will not be paid by the Funds, their shareholders or the Policy Owners. Voting Rights of a Policy Owner We invest the variable investment divisions' assets in shares of the Funds. We are the legal owner of the shares held in the Separate Account, and we have the right to vote on certain issues. Among other things, we may: . vote to elect the Boards of Trustees of the Funds; . vote to ratify the selection of independent auditors for the Funds; and 22 . vote on issues described in the Fund's current prospectus or requiring a vote by shareholders under the 1940 Act. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your Policy Account value. We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any portfolio shares that are not attributable to Policies, and any investment portfolio shares where the owner does not give us instructions, the same way we vote where we did receive owner instructions. We reserve the right to vote investment portfolio shares without getting instructions from Policy Owners if the federal securities laws, regulations, or their interpretations change to allow this. You may only instruct us on matters relating to the investment portfolios corresponding to divisions where you have invested assets as of the record date set by the investment portfolio's Board for the portfolio's shareholders meeting. We determine the number of investment portfolio shares in each division that we attribute to your Policy by dividing your account value allocated to that division by the net asset value of one share of the matching investment portfolio. We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your voting instructions. All investment portfolio shares have the right to one vote. The votes of all investment portfolios are cast together on a collective basis, except on issues where the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis. Examples of issues that require a portfolio-by-portfolio vote are: . changes in the fundamental investment Policy of a particular investment portfolio; or . approval of an investment advisory agreement. The Guaranteed Interest Division We invest any accumulation value you have allocated to our Guaranteed Interest Division as part of our general account assets. Unlike the Separate Account, our general account assets may be used to pay any liabilities of AGL in addition to those arising from the Policies. We credit interest on that account value at a rate which we declare from time to time. We guarantee that the interest will be credited at an annual effective rate of at least 4 1/2%. Although this interest increases the amount of any account value that you have in our Guaranteed Interest Division, account value will also be reduced by any charges that are allocated to this option under the procedures described under "Tables of Charges" beginning on page 11. The charges and expenses of the Funds shown under "Tables of Charges" do not apply to our Guaranteed Interest Division. You may transfer Policy Account value into the Guaranteed Interest Division at any time. However, there are restrictions on the amount you may transfer out of the Guaranteed Interest Division in a Policy year. Please see "Transfers from the Guaranteed Interest Division" on page 34. 23 Illustrations We may provide you with illustrations for your Policy's death benefit, Policy Account value, and cash surrender value based on hypothetical rates of return. Hypothetical illustrations also assume costs of insurance for a hypothetical person. These illustrations are illustrative only and should not be considered a representation of past or future performance. Your actual rates of return and actual charges may be higher or lower than these illustrations. The actual return for your Policy Account value will depend on factors such as the amounts you allocate to particular investment divisions, the amounts deducted for the Policy's fees and charges, the variable investment divisions' fees and charges, and your Policy loan and partial surrender history. Upon your request, we will provide a personalized illustration that takes into account your Policy's actual values and features as of the date the illustration is prepared. We reserve the right to charge a maximum fee of $25 for each personalized illustration prepared if you request us to do so more than once each year. We do not currently charge for additional personalized illustrations. POLICY FEATURES Keep in mind as you review the following Policy features that we no longer sell EquiBuilder III Policies. Age Generally, our use of age in your Policy and this prospectus refers to a person who is between six months younger and six months older than the stated age. Sometimes we refer to this as the "age nearest birthday". Death Benefits We will pay the death benefit (less any Policy loan and loan interest and any overdue charges) to your beneficiary when the Insured Person dies. You may choose one of the following two death benefit options: . Option A - the greater of (i) the Policy's Face Amount and (ii) the required minimum death benefit; or . Option B - the greater of (i) the Policy's Face Amount plus the Policy Account value and (ii) a multiple of the required minimum death benefit. The value of the death benefit under Option B is variable and fluctuates with Policy Account value. However; insurance under Option B costs more per month than under Option A. The value of the Policy Account and the net cash surrender value of the Policy under Option B will be lower than under Option A, all other things being equal. Under both death benefit options, the required minimum death benefit applies if it would provide a greater benefit (before deductions for any outstanding Policy loan and loan interest). This benefit is a percentage multiple of the amount in your Policy Account value. The percentage declines as the Insured Person gets older. The benefit will be your Policy Account value on the day the Insured Person dies multiplied by the percentage for the Insured Person's age (as of his or her nearest birthday) at the beginning of the Policy year of the Insured Person's death. For ages that are not shown on the table set forth below, the applicable percentages will decrease proportionately for each full year. 24
TABLE OF DEATH BENEFITS BASED ON POLICY ACCOUNT VALUES ---------------------------------------------------------------------------------------------------------------- Insured Person's Attained Age* 40 or under 45 50 55 60 65 70 75 95 ---------------------------------------------------------------------------------------------------------------- Minimum Death Benefit as a Percentage of the Policy Account 250% 215% 185% 150% 130% 120% 115% 105% 104% ----------------------------------------------------------------------------------------------------------------
*The percentages are interpolated for ages that are not shown here. For example, if the Insured Person is 40 years old and the Policy Account value is $100,000, the death benefit would be at least $250,000 (250% of $100,000). These percentages are based on provisions of federal tax law which require a minimum death benefit in relation to cash value for a Policy to qualify as life insurance. See "Federal Tax Considerations," on page 49. Under either Option A or Option B, the length of time a Policy remains in force depends on the net cash surrender value of the Policy. Because we deduct the charges that maintain the Policy from the Policy Account, coverage will last as long as the net cash surrender value can cover these deductions. See "Policy Lapse and Reinstatement," on page 48. The investment experience (which may be either positive or negative) of any amounts in the variable investment divisions and the interest earned in the Guaranteed Interest Division affect your Policy Account value. As a result, the returns from these divisions will affect the length of time a Policy remains in force. If you prefer to have insurance coverage that varies with the investment experience of your Policy Account, you should choose Option B. The death benefit under Option B will always be at least the Face Amount of the Policy or the required minimum death benefit described above (in either case, less any outstanding Policy loan and loan interest), whichever is greater. If you prefer to have insurance coverage that does not vary in amount and that has lower cost of insurance charges, you should choose Option A. Maturity Benefit If the Insured Person is still living on the Policy anniversary nearest his or her 95th birthday, we will pay you the Policy Account value net of any outstanding loan and loan interest. The Policy will then end. Policy Issuance Information When you complete an application for a Policy, it is submitted to us. We make the decision to issue a Policy based on the information in the application and our standards for issuing insurance and classifying risks. If we decide not to issue a Policy, we will refund any premium paid. We will not issue a new Policy having a Face Amount that is less than $50,000, nor will we issue a Policy for an Insured Person who is older than 75. No insurance under a Policy will take effect: (a) until we deliver a Policy and you pay the full initial premium while the Insured Person is living and (b) unless the information in the application continues to be true and complete, without material change, as of the time you pay the premium. 25 See "Flexible Premium Payments" on page 26 of this prospectus, for additional information concerning procedures for obtaining a Policy. Right to Examine You have a right to examine your Policy. If for any reason you are not satisfied with it, you may cancel the Policy within the time limits described below by sending it to us with a written request to cancel. A request to cancel the Policy must be postmarked no later than the latest of the following two dates: . 10 days after you receive your Policy; or . 45 days after you sign Part 1 of the Policy application. If you cancel the Policy, we will, within seven days of receipt of the Policy and a duly executed, timely notice of cancellation, refund an amount equal to the greater of (1) the premiums paid or (2) the Policy Account value plus any amount deducted from the premiums paid prior to allocation to the Policy Account. Insurance coverage ends when you send a request for cancellation. Flexible Premium Payments You may choose the amount and frequency of your premium payments, as long as they are within the limits described below. Even though premiums are flexible, the Policy Information page of each Policy will show a "planned" periodic premium. You determine the planned premium, within limits we set when you apply for a Policy. Planned premiums may not equal the amount of premiums that will keep your Policy in effect. Planned premiums are generally the amount you decide you want to pay and you can change them at any time. If mandated under applicable law, we may be required to reject a premium payment. You must pay a minimum initial premium on or before the date on which we deliver the Policy. The insurance will not go into effect until we receive this minimum initial premium. We determine the applicable minimum initial premium based on the age, sex and risk class of the Insured Person, the initial Face Amount of the Policy and any additional benefits you select. Make the first premium payment by check or money order payable to "American General Life Insurance Company" or "AGL." Pay any additional premiums by check payable to "American General Life Insurance Company" or "AGL" and send them to our Administrative Center shown under "Contact Information" on page 5. We will send you premium reminder notices based on your planned premium unless you request that we not do so in your application or by writing to our Administrative Center. Nevertheless, you may make the planned payment, skip the planned payment or change the frequency or the amount of the payment. Generally, you may pay other premiums at any time and in any amount, as long as each payment is at least $100. (In some states, Policies may have different minimum premium payments.) We may increase this minimum upon 90 days' written notice. We may also reject premium payments in a Policy year if the payments would cause the Policy to cease to qualify as life insurance under federal tax law. See "Federal Tax Considerations," on page 49. 26 If you stop paying premiums temporarily or permanently, the Policy will continue in effect until the net cash surrender value no longer covers the monthly charges against the Policy Account for the benefits selected. Planned premiums may not be sufficient to maintain a Policy because of investment experience, Policy changes or other factors. We have filed a Statement of Additional Information ("SAI") with the SEC which includes more information about your Policy. The back cover page to this prospectus describes how you can obtain a copy of the SAI. Premium Payments and Transaction Requests in Good Order We will accept the Policy Owner's instructions to allocate premium payments to investment options, to make redemptions (including loans) or to transfer values among the Policy Owner's investment options, contingent upon the Policy Owner's providing us with instructions in good order. This means that the Policy Owner's request must be accompanied by sufficient detail to enable us to allocate, redeem or transfer assets properly. When we receive a premium payment or transaction request in good order, it will be treated as described in this prospectus. If we receive an instruction that is not in good order, the requested action will not be completed, and any premium payments that cannot be allocated will be held in a non-interest bearing account until we receive all necessary information. We will attempt to obtain Policy Owner guidance on requests not received in good order for up to five business days following receipt. For instance, one of our representatives may telephone the Policy Owner to determine the intent of a request. If a Policy Owner's request is still not in good order after five business days, we will cancel the request, and return any unallocated premiums to the Policy Owner along with the date the request was canceled. Changes in EquiBuilder III Policies EquiBuilder III Policies provide you flexibility to choose from a variety of strategies which enable you to increase or decrease your insurance protection. A reduction in Face Amount lessens emphasis on the Policy's insurance coverage by reducing both the death benefit and the net amount at risk (the difference between the current death benefit under the Policy and the amount of the Policy Account). The reduced net amount at risk results in lower cost of insurance charges against the Policy Account. See "Changing the Face Amount of Insurance," on page 28. A partial withdrawal of net cash surrender value reduces the Policy Account and death benefit and may reduce the Policy's Face Amount, while providing a cash payment. It does not reduce the net amount at risk or the cost of insurance charges. See "Policy Account Transactions - Withdrawing Money from the Policy Account," on page 37. Choosing not to make premium payments may have the effect of reducing the Policy Account. Reducing the Policy Account will, under Option A, increase the net amount at risk (and thereby increase cost of insurance charges) while leaving the death benefit unchanged. Under Option B, it will decrease the death benefit while leaving the net amount at risk and the cost of insurance charge unchanged. See "Flexible Premium Payments," on page 26. 27 Increases in the Face Amount emphasize insurance coverage by increasing both the death benefit and the net amount at risk. See "Changing the Face Amount of Insurance," on page 28. Additional premium payments may increase the Policy Account, which has the effect, under Option A, of reducing the net amount at risk and cost of insurance charge while leaving the death benefit unchanged, or, under Option B, of increasing the death benefit while leaving the net amount at risk and cost of insurance charge unchanged. See "Flexible Premium Payments," on page 26. Changing the Face Amount of Insurance Any time after the first Policy year while a Policy is in force, you may change your Policy's Face Amount. You can do this by sending a written request to us. Any change will be subject to our approval. For increases in the Face Amount, we must have satisfactory evidence that the Insured Person is still insurable. Our current procedure if the Insured Person has become a more expensive risk is to ask you to confirm that you will pay higher cost of insurance charges on the amount of the increase. Any increase in the Face Amount must be at least $10,000. Monthly deductions from the Policy Account for the cost of insurance will increase, beginning on the date the increase in the Face Amount takes effect. In addition, we will assess a one-time administrative charge against the Policy Account for each Face Amount increase. This charge is currently $1.50 for each additional $1,000 of insurance, up to a maximum charge of $300. An increase in the Face Amount will not increase the maximum surrender charge. Increasing the Face Amount may increase the amount of premium you would need to pay to avoid a lapse of your Policy. You may not reduce the Face Amount below the minimum we require to issue a Policy at the time of the reduction. We will lower monthly charges against the Policy Account for the cost of insurance if you reduce the Face Amount. If you reduce the Face Amount during the first ten Policy years, we will assess a pro rata share of the applicable surrender charge against the Policy Account. See "Charges under the Policy - Transaction Fees - Surrender Charge," on page 43. Our current procedure is to disapprove a requested decrease in the Face Amount if it would trigger the required minimum death benefit. (This is the federal tax law provision, discussed earlier in this prospectus, that can require us to pay as a death benefit a percentage multiple of the Policy Account value.) Instead, we will ask you to make a partial withdrawal of net cash surrender value from the Policy Account, and then we decrease the Face Amount. See "Policy Features - Death Benefits," on page 24. Currently, if you request a Face Amount decrease when you have previously increased the Face Amount, we will apply the decrease first against the most recent increase in the Face Amount. We will then apply decreases to prior increases in the Face Amount in the reverse order in which such increases took place, and then to the original Face Amount. Policy changes that result in a reduction of the death benefit, such as a decrease in the Face Amount, may cause a Policy to become a MEC or may have other adverse tax consequences. See "Federal Tax Considerations," page 49. 28 Changing Death Benefit Options Any time after the first Policy year while a Policy is in force, you may change the death benefit option by sending us a written request. If you change the death benefit from Option A to Option B, the Face Amount will go down by the amount of Policy Account value on the date of the change. We will not allow this change if it would reduce the Face Amount below the minimum we require to issue a Policy. If you change the death benefit from Option B to Option A, the Face Amount of insurance will go up by the amount of Policy Account value on the date of the change. These increases and decreases in the Face Amount are made so that the amount of the death benefit remains the same on the date of the change. When the death benefit remains the same, there is no change in the net amount at risk, which is the amount on which cost of insurance charges are based. See "Charges under the Policy - Periodic Charges - Cost of Insurance Charge," on page 45. Changing the death benefit Option may have adverse tax consequences. You should consult a tax advisor before changing the death benefit Option. We will not require evidence of insurability for the increase in the Face Amount when you change from Option B to Option A, nor will we charge for this increase. We will not assess a surrender charge for the decrease in the Face Amount when you change from Option A to Option B. When Face Amount and Death Benefit Changes Go Into Effect Any change in the Face Amount or death benefit option of a Policy will be effective at the beginning of the Policy month following the date we approve the request. Any adjustment to Policy charges on account of the change will take effect at the same time. After we approve the request, we will send you a written notice of the approval showing each change. You should attach this notice to your Policy. We may also request that you return your Policy to us so that we can make the appropriate changes. In some cases, we may not approve a change you request because it might disqualify the Policy as life insurance under applicable federal tax law. We will send you a written notice of our decision to disapprove any requested change for this reason. See "Federal Tax Considerations" on page 49. Reports To Policy Owners After the end of each Policy year, we will send you a report that shows the current death benefit for your Policy, the value of your Policy Account, information about the variable investment divisions, the cash surrender value of your Policy, the amount of any outstanding Policy loans, the amount of any interest you owe on the loan and information about the current loan interest rate. The annual report will also show any transactions involving your Policy Account that occurred during the year. Transactions include premium allocations, deductions, and any transfers or withdrawals that you made in that year. We will also include in reports any information required by state law. We will send you notices of transfers of amounts between variable investment divisions and certain other Policy transactions. Policy Periods, Anniversaries, Dates and Ages We measure Policy years, Policy months and Policy anniversaries from the Register Date shown on the Policy Information page in the Policy. Each Policy month begins on the same day in each 29 calendar month as the day of the month that the Register Date occurred. For purposes of receiving Policy Owner requests, we are open for business at the same time that the NYSE is open for business. The Register Date is the earlier of the issue date or the date of payment. The date of payment will normally be the day we receive a check for the full initial premium. The issue date, shown on the Policy Information page of each Policy, is the date we actually issue a Policy, and depends on the underwriting and other requirements for issuing a particular Policy. Contestability is measured from the issue date, as is the suicide exclusion. If we receive your premiums through payroll allotment, such as salary deduction or salary reduction programs, we consider that we receive your premium on the day we actually receive it, rather than the day the deduction from your payroll occurs. This is important for you to know because your premium receives no interest or earnings for the time between the deduction from your payroll and our receipt of the payment. We do not accept military allotment programs. We will put the initial net premium in the Policy Account as of the date of payment. We will allocate it to the Fidelity(R) VIP Government Money Market division of the Separate Account, regardless of your premium allocation percentages, until the first business day 15 days after the issue date. We will allocate any other net premium we receive during that period to the Fidelity(R) VIP Government Money Market division. On the first business day 15 days after the issue date, we will reallocate the amount in the Policy Account in accordance with your premium allocation percentages. The first time that we assess charges and deductions under the Policy is as of the Register Date. See "Policy Features - Policy Issuance Information," on page 25, regarding the commencement of insurance coverage. The final Policy date is the Policy anniversary nearest the Insured Person's 95th birthday. The Policy ends on that date if the Insured Person is still alive and the maturity benefit is paid. ADDITIONAL BENEFIT RIDERS You may be eligible to add additional benefit riders to your Policy. We will assess a monthly charge against the Policy Account for each additional benefit rider, other than the Accelerated Benefit Settlement Option Rider. You can cancel these benefit riders at any time. Some of the riders provide guaranteed benefits that are obligations against our general account assets and not of the Separate Account. See "The Guaranteed Interest Division" on page 23. Please see the "Tables of Charges" on page 11 of this prospectus for the fees associated with these riders. Your Policy will have more details if you select any of these benefits. Eligibility for and changes in these benefits are subject to our rules and procedures as well as Internal Revenue Service guidance and rules that pertain to the Internal Revenue Code's definition of life insurance as in effect from time to time. The following additional benefit riders are currently available: Disability Waiver Benefit Rider With this benefit, we waive monthly charges from the Policy Account if the Insured Person becomes totally disabled on or after the Insured Person's fifth birthday and the disability continues for six months. There is a charge for this rider. If the disability starts before the Policy anniversary nearest the Insured Person's 60th birthday, we will waive monthly charges for life as long as the disability continues. If the disability starts after that, we will waive monthly charges only up to the Policy anniversary nearest the Insured Person's 65th birthday (as long as the disability continues). You may later elect to terminate this rider. If you do so, the charge will cease. 30 Accidental Death Benefit Rider We will pay an additional benefit if the Insured Person dies from bodily injury that results from an accident, provided the Insured Person dies before the Policy anniversary nearest his or her 70th birthday. There is a charge for this rider. You may later elect to terminate this rider. If you do so, the charge will cease. Children's Term Insurance Rider This benefit provides term life insurance on the lives of the Insured Person's children, including natural children, stepchildren and legally adopted children. There is a charge for this rider. Coverage for an insured child must begin before the child has reached age eighteen. Coverage lasts only until the Insured Person reaches age 65 or the child reaches age 25, whichever happens first. You may terminate this rider at any time. If you do so, the charge will cease. Term Insurance on an Additional Insured Person Rider This rider allows you to obtain term insurance for another person, such as the Insured Person's spouse. There is a charge for this rider. This rider is a level death benefit term insurance rider with annually increasing cost of insurance charges. The minimum amount of coverage is $25,000 and the maximum is five times the Policy's Face Amount. The coverage and deductions expire on the Policy anniversary nearest the Insured Person's age 70. You may later elect to terminate this rider. If you do so, the charge will cease. Accelerated Benefit Settlement Option Rider This rider allows you to receive an accelerated benefit in the event the Insured Person becomes terminally ill or is confined to a nursing facility, as those terms are defined in the rider. In determining the accelerated benefit, we will adjust the death benefit to reflect the payment option you select, the Insured Person's sex and age, the length of time the Policy has been in force, our current assumptions as to the Insured Person's life expectancy, interest rates, cost of insurance rates, and administrative charges, and a processing charge of not over $200. This Accelerated Benefit Settlement Option Rider is available with EquiBuilder III Policies in those states where the rider has been approved. You can get information on approval of this rider in a particular state from us or from a registered representative authorized to sell the Policies. There is no premium charge for this rider, and you may not add the rider after we have issued a Policy. Receipt of an accelerated benefit may be subject to income tax. You should seek assistance from your personal tax advisor before electing a payment option under this rider. POLICY ACCOUNT TRANSACTIONS The following transactions may have different effects on the Policy Account, death benefit, Face Amount or cost of insurance. You should consider the net effects before requesting Policy Account transactions. See "Policy Features - Changes in EquiBuilder III Policies," on page 27. Certain transactions also include charges. For information regarding other charges, see "Charges Under the Policy" on page 42. 31 eDelivery, eService, Telephone Transactions and Written Transactions See page 19 for information regarding eDelivery, eService, telephone transactions and written transactions. Changing Premium and Deduction Allocation Percentages You may change the allocation percentages of your net premiums or your monthly deductions by giving instructions to us. These changes will go into effect as of the date we receive the request, and they will affect transactions on and after that date. Transfers of Policy Account Value Among Investment Divisions You may transfer amounts from any variable investment division to any other variable investment division or to the Guaranteed Interest Division. You may make up to four transfers of Policy Account value among the variable investment divisions in each Policy year without charge. We consider your instruction to transfer from or to more than one investment division at the same time to be one transfer. Depending on the overall cost of performing these transactions, we may charge up to $25 for each additional transfer, except that we will impose no charge for a transfer of all amounts in the variable investment divisions to the Guaranteed Interest Division. Our current practice is to assess the $25 charge for each transfer after the twelfth transfer in a Policy year. To make a transfer, give us instructions at our Administrative Center, shown under "Contact Information" on page 5. If there is a charge for making a transfer, we will allocate the charge as described under "Charges under the Policy - Allocation of Policy Account Charges," on page 46. All simultaneous transfers included in one transfer request count as one transfer for purposes of any fee. A transfer from a variable investment division will take effect as of the business day we receive instructions to make the transfer. The minimum amount we will transfer on any date will be shown on the Policy Information page in each Policy and is usually $500. This minimum need not come from any one variable investment division or be transferred to any one variable investment division as long as the total amount transferred that day equals or exceeds the minimum. However, we will transfer the entire amount in any variable investment division even if it is less than the minimum specified in a Policy. Note that we will allocate future premiums and deductions to variable investment divisions or the Guaranteed Interest Division in accordance with existing allocations unless you also instruct us to change them. Special rules apply to transfers from the Guaranteed Interest Division. See "Policy Account Transactions - Transfers from the Guaranteed Interest Division," on page 34. Market Timing The Policies are not designed for professional market timing organizations or other entities or individuals using programmed and frequent transfers involving large amounts. Market timing carries risks with it, including: . dilution in the value of Fund shares underlying investment options of other Policy Owners; . interference with the efficient management of the Fund's portfolio; and 32 . increased administrative costs. We have policies and procedures affecting your ability to make transfers within your Policy. A transfer can be your allocation of all or a portion of a new premium payment to an investment option. You can also transfer your accumulation value in one investment option (all or a portion of the value) to another investment option. We are required to monitor the Policies to determine if a Policy Owner requests: . a transfer out of a variable investment division within two calendar weeks of an earlier transfer into that same variable investment division; or . a transfer into a variable investment division within two calendar weeks of an earlier transfer out of that same variable investment division; or . a transfer out of a variable investment division followed by a transfer into that same variable investment division, more than twice in any one calendar quarter; or . a transfer into a variable investment division followed by a transfer out of that same variable investment division, more than twice in any one calendar quarter. If any of the above transactions occurs, we will suspend such Policy Owner's same day or overnight delivery transfer privileges (including website, e-mail and facsimile communications) with notice to prevent market timing efforts that could be harmful to other Policy Owners or beneficiaries. Such notice of suspension will take the form of either a letter mailed to your last known address, or a telephone call from our Administrative Center to inform you that effective immediately, your same day or overnight delivery transfer privileges have been suspended. A Policy Owner's first violation of this policy will result in the suspension of Policy transfer privileges for ninety days. A Policy Owner's subsequent violation of this policy will result in the suspension of Policy transfer privileges for six months. In most cases, transfers into and out of the money market investment division are not considered market timing; however, we examine all of the above transactions without regard to any transfer into or out of the money market investment division. We treat such transactions as if they are transfers directly into and out of the same variable investment division. For instance: (1)if a Policy Owner requests a transfer out of any variable investment division into the money market investment division, and (2)the same Policy Owner, within two calendar weeks requests a transfer out of the money market investment division back into that same variable investment division, then (3)the second transaction above is considered market timing. Transfers under dollar cost averaging, automatic rebalancing or any other automatic transfer arrangements to which we have agreed are not affected by these procedures. The procedures above will be followed in all circumstances, and we will treat all Policy Owners the same. 33 In addition, Policy Owners incur a $25 charge for each transfer in excess of 12 each Policy year. Restrictions Initiated By the Funds and Information Sharing Obligations The Funds have policies and procedures restricting transfers into the Fund. For this reason or for any other reason the Fund deems necessary, a Fund may instruct us to reject a Policy Owner's transfer request. Additionally, a Fund may instruct us to restrict all purchases or transfers into the Fund by a particular Policy Owner. We will follow the Fund's instructions. The availability of transfers from any investment option offered under the Policy is unaffected by the Fund's policies and procedures. Please read the Funds' prospectuses and supplements for information about restrictions that may be initiated by the Funds. In order to prevent market timing, the Funds have the right to request information regarding Policy Owner transaction activity. If a Fund requests, we will provide mutually agreed upon information regarding Policy Owner transactions in the Fund. Transfers from the Guaranteed Interest Division You may request a transfer of unloaned amounts in the Guaranteed Interest Division to one or more of the variable investment divisions. We will make the transfer as of the date we receive a written request for it, but we will only process a transfer out of the Guaranteed Investment Division if we receive it within 30 days after a Policy anniversary. The maximum amount that you may transfer is the greater of 25% of the unloaned value in the Guaranteed Interest Division on the date the transfer takes effect or the minimum transfer amount shown in the Policy when we issued it. The smallest amount that you may transfer is the lesser of the unloaned value in the Guaranteed Interest Division on the date the transfer takes effect or the minimum transfer amount shown in the Policy. Borrowing from the Policy Account At any time that a Policy has a net cash surrender value, you may borrow money from us using only your Policy as security for the loan. The maximum aggregate amount that we will loan is 90% of the cash surrender value of the Policy on the business day we receive the request for a loan. Any new loan must be at least the minimum amount shown on the Policy Information page of a Policy, usually $500. Any amount that secures a loan remains part of the Policy Account but is assigned to the Guaranteed Interest Division. This loaned amount earns interest at a rate that we expect will be different from the interest rate for unloaned amounts in the Guaranteed Interest Division. See "Federal Tax Considerations," on page 49, with respect to the federal income tax consequences of a loan. Loan Requests Send requests for loans to us. You may specify how much of the loan should be taken from the unloaned amount, if any, of your Policy Account allocated to the Guaranteed Interest Division and how much should be taken from the amounts allocated to the variable investment divisions. If you request a loan from a variable investment division, we will redeem units sufficient to cover that part of the loan and transfer the amount to the loaned portion of the Guaranteed Interest Division. We determine the amounts in each division as of the day we receive the request for a loan. 34 If you do not specify how to allocate a loan, we will allocate it according to your deduction allocation percentages. If we cannot allocate it based on these percentages, we will allocate it based on the proportions of the unloaned amount, if any, of your Policy Account allocated to the Guaranteed Interest Division and the respective amounts allocated to each variable investment division to the unloaned value of the Policy Account. Policy Loan Interest Interest on a Policy loan accrues daily at an adjustable interest rate. We determine the rate at the beginning of each Policy year. The same rate applies to any outstanding Policy loans and any new amounts borrowed during the year. We will notify you of the current rate when you request a loan. We determine loan rates as follows: The maximum rate is the greater of: . 5 1/2%; or . the "Published Monthly Average" for the calendar month that ends two months before the interest rate is set. The "Published Monthly Average" is the Monthly Average Corporate yield shown in Moody's Corporate Bond Yield Averages published by Moody's Investor Services, Inc. If this average is no longer published, we will use any successor or the average established by the insurance supervisory official of the jurisdiction in which we delivered the Policy. We will not charge more than the maximum rate permitted by applicable law. We may also set a rate lower than the maximum. Any change in the rate from one year to the next will be at least 1/2 of 1%. The current loan interest rate will only change, therefore, if the Published Monthly Average differs from the previous loan interest rate by at least 1/2 of 1%. We will give advance notice of any increase in the interest rate on any loans outstanding. When Interest is Due Interest on any money you borrow from your Policy Account is due on each Policy anniversary. If you do not pay interest when it is due, we will add it to the outstanding loan and allocate it based on the deduction allocation percentages for the Policy Account then in effect. This means that we make an additional loan to pay the interest, and transfer amounts from the variable investment divisions and the unloaned portion of the Guaranteed Interest Division to make the loan. If we cannot allocate the interest based on these percentages, we will allocate it as described above for allocating the loan. Repaying the Loan You may repay all or part of a Policy loan at any time while the Insured Person is alive and a Policy is in force, provided that any loan repayment currently must be at least $100 (unless the amount of the outstanding loan and loan interest is less than $100). While a Policy loan is outstanding, we will apply all amounts we receive in respect to that Policy as a loan repayment unless you include with the payment written instructions that we should apply it as a premium payment. 35 We will first allocate loan repayments to the Guaranteed Interest Division until the amount of any loans originally allocated to that division is repaid. For example, if you borrowed $500 from the Guaranteed Interest Division and $500 from the Fidelity(R) VIP Equity - Income Division, we will not allocate repayments to the Fidelity(R) VIP Equity - Income Division until the $500 borrowed from the Guaranteed Interest Division is repaid. After you have repaid this amount, you may specify how we should allocate subsequent repayments. If you do not give us instructions, we will allocate repayments based on current premium allocation percentages at the time you make the repayment. The Effects of a Policy Loan on the Policy Account A loan against a Policy will have a permanent effect on the value of the Policy Account and, therefore, on benefits under the Policy, even if you repay it. When we make a loan against a Policy, the amount of the loan is set aside in the Guaranteed Interest Division where it earns a declared rate for loaned amounts. The loan amount will not be available for investment in the variable investment divisions or in the unloaned portion of the Guaranteed Interest Division. We expect the interest rate credited to loaned amounts in the Guaranteed Interest Division to be different from the rate that applies to unloaned amounts in the Guaranteed Interest Division. The interest rate for loaned amounts in all years in the Guaranteed Interest Division will never be less than 4 1/2%. Currently: . for the first ten Policy years, it will be 2% less than the interest rate charged on the loan, minus any charge for taxes or reserves for taxes, and . after the tenth Policy year, (a) the interest rate applied to Preferred Loan amounts (as defined below) in the Guaranteed Interest Division will be equal to the interest rate charged on the loan, minus any charge for taxes or reserves for taxes and (b) the interest rate for other loaned amounts in the Guaranteed Interest Division will be as set out in the first bullet. Each month, we add this interest to unloaned amounts of the Policy Account in the Guaranteed Interest Division. "Preferred Loans" are Policy loans made after the tenth Policy year which do not in the aggregate exceed a specified percentage of the cash surrender value. We will charge a lower interest rate on these loans. The maximum amount eligible for Preferred Loans for any year is: . 10% of your Policy Account value or "accumulation value" (which includes any amount we are holding in the Guaranteed Interest Division as collateral for your Policy loans) at the Policy anniversary; or . if less, your Policy's maximum remaining loan value at that Policy anniversary. We will always credit your Preferred Loan collateral amount at a guaranteed annual effective rate of 4 1/2%. We intend to set the rate of interest you are paying to the same 4 1/2% rate we credit to your Preferred Loan collateral amount, resulting in a zero net cost (0.00%) of borrowing for that amount. We have full discretion to vary the rate we charge you, provided that the rate: . will always be greater than or equal to the guaranteed Preferred Loan collateral rate of 4 1/2%; and 36 . will never exceed an annual effective rate of the greater of: (1)5 1/2%; or (2)the "Published Monthly Average" for the calendar month that ends two months before the interest rate is set. See "Policy Loan Interest" on page 35 for a description of the Published Monthly Average. The impact of a loan on a Policy Account will depend, on one hand, on the investment experience of the variable investment divisions and the rates declared for the unloaned portion of the Guaranteed Interest Division and, on the other hand, the rates declared for the loaned portion of the Guaranteed Interest Division. For example, if $1,000 is borrowed against $5,000 in the Fidelity(R) VIP Government Money Market division, the $1,000 will be set aside in the Guaranteed Interest Division. This $1,000 would not be affected by any increases or decreases in the value of units in the Fidelity(R) VIP Government Money Market division. However, the $1,000 earns interest at a declared interest rate. A Policy loan may also affect the amount of time that the insurance provided by a Policy remains in force. For example, a Policy may lapse more quickly when a loan is outstanding because you cannot use the loaned amount to cover monthly charges against the Policy Account. This may have negative tax consequences. If the monthly charges exceed the net cash surrender value of the Policy, then the lapse provisions of the Policy will apply. Since the Policy permits loans up to 90% of the cash surrender value, you may have to pay additional premium payments to keep the Policy in force if you borrowed the maximum amount. For more information about these provisions, see "Policy Lapse and Reinstatement," on page 48 of this prospectus. Withdrawing Money from the Policy Account After a Policy has been in effect for a year, you may request a partial surrender of the net cash surrender value by sending us a written request. The partial surrender and any reductions in Face Amount and net cash surrender value will be effective as of the business day we receive the request for them. Any partial surrender is subject to certain conditions. It must: . be at least $500; . not cause the death benefit or Face Amount to fall below the minimum for which we would issue the Policy; and . not cause the Policy to fail to qualify as life insurance under applicable law. You may specify how much of the partial surrender you want taken from each investment division. If you do not give us instructions, we will make the partial surrender on the basis of the then-current deduction allocation percentages. If we cannot withdraw the amount based on your directions or on the deduction allocation percentages, we will withdraw the amount based on the proportions of the unloaned amount, if any, of the Policy Account allocated to the Guaranteed Interest Division and the respective amounts allocated to the variable investment divisions to the total unloaned value of the Policy Account. For example, if 50% of a Policy Account were in the Guaranteed Interest Division and 50% were in the Fidelity(R) VIP Government Money Market Division and you wanted to withdraw $1,000, we would take $500 from each division. When you make a partial surrender of net cash surrender value, we assess a partial surrender processing fee against the Policy Account of a maximum of the lesser of $25 or 2% of the partial 37 surrender amount. This charge is currently $10. We will allocate this charge equally among the divisions from which the partial surrender was made. If we cannot allocate the charge in this manner, we will allocate it as described under "Charges under the Policy - Allocation of Policy Account Charges," on page 46. A partial surrender of net cash surrender value reduces the amount in the Policy Account. It also reduces the cash surrender value and the death benefit on a dollar-for-dollar basis. If the death benefit based on a percentage multiple applies, the reduction in death benefit can be greater. See "Policy Features - Death Benefits," on page 24. If you elected death benefit Option A, we will also reduce the Face Amount of the Policy by the amount of the partial surrender so there will be no change in the net amount at risk. We will not assess a surrender charge in connection with the reduction in Face Amount. We will send you an endorsement to reflect this change. We may ask you to return the Policy to us so that we can make a change. A partial surrender will not affect the Face Amount of the Policy if death benefit Option B is in effect. See "Federal Tax Considerations," on page 49, for the tax consequences of a partial surrender. A Policy loan may be more advantageous if your need for cash is temporary. Surrendering the Policy for Its Net Cash Surrender Value During the first ten Policy years, the cash surrender value of a Policy is the amount in the Policy Account minus the surrender charge described under "Charges under the Policy - Transaction Fees - Surrender Charge," on page 43. After ten Policy years, the cash surrender value and Policy Account are the same. Especially during the initial Policy years, the applicable surrender charge may be a substantial portion of the premiums paid. You may surrender a Policy for its net cash surrender value at any time while the Insured Person is living. You can do this by sending to us the Policy and a written request in a form satisfactory to us. The net cash surrender value of the Policy equals the cash surrender value minus any outstanding loan and loan interest. We will compute the net cash surrender value as of the business day we receive a request for surrender and the Policy, and all insurance coverage under the Policy will end on that date. See "Federal Tax Considerations," on page 49, for the tax consequences of a surrender. POLICY PAYMENTS Payment Options We can pay Policy benefits or other payments, such as the net cash surrender value or death benefit, immediately in one sum, or in another form of payment described below. Payments under these options do not depend on the investment experience of any variable investment division because none of the payment options is a variable payment option. Instead, interest accrues pursuant to the options chosen. (Such interest will be appropriately includable in federal gross income of the beneficiary). If you do not arrange for a specific form of payment before the Insured Person dies, the beneficiary will have the choice. However, if you make an arrangement for payment of the money, the beneficiary cannot change that choice after the Insured Person dies. Payment options will also be subject to our rules at the time of selection. Currently, you can pick these alternate payment options only if the proceeds applied are $1,000 or more and any periodic payment will be at least $20. The following payment options are generally available: 38 Income Payments for a Fixed Period. We will pay the amount applied in equal installments (including applicable interest) for a specific number of years, for up to 30 years. Life Income with Payments Guaranteed for a Fixed Term of Years. We will make payment at agreed intervals for a definite number of equal payments and as long thereafter as the payee lives. You (or the beneficiary in some cases) may choose any one of four definite periods: 5, 10, 15 or 20 years. Proceeds at Interest. The money will stay on deposit with us while the payee is alive. Interest will accrue on the money at a declared interest rate, and interest will be paid at agreed-upon intervals. Fixed Amount. We will pay the sum in installments in a specified amount. Installments will be paid until the original amount, together with any interest, has been exhausted. We guarantee interest under the foregoing options at the rate of 3% a year. We may also pay or credit excess interest on the options from time to time. We will determine the rate and manner of payment or crediting. Under the second option we will pay no excess interest on the part of the proceeds used to provide payments beyond the fixed term of years. The beneficiary or any other person who is entitled to receive payment may name a successor to receive any amount that would otherwise be paid to that person's estate if that person died. No successor may be named if a payment option chosen is contingent on the life of a beneficiary. The person who is entitled to receive payment may change the successor at any time. We must approve any arrangements that involve more than one of the payment options, or a payee who is not a natural person (for example, a corporation), or a payee who is a fiduciary. Also, the details of all arrangements will be subject to our rules at the time the arrangements take effect. This includes rules on the minimum amount payable under an option, minimum amounts for installment payments, withdrawal or commutation rights (rights to cancel an arrangement involving payments over time in return for a lump sum payment), the naming of people who are entitled to receive payment and their successors and the ways of proving age and survival. You may change your choice of a payment option (and may make later changes) and that change will take effect in the same way as it would if a beneficiary were being changed. See "The Beneficiary," on page 39. Any amounts we pay under the payment options will not be subject to the claims of creditors or to legal process, to the extent that the law provides. We may be required under applicable law to block a request for payment under a Policy until we receive instructions from the appropriate regulator. The Beneficiary You must name a 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 by sending us written notice satisfactory to us. The change will take effect on the date the notice is signed. However, the change will be subject to all payments made and actions we took under the Policy before we received the notice. Changing the beneficiary will cancel any previous arrangement made as to a payment option for benefits. You can pick a payment option for the new beneficiary. 39 At the time of the Insured Person's death, we will pay the benefit equally to the primary beneficiaries, or, if no primary beneficiaries are living, the first contingent beneficiaries (if any), or, if no primary or first contingent beneficiaries are living, the second contingent beneficiaries (if any). If no beneficiary is living when the Insured Person dies, we will pay the death benefit to you or to your executors or administrators. Assignment of a 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 we take 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 advisor before making an assignment. Payment of Proceeds We generally will pay any death benefits, net cash surrender value or loan proceeds within seven days after we receive the required form or request (and other documents that may be required) at our Administrative Center, shown under "Contact Information" on page 5. We determine death benefits as of the date of death of the Insured Person. Subsequent changes in the unit values of the variable investment divisions will not affect death benefits. We will pay interest covering the period from the date of death to the date of payment. We may defer determination of values and payment for one or more of the following reasons: . We contest the Policy, or we are deciding whether or not to contest the Policy; . the NYSE is closed other than weekend and holiday closings; . trading on the NYSE is restricted; . an emergency exists as determined by the SEC or other appropriate regulatory authority such that disposal of securities or determination of the value of the variable investment divisions is not reasonably practicable; . the SEC by order so permits for the protection of Policy Owners; or . we are on notice that the Policy is the subject of a court proceeding, an arbitration, a regulatory matter or other legal action. We may defer payment of any net cash surrender value or loan amount from the Guaranteed Interest Division for up to six months after receipt of a request. We will pay interest of at least 3% a year from the date we receive a request for withdrawal of net cash surrender value if payment from the Guaranteed Interest Division is delayed more than 30 days. 40 Delay Required under Applicable Law We may be required under applicable law to block a request for payment under a Policy until we receive instructions from the appropriate regulator. ADDITIONAL RIGHTS THAT WE HAVE We have the right at any time to: . transfer the resulting balance in an investment division in accordance with any transfer request you make that reduces your accumulation value for that division to below $500; . transfer the entire balance in proportion to any other investment divisions you then are using, if the accumulation value in an investment division is below $500 for any other reason; . replace the underlying Fund that any investment division uses with another fund, subject to SEC and other required regulatory approvals; . add, delete or limit investment divisions, combine two or more investment divisions or withdraw assets relating to the Policies from one investment division and put them into another, subject to SEC and other required regulatory approvals; . operate the Separate Account under the direction of a committee or discharge such a committee at any time; . change our underwriting and risk class guidelines; . operate the Separate Account, or one or more investment options, in any other form the law allows, including a form that allows us to make direct investments. The Separate Account 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 . 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. VARIATIONS IN POLICY OR INVESTMENT DIVISION TERMS AND CONDITIONS We have the right to make some variations in the terms and conditions of a Policy or its investment divisions. Any variations will be made only in accordance with uniform rules that we establish. We intend to comply with all applicable laws in making any changes and, if necessary, we will seek Policy Owner approval and SEC and other regulatory approvals. Here are some of the potential variations: 41 Policies Purchased Through "Internal Rollovers" We maintain published rules that describe the procedures necessary to replace life insurance policies we have issued. Not all types of other insurance 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. State Law Requirements AGL is subject to the insurance laws and regulations in every jurisdiction in which the 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. Expenses or Risks AGL may vary the charges and other terms within the limits 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. Underlying Investments You will be notified as required by law if there are any material changes in the underlying investments of an investment division that you are using. CHARGES UNDER THE POLICY Generally, we allocate monthly charges or certain transaction fees among the variable investment divisions and the unloaned portion of the Guaranteed Interest Division in accordance with the deduction allocation percentages you specify in your application, or in accordance with your subsequent instructions. However, we generally make deductions for the first Policy month from the Fidelity(R) VIP Government Money Market division. The following information describes the charges under the Policy as shown beginning on page 11 in the "Tables of Charges" section. Please review both prospectus sections, and the Policy form itself for information on charges. We deduct the charges described below to cover costs and expenses, services provided, and risks assumed under the Policies. The amount of a charge may not necessarily correspond to the cost of providing the services or benefits indicated by the designation of the charge or associated with the particular Policy. For example, the premium expense charge and the surrender charge may not fully cover all of the sales and distribution expenses we actually incur, and we may use proceeds from other charges, including the mortality and expense risk charge and the cost of insurance charge, to cover such expenses. Transaction Fees Premium Expense Charge. We deduct 5% of each Policy premium payment we receive as a Premium Expense Charge. We deduct this charge for each premium paid during a Policy year until the total amount of premiums for that Policy year equal the Target Premium. We do not deduct a Premium Expense Charge for premiums that you pay during that Policy year which exceed the Target Premium. During the next Policy year, we will again deduct a Premium Expense Charge of 5% until total premiums paid during that Policy year equal the Target Premium. 42 You can reduce aggregate Premium Expense Charges by concentrating premium payments in a few Policy years so that the premiums paid in each of those years exceed a Target Premium. However, concentrating premium payments during a Policy's early Policy years, and in particular during the first Policy year, may increase the surrender charge if you surrender your Policy or, in some instances, if you reduce your Policy's Face Amount or let it lapse during the first ten Policy years. In addition, concentrating premium payments during the first seven Policy years can increase the likelihood that a Policy will be considered a MEC. See "Federal Tax Considerations," on page 49. We deduct a Premium Expense Charge to recover some of the costs of distributing the EquiBuilder III Policies. These expenses include agents' commissions and printing prospectuses and sales literature. We do not profit from this charge. Statutory Premium Taxes. All states and certain other jurisdictions tax premium payments. Taxes currently range up to 3.5%. We deduct the applicable tax from each premium payment. This is a tax to AGL, so you cannot deduct it on your income tax return. The amount of the tax will vary depending on where you live. Since the tax deduction is a percentage of your premium, the amount of the tax will also vary with the amount of the premium payment. If you change your place of residence, we will change the deduction to match the new tax rate. Please notify us if you move. Surrender Charge (for full surrenders). Your Policy Information page shows the maximum surrender charge, which will equal 50% of one Target Premium. This maximum will not vary with the amount of premiums paid or when they are paid. At the end of the sixth Policy year, and at the end of each of the four succeeding Policy years, the maximum surrender charge will decrease by 20% of the initial maximum surrender charge. After the end of the tenth Policy year, there is no surrender charge. The maximum surrender charge will not be more than 50% of one Target Premium. Subject to the maximum surrender charge, we calculate the surrender charge based on actual premium payments. The surrender charge we currently assess equals the sum of . 25% of premium payments you make during the first Policy year up to the amount of one Target Premium, and . 9% of any additional premiums you pay during the first through tenth Policy years. Under the Policy's formula used to calculate surrender charges, paying less than one Target Premium in the first Policy year results in a surrender charge of less than the maximum surrender charge in the first year. If you continue to pay less than one Target Premium in the following years, you can surrender your Policy and pay less than the maximum surrender charge. Keep in mind, however, that the less premiums you pay, the less value your Policy will have to pay monthly charges, which increases the possibility your Policy will lapse. In addition, paying less premiums may increase cost of insurance charges (which are based on amount at risk). 43 -------------------------------------------------------------------------------- Assume a $200,000 initial Face Amount Policy for a male age 40. This Policy would have a Target Premium of $2,280 and a maximum surrender charge of $1,140 ($2,280 x 50%). Also, assume that all premium payments are made at the beginning of each Policy year and that no benefit riders have been selected. The following table shows the surrender charge only which would apply under different premium payment assumptions if surrender of the Policy were to occur during the indicated Policy year. --------------------------------------------------------------------------------
Premium Premium Premium Payment Payment Payment During Year Assumptions Charge Assumptions Charge Assumptions Charge ------------------------------------------------------------------------------- 1 $3,000 $ 635 $2280 $ 570 $1140 $ 285 ------------------------------------------------------------------------------- 2 3000 905 2280 775 3420 593 ------------------------------------------------------------------------------- 3 3000 1140 2280 980 2280 790 ------------------------------------------------------------------------------- 4 3000 1140 2280 1140 2280 1003 ------------------------------------------------------------------------------- 5 3000 1140 2280 1140 2280 1140 ------------------------------------------------------------------------------- 6 3000 1140 2280 1140 2280 1140 ------------------------------------------------------------------------------- 7 3000 912 2280 912 2280 912 ------------------------------------------------------------------------------- 8 3000 684 2280 684 2280 684 ------------------------------------------------------------------------------- 9 3000 456 2280 456 2280 456 ------------------------------------------------------------------------------- 10 3000 228 2280 228 2280 228 -------------------------------------------------------------------------------
We reduce the maximum surrender charge by the amount of any pro rata surrender charge we previously imposed in connection with a decrease in the Face Amount. Surrender Charge (for Face Amount decreases). During the first ten Policy years, we will treat a decrease in the Face Amount of a Policy as a surrender, and we will deduct a portion of the surrender charge. If the Face Amount of a Policy increases and then decreases, a surrender charge will apply only to a decrease below the original Face Amount (i.e., the Face Amount when we issue the Policy). Generally, we determine the pro rata surrender charge for a partial surrender by dividing the amount of the Face Amount decrease (excluding the portion that merely reverses a prior increase) by the original Face Amount and multiplying the fraction by the surrender charge that would apply to a total surrender. -------------------------------------------------------------------------------- For example, assume that we issue a Policy for a male age 40 with a Face Amount of $200,000. In the third Policy year, you decide to decrease this Face Amount by $100,000. Assume also that you paid an annual premium of $3,000 for each of the first three Policy years and that the maximum surrender charge for the third Policy year is $1,140. To determine the pro rata surrender charge: Divide the amount of the Face Amount decrease by the initial Face Amount. ($100,000 / $200,000 = .5) Then multiply this fraction by the surrender charge in effect before the decrease. Pro rata surrender charge = .5 x $1,140 = $570. Thus, you would be charged $570 for decreasing the Face Amount of this Policy from $200,000 to $100,000 during the third Policy year. The maximum surrender charge you might pay in the future would be reduced proportionately. We would send you a new Policy Information page that shows the new maximum charges. You will pay the maximum only if you surrender the Policy or let the Policy lapse after you pay enough premiums to reach the maximum. -------------------------------------------------------------------------------- Partial Surrender Processing Fee. For withdrawals of less than your full Policy Account value, we will deduct a maximum fee equal to the lesser of 2% of the amount withdrawn or $25 for each partial surrender you make. This charge is currently $10. We use this charge to help pay for the expense of making a partial surrender. See "Policy Account Transactions - Withdrawing Money from the Policy Account" on page 37. We do not charge a partial surrender processing fee for Face Amount decreases. 44 Face Amount Increase Charge. There is an administrative charge that is currently $1.50 for each $1,000 of Face Amount increase up to a maximum charge of $300. See "Policy Features - Changes in EquiBuilder III Policies," on page 27. Transfers. If you make more than four transfers of Policy Account value in a Policy year among variable investment divisions, we may charge up to $25 for each additional transfer in that Policy year. Our current practice is to assess the $25 charge for each transfer after the twelfth transfer in a Policy year. However, if you transfer all of the assets to the Guaranteed Interest Division, we will not impose any transfer charge. See "Policy Account Transactions - Transfers of Policy Account Value Among Investment Divisions," on page 32. We will consider a request for transfer involving the simultaneous transfer of funds from or to more than one investment division to be one transfer. Policy Owner Additional Illustration Charge. If you request more than one illustration of projected death benefits and Policy Account and cash surrender values in a Policy year, we may charge a $25 fee. Periodic Charges At the beginning of each Policy month, we deduct the following charges from each Policy Account. Administrative Charge. At the beginning of each of the first 12 Policy months that a Policy is in effect, we will also deduct an administrative charge of $30 per month. After the first 12 Policy months, the current charge will be $9 per month. We may raise this $9 charge to reflect higher costs, but we guarantee it will never be more than $12 per month. For the first 12 Policy months, we use this charge to recover costs of issuing and placing the Policy such as application processing, medical examinations, establishment of Policy records and underwriting costs (determining insurability and assigning the Insured Person to a risk class). After the first 12 Policy months, this charge is used to cover the continuing costs of maintaining the EquiBuilder III Policies, such as premium billing and collection, claim processing, Policy transactions, record keeping, other expenses, overhead, and communications with Policy Owners, such as regulatory mailings and responding to Policy Owners' requests. Cost of Insurance Charge. The monthly cost of insurance is our current monthly cost of insurance rate multiplied by the net amount at risk at the beginning of the Policy month divided by $1,000. The net amount at risk is the difference between the current death benefit and the amount in the Policy Account. If the current death benefit for the month rises due to the requirements of federal tax law (see "Policy Features - Death Benefits," on page 24), the net amount at risk for the month will also rise. For this purpose we determine the amount of each Policy Account before deducting the cost of insurance charge, but after all other charges due on that date. The cost of insurance charge will vary from month to month with changes in the net amount at risk and with the Insured Person's increasing age. We base the cost of insurance rates on the Insured Person's sex, age and risk class and the Face Amount of the Policy at the time of the charge. We may change these rates from time to time, but they will never be more than the maximum guaranteed rates set forth in a particular Policy. We base the 45 maximum guaranteed charges on the Commissioner's 1980 Standard Ordinary Male and Female Mortality Tables. In Montana and Massachusetts cost of insurance rates will not vary based on sex. Where required, we will provide cost of insurance charges that do not distinguish between males and females. See "Employee Benefit Plans" on page 8 of the SAI. Mortality and Expense Risk Charge. We deduct a charge from the variable investment divisions for assuming mortality and expense risks. The mortality risk that we assume is that Insured Persons will live for shorter periods than estimated. When this happens, we have to pay a larger death benefit than expected in relation to the cost of insurance charges we received. The expense risk we assume is that the cost of issuing and administering Policies will be greater than we expected. We assess a daily charge for mortality and expense risks at an annual effective rate of 0.75% of the value of the assets in the Separate Account attributable to EquiBuilder III Policies. This charge affects the unit values for the variable investment divisions. See "Policy Account Value - Determination of the Unit Value" on page 48. We may profit from this charge and may use such profits for any lawful purpose including paying distribution expenses. Fees and Expenses and Money Market Investment Division. During periods of low short-term interest rates, and in part due to Policy fees and expenses that are assessed as frequently as daily, the yield of the money market investment division may become extremely low and possibly negative. If the daily dividends paid by the underlying mutual fund for the money market investment division are less than the Policy's fees and expenses, the money market investment division's unit value will decrease. In the case of negative yields, your accumulation value in the money market investment division will lose value. Optional Rider Charges. We will deduct the cost of any additional (optional) benefit riders on a monthly basis. We may change these charges, but each Policy contains tables showing the guaranteed maximum rates for all of these insurance costs. See "Tables of Charges" on page 11. Annual Fund Expenses The value of the net assets of each variable investment division reflects the management fees and other expenses incurred by the corresponding Fund in which the variable investment division invests. For further information, consult the Funds' prospectuses and the "Tables of Charges" section in this prospectus. We guarantee that the fees for partial withdrawals, increases in Face Amounts and for transfers will never exceed the Maximum Guaranteed Charges shown in the "Tables of Charges". See also "Charges Under the Policy - Transaction Fees - Surrender Charge," on page 43. Allocation of Policy Account Charges Allocation percentages for deductions may be any whole numbers (from zero to one hundred) which add up to one hundred. You may change deduction allocation percentages by giving us instructions. Changes will be effective as of the date we receive your instructions in good order. 46 We will subtract charges for partial withdrawals of net cash surrender value and transfers of Policy Account values equally among the divisions from which the transactions were made. If we cannot make the charge this way, we will make it based on the proportion of the unloaned amounts in the Guaranteed Interest Division, if any, and the amounts in the variable investment divisions, to the total unloaned value of the Policy Account. POLICY ACCOUNT VALUE The amount in a Policy Account is the sum of the amounts allocated to the Guaranteed Interest Division and to the variable investment divisions. The amount in a Policy Account also reflects various deductions and charges. We deduct monthly charges on the first day of each Policy month. We deduct transaction charges or surrender charges on the effective date of the transaction. Charges against the Separate Account are reflected daily. Any amount you allocate to a variable investment division will increase or decrease depending on the investment experience of that division, and there is no guaranteed minimum cash value. We guarantee the value of amounts in a Policy Account you allocate to the Guaranteed Interest Division, and interest credited to those amounts. See "The Guaranteed Interest Division" on page 23. Amounts in the Variable Investment Divisions We use amounts you allocate, transfer or add to the variable investment divisions to purchase units representing undivided interests in the various divisions. The value of the units we credit to the Policy Account for a division represents the amount in that division. We calculate the number of units purchased or redeemed in a variable investment division by dividing the dollar amount of the transaction by the division's unit value next calculated at the close of business on the effective date of the transaction. (See "Policy Account Transactions" on page 31 regarding the effective dates of Policy Account transactions.) The number of units changes only when you purchase or redeem them, but the value of a unit will change with the investment performance of the corresponding Fund. The value of a unit also reflects charges we assess against the Separate Account. On any given day, the value your Policy Account has in a variable investment division is the unit value times the number of units you have in that division. The units of each variable investment division have different unit values. You purchase units of a variable investment division when you allocate premiums, repay loans or transfer amounts to that division. You redeem or sell units when you make withdrawals or transfer amounts from a variable investment division (including transfers for loans) or when we pay a death benefit when the Insured Person dies. We also redeem units for monthly charges or other charges from the Separate Account. Business Day and Close of Business We compute unit values for each variable division on each day that the NYSE is open for business. We call each such day a "business day." We compute Policy values as of the time the NYSE closes on each business day, which usually is 3:00 p.m. Central time. We call this our "close of business." We are closed only on those holidays the NYSE is closed. Generally we consider that we have received a premium payment or another communication from you on the day we actually receive it in good order at any of the addresses shown on page 5 of this 47 prospectus. If we receive it after the close of business on any business day, however, we consider that we have received it on the business day following that business day. Any premium payments we receive after our close of business are held in our general account until the next business day. Determination of the Unit Value The initial unit value for each investment division was set at $100. Subsequently, the unit value for any business day equals the unit value for the preceding business day multiplied by the net investment factor for that division on that business day. We determine a net investment factor for each variable investment division every business day as follows: . First, each Fund produces a price per Fund share following each close of the NYSE and provides that price to us; . Next, we determine the value of the shares belonging to the division in the corresponding Fund at the close of business that day (before giving effect to any Policy transactions for that day, such as premium payments or surrenders); . Then, we add any dividends or capital gains distributions paid for the corresponding Fund on that day; . Then, we divide this sum by the value of the amounts in the investment division at the close of business on the immediately preceding business day (after giving effect to any Policy transactions on that day); . Then, we subtract a daily mortality and expense risk charge for each calendar day between business days. (For example, a Monday calculation may include charges for Saturday and Sunday). The daily charge is 0.00002063, which is an annual effective rate of 0.75%; and . Finally, we subtract any daily charge for taxes or amounts set aside as a reserve for taxes. Generally, this means that unit values are adjusted to reflect what happens to the Funds, and also for the mortality and expense risk charge and any charge for taxes. POLICY LAPSE AND REINSTATEMENT Lapse of the Policy If the net cash surrender value is insufficient to pay the charges that are made against the Policy Account each month, or if the total of any Policy loan plus loan interest exceeds the cash surrender value, we will start procedures to terminate the Policy. We will notify you and any assignee shown on our records in writing that the net cash surrender value is insufficient to pay monthly charges or that an outstanding Policy loan plus loan interest exceeds the cash surrender value of the Policy. In either case, we will notify you and give you a grace period of 61 days to pay an additional premium to prevent lapse of the Policy, and that you must pay an amount of premium that we determine will cover estimated monthly charges for three months, plus any loan interest due, to avoid lapse of the Policy. The grace period begins with the first day of the Policy month for which all charges could not be paid. 48 If we receive at least the amount to cover three months' charges, plus any loan interest due, before the end of the grace period, we will use the payment to satisfy the overdue charges. We will place any remaining balance in the Policy Account, and will allocate it in the same manner as previous premium payments. We will apply a payment of less than the specified amount we receive before the end of the grace period to overdue charges. This will not prevent lapse of the Policy. If we do not receive at least the amount to cover three months' charges, plus any loan interest due, within the 61 days, the Policy will lapse without value. We will withdraw any amount left in your Policy Account and apply this amount to the charges owed us, including any applicable surrender charge. We will inform you that your Policy has ended without value. If the Insured Person dies during the grace period, we will pay the insurance benefits to the beneficiary, minus any outstanding Policy loan and loan interest and overdue charges. Reinstatement of the Policy You may reinstate your Policy within three years after it lapses if: . you provide evidence that the Insured Person is still insurable; and . you send us a premium payment sufficient to keep the Policy in force for three months after the date it is reinstated. The effective date of the reinstated Policy will be the beginning of the Policy month which coincides with or follows the date we approve the reinstatement application. Upon reinstatement, we will reduce your maximum surrender charge by the amount of all surrender charges you have already paid. We will calculate future surrender charges as if the Policy had been in force since the original Register Date. We will not reinstate previous loans. FEDERAL TAX CONSIDERATIONS Generally, the death benefit paid under a Policy is not subject to income tax. 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. If your Policy lapses, or you surrender your policy, you may have to pay income tax on a portion of any outstanding loan. 49 Tax Effects Discussions regarding the tax treatment of any life insurance policy are intended for general purposes only and are not intended as tax advice, either general or individualized, nor should they be interpreted to provide any predictions or guarantees of a particular tax treatment. This discussion generally is based on current federal income tax law and interpretations, and may include areas of those rules that are more or less clear or certain. Tax laws are subject to legislative modification, and while many such modifications will have only a prospective application, it is important to recognize that a change could have retroactive effect as well. Any verbal/written communications, including this form, you have with and/or received from us are intended solely to educate you or facilitate the education with respect to our products and services or to facilitate the administration of this contract. You must consult with your insurance agent or financial advisor in order to receive advice or recommendations regarding this contract or any contract purchased. We are not/will not provide advice/guidance/recommendations that create a fiduciary relationship with you. You should seek competent tax or legal advice, as you deem necessary or appropriate, regarding your own circumstances. Except as described in the Foreign Account Tax Compliance section on page 56 this discussion assumes that the policy owner is a natural person who is a U.S. citizen and resident. The consequences for corporate taxpayers, non-U.S. residents or non-U.S. citizens, may be different. The following discussion of federal income tax treatment is general in nature and is not intended as tax advice. General. The 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 at issue meet these requirements and that: . the death benefit received by the beneficiary under your Policy will generally 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," as explained in the following discussion. In all cases, however, the character of all income that is described as taxable to the payee will be ordinary income (as opposed to capital gain). Testing for Modified Endowment Contract Status The Code provides for a "seven-pay test." This test determines if 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; . the cumulative amount exceeds the premiums you would have paid by the same time under a similar fixed-benefit insurance policy; and 50 . the fixed benefit policy was designed (based on certain assumptions mandated under the Code) to provide for paid-up future benefits ("paid-up" means no future premium payments are required) after the payment of seven level annual premiums; then your Policy will be a modified endowment contract. 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 at any time during the new seven-pay period. 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, 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 that you request or that results 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 contract. We will attempt to notify you on a timely basis to prevent additional premium payments from causing your Policy to become a modified endowment contract. A life insurance Policy that is received in a tax free exchange under Section 1035 of the Code 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, adding a rider to 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. Under Notice 2016-63 published by the Internal Revenue Service, certain policy changes, not expressly provided for in your Policy, may have adverse federal income tax effects. You should consult your own competent, professional tax advisor on this issue. Rider Benefits We believe that premium payments and any death benefits or other benefits to be paid under any rider you may purchase under your Policy will not disqualify your Policy as life insurance for tax purposes. However, the tax law related to rider benefits is complex and some uncertainty exists. You should consult a qualified tax advisor regarding the impact of any rider you may purchase. 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 modified endowment contract, a Policy loan will be treated as indebtedness, and no part of the loan 51 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, however, 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 any accrued loan interest will be treated as a distribution and could be subject to federal income 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 while the insured person is still living will be taxed on an "income-first" basis. Distributions: . include loans (including any increase in the loan amount to pay interest on an existing loan, or an assignment or pledge to secure a loan) and partial surrenders; . will be considered taxable income to you to the extent your accumulation value exceeds your basis in the Policy; and . have their taxability determined by aggregating all modified endowment contracts issued by the same insurer (or its affiliates) to the same owner (excluding certain qualified plans) during any calendar year. For modified endowment contracts, your basis: . is similar to the basis described above for other Policies; and . will be increased by the amount of any prior loan under your Policy that was considered taxable income to you. 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 taxpayers 59 1/2 years of age or older; . in the case of a disability (as defined in the Code); or 52 . to distributions 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, policy lapse 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 one of the above exceptions 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. 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 and Investor Control 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 person died during such period of disqualification or subsequent periods, a portion of the death benefit proceeds would be taxable to the beneficiary. The Separate Account, through the Mutual Funds, intends to comply with these 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. The Treasury Department has provided only limited guidance describing the circumstances in which the ability of a Policy Owner to direct his or her investment to particular Mutual Funds within the Separate Account 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 the Separate Account, 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 the Separate Account. However, we reserve the right to make changes that we deem necessary to insure that the Policy qualifies as a life insurance contract. 53 Estate and Generation Skipping Taxes If the insured person is the Policy's owner, the death benefit under the 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. 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. You should consult with a qualified tax advisor 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 IRS and Treasury have issued regulations on split dollar life insurance arrangements. In general, a split dollar insurance arrangement involves two parties agreeing to split the premium and/or benefits of a life insurance policy. These arrangements are often used as a type of employee compensation or for making gifts among family members. The regulations provide two mutually exclusive regimes for taxing split dollar life insurance arrangements: the "economic benefit" regime and the "loan" regime. The economic benefit regime, under which the non-owner of the policy is treated as receiving certain economic benefits from its owner, applies to endorsement arrangements and most non-equity split dollar life insurance arrangements. The loan regime applies to collateral assignment arrangements and other arrangements in which the non-owner could be treated as loaning amounts to the owner. In addition, it should be noted that split dollar arrangements characterized as loans for tax purposes may be affected by the Corporate Responsibility Act of 2002 also referred to as the Sarbanes-Oxley Act of 2002 (the "Act"). The Act prohibits loans from companies publicly traded in the United States to their executives and officers. The status of split dollar arrangements under the Act is uncertain, in part because the SEC may view the tax treatment of such arrangements as instructive. Purchasers of life insurance policies are strongly advised to consult with a qualified tax advisor to determine the tax treatment resulting from a split dollar arrangement. 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 54 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. The rules for determining "P.S. 58" costs are currently provided under Notice 2002-8, 2002-1 CB 398. 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 advisor. As of the publication date, AIG has confirmed its position that it will not sell life insurance into a qualified plan under the Employee Retirement Security Act of 1974, as amended ("ERISA"). 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 holding the policy may be subject to reporting, disclosure and fiduciary obligations under ERISA. Our Taxes We report the operations of the Separate Account in our federal income tax return, but we currently pay no income tax on the Separate Account's investment income and capital gains, because these items are, for tax purposes, reflected in our variable universal life insurance Policy reserves. We currently make no charge to any Separate Account division for taxes. We reserve the right to make a charge in the future for taxes incurred; for example, a charge to the Separate Account 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 the Separate Account or allocable to the Policy. 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. 55 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. Note: 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, non-resident 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. Other tax withholding. Any owner not exempt from United States federal tax withholding should consult a tax advisor as to the availability of an exemption from, or reduction of, such tax withholding under an applicable income tax treaty, if any. Foreign Account Tax Compliance ("FATCA"). An owner who is not a "United States person," which is defined under the Code to mean: . a citizen or resident of the United States . a partnership or corporation created or organized in the United States or under the law of the United States or of any state, or the District of Columbia . any estate or trust other than a foreign estate or foreign trust (see Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust) . a person that meets the substantial presence test . any other person that is not a foreign person should be aware that FATCA, enacted in 2010, provides that a 30% withholding tax will be imposed on certain gross payments (which could include distributions from cash value life insurance or annuity products) made to a foreign entity if such entity fails to provide applicable certifications under a Form W-9, Form W-8-BEN-E, Form W-8-IMY, or other applicable form, each of which is effective for three years from the date of signature unless a change in circumstances makes any information on the form incorrect. Notwithstanding the preceding sentence, certain withholding certifications will remain effective until a change in circumstances makes any information on the form incorrect. The Policy owner must inform the Company within 30 days of any change in circumstances that makes any information on the form incorrect by furnishing a new IRS Form W-8 or acceptable substitute form. An entity, for this purpose, will be considered a foreign entity unless it provides an applicable certification to the contrary. 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 advisor. 56 BUSINESS DISRUPTION AND CYBER SECURITY RISKS We rely heavily on interconnected computer systems and digital data to conduct our variable product business activities. Because our variable product business is highly dependent upon the effective operation of our computer systems and those of our business partners, our business is vulnerable to disruptions from physical disruptions and utility outages, and susceptible to operational and information security risks resulting from information systems failure (e.g., hardware and software malfunctions) and cyber-attacks. These risks include, among other things, the theft, misuse, corruption and destruction of data maintained online or digitally, interference with or denial of service attacks on websites and other operational disruption and unauthorized release of confidential customer information. Such systems failures and cyber-attacks affecting us, any third party administrator, the underlying funds, intermediaries and other affiliated or third-party service providers, as well as our distribution partners, may adversely affect us and your contract value. For instance, systems failures and cyber-attacks may interfere with our processing of contract transactions, including the processing of orders from our website, our distribution partners, or with the Underlying Funds, impact our ability to calculate Accumulation Unit Values ("AUVs"), cause the release and possible destruction of confidential customer or business information, impede order processing, subject us and/or our service providers, distribution partners and other intermediaries to regulatory fines and financial losses and/or cause reputational damage. Cyber security risks may also impact the issuers of securities in which the Underlying Funds invest, which may cause the funds underlying your contract to lose value. Despite our implementation of administrative and technical controls and other preventative actions to reduce the risk of cyber-incident, there can be no assurance that we or our distribution partners or the Underlying Funds or our service providers will avoid losses affecting your contract and personal information due to cyber-attacks or information security breaches in the future. LEGAL PROCEEDINGS There are no pending legal proceedings affecting the Separate Account. Various federal, state or other regulatory agencies may from time to time review, examine or inquire into the operations, practices and procedures of the Company, such as through financial examinations, subpoenas, investigations, market conduct exams or other regulatory inquiries. Based on the current status of pending regulatory examinations, investigations and inquiries involving the Company, the Company believes it is not likely that these regulatory examinations, investigations or inquiries will have a material adverse effect on the financial position, results of operations or cash flows of the Company. Various lawsuits against the Company have arisen in the ordinary course of business. As of October 30, 2019, the Company believes it is not likely that contingent liabilities arising from the above matters will have a material adverse effect on the financial condition of the Company. FINANCIAL STATEMENTS The Financial Statements of AGL, the Separate Account and American Home can be found in the SAI. You may obtain a free copy of these Financial Statements if you write us at our Administrative Center at American General Life Insurance Company, VUL Administration, P.O. Box 305600, Nashville, Tennessee 37230-5600, or call us at 1-800-340-2765. Rule 12h-7 disclosure. In reliance on the exemption provided by Rule 12h-7 of the Securities Exchange Act of 1934 ("34 Act"), AGL does not intend to file periodic reports as required under the '34 Act. 57 REGISTRATION STATEMENTS Registration statements under the Securities Act of 1933, as amended, related to the Policies offered by this prospectus are on file with the SEC. This prospectus does not contain all of the information contained in the registration statements and exhibits. For further information regarding the Separate Account, AGL and its general account, the variable investment divisions and the Policy, please refer to the registration statements and exhibits. 58 DEFINITIONS Here are definitions of certain terms used in this prospectus: Administrative Center - The address of the Administrative Center of AGL is VUL Administration, P.O. Box 305600, Nashville, Tennessee 37230-5600. See "Contact Information" on page 5. Age - The age of the Insured Person on his or her birthday nearest the date on which a determination of the Insured Person's age is made. AGL, We, Our, Us - American General Life Insurance Company, a Texas stock life insurance company and the issuer of the EquiBuilder III individual flexible premium variable universal life insurance Policies described in this prospectus. Face Amount - The face amount of insurance shown on the Policy Information page of a Policy. The Face Amount is the minimum death benefit payable under a Policy while the Policy remains in effect. The death benefit proceeds will be reduced by any outstanding loan and loan interest on the Policy and any due and unpaid charges. Fund(s) - Portfolio(s) of Fidelity(R) Variable Insurance Products and MFS(R) Variable Insurance Trust, which are all "series" type mutual funds. Each portfolio is referred to as a Fund or Mutual Fund, and collectively, as the Funds or Mutual Funds. Guaranteed Interest Division - A part of AGL's General Account in which amounts in a Policy Account other than those allocated to the Separate Account earn interest at a rate stipulated in advance and guaranteed by AGL. Insured Person - The person whose life is insured under a Policy. Policy Account - The sum of amounts allocated to the investment divisions of the Separate Account and AGL's Guaranteed Interest Division for a particular Policy. Policy anniversary - An anniversary of the Register Date of a Policy while the Policy is in effect. Policy month - A month-long period beginning on the Register Date and on the same day in each subsequent calendar month while a Policy is in effect. Policy Owner, You, Your - The person designated as Policy Owner on the Policy Information page of a Policy. Policy year - An annual period beginning on the Register Date and on each anniversary of the Register Date while the Policy is in effect. Register Date - The date we issue a Policy or the date we receive a full initial premium payment, whichever is earlier. SEC - The Securities and Exchange Commission. Separate Account - Separate Account VL-R, a segregated investment account of AGL established under the Insurance Laws of the State of Texas in which amounts in a Policy Account other than those in the 59 Guaranteed Interest Division are held for investment in one of the portfolios of the Funds. The value of amounts in the Separate Account will fluctuate in accordance with the performance of the corresponding Funds. Statement of Additional Information - The Statement of Additional Information ("SAI") is a document, separate from this prospectus, that contains additional information about the EquiBuilder III Policies. Target Premium - A hypothetical annual premium which is based on the age and sex of the Insured Person, the initial Face Amount of the Policy and the types and amounts of any additional benefits included in the Policy. The Target Premium for each EquiBuilder III Policy is shown on the Policy Information page of the Policy. 60 [LOGO OF AIG] For additional information about the For eService and EquiBuilder III Policies and the Separate Account, eDelivery, or to view and you may request a copy of the Statement of Print Policy or Fund Additional Information (the "SAI"), dated prospectuses visit us at December 2, 2019. We have filed the SAI with the www.aig.com/eservice SEC and have incorporated it by reference into this prospectus. You may obtain a free copy of the SAI and the Policy or Fund prospectuses if you write us at our Administrative Center, which is located at VUL Administration, P.O. Box 305600, Nashville, Tennessee 37230-5600 or call us at 1-800-340-2765. You may also obtain the SAI from your AGL representative through which the Policies may be purchased. Additional information about the EquiBuilder III Policies, including personalized illustrations of death benefits, cash surrender values, and Policy Account values is available without charge to individuals considering purchasing a Policy, upon request to the same address or phone number printed above. We may charge current Policy Owners $25 per illustration if they request more than one personalized illustration in a Policy year. Information about the Separate Account, including the SAI, can also be reviewed and copied at the SEC's Office of Investor Education and Advocacy in Washington, D.C. Inquiries on the operations of the Office of Investor Education and Advocacy may be made by calling the SEC at 1-202-942-8090. Reports and other information about the Separate Account are available on the SEC's Internet site at http://www.sec.gov and copies of this information may be obtained, upon payment of a duplicating fee, by writing the Office of Investor Education and Advocacy of the SEC, 100 F Street N.E., Washington, D.C. 20549. Policies issued by: American General Life Insurance Company 2727-A Allen Parkway, Houston, TX 77019 EquiBuilder III Flexible Premium Variable Universal Life Insurance Policy Form Number T1735 Not available in the state of New York Distributed by AIG Capital Services, Inc. Member FINRA The underwriting risks, financial obligations and support functions associated with the products issued by American General Life Insurance Company ("AGL") are its responsibility. AGL is responsible for its own financial condition and contractual obligations and is a member of American International Group, Inc. ("AIG"). The commitments under the Policies are AGL's and AIG has no legal obligation to back those commitments. AGL does not solicit business in the state of New York. The Policies are not available in all states. (C) 2019 American International Group, Inc. All ICA File No. 811-06366 Rights Reserved AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICIES ISSUED BY AMERICAN GENERAL LIFE INSURANCE COMPANY VUL ADMINISTRATION DEPARTMENT P.O. BOX 305600, NASHVILLE, TENNESSEE 37230-5600 TELEPHONE: 1-800-340-2765; 1-713-831-3443; HEARING IMPAIRED: 1-888-436-5256 STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER 2, 2019 This Statement of Additional Information ("SAI") is not a prospectus. It should be read in conjunction with the prospectus for American General Life Insurance Company Separate Account VL-R (the "Separate Account" or "Separate Account VL-R") dated December 2, 2019, describing the EquiBuilder III flexible premium variable universal life insurance policies (the "Policy" or "Policies"). The prospectus sets forth information that a prospective investor should know before investing. For a copy of the prospectus, and any prospectus supplements, contact American General Life Insurance Company ("AGL" or "Company") at the address or telephone numbers given above. Each term used in this SAI that is defined in the related prospectus has the same meaning as the prospectus' definition. TABLE OF CONTENTS GENERAL INFORMATION........................................................ 3 AGL..................................................................... 3 Separate Account Consolidation.......................................... 3 Separate Account VL-R................................................... 3 American Home Assurance Company......................................... 4 SERVICES................................................................... 4 MORE INFORMATION ON LAPSE OF THE POLICY.................................... 5 DISTRIBUTION OF THE POLICIES............................................... 5 ADDITIONAL INFORMATION..................................................... 5 Material Conflicts...................................................... 6 Cost of insurance rates................................................. 6 Limits on AGL's Right to Challenge a Policy............................. 6 Special Purchase Plans.................................................. 7 Underwriting Procedures and Cost of Insurance Charges................... 7 Employee Benefit Plans.................................................. 8 Dividends............................................................... 8 ACTUARIAL EXPERT........................................................... 8 FINANCIAL STATEMENTS....................................................... 8
2 GENERAL INFORMATION AGL We are American General Life Insurance Company ("AGL"). AGL is a stock life insurance company organized under the laws of the State 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 International Group, Inc. ("AIG"), a Delaware corporation. AIG is a leading global insurance organization. AIG provides a wide range of property casualty insurance, life insurance, retirement products, and other financial services to commercial and individual customers in more than 80 countries and jurisdictions. AIG common stock is listed on the New York Stock Exchange. More information about AIG may be found in the regulatory filings AIG files from time to time with the U.S. Securities and Exchange Commission ("SEC") at www.sec.gov. The commitments under the Contracts are AGL's, and American International Group, Inc. has no legal obligation to back those commitments. Separate Account Consolidation Effective after the close of business on November 29, 2019, AGL consolidated Separate Account VUL-2 with Separate Account VL-R, with Separate Account VL-R being the surviving Separate Account after such consolidation (the "Consolidation"). Accordingly, all references to Separate Account VUL-2 are hereby replaced with Separate Account VL-R. The Consolidation did not affect the terms of, or the rights and obligations under your Policy, other than to reflect the change to the name of the separate account. The number of units and the accumulation values for the variable investment divisions in which you invest, and the variable investment divisions available under the Policy did not change as a result of the Consolidation. Your accumulation value immediately after the Consolidation was the same as the value immediately before the Consolidation. The Consolidation did not result in any adverse tax consequences for any Policy Owners. Until we amend all forms related to the Policies, some forms may still refer to the prior name of the separate account. The purpose of the Consolidation was to reduce the ongoing administrative costs, independent accountant fees, and inefficiencies associated with maintaining multiple Separate Accounts, each with its own recordkeeping and reporting requirements. Separate Account VL-R We hold the Mutual Fund shares in which any of your accumulation value is invested in Separate Account VL-R. The Company established Separate Account VL-R under the laws of the State of Texas on May 6, 1997. Separate Account VL-R is registered as a unit investment trust with the SEC under the Investment Company Act of 1940 (the "1940 Act"). The Policies were previously issued through AGL Separate Account VUL-2. Prior to December 31, 2002, Separate Account VUL-2 was a separate account of American Franklin, created on April 9, 1991 under Illinois insurance law. On December 31, 2002, and in conjunction with the merger of AGL and American Franklin, Separate Account VUL-2 became a separate account of AGL under Texas law. Effective after the close of business November 29, 2019, AGL Separate Account VUL-2 was consolidated into Separate Account VL-R. 3 For record keeping and financial reporting purposes, the Separate Account VL-R is divided into 163 separate "divisions," 16 of which correspond to the 16 variable "investment options" under the Policy. The remaining 147 divisions, and all of these 16 divisions, represent variable investment options available under other variable universal life policies we offer. We hold the Fund shares in which we invest your accumulation value for an investment option in the division that corresponds to that investment option. One or more of the Funds may sell its shares to other funds. The assets in Separate Account VL-R are our property. The assets in the Separate Account may not be used to pay any liabilities of AGL other than those arising from the Policies. AGL is obligated to pay all amounts under the Policies due the Policy Owners. We act as custodian for the Separate Account's assets. American Home Assurance Company All references in this SAI to American Home Assurance Company ("American Home") apply only to Policies with a date of issue prior to December 29, 2006 at 4:00 p.m. Eastern time. American Home is a stock property-casualty insurance company incorporated under the laws of the State of New York on February 7, 1899. American Home's principal executive office is located at 175 Water Street, 18/th/ Floor, New York, New York 10038. American Home is licensed in all 50 states of the United States and the District of Columbia, as well as certain foreign jurisdictions, and engages in a broad range of insurance and reinsurance activities. American Home is an indirect wholly-owned subsidiary of American International Group, Inc. Guarantees for Policies issued prior to the Consolidation will continue after the Consolidation. As a result, the Consolidation of Separate Account VUL-2 into Separate Account VL-R will not impact the insurance obligations under the Guarantee. SERVICES AGL and American General Life Companies, LLC ("AGLC"), were previously parties to a services agreement. AGL and AGLC are each indirect wholly-owned subsidiaries of American International Group, Inc. and therefore affiliates of one another. AGLC was a Delaware limited liability company established on August 30, 2002. Prior to that date, AGLC was a Delaware business trust. Its address is 2727-A Allen Parkway, Houston, Texas 77019-2191. Under the services agreement, AGLC provided shared services to AGL and certain other life insurance companies under the American International Group, Inc. holding company system at cost. Those services include data processing systems, customer services, product development, actuarial, internal auditing, accounting and legal services. AGLC was merged into AGL at the end of 2011. AIG now provides the services that were previously provided by AGLC. During 2018, 2017, and 2016, AGL paid AIG for these services $163,225,360, $108,138,878, and $89,508,561, respectively. AGL is reimbursed by the Affiliates at cost, to the extent the services apply to the Affiliates. We have not designed the Policies for professional market timing organizations or other entities or individuals using programmed and frequent transfers involving large amounts. We currently have no contractual agreements or any other formal or informal arrangements with any entity or individual permitting such transfers and receive no compensation for any such contract or arrangement. 4 MORE INFORMATION ON LAPSE OF THE POLICY A Policy which has lapsed may have tax consequences, 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. If your Policy lapses, you will not be able to take any loans or surrenders from your Policy unless you make a full surrender (subject to applicable surrender charges). You will also not be permitted to transfer Policy Account value between investment divisions while your Policy is in lapse. DISTRIBUTION OF THE POLICIES The Policies are offered on a continuous basis through AIG Capital Services, Inc. ("ACS"), located at 21650 Oxnard Street, Suite 750, Woodland Hills, CA 91367-4997. ACS is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, and a member of the Financial Industry Regulatory Authority ("FINRA"). The Company and ACS are each an indirect, wholly owned subsidiary of AIG. No underwriting fees are paid in connection with the distribution of the policies. We and ACS have sales agreements with various broker-dealers and banks under which the Policies will be sold by registered representatives of the broker-dealers or employees of the banks. These registered representatives and employees are also required to be authorized under applicable state regulations as life insurance agents to sell variable universal life insurance. The broker-dealers are ordinarily required to be registered with the SEC and must be members of FINRA. Broker-dealers earn commissions on Policy sales of up to 90% of premiums paid during the first Policy year. For Policies issued on or after October 8, 1997, annual trail commissions are earned at an annual rate of 0.25% on the amount in the Policy Account that is in the Separate Account. These commissions (and other distribution expenses, such as production incentive bonuses, agent's insurance and pensions benefits, agency management compensation and bonuses and expense allowances) are paid by AGL. They do not result in any additional charges against the Policy that are not described in the Policy prospectus. Under the Public Disclosure Program, FINRA Regulation ("FINRA") provides certain information regarding the disciplinary history of FINRA member broker-dealers and their associated persons in response to written, electronic or telephonic inquiries. FINRA's toll-free Public Disclosure Program Hotline telephone number is 1-800-289-9999 and their Web site address is www.finra.org. An investor brochure that includes information describing the Public Disclosure Program is available from FINRA. ADDITIONAL INFORMATION The purpose of this section is to provide you with information to help clarify certain discussion found in the related prospectus. Many topics, such as Policy sales loads and increases in your Policy's death benefit, have been fully described in the related prospectus. For any topics that we do not discuss in this SAI, please see the related prospectus. 5 Material Conflicts We are required to track events to identify any material conflicts from using investment portfolios for both variable universal life and variable annuity separate accounts. The boards of the Funds, AGL, and other insurance companies participating in the Funds have this same duty. There may be a material conflict if: . state insurance law or federal income tax law changes; . investment management of an investment portfolio changes; or . voting instructions given by owners of variable universal life insurance Policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). One or more of the investment portfolios may sell its shares to other investment portfolios. Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the portfolios involved from our variable investment options. We may take other action to protect Policy Owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require us, we may ignore instructions relating to changes in an investment portfolio's adviser or its investment policies. If we do ignore voting instructions, we give you a summary of our actions in the next semi-annual report to owners. 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 proportionately to each increment of specified amount to compute our net amount at risk. Limits on AGL's Right to Challenge a Policy We can challenge the validity of an insurance Policy (based on material misstatements in the application or, with respect to any Policy change, in the application for the change) if it appears that the Insured Person is not actually covered by the Policy under our rules. However, there are some limits on how and when we can challenge the Policy. Except on the basis of fraud, 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 reinstated. (Some states may require this time to be measured in some other way.) Except on the basis of fraud, we cannot challenge any Policy change that requires evidence of insurability (such as an increase in Face Amount) after the change has been in effect for two years during the Insured Person's lifetime. We can challenge at any time an additional benefit that provides benefits to the Insured Person in the event that the Insured Person becomes totally disabled. We can also require proof of continuing disability. 6 If the Insured Person dies within the time that the validity of the Policy may be challenged, we may delay payment until we decide whether to challenge the Policy. If the Insured Person's age or sex is misstated on any application, we can provide the death benefit and any additional benefits that would have been purchased by the most recent deduction for the cost of insurance and the cost of any additional benefits at the Insured Person's correct age and sex. If the Insured Person commits suicide within two years after the date on which the Policy was issued or reinstated, we will limit the proceeds payable to the total of all premiums that you paid to the time of death minus the amount of any outstanding Policy loan and loan interest and minus any partial withdrawals of net cash surrender value. If the Insured Person commits suicide within two years after the effective date of an increase in death benefit that you requested, we will pay the death benefit which was in effect before the increase, plus the monthly cost of insurance deductions for the increase (including the expense charge). (Some states require this time to be measured by some other date.) Special Purchase Plans Special purchase plans provide for variations in, or elimination of, certain Policy charges, and would be available to a defined group of individuals. We currently do not provide for or support any special purchase plans. Underwriting Procedures and Cost of Insurance Charges Cost of insurance charges for the Policies will not be the same for all Policy Owners. The chief reason is that the principle of pooling and distribution of mortality risks is based upon the assumption that each Policy Owner pays a cost of insurance charge related to the Insured Person's mortality risk which is actuarially determined based upon factors such as age, sex and risk class of the Insured Person and the face amount size band of the Policy. In the context of life insurance, a uniform mortality charge (the "cost of insurance charge") for all Insured Persons would discriminate unfairly in favor of those Insured Persons representing greater mortality risks to the disadvantage of those representing lesser risks. Accordingly, although there will be a uniform "public offering price" for all Policy Owners, because premiums are flexible and amounts allocated to the Separate Account will be subject to some charges that are the same for all owners, there will be a different "price" for each actuarial category of Policy Owners because different cost of insurance rates will apply. The "price" will also vary based on net amount at risk. The Policies will be offered and sold pursuant to this cost of insurance schedule and our underwriting standards and in accordance with state insurance laws. Such laws prohibit unfair discrimination among Insured Persons, but recognize that premiums must be based upon factors such as age, sex, health and occupation. A table showing the maximum cost of insurance charges will be delivered as part of the Policy. Our underwriting procedures are designed to treat applicants for Policies in a uniform manner. Collection of required medical information is conducted in a confidential manner. We maintain underwriting standards designed to avoid unfair or inconsistent decisions about which underwriting class should apply to a particular proposed insured person. In some group or employment-related situations, we may offer what we call simplified or guaranteed issue underwriting classes. These underwriting classes provide for brief or no medical underwriting. Our offer to insure a person under either class results in cost of insurance charges that are the same for each insured person. 7 Employee Benefit Plans Employers and employee organizations should consider, in consultation with counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase of Policies in connection with an employment-related insurance or benefit plan. The United States Supreme Court held, in a 1983 decision, that, under Title VII, optional annuity benefits under a deferred compensation plan could not vary on the basis of sex. We did not design the Policies for use in connection with qualified plans or trusts under federal tax laws. Dividends We pay no dividends on the Policies offered by this Prospectus. ACTUARIAL EXPERT Actuarial matters have been examined by Tim Donovan, who is Chief Life Pricing Actuary - Life, Health and Disability of AGL. An opinion on actuarial matters is filed as an exhibit to the registration statement we have filed with the SEC in connection with the Policies. FINANCIAL STATEMENTS PricewaterhouseCoopers LLP, located at 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, serves as the independent registered public accounting firm for Separate Account VL-R, Separate Account VUL-2, American General Life Insurance Company and American Home Assurance Company. You may obtain a free copy of these financial statements if you write us at our Administrative Service Center or call at 1-800-340-2765. The financial statements have also been filed with the SEC and can be obtained through its website at http://www.sec.gov. The following financial statements are included in the Statement of Additional Information in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting: . Pro Forma Narrative description of the effects of the Consolidation. . The Audited Financial Statements of Separate Account VL-R of American General Life Insurance Company as of December 31, 2018 and for each of the two years in the period ended December 31, 2018. . The Audited Financial Statements of Separate Account VUL-2 of American General Life Insurance Company as of December 31, 2018 and for each of the two years in the period ended December 31, 2018. . The Audited Statutory Financial Statements of American General Life Insurance Company as of December 31, 2018 and December 31, 2017 and for each of the three years in the period ended December 31, 2018. . The Audited Statutory Financial Statements of American Home Assurance Company as of December 31, 2018 and December 31, 2017 and for each of the three years in the period ended December 31, 2018. 8 The financial statements of AGL should be considered only as bearing on the ability of AGL to meet its obligation under the Policies. You should only consider the statutory financial statements of American Home Assurance Company ("American Home") that we include in the Statement of Additional Information as bearing on the ability of American Home, as guarantor, to meet its obligations under the guarantee of insurance obligations under Policies issued prior to December 29, 2006, at 4:00 p.m. Eastern Time ("Point of Termination"). Policies with an issue date after the Point of Termination are not covered by the American Home guarantee. Description of Separate Account Consolidation and Impact on Financial Statement Presentation Effective after the close of business November 29, 2019, American General Life Insurance Company ("AGL") consolidated AGL Separate Account VUL-2 ("Separate Account VUL-2") with AGL Separate Account VL-R ("Separate Account VL-R"), with Separate Account VL-R being the surviving Separate Account after such consolidation. Financial statements issued on and after December 2, 2019 will reflect the consolidation transaction. Pursuant to Regulation S-X, Rule 11-02(b), the following is a narrative description of the pro forma effects of the consolidation described above. The consolidation will result in the financial statements of Separate Account VUL-2 being combined with the financial statements of Separate Account VL-R. In effect, the consolidation will result in the transfer of the subaccounts in Separate Account VUL-2 to Separate Account VL-R. Each subaccount will remain unchanged and will continue to reflect the number and value of units currently outstanding. The statements of net assets, statements of operations and statements of changes in net assets will reflect each of the individual subaccount holdings and results, respectively, and the footnotes to the financial statements will reflect the individual subaccounts similar to what has historically been presented with the exception that the information will be presented in a single set of financial statements. The purpose of the Consolidation is to reduce the ongoing administrative costs, independent accountant fees, and inefficiencies associated with maintaining multiple Separate Accounts, each with its own recordkeeping and reporting requirements. 9 American General Life Companies Separate Account VL-R American General Life Insurance Company 2018 Annual Report December 31, 2018 Report of Independent Registered Public Accounting Firm To the Board of Directors of American General Life Insurance Company and the Contract Owners of Separate Account VL-R. Opinions on the Financial Statements We have audited the accompanying statements of assets and liabilities, including the schedules of portfolio investments, of each of the sub-accounts of Separate Account VL-R indicated in the table below as of December 31, 2018, and the related statement of operations and changes in net assets for each of the two years in the period then ended or each of the periods indicated in the table below, including the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the sub-accounts in the Separate Account VL-R as of December 31, 2018, and the results of each of their operations and the changes in each of their net assets for the two years in the period then ended or each of the periods indicated in the table below, in conformity with accounting principles generally accepted in the United States of America. Alger Capital Appreciation Portfolio Alger Mid Cap Growth Portfolio Class I-2 Shares Class I-2 Shares American Century VP Value Fund Class I American Funds IS Growth-Income Fund Class 2 American Funds IS Asset Allocation American Funds IS High-Income Bond Fund Class 2 Fund Class 2 American Funds IS Global Growth Fund American Funds IS International Fund Class 2 Class 2 American Funds IS Growth Fund Class 2 AST SA Wellington Government and Quality Bond Portfolio Class 3 AST SA Wellington Capital Appreciation Dreyfus VIF Quality Bond Portfolio Portfolio Class 3 Initial Shares Dreyfus IP MidCap Stock Portfolio Fidelity VIP Freedom 2030 Portfolio Initial Shares Service Class 2 Dreyfus VIF International Value Fidelity VIP Government Money Market Portfolio Initial Shares Portfolio Service Class 2 Dreyfus VIF Opportunistic Small Cap Fidelity VIP Growth Portfolio Service Portfolio Initial Shares Class 2 Fidelity VIP Asset Manager Portfolio Fidelity VIP Mid Cap Portfolio Service Service Class 2 Class 2 Fidelity VIP Contrafund Portfolio FTVIP Franklin U.S. Government Service Class 2 Securities VIP Fund Class 2 Fidelity VIP Equity-Income Portfolio FTVIP Templeton Foreign VIP Fund Service Class 2 Class 2 Fidelity VIP Freedom 2020 Portfolio Invesco V.I. Growth and Income Fund Service Class 2 Series I Fidelity VIP Freedom 2025 Portfolio Service Class 2 Invesco V.I. High Yield Fund Series I FTVIP Franklin Mutual Shares VIP Fund Invesco V.I. International Growth Fund Class 2 Series I FTVIP Franklin Small Cap Value VIP Janus Henderson Global Research Fund Class 2 Portfolio Service Shares FTVIP Franklin Small-Mid Cap Growth Janus Henderson Overseas Portfolio VIP Fund Class 2 Service Shares Goldman Sachs VIT Strategic Growth JPMorgan Insurance Trust Small Cap Fund Institutional Shares Core Portfolio Class 1 Invesco V.I. American Franchise Fund Series I MFS VIT Research Series Initial Class Invesco V.I. Core Equity Fund Series I MFS VIT Total Return Series Initial Class Invesco V.I. Global Real Estate Fund Neuberger Berman AMT Sustainable Series I Equity Portfolio Class I Invesco V.I. Government Securities Oppenheimer Global Strategic Income Fund Series I Fund/VA Non-Service Shares Janus Henderson Enterprise Portfolio PIMCO Short-Term Portfolio Service Shares Administrative Class Janus Henderson Forty Portfolio PIMCO Total Return Portfolio Service Shares Administrative Class JPMorgan Insurance Trust Core Bond Pioneer Select Mid Cap Growth VCT Portfolio Class 1 Portfolio Class I JPMorgan Insurance Trust Mid Cap Value Putnam VT International Value Fund Portfolio Class 1 Class IB MFS VIT Growth Series Initial Class Putnam VT Small Cap Value Fund Class IB MFS VIT II Core Equity Portfolio Putnam VT Sustainable Leaders Fund Initial Class Class IB MFS VIT New Discovery Series Initial SAST SA WellsCap Aggressive Growth Class Portfolio Class 1 Morgan Stanley VIF Growth Portfolio Class I VALIC Company I Mid Cap Index Fund Neuberger Berman AMT Large Cap Value Portfolio Class I VALIC Company I Nasdaq-100 Index Fund Neuberger Berman AMT Mid Cap Growth VALIC Company I Science & Technology Portfolio Class I Fund Oppenheimer Conservative Balanced Fund/VA Non Service Shares VALIC Company I Small Cap Index Fund Oppenheimer Global Fund/VA Non Service Shares VALIC Company I Stock Index Fund PIMCO CommodityRealReturn Strategy Portfolio Administrative Class VALIC Company II Strategic Bond Fund PIMCO Global Bond Opportunities Vanguard VIF Real Estate Index Portfolio (Unhedged) Adminstrative Portfolio Class PIMCO Real Return Portfolio Administrative Class Pioneer Fund VCT Portfolio Class I Pioneer Mid Cap Value VCT Portfolio Class I Putnam VT Diversified Income Fund Class IB Putnam VT Equity Income Fund Class IB (1) (2) Putnam VT Growth Opportunities Fund Class IB SST SA Multi-Managed Mid Cap Value Portfolio Class 3 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 VALIC Company I Dynamic Allocation Fund VALIC Company I Emerging Economies Fund VALIC Company I Government Money Market I Fund VALIC Company I International Equities Index Fund VALIC Company I International Value Fund VALIC Company II Mid Cap Value Fund VALIC Company II Socially Responsible Fund Vanguard VIF High Yield Bond Portfolio (1)The Putnam VT Growth and Income Fund, in operation for the period January 1, 2016 to May 12, 2017 (cessation of operations), merged into the Putnam VT Equity Income Fund, in operation for the period May 12, 2017 (commencement of operations) to December 31, 2017. (2)Where there was a cessation of operations, only a statement of operations and changes in net assets is included for the respective period presented. Basis for Opinions These financial statements are the responsibility of American General Life Insurance Company management. Our responsibility is to express an opinion on the financial statements of each of the sub-accounts in the Separate Account VL-R based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to each of the subaccounts in the Separate Account VL-R in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of investments owned as of December 31, 2018 by correspondence with the transfer agents of the investee mutual funds. We believe that our audits provide a reasonable basis for our opinions. /s/ PricewaterhouseCoopers LLP Houston, Texas April 22, 2019 We have served as the auditor of one or more of the sub-accounts in the AIG Life and Retirement Separate Account Group since at least 1994. We have not been able to determine the specific year we began serving as auditor. 2 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENT OF ASSETS AND LIABILITIES December 31, 2018
Due from (to) Company's Investments at General Sub-accounts Fair Value Account, Net Net Assets ------------ -------------- ------------ ----------- Alger Capital Appreciation Portfolio Class I-2 Shares $ 7,356,556 $ -- $ 7,356,556 Alger Mid Cap Growth Portfolio Class I-2 Shares 2,737,895 -- 2,737,895 American Century VP Value Fund Class I 13,539,464 -- 13,539,464 American Funds IS Asset Allocation Fund Class 2 2,326,604 -- 2,326,604 American Funds IS Global Growth Fund Class 2 727,645 -- 727,645 American Funds IS Growth Fund Class 2 1,770,815 -- 1,770,815 American Funds IS Growth-Income Fund Class 2 2,061,677 -- 2,061,677 American Funds IS High-Income Bond Fund Class 2 361,464 -- 361,464 American Funds IS International Fund Class 2 525,792 -- 525,792 AST SA Wellington Capital Appreciation Portfolio Class 3 232,885 -- 232,885 AST SA Wellington Government and Quality Bond Portfolio Class 3 116,518 -- 116,518 Dreyfus IP MidCap Stock Portfolio Initial Shares 3,970,163 -- 3,970,163 Dreyfus VIF International Value Portfolio Initial Shares 117,604 -- 117,604 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 6,407,578 -- 6,407,578 Dreyfus VIF Quality Bond Portfolio Initial Shares 4,096,694 -- 4,096,694 Fidelity VIP Asset Manager Portfolio Service Class 2 3,780,901 -- 3,780,901 Fidelity VIP Contrafund Portfolio Service Class 2 28,392,983 -- 28,392,983 Fidelity VIP Equity-Income Portfolio Service Class 2 15,004,507 -- 15,004,507 Fidelity VIP Freedom 2020 Portfolio Service Class 2 360,714 -- 360,714 Fidelity VIP Freedom 2025 Portfolio Service Class 2 559,815 -- 559,815 Fidelity VIP Freedom 2030 Portfolio Service Class 2 2,359,621 -- 2,359,621 Fidelity VIP Government Money Market Portfolio Service Class 2 1,023,453 -- 1,023,453 Fidelity VIP Growth Portfolio Service Class 2 17,707,184 -- 17,707,184 Fidelity VIP Mid Cap Portfolio Service Class 2 8,071,996 -- 8,071,996 FTVIP Franklin Mutual Shares VIP Fund Class 2 5,989,211 -- 5,989,211 FTVIP Franklin Small Cap Value VIP Fund Class 2 6,322,587 -- 6,322,587 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 22,210 -- 22,210 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 1,599,147 -- 1,599,147 FTVIP Templeton Foreign VIP Fund Class 2 4,126,561 -- 4,126,561 Goldman Sachs VIT Strategic Growth Fund Institutional Shares 3,181,316 -- 3,181,316 Invesco V.I. American Franchise Fund Series I 13,001 -- 13,001 Invesco V.I. Core Equity Fund Series I 6,977,216 -- 6,977,216 Invesco V.I. Global Real Estate Fund Series I 438,602 -- 438,602 Invesco V.I. Government Securities Fund Series I 12,050 -- 12,050 Invesco V.I. Growth and Income Fund Series I 9,134,590 -- 9,134,590 Invesco V.I. High Yield Fund Series I 1,769,886 -- 1,769,886 Invesco V.I. International Growth Fund Series I 6,414,590 -- 6,414,590 Janus Henderson Enterprise Portfolio Service Shares 6,331,865 -- 6,331,865 Janus Henderson Forty Portfolio Service Shares 713,863 -- 713,863 Janus Henderson Global Research Portfolio Service Shares 2,818,406 -- 2,818,406 Janus Henderson Overseas Portfolio Service Shares 5,966,055 -- 5,966,055 JPMorgan Insurance Trust Core Bond Portfolio Class 1 1,265,297 -- 1,265,297 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 663,877 -- 663,877 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 3,101,349 -- 3,101,349 MFS VIT Growth Series Initial Class 11,673,310 -- 11,673,310 MFS VIT II Core Equity Portfolio Initial Class 4,274,993 -- 4,274,993 MFS VIT New Discovery Series Initial Class 5,251,759 -- 5,251,759 MFS VIT Research Series Initial Class 2,911,066 -- 2,911,066 MFS VIT Total Return Series Initial Class 215,588 -- 215,588 Morgan Stanley VIF Growth Portfolio Class I 3,911,601 -- 3,911,601 Neuberger Berman AMT Large Cap Value Portfolio Class I 25,534 -- 25,534 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 5,479,092 -- 5,479,092 Neuberger Berman AMT Sustainable Equity Portfolio Class I 129,447 -- 129,447 Oppenheimer Conservative Balanced Fund/VA Non Service Shares 1,199,241 -- 1,199,241 Oppenheimer Global Fund/VA Non Service Shares 6,402,814 -- 6,402,814 Oppenheimer Global Strategic Income Fund/VA Non-Service Shares 3,510 -- 3,510 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 587,286 -- 587,286 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 305,520 -- 305,520 PIMCO Real Return Portfolio Administrative Class 7,524,253 -- 7,524,253 PIMCO Short-Term Portfolio Administrative Class 3,671,595 -- 3,671,595 PIMCO Total Return Portfolio Administrative Class 12,129,200 -- 12,129,200 Pioneer Fund VCT Portfolio Class I 1,656,011 -- 1,656,011 Pioneer Mid Cap Value VCT Portfolio Class I 793,307 -- 793,307 Pioneer Select Mid Cap Growth VCT Portfolio Class I 2,559,747 -- 2,559,747
The accompanying Notes to Financial Statements are an integral part of this statement. 1 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENT OF ASSETS AND LIABILITIES December 31, 2018
Due from (to) Company's Investments General Sub-accounts at Fair Value Account, Net Net Assets ------------ ------------- ------------ ---------- Putnam VT Diversified Income Fund Class IB 5,665,739 -- 5,665,739 Putnam VT Equity Income Fund Class IB 11,718,433 -- 11,718,433 Putnam VT Growth Opportunities Fund Class IB 177,616 -- 177,616 Putnam VT International Value Fund Class IB 3,090,053 -- 3,090,053 Putnam VT Small Cap Value Fund Class IB 157,042 -- 157,042 Putnam VT Sustainable Leaders Fund Class IB 40,670 -- 40,670 SST SA Multi-Managed Mid Cap Value Portfolio Class 3 47,183 -- 47,183 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 2,654,340 -- 2,654,340 SAST SA WellsCap Aggressive Growth Portfolio Class 1 1,593,822 -- 1,593,822 VALIC Company I Dynamic Allocation Fund 3,439,714 -- 3,439,714 VALIC Company I Emerging Economies Fund 97,387 -- 97,387 VALIC Company I Government Money Market I Fund 8,312,365 -- 8,312,365 VALIC Company I International Equities Index Fund 2,593,223 -- 2,593,223 VALIC Company I International Value Fund 56,732 -- 56,732 VALIC Company I Mid Cap Index Fund 13,017,944 -- 13,017,944 VALIC Company I Nasdaq-100 Index Fund 6,330,427 -- 6,330,427 VALIC Company I Science & Technology Fund 3,978,318 -- 3,978,318 VALIC Company I Small Cap Index Fund 6,289,434 -- 6,289,434 VALIC Company I Stock Index Fund 18,931,067 -- 18,931,067 VALIC Company II Mid Cap Value Fund 60,871 -- 60,871 VALIC Company II Socially Responsible Fund 39,595 -- 39,595 VALIC Company II Strategic Bond Fund 202,859 -- 202,859 Vanguard VIF High Yield Bond Portfolio 6,229,346 -- 6,229,346 Vanguard VIF Real Estate Index Portfolio 11,664,388 -- 11,664,388
The accompanying Notes to Financial Statements are an integral part of this statement. 2 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 2018
Net Asset Value per Shares at Fair Cost of Shares Sub-accounts Shares Share Value Held Level* ------------ --------- --------- -------------- -------------- ------ Alger Capital Appreciation Portfolio Class I-2 Shares 108,073 $68.07 $ 7,356,556 $ 8,076,713 1 Alger Mid Cap Growth Portfolio Class I-2 Shares 140,046 19.55 2,737,895 2,940,250 1 American Century VP Value Fund Class I 1,352,594 10.01 13,539,464 12,107,650 1 American Funds IS Asset Allocation Fund Class 2 110,370 21.08 2,326,604 2,490,090 1 American Funds IS Global Growth Fund Class 2 28,535 25.50 727,645 782,560 1 American Funds IS Growth Fund Class 2 25,487 69.48 1,770,815 1,893,230 1 American Funds IS Growth-Income Fund Class 2 45,917 44.90 2,061,677 2,190,642 1 American Funds IS High-Income Bond Fund Class 2 39,332 9.19 361,464 398,318 1 American Funds IS International Fund Class 2 29,875 17.60 525,792 599,392 1 AST SA Wellington Capital Appreciation Portfolio Class 3 6,281 37.08 232,885 263,214 1 AST SA Wellington Government and Quality Bond Portfolio Class 3 7,937 14.68 116,518 117,508 1 Dreyfus IP MidCap Stock Portfolio Initial Shares 236,319 16.80 3,970,163 4,678,232 1 Dreyfus VIF International Value Portfolio Initial Shares 11,714 10.04 117,604 132,974 1 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 155,524 41.20 6,407,578 6,753,019 1 Dreyfus VIF Quality Bond Portfolio Initial Shares 361,261 11.34 4,096,694 4,307,402 1 Fidelity VIP Asset Manager Portfolio Service Class 2 283,638 13.33 3,780,901 4,336,983 1 Fidelity VIP Contrafund Portfolio Service Class 2 906,834 31.31 28,392,983 29,466,654 1 Fidelity VIP Equity-Income Portfolio Service Class 2 755,895 19.85 15,004,507 16,310,629 1 Fidelity VIP Freedom 2020 Portfolio Service Class 2 28,857 12.50 360,714 375,634 1 Fidelity VIP Freedom 2025 Portfolio Service Class 2 42,701 13.11 559,815 583,258 1 Fidelity VIP Freedom 2030 Portfolio Service Class 2 182,775 12.91 2,359,621 2,462,889 1 Fidelity VIP Government Money Market Portfolio Service Class 2 1,023,453 1.00 1,023,453 1,023,453 1 Fidelity VIP Growth Portfolio Service Class 2 286,015 61.91 17,707,184 16,515,632 1 Fidelity VIP Mid Cap Portfolio Service Class 2 276,249 29.22 8,071,996 9,175,553 1 FTVIP Franklin Mutual Shares VIP Fund Class 2 344,208 17.40 5,989,211 6,950,293 1 FTVIP Franklin Small Cap Value VIP Fund Class 2 433,054 14.60 6,322,587 7,974,697 1 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 1,459 15.22 22,210 27,301 1 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 135,636 11.79 1,599,147 1,682,640 1 FTVIP Templeton Foreign VIP Fund Class 2 323,906 12.74 4,126,561 4,735,560 1 Goldman Sachs VIT Strategic Growth Fund Institutional Shares 325,288 9.78 3,181,316 3,860,587 1 Invesco V.I. American Franchise Fund Series I 227 57.15 13,001 13,336 1 Invesco V.I. Core Equity Fund Series I 225,508 30.94 6,977,216 7,598,178 1 Invesco V.I. Global Real Estate Fund Series I 28,260 15.52 438,602 466,303 1 Invesco V.I. Government Securities Fund Series I 1,074 11.22 12,050 12,557 1 Invesco V.I. Growth and Income Fund Series I 521,678 17.51 9,134,590 11,177,815 1 Invesco V.I. High Yield Fund Series I 349,780 5.06 1,769,886 1,914,143 1 Invesco V.I. International Growth Fund Series I 194,499 32.98 6,414,590 6,796,705 1 Janus Henderson Enterprise Portfolio Service Shares 100,522 62.99 6,331,865 5,865,408 1 Janus Henderson Forty Portfolio Service Shares 21,534 33.15 713,863 792,773 1 Janus Henderson Global Research Portfolio Service Shares 61,071 46.15 2,818,406 2,217,650 1 Janus Henderson Overseas Portfolio Service Shares 232,685 25.64 5,966,055 6,932,203 1 JPMorgan Insurance Trust Core Bond Portfolio Class 1 118,696 10.66 1,265,297 1,266,488 1 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 65,342 10.16 663,877 658,029 1 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 146,983 21.10 3,101,349 3,337,233 1 MFS VIT Growth Series Initial Class 248,315 47.01 11,673,310 9,095,822 1 MFS VIT II Core Equity Portfolio Initial Class 197,186 21.68 4,274,993 4,598,254 1 MFS VIT New Discovery Series Initial Class 300,788 17.46 5,251,759 5,519,382 1 MFS VIT Research Series Initial Class 116,770 24.93 2,911,066 3,150,741 1 MFS VIT Total Return Series Initial Class 9,898 21.78 215,588 233,070 1 Morgan Stanley VIF Growth Portfolio Class I 136,674 28.62 3,911,601 4,056,362 1 Neuberger Berman AMT Large Cap Value Portfolio Class I 1,751 14.58 25,534 26,113 1 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 227,443 24.09 5,479,092 5,677,244 1 Neuberger Berman AMT Sustainable Equity Portfolio Class I 5,703 22.70 129,447 140,673 1 Oppenheimer Conservative Balanced Fund/VA Non Service Shares 83,107 14.43 1,199,241 1,225,283 1 Oppenheimer Global Fund/VA Non Service Shares 168,495 38.00 6,402,814 6,767,468 1 Oppenheimer Global Strategic Income Fund/VA Non-Service Shares 753 4.66 3,510 3,769 1 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 97,556 6.02 587,286 665,321 1 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 27,876 10.96 305,520 332,757 1 PIMCO Real Return Portfolio Administrative Class 634,958 11.85 7,524,253 8,202,826 1 PIMCO Short-Term Portfolio Administrative Class 356,812 10.29 3,671,595 3,680,531 1 PIMCO Total Return Portfolio Administrative Class 1,157,366 10.48 12,129,200 12,665,646 1 Pioneer Fund VCT Portfolio Class I 122,486 13.52 1,656,011 2,167,901 1 Pioneer Mid Cap Value VCT Portfolio Class I 51,082 15.53 793,307 1,009,254 1 Pioneer Select Mid Cap Growth VCT Portfolio Class I 103,132 24.82 2,559,747 2,747,680 1
* Represents the level within the fair value hierarchy under which the portfolio is classified as defined in ASC 820 and described in Note 3 to the financial statements. The accompanying Notes to Financial Statements are an integral part of this statement. 3 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 2018
Net Asset Value per Shares at Fair Cost of Shares Sub-accounts Shares Share Value Held Level* ------------ --------- --------- -------------- -------------- ------ Putnam VT Diversified Income Fund Class IB 971,825 $ 5.83 $ 5,665,739 $ 6,571,067 1 Putnam VT Equity Income Fund Class IB 506,853 23.12 11,718,433 12,058,655 1 Putnam VT Growth Opportunities Fund Class IB 18,560 9.57 177,616 146,163 1 Putnam VT International Value Fund Class IB 330,134 9.36 3,090,053 3,399,618 1 Putnam VT Small Cap Value Fund Class IB 17,725 8.86 157,042 227,783 1 Putnam VT Sustainable Leaders Fund Class IB 1,217 33.42 40,670 35,373 1 SST SA Multi-Managed Mid Cap Value Portfolio Class 3 3,417 13.81 47,183 59,344 1 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 153,076 17.34 2,654,340 2,962,437 1 SAST SA WellsCap Aggressive Growth Portfolio Class 1 89,340 17.84 1,593,822 1,818,203 1 VALIC Company I Dynamic Allocation Fund 299,627 11.48 3,439,714 3,578,462 1 VALIC Company I Emerging Economies Fund 12,950 7.52 97,387 102,722 1 VALIC Company I Government Money Market I Fund 8,312,365 1.00 8,312,365 8,312,365 1 VALIC Company I International Equities Index Fund 400,189 6.48 2,593,223 2,789,855 1 VALIC Company I International Value Fund 6,339 8.95 56,732 63,217 1 VALIC Company I Mid Cap Index Fund 539,269 24.14 13,017,944 13,562,171 1 VALIC Company I Nasdaq-100 Index Fund 497,675 12.72 6,330,427 5,386,045 1 VALIC Company I Science & Technology Fund 147,127 27.04 3,978,318 3,870,050 1 VALIC Company I Small Cap Index Fund 331,721 18.96 6,289,434 6,617,048 1 VALIC Company I Stock Index Fund 512,898 36.91 18,931,067 17,338,576 1 VALIC Company II Mid Cap Value Fund 3,356 18.14 60,871 71,827 1 VALIC Company II Socially Responsible Fund 1,963 20.17 39,595 38,975 1 VALIC Company II Strategic Bond Fund 18,994 10.68 202,859 211,317 1 Vanguard VIF High Yield Bond Portfolio 827,270 7.53 6,229,346 6,532,804 1 Vanguard VIF Real Estate Index Portfolio 1,008,158 11.57 11,664,388 12,938,216 1
* Represents the level within the fair value hierarchy under which the portfolio is classified as defined in ASC 820 and described in Note 3 to the financial statements. The accompanying Notes to Financial Statements are an integral part of this statement. 4 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Alger Capital Alger Mid Cap American Appreciation Growth American Funds IS American Portfolio Portfolio Century VP Asset Funds IS Class I-2 Class I-2 Value Fund Allocation Global Growth Shares Shares Class I Fund Class 2 Fund Class 2 ------------- ------------- ----------- ------------ ------------- For the Year Ended December 31, 2018 From operations: Dividends $ 6,846 $ -- $ 260,761 $ 39,540 $ 5,099 Mortality and expense risk and administrative charges (35,412) (15,272) (68,954) (6,188) (1,563) ----------- ----------- ----------- ---------- --------- Net investment income (loss) (28,566) (15,272) 191,807 33,352 3,536 Net realized gain (loss) 409,107 432,143 864,988 20,304 27,299 Capital gain distribution from mutual funds 1,310,404 430,316 1,018 87,295 40,158 Change in unrealized appreciation (depreciation) of investments (1,663,311) (1,045,698) (2,479,234) (270,411) (139,002) ----------- ----------- ----------- ---------- --------- Increase (decrease) in net assets from operations 27,634 (198,511) (1,421,421) (129,460) (68,009) ----------- ----------- ----------- ---------- --------- From contract transactions: Payments received from contract owners 366,615 174,140 754,379 437,362 162,561 Payments for contract benefits or terminations (847,573) (308,278) (1,305,026) (714) (27,690) Policy loans (5,480) (184,657) (25,252) (3,326) 14 Transfers between sub-accounts (including fixed account), net (97,008) (3,146) (273,344) 918,363 196,053 Contract maintenance charges (239,333) (136,447) (745,914) (369,406) (72,365) ----------- ----------- ----------- ---------- --------- Increase (decrease) in net assets from contract transactions (822,779) (458,388) (1,595,157) 982,279 258,573 ----------- ----------- ----------- ---------- --------- Increase (decrease) in net assets (795,145) (656,899) (3,016,578) 852,819 190,564 Net assets at beginning of period 8,151,701 3,394,794 16,556,042 1,473,785 537,081 ----------- ----------- ----------- ---------- --------- Net assets at end of period $ 7,356,556 $ 2,737,895 $13,539,464 $2,326,604 $ 727,645 =========== =========== =========== ========== ========= Beginning units 322,741 184,834 761,205 110,852 37,874 Units issued 43,445 48,463 60,971 108,959 34,876 Units redeemed (63,968) (64,505) (130,360) (22,728) (11,282) ----------- ----------- ----------- ---------- --------- Ending units 302,218 168,792 691,816 197,083 61,468 =========== =========== =========== ========== ========= For the Year Ended December 31, 2017 From operations: Dividends $ 12,455 $ -- $ 267,484 $ 20,857 $ 3,154 Mortality and expense risk and administrative charges (32,374) (14,795) (72,926) (1,801) (314) ----------- ----------- ----------- ---------- --------- Net investment income (loss) (19,919) (14,795) 194,558 19,056 2,840 Net realized gain (loss) 146,934 151,773 1,187,435 13,277 3,399 Capital gain distribution from mutual funds 484,283 74,821 -- 52,328 12,071 Change in unrealized appreciation (depreciation) of investments 1,280,885 539,247 (87,416) 87,138 96,485 ----------- ----------- ----------- ---------- --------- Increase (decrease) in net assets from operations 1,892,183 751,046 1,294,577 171,799 114,795 ----------- ----------- ----------- ---------- --------- From contract transactions: Payments received from contract owners 256,583 179,294 782,895 60,904 8,090 Payments for contract benefits or terminations (211,827) (76,404) (709,204) -- (50,884) Policy loans (21,916) 1,766 (84,126) -- 6,475 Transfers between sub-accounts (including fixed account), net 250,481 122,211 (474,798) 442,996 140,497 Contract maintenance charges (185,087) (131,820) (771,592) (24,062) (6,320) ----------- ----------- ----------- ---------- --------- Increase (decrease) in net assets from contract transactions 88,234 95,047 (1,256,825) 479,838 97,858 ----------- ----------- ----------- ---------- --------- Increase (decrease) in net assets 1,980,417 846,093 37,752 651,637 212,653 Net assets at beginning of period 6,171,284 2,548,701 16,518,290 822,148 324,428 ----------- ----------- ----------- ---------- --------- Net assets at end of period $ 8,151,701 $ 3,394,794 $16,556,042 $1,473,785 $ 537,081 =========== =========== =========== ========== ========= Beginning units 308,315 177,407 819,555 71,357 29,438 Units issued 57,242 33,730 119,692 56,676 16,288 Units redeemed (42,816) (26,303) (178,042) (17,181) (7,852) ----------- ----------- ----------- ---------- --------- Ending units 322,741 184,834 761,205 110,852 37,874 =========== =========== =========== ========== =========
The accompanying Notes to Financial Statements are an integral part of this statement. 5 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
AST SA American American Wellington American Funds IS Funds IS American Capital Funds IS Growth- High-Income Funds IS Appreciation Growth Fund Income Fund Bond Fund International Portfolio Class 2 Class 2 Class 2 Fund Class 2 Class 3 ----------- ----------- ----------- ------------- ------------ For the Year Ended December 31, 2018 From operations: Dividends $ 7,269 $ 28,336 $ 21,368 $ 9,126 $ -- Mortality and expense risk and administrative charges (3,092) (4,708) (867) (1,064) (577) ---------- ---------- -------- --------- -------- Net investment income (loss) 4,177 23,628 20,501 8,062 (577) Net realized gain (loss) 23,030 50,769 1,422 30,503 11,033 Capital gain distribution from mutual funds 103,509 119,796 -- 14,148 27,151 Change in unrealized appreciation (depreciation) of investments (216,155) (257,155) (32,358) (116,553) (43,556) ---------- ---------- -------- --------- -------- Increase (decrease) in net assets from operations (85,439) (62,962) (10,435) (63,840) (5,949) ---------- ---------- -------- --------- -------- From contract transactions: Payments received from contract owners 336,432 648,304 68,368 84,362 41,301 Payments for contract benefits or terminations (12,178) (33,894) (11,964) (14,711) (16,527) Policy loans 408 11 5 -- -- Transfers between sub-accounts (including fixed account), net 969,100 369,464 102,917 166,959 75,806 Contract maintenance charges (249,289) (323,855) (50,101) (59,467) (24,279) ---------- ---------- -------- --------- -------- Increase (decrease) in net assets from contract transactions 1,044,473 660,030 109,225 177,143 76,301 ---------- ---------- -------- --------- -------- Increase (decrease) in net assets 959,034 597,068 98,790 113,303 70,352 Net assets at beginning of period 811,781 1,464,609 262,674 412,489 162,533 ---------- ---------- -------- --------- -------- Net assets at end of period $1,770,815 $2,061,677 $361,464 $ 525,792 $232,885 ========== ========== ======== ========= ======== Beginning units 52,954 102,846 23,439 32,925 10,103 Units issued 102,941 98,674 16,901 36,745 9,763 Units redeemed (17,391) (43,233) (6,263) (17,998) (3,090) ---------- ---------- -------- --------- -------- Ending units 138,504 158,287 34,077 51,672 16,776 ========== ========== ======== ========= ======== For the Year Ended December 31, 2017 From operations: Dividends $ 3,582 $ 18,187 $ 16,574 $ 4,225 $ -- Mortality and expense risk and administrative charges (308) (797) (286) (193) (80) ---------- ---------- -------- --------- -------- Net investment income (loss) 3,274 17,390 16,288 4,032 (80) Net realized gain (loss) 11,211 36 681 1,657 716 Capital gain distribution from mutual funds 56,942 65,229 -- 2,255 12,739 Change in unrealized appreciation (depreciation) of investments 80,855 130,384 (4,835) 49,639 22,601 ---------- ---------- -------- --------- -------- Increase (decrease) in net assets from operations 152,282 213,039 12,134 57,583 35,976 ---------- ---------- -------- --------- -------- From contract transactions: Payments received from contract owners 14,146 19,415 8,173 10,476 6,163 Payments for contract benefits or terminations -- (7,855) -- -- -- Policy loans -- (30) (19) -- -- Transfers between sub-accounts (including fixed account), net 163,312 512,775 110,053 199,312 25,342 Contract maintenance charges (8,205) (12,736) (6,542) (3,795) (3,047) ---------- ---------- -------- --------- -------- Increase (decrease) in net assets from contract transactions 169,253 511,569 111,665 205,993 28,458 ---------- ---------- -------- --------- -------- Increase (decrease) in net assets 321,535 724,608 123,799 263,576 64,434 Net assets at beginning of period 490,246 740,001 138,875 148,913 98,099 ---------- ---------- -------- --------- -------- Net assets at end of period $ 811,781 $1,464,609 $262,674 $ 412,489 $162,533 ========== ========== ======== ========= ======== Beginning units 40,194 62,791 13,125 15,568 8,075 Units issued 20,071 50,684 11,519 20,237 3,575 Units redeemed (7,311) (10,629) (1,205) (2,880) (1,547) ---------- ---------- -------- --------- -------- Ending units 52,954 102,846 23,439 32,925 10,103 ========== ========== ======== ========= ========
The accompanying Notes to Financial Statements are an integral part of this statement. 6 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
AST SA Wellington Dreyfus VIF Dreyfus VIF Government Dreyfus IP International Opportunistic Dreyfus VIF and Quality MidCap Stock Value Small Cap Quality Bond Bond Portfolio Portfolio Initial Portfolio Initial Portfolio Initial Portfolio Initial Class 3 Shares Shares Shares Shares -------------- ----------------- ----------------- ----------------- ----------------- For the Year Ended December 31, 2018 From operations: Dividends $ 1,812 $ 28,014 $ 2,385 $ -- $ 124,122 Mortality and expense risk and administrative charges (225) (21,129) (292) (37,347) (20,722) -------- ----------- -------- ----------- ---------- Net investment income (loss) 1,587 6,885 2,093 (37,347) 103,400 Net realized gain (loss) (706) 71,741 8,105 285,707 (42,742) Capital gain distribution from mutual funds 35 574,389 -- 1,395,678 -- Change in unrealized appreciation (depreciation) of investments (1,049) (1,412,062) (34,101) (3,191,794) (206,089) -------- ----------- -------- ----------- ---------- Increase (decrease) in net assets from operations (133) (759,047) (23,903) (1,547,756) (145,431) -------- ----------- -------- ----------- ---------- From contract transactions: Payments received from contract owners 20,448 196,637 10,276 407,667 282,291 Payments for contract benefits or terminations -- (239,028) (9,465) (367,016) (196,816) Policy loans -- (7,618) 193 (70,404) (2,382) Transfers between sub-accounts (including fixed account), net 37,099 134,675 (238) 120,188 (239,676) Contract maintenance charges (20,281) (385,446) (5,072) (450,321) (428,090) -------- ----------- -------- ----------- ---------- Increase (decrease) in net assets from contract transactions 37,266 (300,780) (4,306) (359,886) (584,673) -------- ----------- -------- ----------- ---------- Increase (decrease) in net assets 37,133 (1,059,827) (28,209) (1,907,642) (730,104) Net assets at beginning of period 79,385 5,029,990 145,813 8,315,220 4,826,798 -------- ----------- -------- ----------- ---------- Net assets at end of period $116,518 $ 3,970,163 $117,604 $ 6,407,578 $4,096,694 ======== =========== ======== =========== ========== Beginning units 7,570 215,289 11,834 361,865 341,206 Units issued 6,813 15,753 8,454 22,739 21,087 Units redeemed (3,083) (28,710) (9,348) (38,620) (64,001) -------- ----------- -------- ----------- ---------- Ending units 11,300 202,332 10,940 345,984 298,292 ======== =========== ======== =========== ========== For the Year Ended December 31, 2017 From operations: Dividends $ 1,202 $ 52,173 $ 1,861 $ -- $ 102,333 Mortality and expense risk and administrative charges (32) (20,853) (371) (33,747) (22,134) -------- ----------- -------- ----------- ---------- Net investment income (loss) 1,170 31,320 1,490 (33,747) 80,199 Net realized gain (loss) (176) 124,544 109 277,080 (10,213) Capital gain distribution from mutual funds -- 77,080 -- 87,673 -- Change in unrealized appreciation (depreciation) of investments 772 442,726 29,719 1,316,412 121,401 -------- ----------- -------- ----------- ---------- Increase (decrease) in net assets from operations 1,766 675,670 31,318 1,647,418 191,387 -------- ----------- -------- ----------- ---------- From contract transactions: Payments received from contract owners 4,141 209,653 10,941 422,761 290,134 Payments for contract benefits or terminations -- (160,233) (1,976) (295,089) (187,139) Policy loans -- (28,573) 2,523 24,072 (99) Transfers between sub-accounts (including fixed account), net 16,155 (149,085) (1,739) (54,102) 94,236 Contract maintenance charges (865) (352,460) (5,216) (462,342) (426,887) -------- ----------- -------- ----------- ---------- Increase (decrease) in net assets from contract transactions 19,431 (480,698) 4,533 (364,700) (229,755) -------- ----------- -------- ----------- ---------- Increase (decrease) in net assets 21,197 194,972 35,851 1,282,718 (38,368) Net assets at beginning of period 58,188 4,835,018 109,962 7,032,502 4,865,166 -------- ----------- -------- ----------- ---------- Net assets at end of period $ 79,385 $ 5,029,990 $145,813 $ 8,315,220 $4,826,798 ======== =========== ======== =========== ========== Beginning units 5,735 237,494 11,400 379,560 357,140 Units issued 2,450 8,947 1,071 14,772 22,272 Units redeemed (615) (31,152) (637) (32,467) (38,206) -------- ----------- -------- ----------- ---------- Ending units 7,570 215,289 11,834 361,865 341,206 ======== =========== ======== =========== ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 7 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Fidelity VIP Asset Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP Manager Contrafund Equity-Income Freedom Freedom Portfolio Portfolio Portfolio 2020 Portfolio 2025 Portfolio Service Class Service Class Service Class Service Class Service Class 2 2 2 2 2 ------------- ------------- ------------- -------------- -------------- For the Year Ended December 31, 2018 From operations: Dividends $ 61,021 $ 142,561 $ 346,425 $ 5,031 $ 7,356 Mortality and expense risk and administrative charges (19,926) (141,076) (73,257) (1,785) (2,635) ---------- ----------- ----------- --------- --------- Net investment income (loss) 41,095 1,485 273,168 3,246 4,721 Net realized gain (loss) (52,826) 1,020,086 172,399 3,453 19,843 Capital gain distribution from mutual funds 145,905 2,940,930 808,618 14,687 11,836 Change in unrealized appreciation (depreciation) of investments (379,970) (5,990,205) (2,734,734) (48,186) (79,560) ---------- ----------- ----------- --------- --------- Increase (decrease) in net assets from operations (245,796) (2,027,704) (1,480,549) (26,800) (43,160) ---------- ----------- ----------- --------- --------- From contract transactions: Payments received from contract owners 297,719 1,624,260 865,446 38,435 93,002 Payments for contract benefits or terminations (355,118) (2,094,141) (814,655) (101,917) (1,136) Policy loans (98,209) (203,241) (29,974) (219) (8,529) Transfers between sub-accounts (including fixed account), net 5,021 (177,649) (363,986) 90,196 1,881 Contract maintenance charges (317,402) (2,144,916) (846,768) (26,111) (93,679) ---------- ----------- ----------- --------- --------- Increase (decrease) in net assets from contract transactions (467,989) (2,995,687) (1,189,937) 384 (8,461) ---------- ----------- ----------- --------- --------- Increase (decrease) in net assets (713,785) (5,023,391) (2,670,486) (26,416) (51,621) Net assets at beginning of period 4,494,686 33,416,374 17,674,993 387,130 611,436 ---------- ----------- ----------- --------- --------- Net assets at end of period $3,780,901 $28,392,983 $15,004,507 $ 360,714 $ 559,815 ========== =========== =========== ========= ========= Beginning units 288,419 1,633,046 980,078 24,020 35,817 Units issued 27,517 145,196 83,391 19,751 9,480 Units redeemed (57,341) (266,076) (145,502) (20,233) (9,999) ---------- ----------- ----------- --------- --------- Ending units 258,595 1,512,166 917,967 23,538 35,298 ========== =========== =========== ========= ========= For the Year Ended December 31, 2017 From operations: Dividends $ 70,788 $ 248,345 $ 256,126 $ 4,647 $ 7,217 Mortality and expense risk and administrative charges (20,738) (141,748) (76,304) (1,904) (3,214) ---------- ----------- ----------- --------- --------- Net investment income (loss) 50,050 106,597 179,822 2,743 4,003 Net realized gain (loss) (17,254) 1,210,979 230,958 20,455 58,685 Capital gain distribution from mutual funds 491,751 1,754,467 362,070 10,800 19,840 Change in unrealized appreciation (depreciation) of investments 19,173 3,076,774 1,197,102 22,809 26,453 ---------- ----------- ----------- --------- --------- Increase (decrease) in net assets from operations 543,720 6,148,817 1,969,952 56,807 108,981 ---------- ----------- ----------- --------- --------- From contract transactions: Payments received from contract owners 341,564 1,475,522 838,441 44,862 89,139 Payments for contract benefits or terminations (220,652) (1,391,806) (992,090) (38,621) (113,343) Policy loans (28,783) (172,093) (73,935) (19,613) 14,952 Transfers between sub-accounts (including fixed account), net 2,243 (1,253,080) (148,117) (11,275) (132,795) Contract maintenance charges (334,127) (1,891,023) (841,026) (19,860) (86,486) ---------- ----------- ----------- --------- --------- Increase (decrease) in net assets from contract transactions (239,755) (3,232,480) (1,216,727) (44,507) (228,533) ---------- ----------- ----------- --------- --------- Increase (decrease) in net assets 303,965 2,916,337 753,225 12,300 (119,552) Net assets at beginning of period 4,190,721 30,500,037 16,921,768 374,830 730,988 ---------- ----------- ----------- --------- --------- Net assets at end of period $4,494,686 $33,416,374 $17,674,993 $ 387,130 $ 611,436 ========== =========== =========== ========= ========= Beginning units 302,946 1,776,410 1,042,442 26,732 49,071 Units issued 29,035 198,644 122,043 6,711 21,317 Units redeemed (43,562) (342,008) (184,407) (9,423) (34,571) ---------- ----------- ----------- --------- --------- Ending units 288,419 1,633,046 980,078 24,020 35,817 ========== =========== =========== ========= =========
The accompanying Notes to Financial Statements are an integral part of this statement. 8 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Fidelity VIP Fidelity VIP Government Fidelity VIP Fidelity VIP FTVIP Freedom Money Market Growth Mid Cap Franklin 2030 Portfolio Portfolio Portfolio Portfolio Mutual Service Class Service Class Service Class Service Class Shares VIP 2 2 2 2 Fund Class 2 -------------- ------------- ------------- ------------- ------------ For the Year Ended December 31, 2018 From operations: Dividends $ 29,664 $ 7,316 $ 8,330 $ 39,912 $ 158,589 Mortality and expense risk and administrative charges (10,710) (1,321) (90,672) (43,073) (29,868) ---------- ----------- ----------- ----------- ----------- Net investment income (loss) 18,954 5,995 (82,342) (3,161) 128,721 Net realized gain (loss) 108,234 -- 921,279 173,582 130,770 Capital gain distribution from mutual funds 69,300 -- 2,879,611 905,353 246,943 Change in unrealized appreciation (depreciation) of investments (418,023) -- (3,723,760) (2,494,588) (1,121,010) ---------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations (221,535) 5,995 (5,212) (1,418,814) (614,576) ---------- ----------- ----------- ----------- ----------- From contract transactions: Payments received from contract owners 117,054 8,827,294 915,784 592,165 474,830 Payments for contract benefits or terminations (182,946) (232) (1,723,956) (1,170,477) (469,588) Policy loans (2,586) -- (46,747) (69,492) (97,216) Transfers between sub-accounts (including fixed account), net 968 (8,041,766) (138,415) (84,584) 68,407 Contract maintenance charges (93,191) (285,598) (955,263) (494,237) (355,937) ---------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from contract transactions (160,701) 499,698 (1,948,597) (1,226,625) (379,504) ---------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets (382,236) 505,693 (1,953,809) (2,645,439) (994,080) Net assets at beginning of period 2,741,857 517,760 19,660,993 10,717,435 6,983,291 ---------- ----------- ----------- ----------- ----------- Net assets at end of period $2,359,621 $ 1,023,453 $17,707,184 $ 8,071,996 $ 5,989,211 ========== =========== =========== =========== =========== Beginning units 156,726 51,864 909,510 493,472 416,827 Units issued 36,366 1,035,869 85,763 55,101 67,229 Units redeemed (43,548) (986,560) (159,438) (106,486) (83,419) ---------- ----------- ----------- ----------- ----------- Ending units 149,544 101,173 835,835 442,087 400,637 ========== =========== =========== =========== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 29,867 $ 1,145 $ 14,538 $ 50,011 $ 156,695 Mortality and expense risk and administrative charges (10,802) 1,392 (81,237) (46,114) (32,615) ---------- ----------- ----------- ----------- ----------- Net investment income (loss) 19,065 2,537 (66,699) 3,897 124,080 Net realized gain (loss) 27,902 -- 803,586 177,491 168,770 Capital gain distribution from mutual funds 88,664 -- 1,267,763 490,637 284,164 Change in unrealized appreciation (depreciation) of investments 322,677 -- 3,112,700 1,222,195 (47,877) ---------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 458,308 2,537 5,117,350 1,894,220 529,137 ---------- ----------- ----------- ----------- ----------- From contract transactions: Payments received from contract owners 123,636 369,652 756,490 501,850 397,025 Payments for contract benefits or terminations (65,382) -- (751,208) (576,056) (295,848) Policy loans (6,262) -- (75,919) (32,637) (29,326) Transfers between sub-accounts (including fixed account), net 90,477 (278,793) 206,393 (723,633) (176,443) Contract maintenance charges (90,807) (19,805) (813,537) (445,510) (314,258) ---------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from contract transactions 51,662 71,054 (677,781) (1,275,986) (418,850) ---------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets 509,970 73,591 4,439,569 618,234 110,287 Net assets at beginning of period 2,231,887 444,169 15,221,424 10,099,201 6,873,004 ---------- ----------- ----------- ----------- ----------- Net assets at end of period $2,741,857 $ 517,760 $19,660,993 $10,717,435 $ 6,983,291 ========== =========== =========== =========== =========== Beginning units 152,631 45,162 934,128 543,458 438,899 Units issued 25,183 299,892 95,765 111,740 70,503 Units redeemed (21,088) (293,190) (120,383) (161,726) (92,575) ---------- ----------- ----------- ----------- ----------- Ending units 156,726 51,864 909,510 493,472 416,827 ========== =========== =========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 9 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FTVIP Goldman FTVIP Franklin FTVIP Sachs VIT Franklin Small Small-Mid Franklin U.S. FTVIP Strategic Cap Value Cap Growth Government Templeton Growth Fund VIP Fund VIP Fund Securities VIP Foreign VIP Institutional Class 2 Class 2 Fund Class 2 Fund Class 2 Shares -------------- ---------- -------------- ------------ ------------- For the Year Ended December 31, 2018 From operations: Dividends $ 69,487 $ -- $ 49,594 $ 131,722 $ 15,810 Mortality and expense risk and administrative charges (33,323) (129) (8,436) (22,376) (8,426) ----------- ------- ---------- ----------- ----------- Net investment income (loss) 36,164 (129) 41,158 109,346 7,384 Net realized gain (loss) (236,869) (662) (35,622) (5,299) 81,885 Capital gain distribution from mutual funds 1,183,385 2,568 -- -- 1,585,519 Change in unrealized appreciation (depreciation) of investments (1,955,757) (3,020) (11,915) (897,039) (1,703,314) ----------- ------- ---------- ----------- ----------- Increase (decrease) in net assets from operations (973,077) (1,243) (6,379) (792,992) (28,526) ----------- ------- ---------- ----------- ----------- From contract transactions: Payments received from contract owners 383,833 513 125,011 393,300 -- Payments for contract benefits or terminations (905,553) (1,377) (282,838) (303,973) (3,844) Policy loans (159,857) -- 4,481 12,697 (73) Transfers between sub-accounts (including fixed account), net (135,857) (364) (24,058) (55,481) (4,059) Contract maintenance charges (338,793) (1,097) (145,683) (419,623) (166,616) ----------- ------- ---------- ----------- ----------- Increase (decrease) in net assets from contract transactions (1,156,227) (2,325) (323,087) (373,080) (174,592) ----------- ------- ---------- ----------- ----------- Increase (decrease) in net assets (2,129,304) (3,568) (329,466) (1,166,072) (203,118) Net assets at beginning of period 8,451,891 25,778 1,928,613 5,292,633 3,384,434 ----------- ------- ---------- ----------- ----------- Net assets at end of period $ 6,322,587 $22,210 $1,599,147 $ 4,126,561 $ 3,181,316 =========== ======= ========== =========== =========== Beginning units 385,185 1,286 151,946 422,235 147,120 Units issued 44,957 24 12,910 63,618 1 Units redeemed (92,721) (133) (39,021) (88,915) (7,045) ----------- ------- ---------- ----------- ----------- Ending units 337,421 1,177 125,835 396,938 140,076 =========== ======= ========== =========== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 40,778 $ -- $ 51,612 $ 132,862 $ 16,284 Mortality and expense risk and administrative charges (36,215) (118) (11,073) (24,713) (7,252) ----------- ------- ---------- ----------- ----------- Net investment income (loss) 4,563 (118) 40,539 108,149 9,032 Net realized gain (loss) 33,634 (462) (39,737) 5,352 50,993 Capital gain distribution from mutual funds 557,711 2,363 -- -- 141,109 Change in unrealized appreciation (depreciation) of investments 199,424 2,596 22,666 655,534 605,731 ----------- ------- ---------- ----------- ----------- Increase (decrease) in net assets from operations 795,332 4,379 23,468 769,035 806,865 ----------- ------- ---------- ----------- ----------- From contract transactions: Payments received from contract owners 301,029 140 138,653 373,546 -- Payments for contract benefits or terminations (236,379) -- (56,593) (231,490) (1,088) Policy loans (17,307) -- (2,309) 52,959 -- Transfers between sub-accounts (including fixed account), net (454,042) 1,760 (802,689) (122,465) (15) Contract maintenance charges (316,211) (1,182) (173,044) (421,377) (129,246) ----------- ------- ---------- ----------- ----------- Increase (decrease) in net assets from contract transactions (722,910) 718 (895,982) (348,827) (130,349) ----------- ------- ---------- ----------- ----------- Increase (decrease) in net assets 72,422 5,097 (872,514) 420,208 676,516 Net assets at beginning of period 8,379,469 20,681 2,801,127 4,872,425 2,707,918 ----------- ------- ---------- ----------- ----------- Net assets at end of period $ 8,451,891 $25,778 $1,928,613 $ 5,292,633 $ 3,384,434 =========== ======= ========== =========== =========== Beginning units 417,273 1,247 222,589 443,064 153,434 Units issued 94,077 99 59,391 76,070 -- Units redeemed (126,165) (60) (130,034) (96,899) (6,314) ----------- ------- ---------- ----------- ----------- Ending units 385,185 1,286 151,946 422,235 147,120 =========== ======= ========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 10 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Invesco V.I. Invesco V.I. Invesco V.I. Invesco V.I. American Invesco V.I. Global Real Government Growth and Franchise Core Equity Estate Fund Securities Income Fund Fund Series I Fund Series I Series I Fund Series I Series I ------------- ------------- ------------ ------------- ------------ For the Year Ended December 31, 2018 From operations: Dividends $ -- $ 71,264 $ 17,397 $ 268 $ 219,829 Mortality and expense risk and administrative charges (74) (36,775) (1,063) (76) (47,578) ------- ----------- -------- -------- ----------- Net investment income (loss) (74) 34,489 16,334 192 172,251 Net realized gain (loss) 263 315,256 2,323 (449) 85,956 Capital gain distribution from mutual funds 927 510,400 5,440 -- 1,001,921 Change in unrealized appreciation (depreciation) of investments (1,642) (1,608,396) (52,728) 100 (2,704,455) ------- ----------- -------- -------- ----------- Increase (decrease) in net assets from operations (526) (748,251) (28,631) (157) (1,444,327) ------- ----------- -------- -------- ----------- From contract transactions: Payments received from contract owners 300 522,117 73,826 205 651,329 Payments for contract benefits or terminations (354) (459,727) (5,517) (9,341) (679,246) Policy loans -- (60,052) (405) (40) (140,988) Transfers between sub-accounts (including fixed account), net (4) (175,713) 19,852 285 224,538 Contract maintenance charges (349) (542,560) (28,299) (1,092) (634,745) ------- ----------- -------- -------- ----------- Increase (decrease) in net assets from contract transactions (407) (715,935) 59,457 (9,983) (579,112) ------- ----------- -------- -------- ----------- Increase (decrease) in net assets (933) (1,464,186) 30,826 (10,140) (2,023,439) Net assets at beginning of period 13,934 8,441,402 407,776 22,190 11,158,029 ------- ----------- -------- -------- ----------- Net assets at end of period $13,001 $ 6,977,216 $438,602 $ 12,050 $ 9,134,590 ======= =========== ======== ======== =========== Beginning units 630 472,905 28,044 1,994 532,628 Units issued 11 26,164 11,362 36 86,522 Units redeemed (28) (66,075) (7,322) (948) (103,263) ------- ----------- -------- -------- ----------- Ending units 613 432,994 32,084 1,082 515,887 ======= =========== ======== ======== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 11 $ 84,594 $ 13,373 $ 472 $ 161,273 Mortality and expense risk and administrative charges (70) (37,152) (692) (130) (47,160) ------- ----------- -------- -------- ----------- Net investment income (loss) (59) 47,442 12,681 342 114,113 Net realized gain (loss) 1,184 206,503 4,240 (179) 93,546 Capital gain distribution from mutual funds 1,031 423,732 6,787 -- 443,127 Change in unrealized appreciation (depreciation) of investments 1,131 300,836 23,660 266 725,330 ------- ----------- -------- -------- ----------- Increase (decrease) in net assets from operations 3,287 978,513 47,368 429 1,376,116 ------- ----------- -------- -------- ----------- From contract transactions: Payments received from contract owners 375 550,396 33,119 56 450,307 Payments for contract benefits or terminations (3,493) (366,136) (46,880) -- (354,851) Policy loans 44 (31,120) 4,655 (39) 3,618 Transfers between sub-accounts (including fixed account), net (7) (43,990) 37,366 (5,187) (87,510) Contract maintenance charges (489) (565,060) (8,555) (2,690) (538,155) ------- ----------- -------- -------- ----------- Increase (decrease) in net assets from contract transactions (3,570) (455,910) 19,705 (7,860) (526,591) ------- ----------- -------- -------- ----------- Increase (decrease) in net assets (283) 522,603 67,073 (7,431) 849,525 Net assets at beginning of period 14,217 7,918,799 340,703 29,621 10,308,504 ------- ----------- -------- -------- ----------- Net assets at end of period $13,934 $ 8,441,402 $407,776 $ 22,190 $11,158,029 ======= =========== ======== ======== =========== Beginning units 815 499,400 26,458 2,700 547,160 Units issued 18 20,855 10,126 26 86,284 Units redeemed (203) (47,350) (8,540) (732) (100,816) ------- ----------- -------- -------- ----------- Ending units 630 472,905 28,044 1,994 532,628 ======= =========== ======== ======== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 11 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Janus Janus Henderson Henderson Global Invesco V.I. Enterprise Janus Research Invesco V.I. International Portfolio Henderson Portfolio High Yield Growth Fund Service Forty Portfolio Service Fund Series I Series I Shares Service Shares Shares ------------- ------------- ----------- --------------- ---------- For the Year Ended December 31, 2018 From operations: Dividends $ 101,308 $ 151,528 $ 7,587 $ -- $ 31,458 Mortality and expense risk and administrative charges (13,586) (32,280) (32,925) (2,638) (14,549) ---------- ----------- ----------- --------- ---------- Net investment income (loss) 87,722 119,248 (25,338) (2,638) 16,909 Net realized gain (loss) (7,135) 256,524 647,127 33,772 114,637 Capital gain distribution from mutual funds -- 51,316 349,729 108,290 -- Change in unrealized appreciation (depreciation) of investments (159,290) (1,604,543) (1,007,675) (127,366) (359,271) ---------- ----------- ----------- --------- ---------- Increase (decrease) in net assets from operations (78,703) (1,177,455) (36,157) 12,058 (227,725) ---------- ----------- ----------- --------- ---------- From contract transactions: Payments received from contract owners 39,692 586,926 246,838 66,618 218,241 Payments for contract benefits or terminations (220,963) (566,882) (928,909) (23,342) (163,378) Policy loans (1,269) (67,808) (42,720) (11,260) 3,059 Transfers between sub-accounts (including fixed account), net 10,594 8,398 595,556 6,970 (19,958) Contract maintenance charges (45,711) (442,898) (268,843) (23,938) (232,164) ---------- ----------- ----------- --------- ---------- Increase (decrease) in net assets from contract transactions (217,657) (482,264) (398,078) 15,048 (194,200) ---------- ----------- ----------- --------- ---------- Increase (decrease) in net assets (296,360) (1,659,719) (434,235) 27,106 (421,925) Net assets at beginning of period 2,066,246 8,074,309 6,766,100 686,757 3,240,331 ---------- ----------- ----------- --------- ---------- Net assets at end of period $1,769,886 $ 6,414,590 $ 6,331,865 $ 713,863 $2,818,406 ========== =========== =========== ========= ========== Beginning units 152,651 549,092 264,281 31,036 201,456 Units issued 8,733 94,627 52,792 27,035 8,626 Units redeemed (25,342) (118,230) (56,238) (24,750) (20,731) ---------- ----------- ----------- --------- ---------- Ending units 136,042 525,489 260,835 33,321 189,351 ========== =========== =========== ========= ========== For the Year Ended December 31, 2017 From operations: Dividends $ 82,929 $ 111,233 $ 8,766 $ -- $ 20,678 Mortality and expense risk and administrative charges (12,715) (34,214) (29,785) (2,639) (13,294) ---------- ----------- ----------- --------- ---------- Net investment income (loss) 70,214 77,019 (21,019) (2,639) 7,384 Net realized gain (loss) 1,897 248,397 238,108 566 96,689 Capital gain distribution from mutual funds -- -- 400,708 33,657 -- Change in unrealized appreciation (depreciation) of investments 40,802 1,178,348 814,447 126,439 578,225 ---------- ----------- ----------- --------- ---------- Increase (decrease) in net assets from operations 112,913 1,503,764 1,432,244 158,023 682,298 ---------- ----------- ----------- --------- ---------- From contract transactions: Payments received from contract owners 43,426 451,321 219,254 39,309 262,884 Payments for contract benefits or terminations (38,234) (436,684) (300,755) (6,433) (95,242) Policy loans (4,128) (29,007) (28,529) 8,120 (8,462) Transfers between sub-accounts (including fixed account), net (12,431) 265,674 163,063 (40,703) (19,049) Contract maintenance charges (49,098) (412,720) (205,667) (15,429) (232,818) ---------- ----------- ----------- --------- ---------- Increase (decrease) in net assets from contract transactions (60,465) (161,416) (152,634) (15,136) (92,687) ---------- ----------- ----------- --------- ---------- Increase (decrease) in net assets 52,448 1,342,348 1,279,610 142,887 589,611 Net assets at beginning of period 2,013,798 6,731,961 5,486,490 543,870 2,650,720 ---------- ----------- ----------- --------- ---------- Net assets at end of period $2,066,246 $ 8,074,309 $ 6,766,100 $ 686,757 $3,240,331 ========== =========== =========== ========= ========== Beginning units 157,151 551,286 264,025 32,085 207,662 Units issued 2,398 94,332 38,074 3,758 12,937 Units redeemed (6,898) (96,526) (37,818) (4,807) (19,143) ---------- ----------- ----------- --------- ---------- Ending units 152,651 549,092 264,281 31,036 201,456 ========== =========== =========== ========= ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 12 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Janus JPMorgan JPMorgan Henderson JPMorgan Insurance Insurance Overseas Insurance Trust Mid Cap Trust Small Portfolio Trust Core Value Cap Core MFS VIT Service Bond Portfolio Portfolio Portfolio Growth Series Shares Class 1 Class 1 Class 1 Initial Class ----------- -------------- ------------- ----------- ------------- For the Year Ended December 31, 2018 From operations: Dividends $ 119,399 $ 20,198 $ 7,533 $ 14,549 $ 11,743 Mortality and expense risk and administrative charges (30,738) (2,737) (3,539) (15,806) (60,085) ----------- ---------- --------- ---------- ----------- Net investment income (loss) 88,661 17,461 3,994 (1,257) (48,342) Net realized gain (loss) (83,110) (15,476) 25,924 111,378 732,234 Capital gain distribution from mutual funds -- 1,376 12,591 249,635 871,426 Change in unrealized appreciation (depreciation) of investments (1,107,497) 4,787 (135,388) (785,705) (1,246,129) ----------- ---------- --------- ---------- ----------- Increase (decrease) in net assets from operations (1,101,946) 8,148 (92,879) (425,949) 309,189 ----------- ---------- --------- ---------- ----------- From contract transactions: Payments received from contract owners 620,464 223,302 -- 168,996 556,738 Payments for contract benefits or terminations (525,758) (27,920) (17,946) (348,636) (625,524) Policy loans (7,208) 556 (3,694) (6,124) (12,419) Transfers between sub-accounts (including fixed account), net (107,981) 458,086 19 24,562 (19,558) Contract maintenance charges (543,198) (118,543) (31,529) (218,388) (733,405) ----------- ---------- --------- ---------- ----------- Increase (decrease) in net assets from contract transactions (563,681) 535,481 (53,150) (379,590) (834,168) ----------- ---------- --------- ---------- ----------- Increase (decrease) in net assets (1,665,627) 543,629 (146,029) (805,539) (524,979) Net assets at beginning of period 7,631,682 721,668 809,906 3,906,888 12,198,289 ----------- ---------- --------- ---------- ----------- Net assets at end of period $ 5,966,055 $1,265,297 $ 663,877 $3,101,349 $11,673,310 =========== ========== ========= ========== =========== Beginning units 811,335 64,724 22,040 161,743 500,388 Units issued 134,905 82,865 454 14,172 21,903 Units redeemed (173,885) (29,113) (1,922) (28,936) (53,765) ----------- ---------- --------- ---------- ----------- Ending units 772,355 118,476 20,572 146,979 468,526 =========== ========== ========= ========== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 112,622 $ 14,738 $ 6,412 $ 12,115 $ 11,763 Mortality and expense risk and administrative charges (31,897) (914) (3,592) (16,304) (51,635) ----------- ---------- --------- ---------- ----------- Net investment income (loss) 80,725 13,824 2,820 (4,189) (39,872) Net realized gain (loss) (324,704) (1,094) 17,897 179,245 528,911 Capital gain distribution from mutual funds -- -- 35,756 26,599 445,108 Change in unrealized appreciation (depreciation) of investments 2,062,885 6,424 42,360 316,527 2,027,743 ----------- ---------- --------- ---------- ----------- Increase (decrease) in net assets from operations 1,818,906 19,154 98,833 518,182 2,961,890 ----------- ---------- --------- ---------- ----------- From contract transactions: Payments received from contract owners 530,568 26,545 -- 166,548 554,811 Payments for contract benefits or terminations (283,748) (36,488) (30,411) (207,091) (448,819) Policy loans (37,313) 6,554 (5,036) (53,444) (86,801) Transfers between sub-accounts (including fixed account), net 63,033 218,230 (2,938) 7,766 26,143 Contract maintenance charges (547,012) (9,473) (30,780) (203,567) (702,094) ----------- ---------- --------- ---------- ----------- Increase (decrease) in net assets from contract transactions (274,472) 205,368 (69,165) (289,788) (656,760) ----------- ---------- --------- ---------- ----------- Increase (decrease) in net assets 1,544,434 224,522 29,668 228,394 2,305,130 Net assets at beginning of period 6,087,248 497,146 780,238 3,678,494 9,893,159 ----------- ---------- --------- ---------- ----------- Net assets at end of period $ 7,631,682 $ 721,668 $ 809,906 $3,906,888 $12,198,289 =========== ========== ========= ========== =========== Beginning units 805,816 45,740 24,041 177,044 530,331 Units issued 159,997 26,844 -- 40,547 23,728 Units redeemed (154,478) (7,860) (2,001) (55,848) (53,671) ----------- ---------- --------- ---------- ----------- Ending units 811,335 64,724 22,040 161,743 500,388 =========== ========== ========= ========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 13 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Morgan MFS VIT II MFS VIT New MFS VIT MFS VIT Stanley VIF Core Equity Discovery Research Total Return Growth Portfolio Initial Series Initial Series Initial Series Initial Portfolio Class Class Class Class Class I ----------------- -------------- -------------- -------------- ----------- For the Year Ended December 31, 2018 From operations: Dividends $ 32,336 $ -- $ 22,551 $ 5,187 $ -- Mortality and expense risk and administrative charges (21,192) (26,067) (13,854) (1,274) (19,930) ---------- ----------- ---------- --------- ---------- Net investment income (loss) 11,144 (26,067) 8,697 3,913 (19,930) Net realized gain (loss) 22,064 233,033 80,129 9,177 265,113 Capital gain distribution from mutual funds 498,732 790,901 372,530 10,568 800,996 Change in unrealized appreciation (depreciation) of investments (711,070) (1,062,069) (603,714) (39,364) (765,726) ---------- ----------- ---------- --------- ---------- Increase (decrease) in net assets from operations (179,130) (64,202) (142,358) (15,706) 280,453 ---------- ----------- ---------- --------- ---------- From contract transactions: Payments received from contract owners 206,900 291,660 209,589 2,394 162,846 Payments for contract benefits or terminations (171,766) (309,091) (130,397) (79,883) (360,841) Policy loans (21,769) (2) (46,093) (16) 728 Transfers between sub-accounts (including fixed account), net (44,699) (139,667) 30,397 2,197 296,457 Contract maintenance charges (237,896) (300,212) (152,850) (22,879) (185,040) ---------- ----------- ---------- --------- ---------- Increase (decrease) in net assets from contract transactions (269,230) (457,312) (89,354) (98,187) (85,850) ---------- ----------- ---------- --------- ---------- Increase (decrease) in net assets (448,360) (521,514) (231,712) (113,893) 194,603 Net assets at beginning of period 4,723,353 5,773,273 3,142,778 329,481 3,716,998 ---------- ----------- ---------- --------- ---------- Net assets at end of period $4,274,993 $ 5,251,759 $2,911,066 $ 215,588 $3,911,601 ========== =========== ========== ========= ========== Beginning units 352,760 238,545 147,051 18,689 130,942 Units issued 8,003 33,613 14,974 126 24,233 Units redeemed (27,327) (44,076) (17,098) (5,794) (26,646) ---------- ----------- ---------- --------- ---------- Ending units 333,436 228,082 144,927 13,021 128,529 ========== =========== ========== ========= ========== For the Year Ended December 31, 2017 From operations: Dividends $ 42,257 $ -- $ 41,522 $ 7,735 $ -- Mortality and expense risk and administrative charges (19,104) (23,036) (12,415) (1,656) (15,184) ---------- ----------- ---------- --------- ---------- Net investment income (loss) 23,153 (23,036) 29,107 6,079 (15,184) Net realized gain (loss) 1,895 89,482 80,357 8,092 119,290 Capital gain distribution from mutual funds 260,351 99,253 203,937 9,000 280,817 Change in unrealized appreciation (depreciation) of investments 666,971 1,033,454 303,679 13,738 703,408 ---------- ----------- ---------- --------- ---------- Increase (decrease) in net assets from operations 952,370 1,199,153 617,080 36,909 1,088,331 ---------- ----------- ---------- --------- ---------- From contract transactions: Payments received from contract owners 250,242 277,292 169,560 4,375 176,980 Payments for contract benefits or terminations (226,186) (250,696) (215,180) (11,977) (244,373) Policy loans (12,699) (40,034) (5,033) 125 (395) Transfers between sub-accounts (including fixed account), net 36,632 165,416 46,265 (5,902) 317,338 Contract maintenance charges (252,635) (239,486) (158,793) (19,935) (176,927) ---------- ----------- ---------- --------- ---------- Increase (decrease) in net assets from contract transactions (204,646) (87,508) (163,181) (33,314) 72,623 ---------- ----------- ---------- --------- ---------- Increase (decrease) in net assets 747,724 1,111,645 453,899 3,595 1,160,954 Net assets at beginning of period 3,975,629 4,661,628 2,688,879 325,886 2,556,044 ---------- ----------- ---------- --------- ---------- Net assets at end of period $4,723,353 $ 5,773,273 $3,142,778 $ 329,481 $3,716,998 ========== =========== ========== ========= ========== Beginning units 368,979 233,442 152,465 20,656 127,750 Units issued 21,498 44,178 19,357 360 22,042 Units redeemed (37,717) (39,075) (24,771) (2,327) (18,850) ---------- ----------- ---------- --------- ---------- Ending units 352,760 238,545 147,051 18,689 130,942 ========== =========== ========== ========= ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 14 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Neuberger Neuberger Neuberger Oppenheimer Berman AMT Berman AMT Berman AMT Conservative Oppenheimer Large Cap Mid Cap Sustainable Balanced Global Value Growth Equity Fund/VA Non Fund/VA Non Portfolio Portfolio Portfolio Service Service Class I Class I Class I Shares Shares ---------- ----------- ----------- ------------ ----------- For the Year Ended December 31, 2018 From operations: Dividends $ 320 $ -- $ 687 $ 25,560 $ 75,854 Mortality and expense risk and administrative charges (138) (28,241) (556) (5,444) (32,501) ------- ----------- -------- ---------- ----------- Net investment income (loss) 182 (28,241) 131 20,116 43,353 Net realized gain (loss) 450 86,706 581 16,393 385,539 Capital gain distribution from mutual funds 2,843 475,343 7,689 30,224 536,282 Change in unrealized appreciation (depreciation) of investments (3,909) (899,181) (16,983) (139,762) (1,948,806) ------- ----------- -------- ---------- ----------- Increase (decrease) in net assets from operations (434) (365,373) (8,582) (73,029) (983,632) ------- ----------- -------- ---------- ----------- From contract transactions: Payments received from contract owners 300 306,498 7,161 130,937 429,791 Payments for contract benefits or terminations (1,327) (883,774) -- (59,350) (827,633) Policy loans 206 (8,936) (335) (10,759) (68,969) Transfers between sub-accounts (including fixed account), net (98) 55,115 (4) (16,783) (126,100) Contract maintenance charges (2,131) (265,232) (1,114) (90,669) (349,074) ------- ----------- -------- ---------- ----------- Increase (decrease) in net assets from contract transactions (3,050) (796,329) 5,708 (46,624) (941,985) ------- ----------- -------- ---------- ----------- Increase (decrease) in net assets (3,484) (1,161,702) (2,874) (119,653) (1,925,617) Net assets at beginning of period 29,018 6,640,794 132,321 1,318,894 8,328,431 ------- ----------- -------- ---------- ----------- Net assets at end of period $25,534 $ 5,479,092 $129,447 $1,199,241 $ 6,402,814 ======= =========== ======== ========== =========== Beginning units 1,873 309,688 6,411 104,560 400,569 Units issued 33 55,776 393 14,338 55,103 Units redeemed (232) (80,405) (118) (17,998) (96,514) ------- ----------- -------- ---------- ----------- Ending units 1,674 285,059 6,686 100,900 359,158 ======= =========== ======== ========== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 166 $ -- $ 637 $ 24,957 $ 69,540 Mortality and expense risk and administrative charges (145) (26,876) (722) (5,787) (33,034) ------- ----------- -------- ---------- ----------- Net investment income (loss) 21 (26,876) (85) 19,170 36,506 Net realized gain (loss) 2,802 (115,465) 33,483 43,152 268,739 Capital gain distribution from mutual funds 775 120,492 4,584 -- -- Change in unrealized appreciation (depreciation) of investments (154) 1,351,362 (18,669) 44,479 1,963,196 ------- ----------- -------- ---------- ----------- Increase (decrease) in net assets from operations 3,444 1,329,513 19,313 106,801 2,268,441 ------- ----------- -------- ---------- ----------- From contract transactions: Payments received from contract owners 5,230 238,213 8,390 108,987 398,341 Payments for contract benefits or terminations (3,532) (172,269) -- (34,285) (398,619) Policy loans 240 (13,058) -- (10,082) (4,144) Transfers between sub-accounts (including fixed account), net (2,765) 50,058 (4) 21,070 9,031 Contract maintenance charges (2,686) (242,825) (1,138) (91,070) (312,538) ------- ----------- -------- ---------- ----------- Increase (decrease) in net assets from contract transactions (3,513) (139,881) 7,248 (5,380) (307,929) ------- ----------- -------- ---------- ----------- Increase (decrease) in net assets (69) 1,189,632 26,561 101,421 1,960,512 Net assets at beginning of period 29,087 5,451,162 105,760 1,217,473 6,367,919 ------- ----------- -------- ---------- ----------- Net assets at end of period $29,018 $ 6,640,794 $132,321 $1,318,894 $ 8,328,431 ======= =========== ======== ========== =========== Beginning units 2,118 308,428 6,209 103,959 409,562 Units issued 390 53,855 6,294 24,289 83,539 Units redeemed (635) (52,595) (6,092) (23,688) (92,532) ------- ----------- -------- ---------- ----------- Ending units 1,873 309,688 6,411 104,560 400,569 ======= =========== ======== ========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 15 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Oppenheimer PIMCO PIMCO Global CommodityRe Global Bond Strategic alReturn Opportunities PIMCO Real Income Strategy Portfolio Return PIMCO Short- Fund/VA Non- Portfolio (Unhedged) Portfolio Term Portfolio Service Administrative Adminstrative Administrative Administrative Shares Class Class Class Class ------------ -------------- ------------- -------------- -------------- For the Year Ended December 31, 2018 From operations: Dividends $ 212 $ 15,285 $ 18,987 $ 195,417 $ 79,969 Mortality and expense risk and administrative charges (22) (3,237) (844) (34,354) (15,421) ------- --------- --------- ----------- ---------- Net investment income (loss) 190 12,048 18,143 161,063 64,548 Net realized gain (loss) (65) 33,504 (4,306) (160,442) 5,990 Capital gain distribution from mutual funds -- -- 845 -- 4,636 Change in unrealized appreciation (depreciation) of investments (338) (146,982) (25,736) (214,914) (34,478) ------- --------- --------- ----------- ---------- Increase (decrease) in net assets from operations (213) (101,430) (11,054) (214,293) 40,696 ------- --------- --------- ----------- ---------- From contract transactions: Payments received from contract owners -- 91,823 60,129 649,447 289,410 Payments for contract benefits or terminations -- (113,572) (2,775) (731,322) (257,019) Policy loans 206 11,546 (4,142) (2) (13,061) Transfers between sub-accounts (including fixed account), net 2 (28,291) 227,866 (75) 183,264 Contract maintenance charges (1,519) (66,656) (150,283) (705,277) (287,759) ------- --------- --------- ----------- ---------- Increase (decrease) in net assets from contract transactions (1,311) (105,150) 130,795 (787,229) (85,165) ------- --------- --------- ----------- ---------- Increase (decrease) in net assets (1,524) (206,580) 119,741 (1,001,522) (44,469) Net assets at beginning of period 5,034 793,866 185,779 8,525,775 3,716,064 ------- --------- --------- ----------- ---------- Net assets at end of period $ 3,510 $ 587,286 $ 305,520 $ 7,524,253 $3,671,595 ======= ========= ========= =========== ========== Beginning units 447 133,947 15,207 635,394 318,961 Units issued 23 27,708 19,623 48,837 69,291 Units redeemed (143) (51,611) (6,624) (106,766) (74,838) ------- --------- --------- ----------- ---------- Ending units 327 110,044 28,206 577,465 313,414 ======= ========= ========= =========== ========== For the Year Ended December 31, 2017 From operations: Dividends $ 131 $ 87,516 $ 3,556 $ 215,470 $ 64,842 Mortality and expense risk and administrative charges (22) (3,794) (536) (39,352) (16,833) ------- --------- --------- ----------- ---------- Net investment income (loss) 109 83,722 3,020 176,118 48,009 Net realized gain (loss) 22 63,425 (1,481) (155,852) 5,430 Change in unrealized appreciation (depreciation) of investments 88 (135,776) 11,328 269,502 20,629 ------- --------- --------- ----------- ---------- Increase (decrease) in net assets from operations 219 11,371 12,867 289,768 74,068 ------- --------- --------- ----------- ---------- From contract transactions: Payments received from contract owners 4,854 88,145 18,962 650,535 289,187 Payments for contract benefits or terminations (4) (25,215) (35,628) (319,449) (308,743) Policy loans 197 7,549 4,732 (30,157) 23,639 Transfers between sub-accounts (including fixed account), net -- (32,095) 19,634 (951,265) 52,067 Contract maintenance charges (1,210) (68,477) (8,337) (771,113) (272,100) ------- --------- --------- ----------- ---------- Increase (decrease) in net assets from contract transactions 3,837 (30,093) (637) (1,421,449) (215,950) ------- --------- --------- ----------- ---------- Increase (decrease) in net assets 4,056 (18,722) 12,230 (1,131,681) (141,882) Net assets at beginning of period 978 812,588 173,549 9,657,456 3,857,946 ------- --------- --------- ----------- ---------- Net assets at end of period $ 5,034 $ 793,866 $ 185,779 $ 8,525,775 $3,716,064 ======= ========= ========= =========== ========== Beginning units 92 147,382 15,724 736,554 335,790 Units issued 470 34,337 7,971 75,406 64,205 Units redeemed (115) (47,772) (8,488) (176,566) (81,034) ------- --------- --------- ----------- ---------- Ending units 447 133,947 15,207 635,394 318,961 ======= ========= ========= =========== ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 16 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
PIMCO Total Pioneer Select Return Pioneer Mid Mid Cap Putnam VT Portfolio Pioneer Fund Cap Value Growth Diversified Administrative VCT Portfolio VCT Portfolio VCT Portfolio Income Fund Class Class I Class I Class I Class IB -------------- ------------- ------------- -------------- ----------- For the Year Ended December 31, 2018 From operations: Dividends $ 310,738 $ 20,821 $ 7,404 $ -- $ 255,487 Mortality and expense risk and administrative charges (53,369) (8,606) (4,737) (14,003) (24,592) ----------- ---------- ---------- ---------- ---------- Net investment income (loss) 257,369 12,215 2,667 (14,003) 230,895 Net realized gain (loss) (136,738) (156,113) (15,778) 63,710 (141,947) Capital gain distribution from mutual funds 144,721 447,271 85,658 382,782 -- Change in unrealized appreciation (depreciation) of investments (392,951) (327,763) (273,426) (614,592) (159,683) ----------- ---------- ---------- ---------- ---------- Increase (decrease) in net assets from operations (127,599) (24,390) (200,879) (182,103) (70,735) ----------- ---------- ---------- ---------- ---------- From contract transactions: Payments received from contract owners 963,887 53,627 60,411 123,605 209,580 Payments for contract benefits or terminations (1,025,645) (66,637) (219,900) (149,562) (346,262) Policy loans 28,198 (6,820) (2,497) (66,421) (13,890) Transfers between sub-accounts (including fixed account), net 537,976 (69,472) (39,580) (994) 68,408 Contract maintenance charges (1,017,685) (68,233) (32,362) (126,328) (363,946) ----------- ---------- ---------- ---------- ---------- Increase (decrease) in net assets from contract transactions (513,269) (157,535) (233,928) (219,700) (446,110) ----------- ---------- ---------- ---------- ---------- Increase (decrease) in net assets (640,868) (181,925) (434,807) (401,803) (516,845) Net assets at beginning of period....... 12,770,068 1,837,936 1,228,114 2,961,550 6,182,584 ----------- ---------- ---------- ---------- ---------- Net assets at end of period $12,129,200 $1,656,011 $ 793,307 $2,559,747 $5,665,739 =========== ========== ========== ========== ========== Beginning units 846,327 93,667 62,494 115,493 325,506 Units issued 170,654 10,179 14,627 13,702 32,714 Units redeemed (188,141) (17,895) (26,697) (22,252) (57,376) ----------- ---------- ---------- ---------- ---------- Ending units 828,840 85,951 50,424 106,943 300,844 =========== ========== ========== ========== ========== For the Year Ended December 31, 2017 From operations: Dividends $ 264,943 $ 20,209 $ 9,991 $ 2,076 $ 333,763 Mortality and expense risk and administrative charges (59,393) (7,831) (5,932) (12,424) (25,174) ----------- ---------- ---------- ---------- ---------- Net investment income (loss) 205,550 12,378 4,059 (10,348) 308,589 Net realized gain (loss) (111,164) (18,789) 11,891 31,538 (167,659) Capital gain distribution from mutual funds -- 237,929 93,697 33,137 -- Change in unrealized appreciation (depreciation) of investments 482,212 93,925 29,970 638,150 250,164 ----------- ---------- ---------- ---------- ---------- Increase (decrease) in net assets from operations 576,598 325,443 139,617 692,477 391,094 ----------- ---------- ---------- ---------- ---------- From contract transactions: Payments received from contract owners 887,705 58,511 64,810 121,671 165,969 Payments for contract benefits or terminations (630,242) (42,137) (20,550) (174,159) (122,303) Policy loans (1,677) 3,506 (7,148) 5,707 942 Transfers between sub-accounts (including fixed account), net (603,602) (4,133) (28,659) (34,142) 153,769 Contract maintenance charges (907,637) (68,230) (40,251) (124,358) (338,995) ----------- ---------- ---------- ---------- ---------- Increase (decrease) in net assets from contract transactions (1,255,453) (52,483) (31,798) (205,281) (140,618) ----------- ---------- ---------- ---------- ---------- Increase (decrease) in net assets (678,855) 272,960 107,819 487,196 250,476 Net assets at beginning of period 13,448,923 1,564,976 1,120,295 2,474,354 5,932,108 ----------- ---------- ---------- ---------- ---------- Net assets at end of period $12,770,068 $1,837,936 $1,228,114 $2,961,550 $6,182,584 =========== ========== ========== ========== ========== Beginning units 917,603 96,575 63,173 124,890 329,860 Units issued 162,859 1,628 22,597 4,099 47,439 Units redeemed (234,135) (4,536) (23,276) (13,496) (51,793) ----------- ---------- ---------- ---------- ---------- Ending units 846,327 93,667 62,494 115,493 325,506 =========== ========== ========== ========== ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 17 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Putnam VT Putnam VT Putnam VT Putnam VT Putnam VT Growth and Growth International Small Cap Equity Income Income Fund Opportunities Value Fund Value Fund Fund Class IB IB Fund Class IB Class IB Class IB ------------- ------------ ------------- ------------- ---------- For the Year Ended December 31, 2018 From operations: Dividends $ 93,111 $ -- $ -- $ 83,041 $ 886 Mortality and expense risk and administrative charges (57,489) -- (952) (17,925) (906) ----------- ------------ -------- ----------- -------- Net investment income (loss) 35,622 -- (952) 65,116 (20) Net realized gain (loss) 129,977 -- 923 136,377 (18,722) Capital gain distribution from mutual funds 597,217 -- 10,975 -- 67,607 Change in unrealized appreciation (depreciation) of investments (1,891,144) -- (7,827) (912,709) (89,956) ----------- ------------ -------- ----------- -------- Increase (decrease) in net assets from operations (1,128,328) -- 3,119 (711,216) (41,091) ----------- ------------ -------- ----------- -------- From contract transactions: Payments received from contract owners 554,775 20 6,187 344,288 6,392 Payments for contract benefits or terminations (657,956) -- -- (505,926) (42,695) Policy loans (38,919) (38) (38) (17,213) (869) Transfers between sub-accounts (including fixed account), net 168,182 952 (896) (98,820) (207) Contract maintenance charges (767,213) (934) (4,356) (301,702) (7,644) ----------- ------------ -------- ----------- -------- Increase (decrease) in net assets from contract transactions (741,131) -- 897 (579,373) (45,023) ----------- ------------ -------- ----------- -------- Increase (decrease) in net assets (1,869,459) -- 4,016 (1,290,589) (86,114) Net assets at beginning of period 13,587,892 -- 173,600 4,380,642 243,156 ----------- ------------ -------- ----------- -------- Net assets at end of period $11,718,433 $ -- $177,616 $ 3,090,053 $157,042 =========== ============ ======== =========== ======== Beginning units 804,976 -- 41,838 401,810 11,455 Units issued 37,605 9 819 57,820 1,969 Units redeemed (80,953) (9) (636) (107,807) (4,384) ----------- ------------ -------- ----------- -------- Ending units 761,628 -- 42,021 351,823 9,040 =========== ============ ======== =========== ======== For the Year Ended December 31, 2017 From operations: Dividends $ -- $ 256,780 $ 162 $ 61,649 $ 1,615 Mortality and expense risk and administrative charges (34,644) (19,400) (805) (20,233) (1,057) ----------- ------------ -------- ----------- -------- Net investment income (loss) (34,644) 237,380 (643) 41,416 558 Net realized gain (loss) 31,354 2,198,732 2,310 165,323 1,218 Capital gain distribution from mutual funds -- 1,427,565 2,085 -- 9,169 Change in unrealized appreciation (depreciation) of investments 1,550,922 (3,270,214) 38,278 680,135 5,888 ----------- ------------ -------- ----------- -------- Increase (decrease) in net assets from operations 1,547,632 593,463 42,030 886,874 16,833 ----------- ------------ -------- ----------- -------- From contract transactions: Payments received from contract owners 354,579 213,497 6,187 346,186 7,195 Payments for contract benefits or terminations (218,976) (191,848) -- (239,961) (884) Policy loans (15,618) (6,588) (36) (18,292) (2,613) Transfers between sub-accounts (including fixed account), net 12,981,324 (12,359,272) (8,703) (77,289) (285) Contract maintenance charges (1,061,049) (280,264) (4,913) (319,259) (7,053) ----------- ------------ -------- ----------- -------- Increase (decrease) in net assets from contract transactions 12,040,260 (12,624,475) (7,465) (308,615) (3,640) ----------- ------------ -------- ----------- -------- Increase (decrease) in net assets 13,587,892 (12,031,012) 34,565 578,259 13,193 Net assets at beginning of period -- 12,031,012 139,035 3,802,383 229,963 ----------- ------------ -------- ----------- -------- Net assets at end of period $13,587,892 $ -- $173,600 $ 4,380,642 $243,156 =========== ============ ======== =========== ======== Beginning units -- 663,437 43,644 422,085 11,580 Units issued 846,943 11,495 1,016 92,263 321 Units redeemed (41,967) (674,932) (2,822) (112,538) (446) ----------- ------------ -------- ----------- -------- Ending units 804,976 -- 41,838 401,810 11,455 =========== ============ ======== =========== ========
The accompanying Notes to Financial Statements are an integral part of this statement. 18 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
SAST SA SAST SA SST SA Multi- JPMorgan WellsCap VALIC Putnam VT Managed Mid Diversified Aggressive Company I Sustainable Cap Value Balanced Growth Dynamic Leaders Fund Portfolio Portfolio Portfolio Allocation Class IB Class 3 Class 1 Class 1 Fund ------------ ------------- ----------- ---------- ---------- For the Year Ended December 31, 2018 From operations: Dividends $ -- $ 348 $ 42,444 $ -- $ 28,190 Mortality and expense risk and administrative charges (226) (135) (11,584) (8,146) (6,965) ------- --------- ---------- ---------- ---------- Net investment income (loss) (226) 213 30,860 (8,146) 21,225 Net realized gain (loss) 973 (413) 37,073 175,517 60,521 Capital gain distribution from mutual funds 5,521 3,565 167,938 258,158 85,259 Change in unrealized appreciation (depreciation) of investments (6,986) (9,961) (465,685) (591,676) (417,988) ------- --------- ---------- ---------- ---------- Increase (decrease) in net assets from operations (718) (6,596) (229,814) (166,147) (250,983) ------- --------- ---------- ---------- ---------- From contract transactions: Payments received from contract owners 813 12,832 182,218 110,573 670,230 Payments for contract benefits or terminations -- (419) (286,923) (405,129) (15,602) Policy loans -- 408 (4,585) (26,051) -- Transfers between sub-accounts (including fixed account), net (1,024) 3,125 205,003 414,885 1,576,000 Contract maintenance charges (993) (7,414) (156,206) (60,335) (639,870) ------- --------- ---------- ---------- ---------- Increase (decrease) in net assets from contract transactions (1,204) 8,532 (60,493) 33,943 1,590,758 ------- --------- ---------- ---------- ---------- Increase (decrease) in net assets (1,922) 1,936 (290,307) (132,204) 1,339,775 Net assets at beginning of period 42,592 45,247 2,944,647 1,726,026 2,099,939 ------- --------- ---------- ---------- ---------- Net assets at end of period $40,670 $ 47,183 $2,654,340 $1,593,822 $3,439,714 ======= ========= ========== ========== ========== Beginning units 1,635 3,519 160,121 93,007 174,429 Units issued 28 1,407 32,937 44,050 198,425 Units redeemed (69) (675) (28,228) (45,117) (53,070) ------- --------- ---------- ---------- ---------- Ending units 1,594 4,251 164,830 91,940 319,784 ======= ========= ========== ========== ========== For the Year Ended December 31, 2017 From operations: Dividends $ 248 $ 450 $ 45,484 $ -- $ 24,552 Mortality and expense risk and administrative charges (195) (75) (10,934) (7,978) (447) ------- --------- ---------- ---------- ---------- Net investment income (loss) 53 375 34,550 (7,978) 24,105 Net realized gain (loss) 1,722 6,824 58,768 254,902 5,178 Capital gain distribution from mutual funds 2,815 5,371 136,905 -- 9,509 Change in unrealized appreciation (depreciation) of investments 5,078 (1,805) 133,634 140,418 261,005 ------- --------- ---------- ---------- ---------- Increase (decrease) in net assets from operations 9,668 10,765 363,857 387,342 299,797 ------- --------- ---------- ---------- ---------- From contract transactions: Payments received from contract owners 515 1,366 135,109 82,532 16,058 Payments for contract benefits or terminations (3,516) -- (33,958) (140,636) -- Policy loans 44 -- (9,114) (5,024) -- Transfers between sub-accounts (including fixed account), net 1,060 (100,669) 54,534 157,555 593,303 Contract maintenance charges (745) (430) (132,575) (61,286) (12,943) ------- --------- ---------- ---------- ---------- Increase (decrease) in net assets from contract transactions (2,642) (99,733) 13,996 33,141 596,418 ------- --------- ---------- ---------- ---------- Increase (decrease) in net assets 7,026 (88,968) 377,853 420,483 896,215 Net assets at beginning of period 35,566 134,215 2,566,794 1,305,543 1,203,724 ------- --------- ---------- ---------- ---------- Net assets at end of period $42,592 $ 45,247 $2,944,647 $1,726,026 $2,099,939 ======= ========= ========== ========== ========== Beginning units 1,756 11,944 157,818 91,749 120,660 Units issued 92 1,076 24,336 42,182 72,716 Units redeemed (213) (9,501) (22,033) (40,924) (18,947) ------- --------- ---------- ---------- ---------- Ending units 1,635 3,519 160,121 93,007 174,429 ======= ========= ========== ========== ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 19 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
VALIC VALIC VALIC Company I Company I Company I VALIC VALIC Emerging Government International Company I Company I Economies Money Market Equities International Mid Cap Fund I Fund Index Fund Value Fund Index Fund --------- ------------ ------------- ------------- ----------- For the Year Ended December 31, 2018 From operations: Dividends $ 1,286 $ 114,383 $ 56,860 $ 1,145 $ 175,550 Mortality and expense risk and administrative charges (252) (39,995) (12,146) (187) (70,766) -------- ----------- ---------- -------- ----------- Net investment income (loss) 1,034 74,388 44,714 958 104,784 Net realized gain (loss) 3,912 -- 67,874 2,107 524,310 Capital gain distribution from mutual funds -- -- -- -- 1,037,039 Change in unrealized appreciation (depreciation) of investments (24,894) -- (545,872) (14,616) (3,432,032) -------- ----------- ---------- -------- ----------- Increase (decrease) in net assets from operations (19,948) 74,388 (433,284) (11,551) (1,765,899) -------- ----------- ---------- -------- ----------- From contract transactions: Payments received from contract owners 19,278 875,880 191,009 19,998 632,074 Payments for contract benefits or terminations (9,536) (2,088,176) (117,285) (7,961) (1,522,446) Policy loans -- 234,710 977 -- (5,830) Transfers between sub-accounts (including fixed account), net 35,754 1,070,857 217,876 5,847 (59,249) Contract maintenance charges (12,781) (1,006,312) (131,408) (8,728) (698,765) -------- ----------- ---------- -------- ----------- Increase (decrease) in net assets from contract transactions 32,715 (913,041) 161,169 9,156 (1,654,216) -------- ----------- ---------- -------- ----------- Increase (decrease) in net assets 12,767 (838,653) (272,115) (2,395) (3,420,115) Net assets at beginning of period 84,620 9,151,018 2,865,338 59,127 16,438,059 -------- ----------- ---------- -------- ----------- Net assets at end of period $ 97,387 $ 8,312,365 $2,593,223 $ 56,732 $13,017,944 ======== =========== ========== ======== =========== Beginning units 7,103 934,888 248,253 5,498 689,546 Units issued 5,982 546,118 79,139 3,158 77,406 Units redeemed (2,849) (641,574) (63,699) (2,105) (145,239) -------- ----------- ---------- -------- ----------- Ending units 10,236 839,432 263,693 6,551 621,713 ======== =========== ========== ======== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 839 $ 41,439 $ 64,411 $ 877 $ 180,860 Mortality and expense risk and administrative charges (81) (51,218) (12,010) (5) (70,475) -------- ----------- ---------- -------- ----------- Net investment income (loss) 758 (9,779) 52,401 872 110,385 Net realized gain (loss) 1,835 -- 65,409 1,283 524,113 Capital gain distribution from mutual funds -- -- -- -- 1,238,490 Change in unrealized appreciation (depreciation) of investments 19,343 -- 427,544 5,522 373,094 -------- ----------- ---------- -------- ----------- Increase (decrease) in net assets from operations 21,936 (9,779) 545,354 7,677 2,246,082 -------- ----------- ---------- -------- ----------- From contract transactions: Payments received from contract owners 3,281 1,298,202 177,509 2,416 569,595 Payments for contract benefits or terminations -- (6,757,284) (137,033) -- (609,599) Policy loans -- 82,190 107,095 -- (19,966) Transfers between sub-accounts (including fixed account), net 10,518 4,757,694 73,461 7,258 (127,826) Contract maintenance charges (1,867) (1,227,828) (118,566) (509) (677,655) -------- ----------- ---------- -------- ----------- Increase (decrease) in net assets from contract transactions 11,932 (1,847,026) 102,466 9,165 (865,451) -------- ----------- ---------- -------- ----------- Increase (decrease) in net assets 33,868 (1,856,805) 647,820 16,842 1,380,631 Net assets at beginning of period 50,752 11,007,823 2,217,518 42,285 15,057,428 -------- ----------- ---------- -------- ----------- Net assets at end of period $ 84,620 $ 9,151,018 $2,865,338 $ 59,127 $16,438,059 ======== =========== ========== ======== =========== Beginning units 6,051 1,113,874 230,323 4,634 723,227 Units issued 1,847 1,323,439 76,488 1,727 89,019 Units redeemed (795) (1,502,425) (58,558) (863) (122,700) -------- ----------- ---------- -------- ----------- Ending units 7,103 934,888 248,253 5,498 689,546 ======== =========== ========== ======== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 20 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
VALIC VALIC Company I VALIC VALIC VALIC Company I Science & Company I Company I Company II Nasdaq-100 Technology Small Cap Stock Index Mid Cap Index Fund Fund Index Fund Fund Value Fund ---------- ---------- ----------- ----------- ---------- For the Year Ended December 31, 2018 From operations: Dividends $ 37,320 $ -- $ 80,068 $ 366,524 $ 252 Mortality and expense risk and administrative charges (33,919) (18,749) (35,335) (97,047) (185) ---------- ---------- ----------- ----------- -------- Net investment income (loss) 3,401 (18,749) 44,733 269,477 67 Net realized gain (loss) 693,128 207,649 356,301 1,363,580 (79) Capital gain distribution from mutual funds 324,355 323,690 453,203 802,333 4,585 Change in unrealized appreciation (depreciation) of investments (982,797) (665,958) (1,654,971) (3,393,048) (14,880) ---------- ---------- ----------- ----------- -------- Increase (decrease) in net assets from operations 38,087 (153,368) (800,734) (957,658) (10,307) ---------- ---------- ----------- ----------- -------- From contract transactions: Payments received from contract owners 222,177 169,972 402,345 1,001,680 23,685 Payments for contract benefits or terminations (629,542) (154,700) (1,086,327) (1,832,673) (891) Policy loans 38,449 (96) 391 (63,761) -- Transfers between sub-accounts (including fixed account), net (406,816) 632,427 (35,698) (568,658) 3,163 Contract maintenance charges (215,479) (119,856) (351,878) (1,323,367) (10,571) ---------- ---------- ----------- ----------- -------- Increase (decrease) in net assets from contract transactions (991,211) 527,747 (1,071,167) (2,786,779) 15,386 ---------- ---------- ----------- ----------- -------- Increase (decrease) in net assets (953,124) 374,379 (1,871,901) (3,744,437) 5,079 Net assets at beginning of period 7,283,551 3,603,939 8,161,335 22,675,504 55,792 ---------- ---------- ----------- ----------- -------- Net assets at end of period $6,330,427 $3,978,318 $ 6,289,434 $18,931,067 $ 60,871 ========== ========== =========== =========== ======== Beginning units 222,786 120,251 359,948 1,022,435 4,131 Units issued 32,350 40,304 54,780 103,478 2,063 Units redeemed (54,540) (23,138) (98,590) (221,538) (772) ---------- ---------- ----------- ----------- -------- Ending units 200,596 137,417 316,138 904,375 5,422 ========== ========== =========== =========== ======== For the Year Ended December 31, 2017 From operations: Dividends $ 47,345 $ -- $ 79,571 $ 313,909 $ 240 Mortality and expense risk and administrative charges (33,613) (13,847) (35,488) (95,436) (56) ---------- ---------- ----------- ----------- -------- Net investment income (loss) 13,732 (13,847) 44,083 218,473 184 Net realized gain (loss) 860,555 103,203 365,642 796,500 (228) Capital gain distribution from mutual funds 295,435 188,684 379,745 920,795 2,494 Change in unrealized appreciation (depreciation) of investments 693,608 689,665 214,375 2,083,858 3,760 ---------- ---------- ----------- ----------- -------- Increase (decrease) in net assets from operations 1,863,330 967,705 1,003,845 4,019,626 6,210 ---------- ---------- ----------- ----------- -------- From contract transactions: Payments received from contract owners 252,634 115,588 339,464 962,673 3,031 Payments for contract benefits or terminations (281,207) (81,834) (320,022) (654,736) -- Policy loans 29,587 (25,726) 107,154 110,050 -- Transfers between sub-accounts (including fixed account), net (348,935) 355,175 (21,370) (207,311) 15,498 Contract maintenance charges (218,209) (90,186) (284,373) (1,229,586) (2,326) ---------- ---------- ----------- ----------- -------- Increase (decrease) in net assets from contract transactions (566,130) 273,017 (179,147) (1,018,910) 16,203 ---------- ---------- ----------- ----------- -------- Increase (decrease) in net assets 1,297,200 1,240,722 824,698 3,000,716 22,413 Net assets at beginning of period 5,986,351 2,363,217 7,336,637 19,674,788 33,379 ---------- ---------- ----------- ----------- -------- Net assets at end of period $7,283,551 $3,603,939 $ 8,161,335 $22,675,504 $ 55,792 ========== ========== =========== =========== ======== Beginning units 240,528 110,255 362,797 1,064,879 2,807 Units issued 47,811 28,092 82,456 124,941 1,605 Units redeemed (65,553) (18,096) (85,305) (167,385) (281) ---------- ---------- ----------- ----------- -------- Ending units 222,786 120,251 359,948 1,022,435 4,131 ========== ========== =========== =========== ========
The accompanying Notes to Financial Statements are an integral part of this statement. 21 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
VALIC Company II VALIC Socially Company II Vanguard VIF Vanguard VIF Responsible Strategic High Yield Real Estate Fund Bond Fund Bond Portfolio Index Portfolio ----------- ---------- -------------- --------------- For the Year Ended December 31, 2018 From operations: Dividends $ 672 $ 6,950 $ 321,566 $ 379,988 Mortality and expense risk and administrative charges (168) (546) (33,487) (55,268) ------- -------- ---------- ----------- Net investment income (loss) 504 6,404 288,079 324,720 Net realized gain (loss) 1,019 (132) (23,855) (75,523) Capital gain distribution from mutual funds 768 -- -- 465,939 Change in unrealized appreciation (depreciation) of investments (4,673) (13,481) (476,870) (1,441,103) ------- -------- ---------- ----------- Increase (decrease) in net assets from operations (2,382) (7,209) (212,646) (725,967) ------- -------- ---------- ----------- From contract transactions: Payments received from contract owners 8,793 31,500 467,492 746,179 Payments for contract benefits or terminations -- (11,531) (562,468) (849,205) Policy loans -- (2,074) 19,612 12,462 Transfers between sub-accounts (including fixed account), net (1,909) 37,959 39,013 (38,275) Contract maintenance charges (5,367) (18,048) (431,445) (626,555) ------- -------- ---------- ----------- Increase (decrease) in net assets from contract transactions 1,517 37,806 (467,796) (755,394) ------- -------- ---------- ----------- Increase (decrease) in net assets (865) 30,597 (680,442) (1,481,361) Net assets at beginning of period 40,460 172,262 6,909,788 13,145,749 ------- -------- ---------- ----------- Net assets at end of period $39,595 $202,859 $6,229,346 $11,664,388 ======= ======== ========== =========== Beginning units 2,605 15,518 358,684 697,040 Units issued 489 6,962 47,160 71,634 Units redeemed (393) (3,164) (70,171) (107,833) ------- -------- ---------- ----------- Ending units 2,701 19,316 335,673 660,841 ======= ======== ========== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 486 $ 5,526 $ 328,849 $ 332,776 Mortality and expense risk and administrative charges (92) (187) (35,552) (61,883) ------- -------- ---------- ----------- Net investment income (loss) 394 5,339 293,297 270,893 Net realized gain (loss) 98 73 14,263 190,217 Capital gain distribution from mutual funds 2,392 -- -- 593,451 Change in unrealized appreciation (depreciation) of investments 3,717 5,131 119,791 (486,562) ------- -------- ---------- ----------- Increase (decrease) in net assets from operations 6,601 10,543 427,351 567,999 ------- -------- ---------- ----------- From contract transactions: Payments received from contract owners 5,783 8,921 454,584 753,037 Payments for contract benefits or terminations -- (37,501) (240,629) (818,346) Policy loans -- 4,320 1,068 (61,665) Transfers between sub-accounts (including fixed account), net 912 51,890 42,342 (421,825) Contract maintenance charges (3,693) (5,232) (440,295) (626,822) ------- -------- ---------- ----------- Increase (decrease) in net assets from contract transactions 3,002 22,398 (182,930) (1,175,621) ------- -------- ---------- ----------- Increase (decrease) in net assets 9,603 32,941 244,421 (607,622) Net assets at beginning of period 30,857 139,321 6,665,367 13,753,371 ------- -------- ---------- ----------- Net assets at end of period $40,460 $172,262 $6,909,788 $13,145,749 ======= ======== ========== =========== Beginning units 2,355 13,302 366,167 752,358 Units issued 675 6,960 70,682 100,183 Units redeemed (425) (4,744) (78,165) (155,501) ------- -------- ---------- ----------- Ending units 2,605 15,518 358,684 697,040 ======= ======== ========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 22 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 1. Organization Separate Account VL-R (the Separate Account) is a segregated investment account established by American General Life Insurance Company (the Company) to receive and invest premium payments from variable universal life insurance policies issued by the Company. The Company is a wholly owned subsidiary of AGC Life Insurance Company, an indirect, wholly owned subsidiary of American International Group, Inc. (AIG). The Separate Account includes the following products: AG Corporate Investor/(b)/ Platinum Investor II/(b)/ AG Income Advantage VUL/(b)/ Platinum Investor III/(b)/ AG Legacy Plus/(b)/ Platinum Investor IV/(b)/ AG Platinum Choice VUL 2/(a)/ Platinum Investor PLUS/(b)/ Corporate America/(b)/ Platinum Investor Survivor/(b)/ Corporate Investor Select/(b)/ Platinum Investor Survivor II/(b)/ Income Advantage Select/(b)/ Platinum Investor VIP/(b)/ Platinum Investor FlexDirector/(b)/ Protection Advantage Select/(b)/ Platinum Investor I/(b)/ Survivor Advantage/(b)/ (a)On November 6, 2014 this product was introduced and is currently offered for sale. The name was changed from AG Platinum Choice VUL to AG Platinum Choice VUL 2 on July 3, 2017. (b)These products are no longer available for sale. The Separate Account is registered with the Securities and Exchange Commission as a Unit Investment Trust under the Investment Company Act of 1940, as amended. The Separate Account consists of various sub-accounts. Each sub-account invests all its investible assets in a corresponding eligible mutual fund, which is registered under the 1940 Act as open-ended management investment companies. The names in bold in the table below are the diversified, open-ended management investment companies and the names below them are the names of the sub-accounts/corresponding eligible mutual funds. Collectively, all of the mutual funds are referred to as "Funds" throughout these financial statements. For each sub-account, the financial statements are comprised of a Statement of Assets and Liabilities, including a Schedule of Portfolio Investments, as of December 31, 2018 and related Statements of Operations and Changes in Net Assets for each of the years in the period then ended, all periods to reflect a full twelve month period, except as noted below. The Alger Portfolios (Alger) Alger Capital Appreciation Portfolio Alger Mid Cap Growth Portfolio Class I-2 Shares Class I-2 Shares American Century Variable Portfolios, Inc. (American Century VP) American Century VP Value Fund Class I American Funds Insurance Series (American Funds IS) American Funds IS Asset Allocation American Funds IS Growth-Income Fund Fund Class 2 Class 2 American Funds IS Global Growth Fund American Funds IS High-Income Bond Class 2 Fund Class 2 American Funds IS Growth Fund Class 2 American Funds IS International Fund Class 2 Anchor Series Trust (AST)/(a)/ AST SA Wellington Capital Appreciation AST SA Wellington Government and Portfolio Class 3 Quality Bond Portfolio Class 3 Dreyfus Investment Portfolios (Dreyfus IP) Dreyfus IP MidCap Stock Portfolio Initial Shares 23 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Dreyfus Variable Investment Fund (Dreyfus VIF) Dreyfus VIF International Value Dreyfus VIF Quality Bond Portfolio Portfolio Initial Shares Initial Shares Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares Fidelity Variable Insurance Products (Fidelity VIP) Fidelity VIP Asset Manager Portfolio Fidelity VIP Freedom 2030 Portfolio Service Class 2 Service Class 2 Fidelity VIP Contrafund Portfolio Fidelity VIP Government Money Market Service Class 2 Portfolio Service Class 2 Fidelity VIP Equity-Income Portfolio Fidelity VIP Growth Portfolio Service Service Class 2 Class 2 Fidelity VIP Freedom 2020 Portfolio Fidelity VIP Mid Cap Portfolio Service Service Class 2 Class 2 Fidelity VIP Freedom 2025 Portfolio Service Class 2 Franklin Templeton Variable Insurance Products Trust (FTVIP) FTVIP Franklin Mutual Shares VIP Fund FTVIP Franklin U.S. Government Class 2 Securities VIP Fund Class 2 FTVIP Franklin Small Cap Value VIP FTVIP Templeton Foreign VIP Fund Fund Class 2 Class 2/(b)/ FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 Goldman Sachs Variable Insurance Trust (Goldman Sachs VIT) Goldman Sachs VIT Strategic Growth Fund Institutional Shares Invesco Variable Insurance Funds (Invesco V.I.) Invesco V.I. American Franchise Fund Invesco V.I. Growth and Income Fund Series I Series I Invesco V.I. Core Equity Fund Series I Invesco V.I. High Yield Fund Series I Invesco V.I. Global Real Estate Fund Invesco V.I. International Growth Fund Series I Series I Invesco V.I. Government Securities Fund Series I Janus Aspen Series Janus Henderson Enterprise Portfolio Janus Henderson Global Research Service Shares Portfolio Service Shares Janus Henderson Forty Portfolio Janus Henderson Overseas Portfolio Service Shares Service Shares JP Morgan Insurance Trust (JP Morgan) JPMorgan Insurance Trust Core Bond JPMorgan Insurance Trust Small Cap Portfolio Class 1 Core Portfolio Class 1 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 MFS Variable Insurance Trust (MFS VIT) MFS VIT Growth Series Initial Class MFS VIT Research Series Initial Class MFS VIT II Core Equity Portfolio MFS VIT Total Return Series Initial Initial Class Class MFS VIT New Discovery Series Initial Class Morgan Stanley Variable Insurance Fund, Inc. (Morgan Stanley VIF) Morgan Stanley VIF Growth Portfolio Class I Neuberger Berman Advisers Management Trust (Neuberger Berman AMT) Neuberger Berman AMT Large Cap Value Neuberger Berman AMT Sustainable Portfolio Class I Equity Portfolio Class I/(c)/ Neuberger Berman AMT Mid Cap Growth Portfolio Class I Oppenheimer Variable Account Funds (Oppenheimer) Oppenheimer Conservative Balanced Oppenheimer Global Strategic Income Fund/VA Non Service Shares Fund/VA Non-Service Shares Oppenheimer Global Fund/VA Non Service Shares PIMCO Variable Insurance Trust (PIMCO) PIMCO CommodityRealReturn Strategy PIMCO Short-Term Portfolio Portfolio Administrative Class Administrative Class PIMCO Global Bond Opportunities PIMCO Total Return Portfolio Portfolio (Unhedged) Adminstrative Administrative Class Class/(i)/ PIMCO Real Return Portfolio Administrative Class Pioneer Variable Contracts Trust (Pioneer) Pioneer Fund VCT Portfolio Class I Pioneer Select Mid Cap Growth VCT Pioneer Mid Cap Value VCT Portfolio Portfolio Class I Class I 24 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Putnam Variable Trust (Putnam VT) Putnam VT Diversified Income Fund Putnam VT International Value Fund Class IB Class IB Putnam VT Equity Income Fund Putnam VT Small Cap Value Fund Class IB/(j)/ Class IB Putnam VT Growth Opportunities Fund Putnam VT Sustainable Leaders Fund Class IB Class IB/(d)/ Seasons Series Trust (SST)/(a)/ SST SA Multi-Managed Mid Cap Value Portfolio Class 3 SunAmerica Series Trust (SAST)/(a)/ SAST SA JPMorgan Diversified Balanced SAST SA WellsCap Aggressive Growth Portfolio Class 1/(e)/ Portfolio Class 1 VALIC Company I/(f)/ VALIC Company I Dynamic Allocation VALIC Company I Mid Cap Index Fund Fund VALIC Company I Emerging Economies VALIC Company I Nasdaq-100 Index Fund Fund VALIC Company I Government Money VALIC Company I Science & Technology Market I Fund Fund VALIC Company I International VALIC Company I Small Cap Index Fund Equities Index Fund VALIC Company I International Value VALIC Company I Stock Index Fund Fund/(h)/ VALIC Company II/(f)/ VALIC Company II Mid Cap Value Fund VALIC Company II Strategic Bond Fund VALIC Company II Socially Responsible Fund Vanguard Variable Insurance Fund (Vanguard VIF) Vanguard VIF High Yield Bond Portfolio Vanguard VIF Real Estate Index Portfolio/(g)/ (a)These are affiliated investment companies. SunAmerica Asset Management Corp., an affiliate of the Company, serves as the investment advisor to Anchor Series Trust, Seasons Series Trust, and SunAmerica Series Trust. (b)Formerly FTVIP Templeton Foreign Securities Fund. (c)Formerly Neuberger Berman AMT Socially Responsive Portfolio. (d)Formerly Putnam VT Multi-Cap Growth Fund. (e)Formerly SAST SA JPMorgan Balanced Portfolio (f)VALIC Company I and II are affiliated investment companies. The Variable Annuity Life Insurance Company (VALIC), an affiliate of the Company, serves as the investment advisor to VALIC Company I and II series. VALIC Retirement Services Company, a direct, wholly owned subsidiary of VALIC, serves as the transfer agent and accounting services agent to VALIC Company I and II series. SunAmerica Asset Management LLC (SAAMCO), an affiliate of the Company, serves as investment sub-advisor to certain underlying mutual funds of VALIC Company I and II series. (g)Formerly Vanguard VIF REIT Index Portfolio. (h)Formerly VALIC Company I Foreign Value Fund. (i)Formerly PIMCO VIT Global Bond Portfolio (Unhedged). (j)The Putnam VT Growth and Income Fund, in operation for the period January 1, 2016 to May 12, 2017 (cessation of operations), merged into the Putnam VT Equity Income Fund, in operation for the period May 12, 2017 (commencement of operations) to December 31, 2017. In addition to the sub-accounts above, a contract owner may allocate contract funds to a fixed account, which is part of the Company's General Account and not included in these financial statements. Contract owners should refer to the product prospectus for the available Funds and fixed account. The assets of the Separate Account are segregated from the Company's assets. The operations of the Separate Account are part of the Company. Net premiums from the contracts are allocated to the sub-accounts and invested in the Funds in accordance with contract owner instructions and are recorded as contract transactions in the Statements of Operations and Changes in Net Assets. 2. Summary of Significant Accounting Policy The financial statements of the Separate Account have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). The following is a summary of significant accounting policies consistently followed by the Separate Account in the preparation of its financial statements. 25 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Use of Estimates: The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from assumptions used, the financial statements of the Separate Account could be materially affected. Investments: Investments in mutual funds are valued at their closing net asset value per share as determined by the respective mutual funds, which generally value their securities at fair value. Purchases and sales of shares of the Funds are made at the net asset values of such Funds. Transactions are recorded on a trade date basis. Realized gains and losses on the sales of investments are recognized at the date of sale and are determined on a first-in, first-out basis. Dividends and capital gain distributions from the Funds are recorded on the ex-dividend date and reinvested upon receipt. Policy Loans: When a policy loan is made, the loan amount is transferred to the Company from the contract owner's selected investment, and held as collateral. Interest on this collateral amount is credited to the policy. Loan repayments are invested in the contract owner's selected investment, after they are first used to repay all loans taken from the declared fixed interest account option. Accumulation Unit: This is the basic valuation unit used to calculate the contract owner's interest. Such units are valued daily to reflect investment performance and the prorated daily deduction for expense charges. Internal Rollovers: A contract owner with an eligible Company life insurance policy may elect to replace their existing policy with another insurance policy offered by the Company. Internal rollovers are included on the payments for contract benefits or terminations line in the Statements of Operations and Changes in Net Assets under contract transactions. Income Taxes: The operations of the Separate Account are included in the federal income tax return of the Company, which is taxed as a life insurance company under the provision of the Internal Revenue Code (the Code). Under the current provisions of the Code, the Company does not expect to incur federal income taxes on the earnings of the Separate Account to the extent that the earnings are credited under the contracts. As a result, no charge is currently made to the Separate Account for federal income taxes. The Separate Account is not treated as a regulated investment company under the Code. The Company will periodically review changes in the tax law. A charge may be made in future years for any federal income taxes that would be attributable to the contracts. 3. Fair Value Measurements Assets recorded at fair value in the Separate Account's Statement of Assets and Liabilities are measured and classified in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of valuation inputs: .. Level 1-- Fair value measurements based on quoted prices (unadjusted) in active markets that the Separate Account has the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. The Separate Account does not adjust the quoted price for such instruments. .. Level 2-- Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. .. Level 3-- Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair value positions in Level 3. The circumstances in which there is little, if any, market activity for the asset or liability. Therefore, the Separate Account makes certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability. 26 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Separate Account assets measured at fair value as of December 31, 2018 consist of investments in registered mutual funds that generally trade daily and are measured at fair value using quoted prices in active markets for identical assets, which are classified as Level 1 throughout the year. As such, no transfers between fair value hierarchy levels occurred during the year. See the Schedule of Portfolio Investments for the table presenting information about assets measured at fair value on a recurring basis at December 31, 2018, and respective hierarchy levels. 4. Expenses Expense charges are applied against the current value of the Separate Account and are paid as follows: Separate Account Annual Charges: Deductions for the mortality and expense risk charges and administrative charges are calculated daily, at an annual rate, on the actual prior day's net asset value of the underlying Funds comprising the sub-accounts attributable to the contract owners and are paid to the Company. The mortality risk charge represents compensation to the Company for the mortality risks assumed under the contract, which is the obligation to provide payments during the payout period for the life of the contract and to provide the standard death benefit. The expense risk charge represents compensation to the Company for assuming the risk that the current contract administration charges will be insufficient to cover the cost of administering the contract in the future. The administrative charge reimburses the Company for any administrative expenses incurred under the contract. This includes the expenses for administration and marketing. These charges are included on the mortality and expense risk and administrative charges line in the Statements of Operations and Changes in Net Assets. The exact rate depends on the particular product issued. Expense charges for each product are as follows:
Mortality and Expense Risk Maximum Annual First Reduction in Second Reduction in Rate and Mortality and Mortality and Administrative Expense Risk and Expense Risk and Charges Maximum Administrative Administrative Products Annual Rate Charges Rate/(a)/ Charges Rate/(b)/ -------- --------------- ------------------ ------------------- AG Corporate Investor 0.65% 0.25% 0.25% AG Income Advantage VUL 0.70% 0.35% 0.15% AG Legacy Plus 0.90% 0.25% 0.25% AG Platinum Choice VUL 2 0.70% 0.35% 0.20% Corporate America 0.35% 0.10% 0.10% Corporate America (reduced surrender charge) 0.65% 0.25% 0.25% Corporate Investor Select 0.65% 0.25% 0.25% Income Advantage Select 0.70% 0.35% 0.20% Platinum Investor FlexDirector 0.70% 0.25% 0.35% Platinum Investor I 0.75% 0.25% 0.25% Platinum Investor II 0.75% 0.25% 0.25% Platinum Investor III 0.70% 0.25% 0.35% Platinum Investor IV 0.70% 0.35% 0.25% Platinum Investor PLUS 0.70% 0.25% 0.35% Platinum Investor Survivor 0.40% 0.20% 0.10% Platinum Investor Survivor II 0.75% 0.25% 0.35% Platinum Investor VIP 0.70% 0.35% 0.20% Protection Advantage Select 0.70% 0.35% 0.20% Survivor Advantage 0.70% 0.35% 0.20%
27 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (a) After 10th policy year. (b) After 20th policy year. Contract Maintenance Charge: Monthly contract maintenance charges are paid to the Company for the administrative services provided under the current policies. The Company may deduct an additional monthly expense charge for expenses associated with acquisition, administrative and underwriting of your policy. The monthly expense charge is applied only against each $1,000 of coverage (if the policy offers both base and supplement coverage, then only each $1,000 of base coverage). This charge varies according to the ages, gender and the premium class of the insured, as well as the amount of coverage. These charges are included as part of the contract maintenance charges line in the Statements of Operations and Changes in Net Assets. The Company may charge a maximum fee of $12 for the monthly contract maintenance charge. Withdrawal Charge: A withdrawal charge is applicable to certain contract withdrawals pursuant to the contract and is payable to the Company. The withdrawal charges are included as part of the payments for contract benefits or terminations line in the Statements of Operations and Changes in Net Assets. The amount of the withdrawal charge depends on the age and other insurance characteristics of the insured person. For partial withdrawals, the Company may charge a maximum transaction fee per partial withdrawal equal to the lesser of 2 percent of the amount withdrawn or $25. Currently, a $10 transaction fee per policy is charged for each partial withdrawal. Cost of Insurance Charge: Since determination of both the insurance rate and the Company's net amount at risk depends upon several factors, the cost of insurance deduction may vary from month to month. Policy accumulation value, specified amount of insurance and certain characteristics of the insured person are among the variables included in the calculation for the monthly cost of insurance deduction. The cost of insurance charge is included as part of the contract maintenance charges line of the Statements of Operations and Changes in Net Assets. Transfer Fee: A transfer fee may be assessed on each transfer of funds in excess of the maximum transactions allowed within a contract year depending on the contract provision. The transfer fee is included as part of the payments for contract benefits or terminations line in the Statements of Operations and Changes in Net Assets. A transfer fee of $25 is assessed on each transfer in excess of 12 transfers during the policy year. Premium Tax Charge: Certain states charge taxes on purchase payments up to a maximum of 3.5 percent. The Company deducts from each premium payment a charge to cover costs associated with the issuance of the policy, administrative services the Company performs and a premium tax that is applicable to the Company in the state or other jurisdiction of the policy owner. Premium tax charges are included as part of the contract maintenance charges line in the Statements of Operations and Changes in Net Assets. A summary of premium tax charges follows: Products Premium Tax Charge -------- ---------------------------------------------------- AG Corporate Investor/*/ 4.00% up to the "target premium" and 5.00% on any premium amounts in excess of the "target premium" for policy years 1-3. 9.00% up to the "target premium" and 5.00% on any premium amounts in excess of the "target premium" for policy years 4-7. 5.00% of all premium payments in policy years 8 and thereafter. AG Income Advantage VUL 5.00% of after-tax premium payment AG Platinum Choice VUL 2 9.00% of after-tax premium payment Corporate America/*/ 9.00% up to the "target premium" and 5.00% on any premium amounts in excess of the "target premium" for policy years 1-7. 5.00% of all premium payments in policy years 8 and thereafter. 28 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Corporate Investor Select/*/ 4.00% up to the "target premium" and 5.00% on any premium amounts in excess of the "target premium" for policy years 1-3. 9.00% up to the "target premium" and 5.00% on any premium amounts in excess of the "target premium" for policy years 4-7. 5.00% of all premium payments in policy years 8 and thereafter. Income Advantage Select 3.50% of each premium payment Platinum Investor FlexDirector 3.50% of each premium payment Platinum Investor I 3.50% of each premium payment Platinum Investor II 3.50% of each premium payment Platinum Investor III 3.50% of each premium payment Platinum Investor IV 3.50% of each premium payment Platinum Investor PLUS 3.50% of each premium payment Platinum Investor Survivor 3.50% of each premium payment Platinum Investor Survivor II 3.50% of each premium payment Platinum Investor VIP 3.50% of each premium payment Protection Advantage Select 3.50% of each premium payment Survivor Advantage 3.50% of each premium payment * The target premium is an amount of premium that is approximately equal to the seven-pay premium, which is the maximum amount of premium that may be paid without the policy becoming a modified endowment contract. Optional Rider Charge: Monthly charges are deducted if the contract owner selects additional benefit riders. The charges for any rider selected will vary by policy within a range based on either the personal characteristics of the insured person or the specific coverage chosen under the rider. The rider charges are included as part of contract maintenance charges line in the Statements of Operations and Changes in Net Assets. Guaranteed Minimum Withdrawal Benefit (GMWB) Charge: Daily charges for the GMWB rider are assessed through the daily unit value calculation on all policies that have elected this option. These charges are included as part of the contract maintenance charges line in the Statements of Operations and Changes in Net Assets. The annualized GMWB charge is 0.75 percent, which may be increased to a maximum of 1.50 percent. 29 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. Purchases and Sales of Investments For the year ended December 31, 2018, the aggregate cost of purchases and proceeds from the sales of investments were:
Cost of Proceeds Sub-accounts Purchases from Sales ------------ ---------- ---------- Alger Capital Appreciation Portfolio Class I-2 Shares $2,369,946 $1,910,884 Alger Mid Cap Growth Portfolio Class I-2 Shares 1,293,608 1,336,950 American Century VP Value Fund Class I 1,505,936 2,908,269 American Funds IS Asset Allocation Fund Class 2 1,358,374 255,448 American Funds IS Global Growth Fund Class 2 449,908 147,641 American Funds IS Growth Fund Class 2 1,337,409 185,251 American Funds IS Growth-Income Fund Class 2 1,271,037 467,583 American Funds IS High-Income Bond Fund Class 2 195,729 66,004 American Funds IS International Fund Class 2 404,108 204,755 AST SA Wellington Capital Appreciation Portfolio Class 3 155,586 52,712 AST SA Wellington Government and Quality Bond Portfolio Class 3 69,923 31,032 Dreyfus IP MidCap Stock Portfolio Initial Shares 961,592 681,099 Dreyfus VIF International Value Portfolio Initial Shares 98,719 100,932 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 1,903,492 905,045 Dreyfus VIF Quality Bond Portfolio Initial Shares 410,062 891,334 Fidelity VIP Asset Manager Portfolio Service Class 2 629,059 910,046 Fidelity VIP Contrafund Portfolio Service Class 2 5,875,742 5,929,015 Fidelity VIP Equity-Income Portfolio Service Class 2 2,520,826 2,628,977 Fidelity VIP Freedom 2020 Portfolio Service Class 2 336,411 318,095 Fidelity VIP Freedom 2025 Portfolio Service Class 2 179,732 171,637 Fidelity VIP Freedom 2030 Portfolio Service Class 2 763,616 836,062 Fidelity VIP Government Money Market Portfolio Service Class 2 7,412,788 6,907,095 Fidelity VIP Growth Portfolio Service Class 2 4,564,347 3,715,677 Fidelity VIP Mid Cap Portfolio Service Class 2 1,977,788 2,302,219 FTVIP Franklin Mutual Shares VIP Fund Class 2 1,424,568 1,428,408 FTVIP Franklin Small Cap Value VIP Fund Class 2 2,102,017 2,038,695 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 3,060 2,946 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 204,341 486,269 FTVIP Templeton Foreign VIP Fund Class 2 877,822 1,141,556 Goldman Sachs VIT Strategic Growth Fund Institutional Shares 1,601,340 183,028 Invesco V.I. American Franchise Fund Series I 1,193 747 Invesco V.I. Core Equity Fund Series I 1,039,846 1,210,893 Invesco V.I. Global Real Estate Fund Series I 167,233 86,001 Invesco V.I. Government Securities Fund Series I 653 10,445 Invesco V.I. Growth and Income Fund Series I 2,773,176 2,178,117 Invesco V.I. High Yield Fund Series I 219,254 350,500 Invesco V.I. International Growth Fund Series I 1,438,610 1,750,309 Janus Henderson Enterprise Portfolio Service Shares 1,684,863 1,758,551 Janus Henderson Forty Portfolio Service Shares 697,809 577,111 Janus Henderson Global Research Portfolio Service Shares 169,544 346,836 Janus Henderson Overseas Portfolio Service Shares 1,303,219 1,778,241 JPMorgan Insurance Trust Core Bond Portfolio Class 1 828,698 274,381 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 37,180 73,744 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 618,738 749,949 MFS VIT Growth Series Initial Class 1,469,593 1,480,682 MFS VIT II Core Equity Portfolio Initial Class 636,759 396,177 MFS VIT New Discovery Series Initial Class 1,444,986 1,137,464 MFS VIT Research Series Initial Class 662,808 370,934 MFS VIT Total Return Series Initial Class 17,903 101,609 Morgan Stanley VIF Growth Portfolio Class I 1,589,490 894,271
30 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Cost of Proceeds Sub-accounts Purchases from Sales ------------ ---------- ---------- Neuberger Berman AMT Large Cap Value Portfolio Class I $ 3,686 $ 3,711 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 1,484,207 1,833,434 Neuberger Berman AMT Sustainable Equity Portfolio Class I 16,297 2,769 Oppenheimer Conservative Balanced Fund/VA Non Service Shares 233,121 229,406 Oppenheimer Global Fund/VA Non Service Shares 1,623,431 1,985,781 Oppenheimer Global Strategic Income Fund/VA Non-Service Shares 462 1,583 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 211,978 305,079 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 219,209 69,426 PIMCO Real Return Portfolio Administrative Class 809,049 1,435,215 PIMCO Short-Term Portfolio Administrative Class 876,469 892,450 PIMCO Total Return Portfolio Administrative Class 2,725,886 2,837,065 Pioneer Fund VCT Portfolio Class I 676,395 374,444 Pioneer Mid Cap Value VCT Portfolio Class I 369,204 514,807 Pioneer Select Mid Cap Growth VCT Portfolio Class I 742,837 593,757 Putnam VT Diversified Income Fund Class IB 767,788 983,003 Putnam VT Equity Income Fund Class IB 1,457,750 1,566,041 Putnam VT Growth and Income Fund IB 158 158 Putnam VT Growth Opportunities Fund Class IB 14,677 3,757 Putnam VT International Value Fund Class IB 653,864 1,168,121 Putnam VT Small Cap Value Fund Class IB 111,845 89,281 Putnam VT Sustainable Leaders Fund Class IB 6,304 2,213 SST SA Multi-Managed Mid Cap Value Portfolio Class 3 20,705 8,395 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 644,252 505,946 SAST SA WellsCap Aggressive Growth Portfolio Class 1 1,154,609 870,653 VALIC Company I Dynamic Allocation Fund 2,159,902 462,661 VALIC Company I Emerging Economies Fund 61,424 27,675 VALIC Company I Government Money Market I Fund 5,547,140 6,385,793 VALIC Company I International Equities Index Fund 941,629 735,746 VALIC Company I International Value Fund 31,715 21,601 VALIC Company I Mid Cap Index Fund 3,029,672 3,542,065 VALIC Company I Nasdaq-100 Index Fund 1,374,431 2,037,886 VALIC Company I Science & Technology Fund 1,574,445 741,758 VALIC Company I Small Cap Index Fund 1,712,745 2,285,975 VALIC Company I Stock Index Fund 3,406,789 5,121,756 VALIC Company II Mid Cap Value Fund 26,990 6,951 VALIC Company II Socially Responsible Fund 8,172 5,382 VALIC Company II Strategic Bond Fund 75,308 31,098 Vanguard VIF High Yield Bond Portfolio 1,177,872 1,357,590 Vanguard VIF Real Estate Index Portfolio 2,121,273 2,086,008
31 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Financial Highlights The summary of unit values and units outstanding for sub-accounts, investment income ratios, total return and expense ratios, excluding expenses of the underlying mutual funds, for each of the five years in the period ended December 31, 2018, follows:
December 31, 2018 For the Year Ended December 31, 2018 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- Alger Capital Appreciation Portfolio Class I-2 Shares 302,218 23.25 26.13 7,356,556 0.09 0.00 1.10 -1.20 -0.10 Alger Mid Cap Growth Portfolio Class I-2 Shares 168,792 30.25 30.73 2,737,895 0.00 0.00 0.75 -8.14 -7.44 American Century VP Value Fund Class I 691,816 20.37 27.99 13,539,464 1.73 0.00 0.75 -9.83 -9.15 American Funds IS Asset Allocation Fund Class 2 197,083 13.70 14.09 2,326,604 2.08 0.20 0.70 -5.27 -4.15 American Funds IS Global Growth Fund Class 2 61,468 14.68 15.10 727,645 0.81 0.20 0.70 -9.68 -8.60 American Funds IS Growth Fund Class 2 138,504 17.97 18.48 1,770,815 0.56 0.20 0.70 -0.95 0.23 American Funds IS Growth-Income Fund Class 2 158,287 16.79 17.27 2,061,677 1.61 0.20 0.70 -2.48 -1.31 American Funds IS High-Income Bond Fund Class 2 34,077 11.27 11.42 361,464 6.85 0.20 0.70 -3.03 -1.87 American Funds IS International Fund Class 2 51,672 11.87 12.16 525,792 1.95 0.20 0.70 -13.74 -12.71 AST SA Wellington Capital Appreciation Portfolio Class 3 16,776 18.85 19.39 232,885 0.00 0.20 0.70 -1.69 -0.51 AST SA Wellington Government and Quality Bond Portfolio Class 3 11,300 10.29 10.58 116,518 1.85 0.20 0.70 -0.91 0.27 Dreyfus IP MidCap Stock Portfolio Initial Shares 202,332 19.86 30.35 3,970,163 0.62 0.20 0.75 -16.12 -15.66 Dreyfus VIF International Value Portfolio Initial Shares 10,940 9.20 14.73 117,604 1.81 0.00 0.70 -17.40 -16.81 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 345,984 19.01 20.64 6,407,578 0.00 0.20 0.75 -19.69 -19.24 Dreyfus VIF Quality Bond Portfolio Initial Shares 298,292 14.02 16.05 4,096,694 2.78 0.20 0.75 -3.28 -2.74 Fidelity VIP Asset Manager Portfolio Service Class 2 258,595 15.10 19.97 3,780,901 1.47 0.00 0.75 -6.32 -5.61 Fidelity VIP Contrafund Portfolio Service Class 2 1,512,166 17.46 30.95 28,392,983 0.46 0.00 1.10 -7.67 -6.64 Fidelity VIP Equity-Income Portfolio Service Class 2 917,967 15.25 27.22 15,004,507 2.12 0.00 1.10 -9.54 -8.54 Fidelity VIP Freedom 2020 Portfolio Service Class 2 23,538 14.96 15.83 360,714 1.35 0.00 0.70 -6.74 -6.08 Fidelity VIP Freedom 2025 Portfolio Service Class 2 35,298 15.65 16.55 559,815 1.26 0.00 0.70 -7.43 -6.78 Fidelity VIP Freedom 2030 Portfolio Service Class 2 149,544 14.55 16.35 2,359,621 1.16 0.00 1.10 -9.07 -8.05 Fidelity VIP Government Money Market Portfolio Service Class 2 101,173 9.79 10.07 1,023,453 0.95 0.20 0.70 0.69 1.88 Fidelity VIP Growth Portfolio Service Class 2 835,835 25.70 34.90 17,707,184 0.04 0.00 0.75 -1.18 -0.43 Fidelity VIP Mid Cap Portfolio Service Class 2 442,087 16.57 29.25 8,071,996 0.42 0.00 1.10 -15.71 -14.77 FTVIP Franklin Mutual Shares VIP Fund Class 2 400,637 13.99 22.68 5,989,211 2.45 0.00 1.10 -10.07 -9.07 FTVIP Franklin Small Cap Value VIP Fund Class 2 337,421 17.30 29.44 6,322,587 0.94 0.00 1.10 -13.84 -12.88 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 1,177 18.87 22,210 0.00 0.50 -5.85 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 125,835 12.54 15.22 1,599,147 2.81 0.20 0.75 -0.42 0.14 FTVIP Templeton Foreign VIP Fund Class 2 396,938 10.45 17.46 4,126,561 2.80 0.20 0.75 -16.08 -15.61 Goldman Sachs VIT Strategic Growth Fund Institutional Shares 140,076 22.08 22.80 3,181,316 0.48 0.20 0.50 -1.53 -1.24 Invesco V.I. American Franchise Fund Series I 613 21.20 13,001 0.00 0.50 -4.11 Invesco V.I. Core Equity Fund Series I 432,994 16.53 17.86 6,977,216 0.92 0.20 0.75 -10.08 -9.58 Invesco V.I. Global Real Estate Fund Series I 32,084 11.09 21.33 438,602 4.11 0.00 0.70 -6.81 -6.15 Invesco V.I. Government Securities Fund Series I 1,082 11.14 12,050 1.57 0.50 0.05 Invesco V.I. Growth and Income Fund Series I 515,887 25.63 26.06 9,134,590 2.17 0.00 0.75 -14.03 -13.38 Invesco V.I. High Yield Fund Series I 136,042 12.86 13.42 1,769,886 5.28 0.20 0.75 -4.08 -3.55 Invesco V.I. International Growth Fund Series I 525,489 11.17 20.01 6,414,590 2.09 0.00 1.10 -15.91 -14.98 Janus Henderson Enterprise Portfolio Service Shares 260,835 25.39 42.85 6,331,865 0.12 0.00 0.75 -1.41 -0.66 Janus Henderson Forty Portfolio Service Shares 33,321 18.56 35.34 713,863 0.00 0.00 0.70 1.01 1.72 Janus Henderson Global Research Portfolio Service Shares 189,351 15.24 17.49 2,818,406 1.04 0.20 0.75 -7.78 -7.27 Janus Henderson Overseas Portfolio Service Shares 772,355 7.01 7.87 5,966,055 1.76 0.00 1.10 -16.07 -15.14 JPMorgan Insurance Trust Core Bond Portfolio Class 1 118,476 10.61 14.54 1,265,297 2.03 0.00 0.70 -0.65 0.05 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 20,572 31.34 33.06 663,877 1.02 0.20 0.75 -12.50 -12.01 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 146,979 21.43 32.25 3,101,349 0.42 0.20 0.75 -12.59 -12.11 MFS VIT Growth Series Initial Class 468,526 25.60 33.16 11,673,310 0.10 0.20 0.75 1.90 2.46 MFS VIT II Core Equity Portfolio Initial Class 333,436 12.66 12.93 4,274,993 0.72 0.20 0.75 -4.55 -4.02 MFS VIT New Discovery Series Initial Class 228,082 23.32 26.20 5,251,759 0.00 0.00 1.10 -2.56 -1.48 MFS VIT Research Series Initial Class 144,927 22.04 28.40 2,911,066 0.75 0.00 0.75 -5.09 -4.37 MFS VIT Total Return Series Initial Class 13,021 16.56 215,588 1.90 0.50 -6.09 Morgan Stanley VIF Growth Portfolio Class I 128,529 31.25 39.41 3,911,601 0.00 0.20 0.75 6.73 7.32 Neuberger Berman AMT Large Cap Value Portfolio Class I 1,674 15.26 25,534 1.17 0.50 -1.54 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 285,059 18.43 31.72 5,479,092 0.00 0.00 1.10 -7.43 -6.40 Neuberger Berman AMT Sustainable Equity Portfolio Class I 6,686 18.82 29.51 129,447 0.52 0.20 0.70 -6.39 -5.91 Oppenheimer Conservative Balanced Fund/VA Non Service Shares 100,900 12.07 16.57 1,199,241 2.03 0.00 0.75 -6.03 -5.32 Oppenheimer Global Fund/VA Non Service Shares 359,158 16.24 28.58 6,402,814 1.03 0.00 1.10 -14.14 -13.18 Oppenheimer Global Strategic Income Fund/VA Non-Service Shares 327 10.72 3,510 4.96 0.50 -4.88 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 110,044 7.33 14.62 587,286 2.21 0.00 1.10 -15.08 -14.13 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 28,206 9.87 13.67 305,520 7.73 0.00 0.70 -4.87 -4.20
32 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2018 For the Year Ended December 31, 2018 ------------------------------------------ ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ ------- ------ ------- -------------- ------------- ------ ------- ------ ------- PIMCO Real Return Portfolio Administrative Class 577,465 14.93 18.82 7,524,253 2.44 0.00 0.75 -2.95 -2.21 PIMCO Short-Term Portfolio Administrative Class 313,414 10.88 12.26 3,671,595 2.16 0.00 1.10 0.41 1.53 PIMCO Total Return Portfolio Administrative Class 828,840 13.91 16.14 12,129,200 2.50 0.00 1.10 -1.63 -0.54 Pioneer Fund VCT Portfolio Class I 85,951 19.78 23.63 1,656,011 1.19 0.20 0.70 -2.20 -1.71 Pioneer Mid Cap Value VCT Portfolio Class I 50,424 16.18 16.25 793,307 0.73 0.00 0.75 -19.95 -19.34 Pioneer Select Mid Cap Growth VCT Portfolio Class I 106,943 23.78 24.54 2,559,747 0.00 0.20 0.50 -6.95 -6.67 Putnam VT Diversified Income Fund Class IB 300,844 15.62 17.08 5,665,739 4.31 0.00 0.95 -1.92 -0.98 Putnam VT Equity Income Fund Class IB 761,628 19.25 21.47 11,718,433 0.74 0.20 0.75 -9.18 -8.67 Putnam VT Growth Opportunities Fund Class IB 42,021 4.23 177,616 0.00 0.50 1.87 Putnam VT International Value Fund Class IB 351,823 7.93 8.72 3,090,053 2.22 0.20 1.10 -18.52 -17.78 Putnam VT Small Cap Value Fund Class IB 9,040 16.75 17.86 157,042 0.44 0.00 0.70 -20.49 -19.93 Putnam VT Sustainable Leaders Fund Class IB 1,594 25.52 40,670 0.00 0.50 -2.02 SST SA Multi-Managed Mid Cap Value Portfolio Class 3 4,251 13.03 13.40 47,183 0.75 0.20 0.70 -12.71 -11.67 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 164,830 18.54 20.63 2,654,340 1.52 0.00 0.75 -8.40 -7.70 SAST SA WellsCap Aggressive Growth Portfolio Class 1 91,940 16.12 18.12 1,593,822 0.00 0.00 1.10 -7.81 -6.78 VALIC Company I Dynamic Allocation Fund 319,784 11.94 12.28 3,439,714 1.02 0.20 0.70 -7.60 -6.50 VALIC Company I Emerging Economies Fund 10,236 9.63 9.90 97,387 1.41 0.20 0.70 -19.90 -18.94 VALIC Company I Government Money Market I Fund 839,432 9.18 10.32 8,312,365 1.31 0.00 1.10 0.21 1.32 VALIC Company I International Equities Index Fund 263,693 10.17 14.54 2,593,223 2.08 0.00 0.75 -14.39 -13.74 VALIC Company I International Value Fund 6,551 8.64 9.96 56,732 1.98 0.25 0.70 -18.39 -18.02 VALIC Company I Mid Cap Index Fund 621,713 19.58 22.00 13,017,944 1.19 0.00 1.10 -12.41 -11.43 VALIC Company I Nasdaq-100 Index Fund 200,596 29.94 33.65 6,330,427 0.55 0.00 1.10 -1.72 -0.63 VALIC Company I Science & Technology Fund 137,417 31.55 31.93 3,978,318 0.00 0.00 0.75 -2.20 -1.46 VALIC Company I Small Cap Index Fund 316,138 20.93 32.50 6,289,434 1.11 0.00 0.75 -11.89 -11.23 VALIC Company I Stock Index Fund 904,375 21.94 26.28 18,931,067 1.76 0.00 0.75 -5.43 -4.72 VALIC Company II Mid Cap Value Fund 5,422 13.15 13.52 60,871 0.43 0.20 0.70 -15.62 -14.61 VALIC Company II Socially Responsible Fund 2,701 16.36 16.83 39,595 1.68 0.20 0.70 -5.87 -4.75 VALIC Company II Strategic Bond Fund 19,316 10.77 11.07 202,859 3.71 0.20 0.70 -4.21 -3.07 Vanguard VIF High Yield Bond Portfolio 335,673 16.21 18.22 6,229,346 4.89 0.00 1.10 -3.80 -2.73 Vanguard VIF Real Estate Index Portfolio 660,841 16.02 27.22 11,664,388 3.06 0.00 1.10 -6.39 -5.35
December 31, 2017 For the Year Ended December 31 2017 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- Alger Capital Appreciation Portfolio Class I-2 Shares 322,741 23.54 26.15 8,151,701 0.17 0.00 1.10 29.65 31.08 Alger Mid Cap Growth Portfolio Class I-2 Shares 184,834 13.61 32.09 3,394,794 0.00 0.20 0.95 28.57 29.53 American Century VP Value Fund Class I 761,205 22.42 31.05 16,556,042 1.62 0.00 0.75 7.94 8.75 American Funds IS Asset Allocation Fund Class 2 110,852 14.46 14.80 1,473,785 1.82 0.20 0.70 15.42 16.79 American Funds IS Global Growth Fund Class 2 37,874 16.25 16.63 537,081 0.73 0.20 0.70 30.56 32.10 American Funds IS Growth Fund Class 2 52,954 18.14 18.56 811,781 0.55 0.20 0.70 27.40 28.91 American Funds IS Growth-Income Fund Class 2 102,846 17.21 17.61 1,464,609 1.65 0.20 0.70 21.53 22.97 American Funds IS High-Income Bond Fund Class 2 23,439 11.62 11.71 262,674 8.26 0.20 0.70 6.14 7.40 American Funds IS International Fund Class 2 32,925 13.77 14.03 412,489 1.51 0.20 0.70 31.23 32.78 AST SA Wellington Capital Appreciation Portfolio Class 3 10,103 19.18 19.62 162,533 0.00 0.20 0.70 31.53 33.09 AST SA Wellington Government and Quality Bond Portfolio Class 3 7,570 10.38 10.63 79,385 1.75 0.20 0.70 2.04 3.25 Dreyfus IP MidCap Stock Portfolio Initial Shares 215,289 23.55 36.18 5,029,990 1.06 0.20 0.75 14.52 15.15 Dreyfus VIF International Value Portfolio Initial Shares 11,834 9.46 11.41 145,813 1.46 0.00 0.95 27.31 28.52 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 361,865 23.53 25.70 8,315,220 0.00 0.20 0.75 23.75 24.43 Dreyfus VIF Quality Bond Portfolio Initial Shares 341,206 14.42 16.59 4,826,798 2.11 0.20 0.75 3.72 4.29 Fidelity VIP Asset Manager Portfolio Service Class 2 288,419 21.32 22.12 4,494,686 1.63 0.20 0.75 12.90 13.52 Fidelity VIP Contrafund Portfolio Service Class 2 1,633,046 18.91 21.01 33,416,374 0.78 0.00 1.10 20.26 21.59 Fidelity VIP Equity-Income Portfolio Service Class 2 980,078 16.86 29.22 17,674,993 1.48 0.20 1.10 11.42 12.43 Fidelity VIP Freedom 2020 Portfolio Service Class 2 24,020 16.04 23.12 387,130 1.22 0.20 0.70 15.45 16.03 Fidelity VIP Freedom 2025 Portfolio Service Class 2 35,817 16.91 24.79 611,436 1.08 0.20 0.70 16.75 17.33 Fidelity VIP Freedom 2030 Portfolio Service Class 2 156,726 16.00 25.94 2,741,857 1.20 0.20 1.10 19.38 20.45 Fidelity VIP Government Money Market Portfolio Service Class 2 51,864 9.73 9.95 517,760 0.24 0.20 0.70 -0.27 0.91 Fidelity VIP Growth Portfolio Service Class 2 909,510 26.00 34.41 19,660,993 0.08 0.20 0.75 33.81 34.55 Fidelity VIP Mid Cap Portfolio Service Class 2 493,472 19.66 21.85 10,717,435 0.48 0.00 1.10 19.22 20.54 FTVIP Franklin Mutual Shares VIP Fund Class 2 416,827 15.55 24.49 6,983,291 2.26 0.20 1.10 7.17 8.13 FTVIP Franklin Small Cap Value VIP Fund Class 2 385,185 20.07 22.31 8,451,891 0.48 0.00 1.10 9.44 10.65 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 1,286 20.04 25,778 0.00 0.50 20.79 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 151,946 12.52 15.28 1,928,613 2.18 0.20 0.75 0.58 1.14 FTVIP Templeton Foreign VIP Fund Class 2 422,235 12.38 20.81 5,292,633 2.61 0.20 0.75 15.82 16.46
33 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2017 For the Year Ended December 31 2017 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- Goldman Sachs VIT Strategic Growth Fund Institutional Shares 147,120 22.43 23.08 3,384,434 0.53 0.20 0.50 30.01 30.40 Invesco V.I. American Franchise Fund Series I 630 22.11 13,934 0.08 0.50 26.71 Invesco V.I. Core Equity Fund Series I 472,905 18.28 19.86 8,441,402 1.03 0.20 0.75 12.33 12.95 Invesco V.I. Global Real Estate Fund Series I 28,044 11.90 14.12 407,776 3.57 0.00 0.70 12.26 13.05 Invesco V.I. Government Securities Fund Series I 1,994 11.13 22,190 1.82 0.50 1.45 Invesco V.I. Growth and Income Fund Series I 532,628 18.24 22.12 11,158,029 1.50 0.00 0.95 13.24 14.32 Invesco V.I. High Yield Fund Series I 152,651 13.41 13.91 2,066,246 4.07 0.20 0.75 5.51 6.09 Invesco V.I. International Growth Fund Series I 549,092 13.29 14.76 8,074,309 1.50 0.00 1.10 21.66 23.00 Janus Henderson Enterprise Portfolio Service Shares 264,281 41.27 43.46 6,766,100 0.14 0.20 0.75 26.14 26.83 Janus Henderson Forty Portfolio Service Shares 31,036 18.73 20.27 686,757 0.00 0.00 0.95 28.77 29.99 Janus Henderson Global Research Portfolio Service Shares 201,456 16.44 18.96 3,240,331 0.70 0.20 0.75 25.74 26.43 Janus Henderson Overseas Portfolio Service Shares 811,335 8.35 9.10 7,631,682 1.64 0.20 1.10 29.38 30.54 JPMorgan Insurance Trust Core Bond Portfolio Class 1 64,724 10.68 14.28 721,668 2.42 0.20 0.70 2.85 3.37 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 22,040 35.82 37.57 809,906 0.81 0.20 0.75 12.92 13.54 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 161,743 24.39 36.90 3,906,888 0.32 0.20 0.75 14.37 15.00 MFS VIT Growth Series Initial Class 500,388 24.98 32.55 12,198,289 0.11 0.20 0.75 30.43 31.14 MFS VIT II Core Equity Portfolio Initial Class 352,760 13.27 13.47 4,723,353 0.97 0.20 0.75 23.90 24.58 MFS VIT New Discovery Series Initial Class 238,545 23.93 41.01 5,773,273 0.00 0.20 1.10 25.27 26.40 MFS VIT Research Series Initial Class 147,051 16.45 33.31 3,142,778 1.42 0.20 0.70 22.51 23.12 MFS VIT Total Return Series Initial Class 18,689 17.63 329,481 2.36 0.50 11.74 Morgan Stanley VIF Growth Portfolio Class I 130,942 29.11 39.11 3,716,998 0.00 0.20 0.75 42.08 42.86 Neuberger Berman AMT Large Cap Value Portfolio Class I 1,873 15.49 29,018 0.57 0.50 12.80 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 309,688 19.91 22.13 6,640,794 0.00 0.00 1.10 23.92 25.29 Neuberger Berman AMT Sustainable Equity Portfolio Class I 6,411 20.11 31.37 132,321 0.54 0.20 0.70 17.61 18.19 Oppenheimer Conservative Balanced Fund/VA Non Service Shares 104,560 17.63 18.18 1,318,894 1.97 0.20 0.75 8.44 9.03 Oppenheimer Global Fund/VA Non Service Shares 400,569 18.91 21.01 8,328,431 0.95 0.00 1.10 35.17 36.66 Oppenheimer Global Strategic Income Fund/VA Non-Service Shares 447 11.27 5,034 4.36 0.50 5.74 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 133,947 8.36 8.63 793,866 10.90 0.20 1.10 -49.03 1.04 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 15,207 10.37 15.87 185,779 1.98 0.20 0.70 7.87 8.41 PIMCO Real Return Portfolio Administrative Class 635,394 14.99 19.39 8,525,775 2.37 0.20 0.75 2.88 3.45 PIMCO Short-Term Portfolio Administrative Class 318,961 10.84 12.05 3,716,064 1.71 0.00 1.10 1.28 2.40 PIMCO Total Return Portfolio Administrative Class 846,327 14.14 15.71 12,770,068 2.02 0.00 1.10 3.77 4.91 Pioneer Fund VCT Portfolio Class I 93,667 20.13 24.16 1,837,936 1.19 0.20 0.70 20.87 21.47 Pioneer Mid Cap Value VCT Portfolio Class I 62,494 20.14 20.21 1,228,114 0.85 0.00 0.75 12.33 13.17 Pioneer Select Mid Cap Growth VCT Portfolio Class I 115,493 25.55 26.30 2,961,550 0.08 0.20 0.50 29.38 29.77 Putnam VT Diversified Income Fund Class IB 325,506 17.42 18.66 6,182,584 5.51 0.20 0.95 6.11 6.91 Putnam VT Equity Income Fund Class IB 804,976 21.08 23.64 13,587,892 0.00 0.20 0.75 12.67 13.06 Putnam VT Growth and Income Fund IB -- 18.64 20.98 -- 4.27 0.20 0.75 4.85 5.06 Putnam VT Growth Opportunities Fund Class IB 41,838 4.15 173,600 0.10 0.50 30.25 Putnam VT International Value Fund Class IB 401,810 9.73 10.61 4,380,642 1.51 0.20 1.10 23.34 24.45 Putnam VT Small Cap Value Fund Class IB 11,455 21.07 33.23 243,156 0.68 0.20 0.70 7.12 7.66 Putnam VT Sustainable Leaders Fund Class IB 1,635 26.04 42,592 0.63 0.50 28.58 SST SA Multi-Managed Mid Cap Value Portfolio Class 3 3,519 14.92 15.27 45,247 0.50 0.20 0.70 11.85 13.18 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 160,121 22.52 25.60 2,944,647 1.65 0.20 0.75 13.71 14.33 SAST SA WellsCap Aggressive Growth Portfolio Class 1 93,007 17.49 34.17 1,726,026 0.00 0.20 1.10 28.17 29.33 VALIC Company I Dynamic Allocation Fund 174,429 12.92 13.22 2,099,939 1.49 0.20 0.70 19.38 20.80 VALIC Company I Emerging Economies Fund 7,103 12.02 12.30 84,620 1.24 0.20 0.70 40.28 41.95 VALIC Company I Government Money Market I Fund 934,888 9.16 10.16 9,151,018 0.41 0.20 1.10 -0.72 0.18 VALIC Company I International Equities Index Fund 248,253 16.98 19.46 2,865,338 2.53 0.20 0.75 23.42 24.10 VALIC Company I International Value Fund 5,498 10.54 12.20 59,127 1.73 0.25 0.70 16.18 18.37 VALIC Company I Mid Cap Index Fund 689,546 22.35 38.03 16,438,059 1.15 0.20 1.10 14.64 15.68 VALIC Company I Nasdaq-100 Index Fund 222,786 30.47 33.22 7,283,551 0.71 0.20 1.10 30.85 32.03 VALIC Company I Science & Technology Fund 120,251 32.65 49.22 3,603,939 0.00 0.20 0.75 40.23 41.00 VALIC Company I Small Cap Index Fund 359,948 32.29 36.89 8,161,335 1.03 0.20 0.75 13.53 14.15 VALIC Company I Stock Index Fund 1,022,435 27.79 33.05 22,675,504 1.48 0.20 0.75 20.51 21.17 VALIC Company II Mid Cap Value Fund 4,131 15.58 15.94 55,792 0.54 0.20 0.70 13.67 15.02 VALIC Company II Socially Responsible Fund 2,605 17.38 17.78 40,460 1.36 0.20 0.70 19.82 21.24 VALIC Company II Strategic Bond Fund 15,518 11.24 11.50 172,262 3.55 0.20 0.70 6.06 7.32 Vanguard VIF High Yield Bond Portfolio 358,684 16.85 18.73 6,909,788 4.84 0.00 1.10 5.84 7.00 Vanguard VIF Real Estate Index Portfolio 697,040 17.12 19.02 13,145,749 2.47 0.00 1.10 3.63 4.78
34 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2016 For the Year Ended December 31 2016 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- Alger Capital Appreciation Portfolio Class I-2 Shares 308,315 23.79 30.60 6,171,284 0.19 0.20 1.45 -0.94 0.30 Alger Mid Cap Growth Portfolio Class I-2 Shares 177,407 10.59 24.77 2,548,701 0.00 0.20 0.95 0.02 0.77 American Century VP Value Fund Class I 819,555 26.70 28.76 16,518,290 1.69 0.20 0.75 19.58 20.24 American Funds IS Asset Allocation Fund Class 2 71,357 11.13 12.67 822,148 1.85 0.20 0.70 8.65 9.19 American Funds IS Global Growth Fund Class 2 29,438 10.65 12.59 324,428 1.20 0.20 0.70 -0.08 0.42 American Funds IS Growth Fund Class 2 40,194 11.95 14.40 490,246 1.09 0.20 0.70 8.73 9.27 American Funds IS Growth-Income Fund Class 2 62,791 11.48 14.32 740,001 1.89 0.20 0.70 10.74 11.30 American Funds IS High-Income Bond Fund Class 2 13,125 10.46 10.98 138,875 7.43 0.20 0.70 16.88 17.46 American Funds IS International Fund Class 2 15,568 9.39 10.64 148,913 1.92 0.20 0.70 2.81 3.33 AST SA Wellington Capital Appreciation Portfolio Class 3 8,075 11.55 14.74 98,099 0.00 0.20 0.70 1.02 1.53 AST SA Wellington Government and Quality Bond Portfolio Class 3 5,735 10.10 10.29 58,188 0.99 0.20 0.70 0.51 1.01 Dreyfus IP MidCap Stock Portfolio Initial Shares 237,494 20.45 31.60 4,835,018 1.04 0.20 0.75 14.61 15.24 Dreyfus VIF International Value Portfolio Initial Shares 11,400 7.43 13.56 109,962 1.68 0.20 0.95 -2.38 -1.64 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 379,560 18.91 20.77 7,032,502 0.00 0.20 0.75 16.20 16.84 Dreyfus VIF Quality Bond Portfolio Initial Shares 357,140 13.83 16.00 4,865,166 1.80 0.20 0.75 0.76 1.32 Fidelity VIP Asset Manager Portfolio Service Class 2 302,946 18.89 19.49 4,190,721 1.28 0.20 0.75 2.07 2.63 Fidelity VIP Contrafund Portfolio Service Class 2 1,776,410 17.53 26.82 30,500,037 0.59 0.20 1.45 6.18 7.52 Fidelity VIP Equity-Income Portfolio Service Class 2 1,042,442 15.72 25.99 16,921,768 2.08 0.20 1.45 16.02 17.47 Fidelity VIP Freedom 2020 Portfolio Service Class 2 26,732 13.89 19.93 374,830 1.25 0.20 0.70 5.07 5.59 Fidelity VIP Freedom 2025 Portfolio Service Class 2 49,071 15.76 21.13 730,988 1.36 0.20 0.75 5.19 5.77 Fidelity VIP Freedom 2030 Portfolio Service Class 2 152,631 14.72 21.54 2,231,887 1.21 0.20 1.45 4.85 6.16 Fidelity VIP Government Money Market Portfolio Service Class 2 45,162 9.75 9.86 444,169 0.01 0.20 0.70 -0.68 -0.19 Fidelity VIP Growth Portfolio Service Class 2 934,128 19.43 25.58 15,221,424 0.00 0.20 0.75 -0.20 0.35 Fidelity VIP Mid Cap Portfolio Service Class 2 543,458 16.49 28.01 10,099,201 0.31 0.20 1.10 10.70 11.70 FTVIP Franklin Mutual Shares VIP Fund Class 2 438,899 14.51 22.65 6,873,004 1.91 0.20 1.10 14.79 15.83 FTVIP Franklin Small Cap Value VIP Fund Class 2 417,273 18.34 30.04 8,379,469 0.79 0.20 1.10 28.77 29.93 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 1,247 16.59 20,681 0.00 0.50 3.65 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 222,589 12.38 15.19 2,801,127 2.67 0.20 0.75 -0.09 0.46 FTVIP Templeton Foreign VIP Fund Class 2 443,064 10.63 17.97 4,872,425 1.83 0.20 0.75 6.38 6.96 Goldman Sachs VIT Strategic Growth Fund Institutional Shares 153,434 17.25 17.70 2,707,918 0.56 0.20 0.50 1.48 1.78 Invesco V.I. American Franchise Fund Series I 815 17.45 14,217 0.00 0.50 1.76 Invesco V.I. Core Equity Fund Series I 499,400 16.19 17.68 7,918,799 0.76 0.20 0.75 9.44 10.04 Invesco V.I. Global Real Estate Fund Series I 26,458 9.96 19.78 340,703 1.81 0.20 0.70 1.33 1.84 Invesco V.I. Government Securities Fund Series I 2,700 10.97 29,621 1.89 0.50 0.73 Invesco V.I. Growth and Income Fund Series I 547,160 16.11 25.89 10,308,504 1.08 0.20 0.95 18.57 19.46 Invesco V.I. High Yield Fund Series I 157,151 12.71 13.11 2,013,798 4.17 0.20 0.75 10.38 10.99 Invesco V.I. International Growth Fund Series I 551,286 10.92 18.82 6,731,961 1.37 0.20 1.10 -1.54 -0.65 Janus Henderson Enterprise Portfolio Service Shares 264,025 32.54 34.46 5,486,490 0.02 0.20 0.75 11.27 11.88 Janus Henderson Forty Portfolio Service Shares 32,085 14.55 26.29 543,870 0.00 0.20 0.95 0.98 1.74 Janus Henderson Global Research Portfolio Service Shares 207,662 13.00 15.08 2,650,720 0.92 0.20 0.75 1.06 1.62 Janus Henderson Overseas Portfolio Service Shares 805,816 6.97 10.03 6,087,248 4.44 0.20 1.45 -8.05 -6.89 JPMorgan Insurance Trust Core Bond Portfolio Class 1 45,740 10.26 13.82 497,146 2.37 0.20 0.70 1.40 1.91 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 24,041 31.72 33.09 780,238 0.85 0.20 0.75 13.84 14.47 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 177,044 21.21 32.26 3,678,494 0.48 0.20 0.75 19.32 19.97 MFS VIT Growth Series Initial Class 530,331 19.05 24.95 9,893,159 0.04 0.20 0.75 1.68 2.24 MFS VIT II Core Equity Portfolio Initial Class 368,979 10.71 10.81 3,975,629 0.74 0.20 0.75 10.55 11.15 MFS VIT New Discovery Series Initial Class 233,442 19.10 32.45 4,661,628 0.00 0.20 1.10 7.86 8.83 MFS VIT Research Series Initial Class 152,465 24.44 27.05 2,688,879 0.76 0.20 0.75 7.93 8.52 MFS VIT Total Return Series Initial Class 20,656 15.78 325,886 2.85 0.50 8.55 Morgan Stanley VIF Growth Portfolio Class I 127,750 20.38 25.99 2,556,044 0.00 0.20 0.75 -2.37 -1.83 Neuberger Berman AMT Large Cap Value Portfolio Class I 2,118 13.74 29,087 0.83 0.50 26.73 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 308,428 16.07 26.61 5,451,162 0.00 0.20 1.10 3.26 4.19 Neuberger Berman AMT Sustainable Equity Portfolio Class I 6,209 17.10 26.54 105,760 0.71 0.20 0.70 9.10 9.64 Oppenheimer Conservative Balanced Fund/ VA Non Service Shares 103,959 16.26 16.67 1,217,473 2.40 0.20 0.75 4.48 5.05 Oppenheimer Global Fund/VA Non Service Shares 409,562 14.90 23.69 6,367,919 1.04 0.20 1.45 -1.36 -0.12 Oppenheimer Global Strategic Income Fund/ VA Non-Service Shares 92 10.66 978 4.88 0.50 6.00 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 147,382 8.54 16.39 812,588 1.09 0.20 1.10 13.90 14.93 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 15,724 9.42 14.64 173,549 1.55 0.20 0.70 3.32 3.83 PIMCO Real Return Portfolio Administrative Class 736,554 14.49 18.85 9,657,456 2.28 0.20 0.75 4.41 4.99 PIMCO Short-Term Portfolio Administrative Class 335,790 10.70 11.74 3,857,946 1.58 0.20 1.10 1.25 2.17 PIMCO Total Return Portfolio Administrative Class 917,603 13.62 15.52 13,448,923 2.09 0.20 1.10 1.56 2.47 Pioneer Fund VCT Portfolio Class I 96,575 16.57 19.87 1,564,976 1.28 0.20 0.75 9.00 9.60 Pioneer Mid Cap Value VCT Portfolio Class I 63,173 17.99 25.75 1,120,295 0.69 0.20 0.75 15.69 16.32 Pioneer Select Mid Cap Growth VCT Portfolio Class I 124,890 19.62 20.26 2,474,354 0.00 0.20 0.75 2.96 3.53 Putnam VT Diversified Income Fund Class IB 329,860 16.41 17.45 5,932,108 7.05 0.20 0.95 4.43 5.21 Putnam VT Growth and Income Fund IB 663,437 17.74 20.01 12,031,012 1.62 0.20 0.75 14.16 14.79 Putnam VT Growth Opportunities Fund Class IB 43,644 3.19 139,035 0.00 0.50 0.67
35 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2016 For the Year Ended December 31 2016 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- Putnam VT International Value Fund Class IB 422,085 8.52 9.25 3,802,383 2.40 0.20 1.45 -0.35 0.90 Putnam VT Small Cap Value Fund Class IB 11,580 19.67 30.87 229,963 1.17 0.20 0.70 26.61 27.24 Putnam VT Sustainable Leaders Fund Class IB 1,756 20.25 35,566 0.73 0.50 7.25 Putnam VT Voyager Fund IB -- -- -- -- 1.94 0.00 0.00 0.00 0.00 SST SA Multi-Managed Mid Cap Value Portfolio Class 3 11,944 11.21 13.34 134,215 1.49 0.70 14.95 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 157,818 19.80 22.39 2,566,794 1.66 0.20 0.75 6.37 6.95 SAST SA WellsCap Aggressive Growth Portfolio Class 1 91,749 13.64 26.42 1,305,543 0.00 0.20 1.10 6.21 7.17 VALIC Company I Dynamic Allocation Fund 120,660 9.94 10.95 1,203,724 1.10 0.20 0.70 4.12 4.64 VALIC Company I Emerging Economies Fund 6,051 8.33 8.67 50,752 1.69 0.20 0.70 10.70 11.25 VALIC Company I Government Money Market I Fund 1,113,874 9.23 10.15 11,007,823 0.01 0.20 1.10 -1.08 -0.19 VALIC Company I International Equities Index Fund 230,323 13.76 15.68 2,217,518 2.90 0.20 0.75 0.50 1.06 VALIC Company I International Value Fund 4,634 8.90 10.50 42,285 1.98 0.70 11.31 VALIC Company I Mid Cap Index Fund 723,227 20.86 32.87 15,057,428 1.20 0.20 1.45 18.89 20.38 VALIC Company I Nasdaq-100 Index Fund 240,528 23.29 25.16 5,986,351 0.67 0.20 1.10 5.60 6.55 VALIC Company I Science & Technology Fund 110,255 23.28 34.91 2,363,217 0.00 0.20 0.75 6.54 7.12 VALIC Company I Small Cap Index Fund 362,797 28.29 32.49 7,336,637 1.17 0.20 0.75 20.28 20.94 VALIC Company I Stock Index Fund 1,064,879 23.06 27.28 19,674,788 2.45 0.20 0.75 10.76 11.37 VALIC Company II Mid Cap Value Fund 2,807 11.32 13.86 33,379 0.21 0.20 0.70 13.27 13.83 VALIC Company II Socially Responsible Fund 2,355 11.79 14.67 30,857 1.51 0.20 0.70 9.88 10.43 VALIC Company II Strategic Bond Fund 13,302 10.24 10.72 139,321 3.83 0.20 0.70 7.42 7.95 Vanguard VIF High Yield Bond Portfolio 366,167 15.92 22.61 6,665,367 5.48 0.20 1.10 10.14 11.13 Vanguard VIF Real Estate Index Portfolio 752,358 17.03 27.00 13,753,371 2.70 0.20 1.45 6.80 8.14
December 31, 2015 For the Year Ended December 31 2015 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- Alger Capital Appreciation Portfolio Class I-2 Shares 306,548 14.22 24.01 6,405,391 0.09 0.20 1.45 4.66 5.98 Alger Mid Cap Growth Portfolio Class I-2 Shares 182,860 13.03 13.83 2,669,937 0.00 0.20 1.45 -2.98 -1.76 American Century VP Value Fund Class I 870,970 16.86 24.05 14,908,764 2.13 0.20 0.75 -4.60 -4.08 American Funds IS Asset Allocation Fund Class 2 45,797 11.53 11.68 482,133 2.40 0.20 0.70 0.69 1.20 American Funds IS Global Growth Fund Class 2 9,466 12.46 12.62 112,003 1.15 0.20 0.70 6.19 6.72 American Funds IS Growth Fund Class 2 10,934 13.09 13.27 123,244 0.92 0.20 0.70 6.11 6.64 American Funds IS Growth-Income Fund Class 2 25,944 10.36 12.96 284,389 1.75 0.20 0.70 0.75 1.25 American Funds IS High-Income Bond Fund Class 2 6,865 8.95 9.35 62,767 7.96 0.20 0.70 -6.14 -8.86 American Funds IS International Fund Class 2 5,694 9.13 10.30 53,220 2.32 0.20 0.70 -5.09 -5.03 AST SA Wellington Capital Appreciation Portfolio Class 3 4,639 14.43 14.62 57,172 0.00 0.20 0.70 7.70 8.24 AST SA Wellington Government and Quality Bond Portfolio Class 3 2,574 10.13 10.26 26,013 2.41 0.20 0.70 -0.41 0.09 Dreyfus IP MidCap Stock Portfolio Initial Shares 271,786 17.75 27.57 4,828,014 0.63 0.20 0.75 -3.02 -2.48 Dreyfus VIF International Value Portfolio Initial Shares 14,834 7.61 13.78 143,386 2.24 0.20 0.95 -3.64 -2.91 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 424,523 16.19 19.77 6,796,573 0.00 0.20 0.75 -3.01 -2.47 Dreyfus VIF Quality Bond Portfolio Initial Shares 394,856 13.65 18.83 5,385,617 2.05 0.20 0.75 -2.38 -1.85 Fidelity VIP Asset Manager Portfolio Service Class 2 309,899 18.50 18.99 4,248,819 1.36 0.20 0.75 -0.81 -0.26 Fidelity VIP Contrafund Portfolio Service Class 2 1,897,435 16.51 24.95 31,784,963 0.80 0.20 1.45 -1.03 0.21 Fidelity VIP Equity-Income Portfolio Service Class 2 1,099,574 13.55 13.91 15,777,973 2.93 0.20 1.45 -5.62 -4.43 Fidelity VIP Freedom 2020 Portfolio Service Class 2 27,297 14.47 18.87 370,220 1.66 0.20 0.70 -1.15 -0.66 Fidelity VIP Freedom 2025 Portfolio Service Class 2 44,989 14.98 19.97 640,820 1.66 0.20 0.75 -1.25 -0.70 Fidelity VIP Freedom 2030 Portfolio Service Class 2 154,093 12.57 14.04 2,147,681 2.06 0.20 1.45 -1.96 -0.73 Fidelity VIP Government Money Market Portfolio Service Class 2 90,441 9.82 9.95 894,457 0.00 0.20 0.70 -0.69 -0.19 Fidelity VIP Growth Portfolio Service Class 2 964,228 16.37 19.47 16,073,318 0.03 0.20 0.75 6.11 6.69 Fidelity VIP Mid Cap Portfolio Service Class 2 564,487 12.33 16.66 9,995,340 0.26 0.20 1.45 -3.05 -1.83 FTVIP Franklin Mutual Shares VIP Fund Class 2 454,155 12.35 13.34 6,270,133 3.13 0.20 1.45 -6.31 -5.13 FTVIP Franklin Small Cap Value VIP Fund Class 2 408,261 14.67 14.70 6,935,707 0.63 0.20 1.45 -8.72 -7.57 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 2,534 16.01 40,559 0.00 0.50 -3.14 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 232,614 12.32 15.20 2,995,988 2.86 0.20 0.75 -0.28 0.27 FTVIP Templeton Foreign VIP Fund Class 2 454,864 9.94 16.89 5,101,290 3.37 0.20 0.75 -7.19 -6.68 Goldman Sachs VIT Strategic Growth Fund Institutional Shares 187,977 17.39 19.29 3,341,287 0.36 0.20 0.75 2.62 3.19 Invesco V.I. American Franchise Fund Series I 298 17.14 5,116 0.00 0.50 4.48 Invesco V.I. Core Equity Fund Series I 526,582 14.71 16.16 7,610,942 1.12 0.20 0.75 -6.47 -5.96 Invesco V.I. Global Real Estate Fund Series I 19,199 10.46 10.60 256,355 3.83 0.20 0.70 -2.17 -1.68 Invesco V.I. Government Securities Fund Series I 3,342 10.89 36,400 2.21 0.50 -0.16 Invesco V.I. Growth and Income Fund Series I 573,664 13.58 15.92 9,397,249 2.88 0.20 0.95 -3.98 -3.26 Invesco V.I. High Yield Fund Series I 161,859 11.51 11.81 1,874,637 4.77 0.20 0.75 -3.89 -3.36 Invesco V.I. International Growth Fund Series I 575,992 10.91 13.66 7,464,549 1.51 0.20 1.45 -3.75 -2.54 Janus Henderson Enterprise Portfolio Service Shares 282,411 17.67 30.97 5,309,566 0.53 0.20 0.75 2.99 3.56
36 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2015 For the Year Ended December 31 2015 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- Janus Henderson Forty Portfolio Service Shares 25,998 14.25 14.41 445,910 0.00 0.20 0.95 10.88 11.71 Janus Henderson Global Research Portfolio Service Shares 226,554 12.79 14.92 2,857,036 0.55 0.20 0.75 -3.26 -2.73 Janus Henderson Overseas Portfolio Service Shares 843,160 7.01 10.91 7,496,099 0.54 0.20 1.45 -10.12 -8.99 JPMorgan Insurance Trust Core Bond Portfolio Class 1 24,910 10.11 10.38 278,198 2.31 0.20 0.70 0.41 0.92 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 26,415 27.87 28.91 747,190 1.02 0.20 0.75 -3.38 -2.85 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 201,877 17.67 27.04 3,491,842 0.15 0.20 0.75 -5.99 -5.47 MFS VIT Core Equity Series-Initial Class -- -- -- -- 1.90 0.20 0.75 0.00 0.00 MFS VIT Growth Series Initial Class 592,534 18.63 25.59 10,847,200 0.16 0.20 0.75 6.76 7.34 MFS VIT II Core Equity Portfolio Initial Class 398,790 9.69 9.73 3,874,431 1.18 0.20 0.75 -3.14 -2.73 MFS VIT New Discovery Series Initial Class 249,507 17.83 18.97 4,696,667 0.00 0.20 1.45 -3.30 -2.08 MFS VIT Research Series Initial Class 151,314 12.60 22.64 2,574,658 0.72 0.20 0.75 0.05 0.60 MFS VIT Total Return Series Initial Class 25,915 14.53 376,652 2.60 0.50 -0.87 Morgan Stanley VIF Growth Portfolio Class I 154,144 20.76 26.62 3,154,713 0.00 0.20 0.75 11.40 12.01 Neuberger Berman AMT Large Cap Value Portfolio Class I 2,629 10.84 28,491 0.78 0.50 -12.24 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 322,635 16.66 17.89 5,601,819 0.00 0.20 1.45 -0.18 1.07 Neuberger Berman AMT Sustainable Equity Portfolio Class I 5,802 15.67 24.21 90,687 0.59 0.20 0.70 -1.16 -0.66 Oppenheimer Conservative Balanced Fund/ VA Non Service Shares 116,211 15.56 15.87 1,309,698 2.27 0.20 0.75 0.08 0.63 Oppenheimer Global Fund/VA Non Service Shares 430,410 12.02 15.11 6,918,180 1.36 0.20 1.45 2.45 3.74 Oppenheimer Global Strategic Income Fund/VA Non-Service Shares 119 9.98 10.06 1,192 54.19 0.50 0.75 -2.99 -2.75 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 157,941 5.45 748,201 4.72 0.20 1.45 -26.78 -25.85 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 9,924 9.43 12.22 112,453 1.84 0.20 0.70 -4.69 -4.22 PIMCO Real Return Portfolio Administrative Class 768,137 12.46 19.29 9,823,635 3.98 0.20 0.75 -3.43 -2.90 PIMCO Short-Term Portfolio Administrative Class 356,593 10.93 11.32 4,051,596 0.97 0.20 1.45 -0.34 0.91 PIMCO Total Return Portfolio Administrative Class 960,916 10.17 14.72 14,091,840 4.94 0.20 1.45 -0.98 0.27 Pioneer Fund VCT Portfolio Class I 105,109 15.12 18.23 1,558,132 1.08 0.20 0.75 -0.81 -0.26 Pioneer Mid Cap Value VCT Portfolio Class I 67,069 15.55 22.14 1,034,676 0.79 0.20 0.75 -6.84 -6.33 Pioneer Select Mid Cap Growth VCT Portfolio Class I 138,650 19.05 19.57 2,660,062 0.00 0.20 0.75 0.87 1.43 Putnam VT Diversified Income Fund Class IB 353,185 13.76 15.72 6,043,586 9.47 0.20 0.95 -3.26 -2.54 Putnam VT Growth and Income Fund IB 714,172 15.45 17.53 11,296,683 1.87 0.20 0.75 -8.22 -7.71 Putnam VT International Value Fund Class IB 454,450 8.45 9.28 4,218,894 1.37 0.20 1.45 -3.41 -2.20 Putnam VT Small Cap Value Fund Class IB 13,733 24.26 31.09 214,083 0.86 0.20 0.75 -4.95 -4.43 Putnam VT Sustainable Leaders Fund Class IB 2,141 18.64 18.89 40,437 0.51 0.50 0.75 -1.03 -0.79 Putnam VT Voyager Fund IB 10,278 17.58 180,671 1.14 0.50 -6.58 SST SA Multi-Managed Mid Cap Value Portfolio Class 3 973 11.61 9,593 0.60 0.70 -6.69 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 137,230 12.01 18.62 2,184,924 1.81 0.20 0.75 -0.72 -0.17 SAST SA WellsCap Aggressive Growth Portfolio Class 1 95,675 12.10 24.65 1,276,068 0.00 0.20 1.45 -2.61 -1.38 VALIC Company I Dynamic Allocation Fund 44,433 10.40 10.53 426,336 0.00 0.20 0.70 -5.22 -4.74 VALIC Company I Emerging Economies Fund 1,266 7.74 7.84 9,783 1.64 0.20 0.70 -15.14 -14.71 VALIC Company I Government Money Market I Fund 1,157,120 9.70 9.99 11,540,062 0.01 0.20 1.45 -1.43 -0.19 VALIC Company I International Equities Index Fund 261,372 10.28 13.69 2,498,488 3.69 0.20 0.75 -1.74 -1.20 VALIC Company I International Value Fund 3,100 9.43 25,424 0.49 0.70 -7.95 VALIC Company I Mid Cap Index Fund 767,547 17.50 17.54 13,632,876 1.04 0.20 1.45 -3.90 -2.69 VALIC Company I Nasdaq-100 Index Fund 278,122 15.56 24.79 6,538,380 0.86 0.20 1.45 7.62 8.97 VALIC Company I Science & Technology Fund 122,249 15.52 21.85 2,513,308 0.00 0.20 0.75 7.07 7.66 VALIC Company I Small Cap Index Fund 356,597 16.75 27.01 6,123,899 1.02 0.20 0.75 -5.19 -4.67 VALIC Company I Stock Index Fund 1,174,358 12.89 21.57 19,822,358 1.66 0.20 0.75 0.30 0.85 VALIC Company II Mid Cap Value Fund 1,425 10.00 12.26 15,590 0.18 0.20 0.70 -2.10 -1.61 VALIC Company II Socially Responsible Fund 1,167 13.20 13.37 15,000 0.92 0.20 0.70 0.41 0.91 VALIC Company II Strategic Bond Fund 10,346 9.86 9.99 101,212 3.38 0.20 0.70 -2.62 -2.13 Vanguard VIF High Yield Bond Portfolio 377,721 15.03 15.42 6,281,947 5.53 0.20 1.45 -3.00 -1.77 Vanguard VIF Real Estate Index Portfolio 814,685 15.95 24.97 14,170,899 1.81 0.20 1.45 0.75 2.02
December 31, 2014 For the Year Ended December 31 2014 ------------------------------------------ ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ ------- ------ ------- -------------- ------------- ------ ------- ------ ------- Alger Capital Appreciation Portfolio Class I-2 Shares 274,166 22.94 28.79 5,759,903 0.10 0.20 1.45 12.12 13.53 Alger Mid Cap Growth Portfolio Class I-2 Shares 192,686 11.46 14.25 2,958,031 0.00 0.20 1.45 6.46 7.80 American Century VP Value Fund Class I 919,159 12.57 28.62 16,723,661 1.54 0.20 0.75 12.23 12.85 American Funds IS Asset Allocation Fund Class 2 6,802 11.45 11.54 77,912 2.40 0.20 0.70 4.66 5.19 American Funds IS Global Growth Fund Class 2 5,685 11.73 11.83 67,216 0.68 0.20 0.70 1.60 2.11 American Funds IS Growth Fund Class 2 899 12.34 12.44 11,137 0.01 0.20 0.70 7.75 8.29 American Funds IS Growth-Income Fund Class 2 5,674 12.70 12.80 72,411 0.02 0.20 0.70 9.86 10.41 American Funds IS High-Income Bond Fund Class 2 2,617 10.17 10.26 26,459 0.08 0.20 0.70 -0.07 0.43
37 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2014 For the Year Ended December 31 2014 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- American Funds IS International Fund Class 2 400 10.76 10.85 4,308 2.60 0.20 0.70 -3.33 -2.85 AST SA Wellington Capital Appreciation Portfolio Class 3 1,023 13.40 13.51 13,792 0.00 0.20 0.70 14.15 14.73 AST SA Wellington Government and Quality Bond Portfolio Class 3 337 10.17 10.25 3,454 3.42 0.20 0.70 4.18 4.70 Dreyfus IP MidCap Stock Portfolio Initial Shares 301,137 18.20 28.43 5,588,214 0.93 0.20 0.75 11.25 11.87 Dreyfus VIF International Value Portfolio Initial Shares 14,043 7.90 8.34 139,628 1.65 0.20 0.95 -10.18 -9.50 Dreyfus VIF Opportunistic Small Cap Portfolio Initial Shares 467,865 16.60 20.39 7,676,329 0.00 0.20 0.75 0.84 1.39 Dreyfus VIF Quality Bond Portfolio Initial Shares 400,797 13.90 19.29 5,594,333 2.14 0.20 0.75 4.01 4.58 Fidelity VIP Asset Manager Portfolio Service Class 2 327,100 18.65 19.04 4,533,991 1.26 0.20 0.75 4.75 5.33 Fidelity VIP Contrafund Portfolio Service Class 2 1,992,046 16.68 24.89 34,117,348 0.74 0.20 1.45 10.05 11.43 Fidelity VIP Equity-Income Portfolio Service Class 2 1,176,181 14.36 23.15 17,933,840 2.62 0.20 1.45 6.92 8.26 Fidelity VIP Freedom 2020 Portfolio Service Class 2 26,350 14.64 19.00 362,588 1.45 0.20 0.70 3.87 4.39 Fidelity VIP Freedom 2025 Portfolio Service Class 2 44,417 15.17 20.12 637,712 1.32 0.20 0.75 4.07 4.64 Fidelity VIP Freedom 2030 Portfolio Service Class 2 68,363 12.66 14.32 1,009,535 1.36 0.20 1.45 3.24 4.53 Fidelity VIP Government Money Market Portfolio Service Class 2 2,363 9.89 9.97 23,368 0.03 0.20 0.70 -0.69 -0.19 Fidelity VIP Growth Portfolio Service Class 2 1,073,695 15.34 15.47 16,916,744 0.00 0.20 0.75 10.18 10.79 Fidelity VIP Mid Cap Portfolio Service Class 2 564,784 12.56 17.18 10,828,585 0.02 0.20 1.45 4.51 5.82 FTVIP Franklin Mutual Shares VIP Fund Class 2 470,937 14.24 20.61 7,010,955 2.05 0.20 1.45 5.58 6.91 FTVIP Franklin Small Cap Value VIP Fund Class 2 430,935 16.08 25.01 8,238,202 0.62 0.20 1.45 -0.88 0.37 FTVIP Franklin Small-Mid Cap Growth VIP Fund Class 2 2,703 16.52 44,664 0.00 0.50 6.94 FTVIP Franklin U.S. Government Securities VIP Fund Class 2 229,369 12.29 15.25 3,005,162 2.50 0.20 0.75 2.61 3.18 FTVIP Templeton Foreign VIP Fund Class 2 478,259 10.65 18.20 5,837,832 2.01 0.20 0.75 -11.80 -11.31 Goldman Sachs VIT Strategic Growth Fund Institutional Shares 192,544 16.85 18.80 3,320,170 0.23 0.20 0.75 12.79 13.41 Invesco V.I. American Franchise Fund Series I 315 16.41 5,172 0.05 0.50 7.90 Invesco V.I. Core Equity Fund Series I 578,270 15.64 17.27 8,957,278 0.85 0.20 0.75 7.34 7.93 Invesco V.I. Global Real Estate Fund Series I 15,016 12.10 19.75 210,658 1.52 0.20 0.70 13.82 14.39 Invesco V.I. Government Securities Fund Series I 3,486 10.91 38,030 2.39 0.50 3.62 Invesco V.I. Growth and Income Fund Series I 604,758 14.15 16.46 10,490,134 1.79 0.20 0.95 9.24 10.06 Invesco V.I. High Yield Fund Series I 215,634 11.98 12.22 2,592,381 4.73 0.20 0.75 0.97 1.52 Invesco V.I. International Growth Fund Series I 602,190 11.19 14.19 8,210,933 1.55 0.20 1.45 -1.11 0.13 Janus Henderson Enterprise Portfolio Service Shares 285,729 17.06 30.07 5,329,079 0.03 0.20 0.75 11.40 12.02 Janus Henderson Forty Portfolio Service Shares 32,828 12.75 12.99 492,985 0.03 0.20 0.95 7.44 8.25 Janus Henderson Global Research Portfolio Service Shares 244,595 13.15 15.43 3,195,683 0.97 0.20 0.75 6.38 6.97 Janus Henderson Overseas Portfolio Service Shares 823,066 8.23 12.14 8,434,733 3.17 0.20 1.45 -13.37 -12.28 JPMorgan Insurance Trust Core Bond Portfolio Class 1 13,975 10.20 13.43 166,280 2.80 0.20 0.70 4.19 4.71 JPMorgan Insurance Trust International Equity Portfolio -- -- -- -- 3.53 0.00 0.00 -3.92 -3.23 JPMorgan Insurance Trust Mid Cap Value Portfolio Class 1 28,625 28.84 29.76 834,494 0.78 0.20 0.75 14.25 14.88 JPMorgan Insurance Trust Small Cap Core Portfolio Class 1 214,401 18.70 28.76 3,980,905 0.13 0.20 0.75 8.78 9.38 MFS VIT Core Equity Series-Initial Class 253,650 12.96 16.81 4,227,249 0.76 0.20 0.75 10.41 11.02 MFS VIT Growth Series Initial Class 639,531 17.36 23.97 10,962,846 0.10 0.20 0.75 8.13 8.73 MFS VIT New Discovery Series Initial Class 262,079 18.44 19.37 5,102,989 0.00 0.20 1.45 -8.59 -7.44 MFS VIT Research Series Initial Class 159,337 12.52 22.63 2,760,517 0.81 0.20 0.75 9.38 9.98 MFS VIT Total Return Series Initial Class 28,197 14.66 413,403 1.79 0.50 7.96 Morgan Stanley VIF Growth Portfolio Class I 164,298 18.53 23.89 3,024,443 0.00 0.20 0.75 5.57 6.15 Neuberger Berman AMT Large Cap Value Portfolio Class I 2,860 12.35 35,318 0.74 0.50 9.30 Neuberger Berman AMT Mid Cap Growth Portfolio Class I 340,994 12.60 14.70 5,935,633 0.00 0.20 0.75 6.78 7.37 Neuberger Berman AMT Sustainable Equity Portfolio Class I 5,345 15.86 24.37 84,617 0.37 0.20 0.70 9.61 10.16 Oppenheimer Conservative Balanced Fund/ VA Non Service Shares 112,858 10.30 15.55 1,313,231 2.24 0.20 0.75 7.39 7.98 Oppenheimer Global Fund/VA Non Service Shares 428,197 13.10 14.75 7,020,158 1.12 0.20 1.45 0.82 2.09 Oppenheimer Global Strategic Income Fund/VA Non-Service Shares 435 10.28 10.34 4,497 6.00 0.50 0.75 2.07 2.33 PIMCO CommodityRealReturn Strategy Portfolio Administrative Class 141,574 7.35 7.45 939,699 0.39 0.20 1.45 -19.60 -18.59 PIMCO Global Bond Opportunities Portfolio (Unhedged) Adminstrative Class 9,366 12.82 14.72 109,767 2.02 0.20 0.70 1.55 2.06 PIMCO Real Return Portfolio Administrative Class 846,961 12.83 19.98 11,432,689 1.46 0.20 0.75 2.32 2.89 PIMCO Short-Term Portfolio Administrative Class 389,111 10.97 11.22 4,444,798 0.70 0.20 1.45 -0.74 0.51 PIMCO Total Return Portfolio Administrative Class 1,018,466 14.81 14.87 15,298,326 2.21 0.20 1.45 2.78 4.07 Pioneer Fund VCT Portfolio Class I 112,417 15.16 18.38 1,675,091 1.19 0.20 0.75 10.20 10.81 Pioneer Mid Cap Value VCT Portfolio Class I 78,736 14.69 16.04 1,295,160 0.86 0.20 1.45 13.43 14.86 Pioneer Select Mid Cap Growth VCT Portfolio Class I 159,076 18.89 19.30 3,016,671 0.00 0.20 0.75 8.61 9.21 Putnam VT Diversified Income Fund Class IB 373,499 14.12 16.25 6,577,843 8.12 0.20 0.95 -0.60 0.15 Putnam VT Growth and Income Fund IB 753,606 16.75 19.09 12,972,211 1.32 0.20 0.75 9.91 10.51 Putnam VT International Value Fund Class IB 472,647 8.64 9.61 4,609,199 1.38 0.20 1.45 -10.79 -9.67 Putnam VT Small Cap Value Fund Class IB 13,863 14.61 32.71 227,886 0.48 0.20 0.75 2.66 3.23 Putnam VT Sustainable Leaders Fund Class IB 2,290 18.83 19.04 43,591 0.34 0.50 0.75 12.64 12.92 Putnam VT Voyager Fund IB 10,716 18.82 201,633 0.75 0.50 9.17 SAST SA JPMorgan Diversified Balanced Portfolio Class 1 127,688 18.75 12.03 2,073,068 1.34 0.20 0.75 10.61 11.22 SAST SA WellsCap Aggressive Growth Portfolio Class 1 93,919 11.81 17.37 1,296,355 0.00 0.20 0.75 -0.20 0.35
38 SEPARATE ACCOUNT VL-R AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2014 For the Year Ended December 31 2014 -------------------------------------------- ------------------------------------------- Expense Total Unit Value ($)/(a)/ Investment Ratio (%)/(d)/ Return (%)/(e)/ ------------------- Net Income -------------- -------------- Sub-accounts Units Lowest Highest Assets ($)/(b)/ Ratio (%)/(c)/ Lowest Highest Lowest Highest ------------ --------- ------ ------- -------------- ------------- ------ ------- ------ ------- VALIC Company I Dynamic Allocation Fund 1,709 10.97 11.06 18,755 2.66 0.20 0.70 3.51 4.03 VALIC Company I Emerging Economies Fund 676 9.12 9.20 6,209 0.00 0.20 0.70 -6.23 -5.76 VALIC Company I Government Money Market I Fund 1,134,201 9.84 10.01 11,413,517 0.01 0.20 1.45 -1.43 -0.19 VALIC Company I International Equities Index Fund 247,583 10.86 15.70 2,483,499 2.51 0.20 0.75 -6.15 -5.63 VALIC Company I International Value Fund 134 10.25 1,369 0.00 0.70 -12.25 VALIC Company I Mid Cap Index Fund 832,872 12.36 18.26 15,463,977 1.11 0.20 1.45 7.84 9.19 VALIC Company I Nasdaq-100 Index Fund 264,337 14.28 25.69 5,678,276 0.78 0.20 0.75 17.80 18.45 VALIC Company I Science & Technology Fund 111,094 20.41 30.27 2,117,057 0.12 0.20 0.75 13.57 14.20 VALIC Company I Small Cap Index Fund 451,716 17.57 28.49 8,200,643 1.14 0.20 0.75 3.98 4.55 VALIC Company I Stock Index Fund 1,288,580 12.78 21.51 21,735,503 1.60 0.20 0.75 12.44 13.06 VALIC Company II Mid Cap Value Fund 180 12.36 12.46 2,227 0.00 0.20 0.70 5.98 6.51 VALIC Company II Socially Responsible Fund 1,076 13.15 13.25 14,158 0.00 0.20 0.70 14.72 15.30 VALIC Company II Strategic Bond Fund 4,924 10.13 10.21 50,223 0.00 0.20 0.70 3.22 3.74 Vanguard VIF High Yield Bond Portfolio 444,782 15.49 15.70 7,720,929 5.45 0.20 1.45 2.90 4.20 Vanguard VIF Real Estate Index Portfolio 833,523 15.35 15.83 14,892,265 3.38 0.20 1.45 28.24 29.85
(a)Because the unit values are presented as a range of lowest to highest, based on the product grouping representing the minimum and maximum expense ratio amounts, some individual contract unit values are not within the ranges presented. (b)These amounts represent the net asset value before adjustments allocated to the contracts in payout period. (c)These amounts represent the dividends, excluding distributions of capital gains, received by the sub-account from the Funds, net of management fees assessed by the portfolio manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that are assessed against contract owner accounts either through reductions in the unit values or the redemption of units. The recognition of investment income by the sub-account is affected by the timing of the declaration of dividends by the Funds in which the sub-account invests. The average net assets are calculated using the net asset balances at the beginning and end of the year. (d)These amounts represent the annualized contract expenses of the sub-account, consisting of distribution, mortality and expense charges, for each period indicated. The ratios include only those expenses that result in direct reduction to unit values. Charges made directly to contract owners account through the redemption of units and expenses of the Funds have been excluded. For additional information on charges and deductions, see Note 4. (e)These amounts represent the total return for the periods indicated, including changes in the value of the Funds, and expenses assessed through the reduction of unit values. These ratios do not include any expenses assessed through redemption of units. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for each of the periods indicated or from the effective date through the end of the reporting period. Because the total return is presented as a range of minimum and maximum values, based on the product grouping representing the minimum and maximum expense ratios, some individual contract total returns are not within the ranges presented. 7. Subsequent Events Management considered Separate Accounts related events and transactions that occurred after the date of the Statement of Assets and Liabilities, but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that required additional disclosures. Management has evaluated events through April 22, 2019, the date the financial statements were issued, and has determined that no additional items require disclosure. 39 American General Life Companies Separate Account VUL-2 American General Life Insurance Company 2018 Annual Report December 31, 2018 Report of Independent Registered Public Accounting Firm To the Board of Directors of American General Life Insurance Company and the Contract Owners of Separate Account VUL-2. Opinions on the Financial Statements We have audited the accompanying statements of assets and liabilities, including the schedules of portfolio investments, of each of the sub-accounts of Separate Account VUL-2 indicated in the table below as of December 31, 2018, and the related statement of operations and changes in net assets for each of the two years in the period then ended, including the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the sub-accounts in the Separate Account VUL-2 as of December 31, 2018, and the results of each of their operations and the changes in each of their net assets for the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Fidelity VIP Asset Manager: Growth Fidelity VIP Growth Portfolio Initial Portfolio Initial Class Class Fidelity VIP Asset Manager Portfolio Fidelity VIP High Income Portfolio Initial Class Initial Class Fidelity VIP Contrafund Portfolio Fidelity VIP Index 500 Portfolio Initial Class Initial Class Fidelity VIP Equity-Income Portfolio Fidelity VIP Investment Grade Bond Initial Class Portfolio Initial Class Fidelity VIP Government Money Market Fidelity VIP Overseas Portfolio Portfolio Initial Class Initial Class MFS VIT Growth Series Initial Class MFS VIT Research Series Initial Class MFS VIT II Core Equity Portfolio MFS VIT Total Return Series Initial Initial Class Class MFS VIT Investors Trust Series Initial MFS VIT Utilities Series Initial Class Class Basis for Opinions These financial statements are the responsibility of American General Life Insurance Company management. Our responsibility is to express an opinion on the financial statements of each of the sub-accounts in the Separate Account VUL-2 based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to each of the subaccounts in the Separate Account VUL-2 in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of investments owned as of December 31, 2018 by correspondence with the transfer agents of the investee mutual funds. We believe that our audits provide a reasonable basis for our opinions. /s/ PricewaterhouseCoopers LLP Houston, Texas April 22, 2019 We have served as the auditor of one or more of the sub-accounts in the AIG Life and Retirement Separate Account Group since at least 1994. We have not been able to determine the specific year we began serving as auditor. SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENT OF ASSETS AND LIABILITIES December 31, 2018
Due from (to) Company's Investments at General Sub-accounts Fair Value Account, Net Net Assets ------------ -------------- ------------ ----------- Fidelity VIP Asset Manager: Growth Portfolio Initial Class $ 5,946,660 $-- $ 5,946,660 Fidelity VIP Asset Manager Portfolio Initial Class 9,879,355 -- 9,879,355 Fidelity VIP Contrafund Portfolio Initial Class 33,309,439 -- 33,309,439 Fidelity VIP Equity-Income Portfolio Initial Class 27,454,170 -- 27,454,170 Fidelity VIP Government Money Market Portfolio Initial Class 1,628,735 -- 1,628,735 Fidelity VIP Growth Portfolio Initial Class 52,156,663 -- 52,156,663 Fidelity VIP High Income Portfolio Initial Class 1,797,986 -- 1,797,986 Fidelity VIP Index 500 Portfolio Initial Class 33,448,397 -- 33,448,397 Fidelity VIP Investment Grade Bond Portfolio Initial Class 2,519,921 -- 2,519,921 Fidelity VIP Overseas Portfolio Initial Class 6,251,305 -- 6,251,305 MFS VIT Growth Series Initial Class 13,273,188 -- 13,273,188 MFS VIT II Core Equity Portfolio Initial Class 6,226,606 -- 6,226,606 MFS VIT Investors Trust Series Initial Class 2,881,806 -- 2,881,806 MFS VIT Research Series Initial Class 4,797,480 -- 4,797,480 MFS VIT Total Return Series Initial Class 4,316,665 -- 4,316,665 MFS VIT Utilities Series Initial Class 7,478,024 -- 7,478,024
The accompanying Notes to Financial Statements are an integral part of this statement. 1 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 2018
Net Asset Value per Shares at Fair Cost of Shares Sub-accounts Shares Share Value Held Level* ------------ --------- --------- -------------- -------------- ------ Fidelity VIP Asset Manager: Growth Portfolio Initial Class 354,813 $ 16.76 $ 5,946,660 $ 5,644,184 1 Fidelity VIP Asset Manager Portfolio Initial Class 722,175 13.68 9,879,355 10,794,753 1 Fidelity VIP Contrafund Portfolio Initial Class 1,036,708 32.13 33,309,439 28,501,298 1 Fidelity VIP Equity-Income Portfolio Initial Class 1,347,775 20.37 27,454,170 27,218,756 1 Fidelity VIP Government Money Market Portfolio Initial Class 1,628,735 1.00 1,628,735 1,628,735 1 Fidelity VIP Growth Portfolio Initial Class 826,310 63.12 52,156,663 53,338,288 1 Fidelity VIP High Income Portfolio Initial Class 361,768 4.97 1,797,986 2,000,231 1 Fidelity VIP Index 500 Portfolio Initial Class 132,490 252.46 33,448,397 19,491,369 1 Fidelity VIP Investment Grade Bond Portfolio Initial Class 204,208 12.34 2,519,921 2,622,082 1 Fidelity VIP Overseas Portfolio Initial Class 326,780 19.13 6,251,305 5,573,413 1 MFS VIT Growth Series Initial Class 282,348 47.01 13,273,188 8,815,949 1 MFS VIT II Core Equity Portfolio Initial Class 287,205 21.68 6,226,606 6,698,656 1 MFS VIT Investors Trust Series Initial Class 106,536 27.05 2,881,806 2,561,406 1 MFS VIT Research Series Initial Class 192,438 24.93 4,797,480 4,523,609 1 MFS VIT Total Return Series Initial Class 198,194 21.78 4,316,665 4,178,342 1 MFS VIT Utilities Series Initial Class 254,528 29.38 7,478,024 6,996,969 1
* Represents the level within the fair value hierarchy under which the portfolio is classified as defined in ASC 820 and described in Note 3 to the financial statements. The accompanying Notes to Financial Statements are an integral part of this statement. 2 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Fidelity VIP Asset Fidelity VIP Fidelity VIP Manager: Asset Fidelity VIP Fidelity VIP Government Growth Manager Contrafund Equity-Income Money Market Portfolio Initial Portfolio Initial Portfolio Initial Portfolio Initial Portfolio Initial Class Class Class Class Class ----------------- ----------------- ----------------- ----------------- ----------------- For the Year Ended December 31, 2018 From operations: Dividends $ 95,501 $ 181,400 $ 268,269 $ 693,639 $ 25,469 Mortality and expense risk and administrative charges (50,603) (82,219) (290,057) (234,471) (11,722) ----------- ----------- ----------- ----------- ---------- Net investment income (loss) 44,898 99,181 (21,788) 459,168 13,747 Net realized gain (loss) 183,757 23,140 1,420,127 659,457 -- Capital gain distribution from mutual funds 264,716 359,712 3,334,005 1,456,741 -- Change in unrealized appreciation (depreciation) of investments (1,029,978) (1,123,094) (7,175,209) (5,314,702) -- ----------- ----------- ----------- ----------- ---------- Increase (decrease) in net assets from operations (536,607) (641,061) (2,442,865) (2,739,336) 13,747 ----------- ----------- ----------- ----------- ---------- From contract transactions: Payments received from contract owners 501,980 758,703 1,715,863 1,839,503 253,960 Payments for contract benefits or terminations (461,872) (511,839) (2,263,746) (1,748,222) (379,211) Policy loans (22,612) 2,645 (150,965) (23,040) 1,887 Transfers between sub-accounts (including fixed account), net 29,932 (10,292) (288,756) (258,129) 468,017 Contract maintenance charges (566,809) (1,025,506) (2,167,639) (2,435,438) (257,507) ----------- ----------- ----------- ----------- ---------- Increase (decrease) in net assets from contract transactions (519,381) (786,289) (3,155,243) (2,625,326) 87,146 ----------- ----------- ----------- ----------- ---------- Increase (decrease) in net assets (1,055,988) (1,427,350) (5,598,108) (5,364,662) 100,893 Net assets at beginning of period 7,002,648 11,306,705 38,907,547 32,818,832 1,527,842 ----------- ----------- ----------- ----------- ---------- Net assets at end of period $ 5,946,660 $ 9,879,355 $33,309,439 $27,454,170 $1,628,735 =========== =========== =========== =========== ========== Beginning units 17,729 22,533 45,987 37,089 9,189 Units issued 473 287 396,270 313,497 6,562 Units redeemed (1,776) (1,862) (18,554) (9,706) (6,041) ----------- ----------- ----------- ----------- ---------- Ending units 16,426 20,958 423,703 340,880 9,710 =========== =========== =========== =========== ========== For the Year Ended December 31, 2017 From operations: Dividends $ 85,069 $ 206,687 $ 370,392 $ 541,464 $ 11,731 Mortality and expense risk and administrative charges (51,707) (83,461) (280,135) (239,711) (13,376) ----------- ----------- ----------- ----------- ---------- Net investment income (loss) 33,362 123,226 90,257 301,753 (1,645) Net realized gain (loss) 223,230 47,352 1,414,909 702,818 -- Capital gain distribution from mutual funds 904,377 1,240,773 1,978,069 662,988 -- Change in unrealized appreciation (depreciation) of investments (29,329) (23,020) 3,602,196 1,989,256 -- ----------- ----------- ----------- ----------- ---------- Increase (decrease) in net assets from operations 1,131,640 1,388,331 7,085,431 3,656,815 (1,645) ----------- ----------- ----------- ----------- ---------- From contract transactions: Payments received from contract owners 520,089 773,554 1,781,311 1,929,587 324,390 Payments for contract benefits or terminations (651,247) (701,531) (2,621,731) (2,008,371) (346,962) Policy loans (15,536) (16,273) (181,068) (24,244) (2,639) Transfers between sub-accounts (including fixed account), net (45,920) (29,077) (142,926) (249,417) (61,274) Contract maintenance charges (598,559) (1,077,943) (2,232,795) (2,523,260) (407,120) ----------- ----------- ----------- ----------- ---------- Increase (decrease) in net assets from contract transactions (791,173) (1,051,270) (3,397,209) (2,875,705) (493,605) ----------- ----------- ----------- ----------- ---------- Increase (decrease) in net assets 340,467 337,061 3,688,222 781,110 (495,250) Net assets at beginning of period 6,662,181 10,969,644 35,219,325 32,037,722 2,023,092 ----------- ----------- ----------- ----------- ---------- Net assets at end of period $ 7,002,648 $11,306,705 $38,907,547 $32,818,832 $1,527,842 =========== =========== =========== =========== ========== Beginning units 19,876 24,758 50,356 40,570 12,159 Units issued 315 333 257 275 3,194 Units redeemed (2,462) (2,558) (4,626) (3,756) (6,164) ----------- ----------- ----------- ----------- ---------- Ending units 17,729 22,533 45,987 37,089 9,189 =========== =========== =========== =========== ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 3 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP Investment Fidelity VIP Growth High Income Index 500 Grade Bond Overseas Portfolio Initial Portfolio Initial Portfolio Initial Portfolio Initial Portfolio Initial Class Class Class Class Class ----------------- ----------------- ----------------- ----------------- ----------------- For the Year Ended December 31, 2018 From operations: Dividends $ 131,714 $ 106,877 $ 693,164 $ 63,027 $ 113,934 Mortality and expense risk and administrative charges (423,785) (14,802) (284,487) (19,144) (56,937) ------------ ---------- ----------- ---------- ----------- Net investment income (loss) (292,071) 92,075 408,677 43,883 56,997 Net realized gain (loss) 20,600,680 (18,421) 1,835,432 (17,935) 283,247 Capital gain distribution from mutual funds 6,218,193 -- 181,613 15,991 -- Change in unrealized appreciation (depreciation) of investments (26,089,899) (150,232) (4,163,337) (76,060) (1,498,653) ------------ ---------- ----------- ---------- ----------- Increase (decrease) in net assets from operations 436,903 (76,578) (1,737,615) (34,121) (1,158,409) ------------ ---------- ----------- ---------- ----------- From contract transactions: Payments received from contract owners 2,628,881 156,284 2,023,717 231,660 564,416 Payments for contract benefits or terminations (3,583,208) (185,046) (2,081,798) (148,200) (461,290) Policy loans 63,356 5,882 (190,119) (5,738) 11,432 Transfers between sub-accounts (including fixed account), net (698,615) (657) (82,889) 72,004 (125,990) Contract maintenance charges (3,505,055) (221,512) (2,488,958) (293,448) (698,141) ------------ ---------- ----------- ---------- ----------- Increase (decrease) in net assets from contract transactions (5,094,641) (245,049) (2,820,047) (143,722) (709,573) ------------ ---------- ----------- ---------- ----------- Increase (decrease) in net assets (4,657,738) (321,627) (4,557,662) (177,843) (1,867,982) Net assets at beginning of period 56,814,401 2,119,613 38,006,059 2,697,764 8,119,287 ------------ ---------- ----------- ---------- ----------- Net assets at end of period $ 52,156,663 $1,797,986 $33,448,397 $2,519,921 $ 6,251,305 ============ ========== =========== ========== =========== Beginning units 58,736 6,689 49,044 7,895 20,349 Units issued 1,453,728 285 378 518 595 Units redeemed (968,262) (1,063) (3,888) (943) (2,414) ------------ ---------- ----------- ---------- ----------- Ending units 544,202 5,911 45,534 7,470 18,530 ============ ========== =========== ========== =========== For the Year Ended December 31, 2017 From operations: Dividends $ 116,142 $ 113,568 $ 643,605 $ 67,584 $ 108,961 Mortality and expense risk and administrative charges (400,131) (16,506) (268,731) (21,221) (56,701) ------------ ---------- ----------- ---------- ----------- Net investment income (loss) (283,989) 97,062 374,874 46,363 52,260 Net realized gain (loss) 2,961,888 (25,017) 1,765,460 (13,639) 210,349 Capital gain distribution from mutual funds 3,837,655 -- 114,370 13,646 7,117 Change in unrealized appreciation (depreciation) of investments 8,849,756 60,897 4,546,885 50,446 1,639,206 ------------ ---------- ----------- ---------- ----------- Increase (decrease) in net assets from operations 15,365,310 132,942 6,801,589 96,816 1,908,932 ------------ ---------- ----------- ---------- ----------- From contract transactions: Payments received from contract owners 2,829,791 167,640 2,082,323 249,256 588,762 Payments for contract benefits or terminations (4,220,393) (203,976) (2,311,198) (493,022) (563,761) Policy loans (166,829) 5,924 (112,321) (7,385) (12,395) Transfers between sub-accounts (including fixed account), net (433,315) (6,695) (178,391) 41,813 190,932 Contract maintenance charges (3,632,026) (239,201) (2,541,052) (310,639) (701,845) ------------ ---------- ----------- ---------- ----------- Increase (decrease) in net assets from contract transactions (5,622,772) (276,308) (3,060,639) (519,977) (498,307) ------------ ---------- ----------- ---------- ----------- Increase (decrease) in net assets 9,742,538 (143,366) 3,740,950 (423,161) 1,410,625 Net assets at beginning of period 47,071,863 2,262,979 34,265,109 3,120,925 6,708,662 ------------ ---------- ----------- ---------- ----------- Net assets at end of period $ 56,814,401 $2,119,613 $38,006,059 $2,697,764 $ 8,119,287 ============ ========== =========== ========== =========== Beginning units 65,271 7,579 53,416 9,447 21,742 Units issued 319 289 483 480 970 Units redeemed (6,854) (1,179) (4,855) (2,032) (2,363) ------------ ---------- ----------- ---------- ----------- Ending units 58,736 6,689 49,044 7,895 20,349 ============ ========== =========== ========== ===========
The accompanying Notes to Financial Statements are an integral part of this statement. 4 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
MFS VIT II MFS VIT MFS VIT MFS VIT MFS VIT Core Equity Investors Research Total Return Growth Series Portfolio Initial Trust Series Series Initial Series Initial Initial Class Class Initial Class Class Class ------------- ----------------- ------------- -------------- -------------- For the Year Ended December 31, 2018 From operations: Dividends $ 13,397 $ 47,831 $ 20,768 $ 38,096 $ 103,423 Mortality and expense risk and administrative charges (112,571) (53,207) (25,066) (41,458) (35,623) ----------- ----------- ---------- ----------- ---------- Net investment income (loss) (99,174) (5,376) (4,298) (3,362) 67,800 Net realized gain (loss) 846,905 30,035 156,802 234,389 136,254 Capital gain distribution from mutual funds 994,157 737,719 144,329 629,323 210,734 Change in unrealized appreciation (depreciation) of investments (1,388,663) (1,038,349) (483,035) (1,106,946) (709,003) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 353,225 (275,971) (186,202) (246,596) (294,215) ----------- ----------- ---------- ----------- ---------- From contract transactions: Payments received from contract owners 736,803 374,865 149,761 313,503 348,475 Payments for contract benefits or terminations (1,011,013) (407,093) (195,170) (358,540) (257,944) Policy loans (39,277) (28,281) (5,457) (27,259) (14,547) Transfers between sub-accounts (including fixed account), net (37,958) 24,710 (49,513) 38,151 (6,819) Contract maintenance charges (860,092) (451,558) (215,226) (364,334) (409,653) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from contract transactions (1,211,537) (487,357) (315,605) (398,479) (340,488) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets (858,312) (763,328) (501,807) (645,075) (634,703) Net assets at beginning of period 14,131,500 6,989,934 3,383,613 5,442,555 4,951,368 ----------- ----------- ---------- ----------- ---------- Net assets at end of period $13,273,188 $ 6,226,606 $2,881,806 $ 4,797,480 $4,316,665 =========== =========== ========== =========== ========== Beginning units 43,214 219,759 13,063 19,579 17,322 Units issued 631 5,463 341 623 656 Units redeemed (4,012) (20,123) (1,543) (2,019) (1,857) ----------- ----------- ---------- ----------- ---------- Ending units 39,833 205,099 11,861 18,183 16,121 =========== =========== ========== =========== ========== For the Year Ended December 31, 2017 From operations: Dividends $ 13,876 $ 63,036 $ 23,067 $ 70,547 $ 114,241 Mortality and expense risk and administrative charges (99,244) (50,090) (23,799) (39,096) (36,823) ----------- ----------- ---------- ----------- ---------- Net investment income (loss) (85,368) 12,946 (732) 31,451 77,418 Net realized gain (loss) 675,318 (6,693) 106,283 233,952 171,965 Capital gain distribution from mutual funds 525,084 388,369 124,485 346,498 132,934 Change in unrealized appreciation (depreciation) of investments 2,348,278 1,034,762 410,347 439,846 152,666 ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 3,463,312 1,429,384 640,383 1,051,747 534,983 ----------- ----------- ---------- ----------- ---------- From contract transactions: Payments received from contract owners 749,052 397,021 167,259 319,492 373,340 Payments for contract benefits or terminations (817,804) (433,421) (153,519) (373,212) (501,402) Policy loans (130,753) (40,205) (20,135) (30,454) (7,046) Transfers between sub-accounts (including fixed account), net (63,680) (202,640) 3,813 (52,228) 86,999 Contract maintenance charges (860,578) (464,606) (219,543) (378,332) (412,570) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from contract transactions (1,123,763) (743,851) (222,125) (514,734) (460,679) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets 2,339,549 685,533 418,258 537,013 74,304 Net assets at beginning of period 11,791,951 6,304,401 2,965,355 4,905,542 4,877,064 ----------- ----------- ---------- ----------- ---------- Net assets at end of period $14,131,500 $ 6,989,934 $3,383,613 $ 5,442,555 $4,951,368 =========== =========== ========== =========== ========== Beginning units 47,031 245,569 14,015 21,609 19,018 Units issued 689 2,737 372 352 677 Units redeemed (4,506) (28,547) (1,324) (2,382) (2,373) ----------- ----------- ---------- ----------- ---------- Ending units 43,214 219,759 13,063 19,579 17,322 =========== =========== ========== =========== ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 5 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
MFS VIT Utilities Series Initial Class ---------------- For the Year Ended December 31, 2018 From operations: Dividends $ 87,861 Mortality and expense risk and administrative charges (60,646) ---------- Net investment income (loss) 27,215 Net realized gain (loss) 219,769 Capital gain distribution from mutual funds 30,506 Change in unrealized appreciation (depreciation) of investments (241,986) ---------- Increase (decrease) in net assets from operations 35,504 ---------- From contract transactions: Payments received from contract owners 434,420 Payments for contract benefits or terminations (681,679) Policy loans (8,221) Transfers between sub-accounts (including fixed account), net (116,934) Contract maintenance charges (563,715) ---------- Increase (decrease) in net assets from contract transactions (936,129) ---------- Increase (decrease) in net assets (900,625) Net assets at beginning of period 8,378,649 ---------- Net assets at end of period $7,478,024 ========== Beginning units 18,595 Units issued 381 Units redeemed (2,430) ---------- Ending units 16,546 ========== For the Year Ended December 31, 2017 From operations: Dividends $ 365,401 Mortality and expense risk and administrative charges (63,475) ---------- Net investment income (loss) 301,926 Net realized gain (loss) 187,863 Change in unrealized appreciation (depreciation) of investments 611,949 ---------- Increase (decrease) in net assets from operations 1,101,738 ---------- From contract transactions: Payments received from contract owners 500,581 Payments for contract benefits or terminations (647,167) Policy loans (58,167) Transfers between sub-accounts (including fixed account), net (19,184) Contract maintenance charges (598,404) ---------- Increase (decrease) in net assets from contract transactions (822,341) ---------- Increase (decrease) in net assets 279,397 Net assets at beginning of period 8,099,252 ---------- Net assets at end of period $8,378,649 ========== Beginning units 20,487 Units issued 519 Units redeemed (2,411) ---------- Ending units 18,595 ==========
The accompanying Notes to Financial Statements are an integral part of this statement. 6 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 1. Organization Separate Account VUL-2 (the Separate Account) was established in September 30, 1991 to receive and invest premium payments from variable universal life insurance policies issued by The American Franklin Life Insurance Company (AMFLIC). On December 31, 2002, AMFLIC merged with and into its parent company, The Franklin Life Insurance Company (Franklin). This was followed by an immediate merger of Franklin with an affiliate, American General Life Insurance Company (the Company). The Company is a wholly owned subsidiary of AGC Life Insurance Company, an indirect, wholly owned subsidiary of American International Group, Inc. (AIG). As a result of the mergers, the Company became the depositor of the Separate Account and its assets are the property of the Company. The Company is responsible for all policies funded through the Separate Account. The mergers did not affect the rights of the policy owners. The products in the Separate Account, (EquiBuilder II and EquiBuilder III), are no longer available for sale. The Separate Account is registered with the Securities and Exchange Commission as a Unit Investment Trust under the Investment Company Act of 1940, as amended. The Separate Account consists of various sub-accounts. Each sub-account invests all its investible assets in a corresponding eligible mutual fund, which is registered under the 1940 Act as open-ended management investment companies. The names in bold in the table below are the diversified, open-ended management investment companies and the names below them are the names of the sub-accounts/corresponding eligible mutual funds. Collectively, all of the mutual funds are referred to as "Funds" throughout these financial statements. For each sub-account, the financial statements are comprised of a Statement of Assets and Liabilities, including a Schedule of Portfolio Investments, as of December 31, 2018 and related Statements of Operations and Changes in Net Assets for each of the two years in the period then ended. Fidelity Variable Insurance Products (Fidelity VIP) Fidelity VIP Asset Manager: Growth Fidelity VIP Growth Portfolio Initial Portfolio Initial Class Class Fidelity VIP Asset Manager Portfolio Fidelity VIP High Income Portfolio Initial Class Initial Class Fidelity VIP Contrafund Portfolio Fidelity VIP Index 500 Portfolio Initial Class Initial Class Fidelity VIP Equity-Income Portfolio Fidelity VIP Investment Grade Bond Initial Class Portfolio Initial Class Fidelity VIP Government Money Market Fidelity VIP Overseas Portfolio Portfolio Initial Class Initial Class MFS Variable Insurance Trust (MFS VIT) MFS VIT Growth Series Initial Class MFS VIT Research Series Initial Class MFS VIT II Core Equity Portfolio MFS VIT Total Return Series Initial Initial Class Class MFS VIT Investors Trust Series Initial Class MFS VIT Utilities Series Initial Class In addition to the sub-accounts above, a contract owner may allocate contract funds to a fixed account, which is part of the Company's General Account and not included in these financial statements. Contract owners should refer to the product prospectus for the available Funds and fixed account. The assets of the Separate Account are segregated from the Company's assets. The operations of the Separate Account are part of the Company. Net premiums from the contracts are allocated to the sub-accounts and invested in the Funds in accordance with contract owner instructions and are recorded as contract transactions in the Statements of Operations and Changes in Net Assets. 7 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Summary of Significant Accounting Policy The financial statements of the Separate Account have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). The following is a summary of significant accounting policies consistently followed by the Separate Account in the preparation of its financial statements. Use of Estimates: The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from assumptions used, the financial statements of the Separate Account could be materially affected. Investments: Investments in mutual funds are valued at their closing net asset value per share as determined by the respective mutual funds, which generally value their securities at fair value. Purchases and sales of shares of the Funds are made at the net asset values of such Funds. Transactions are recorded on a trade date basis. Realized gains and losses on the sales of investments are recognized at the date of sale and are determined on a first-in, first-out basis. Dividends and capital gain distributions from the Funds are recorded on the ex-dividend date and reinvested upon receipt. Policy Loans: When a policy loan is made, the loan amount is transferred to the Company from the contract owner's selected investment, and held as collateral. Interest on this collateral amount is credited to the policy. Loan repayments are invested in the contract owner's selected investment, after they are first used to repay all loans taken from the declared fixed interest account option. Accumulation Unit: This is the basic valuation unit used to calculate the contract owner's interest. Such units are valued daily to reflect investment performance and the prorated daily deduction for expense charges. Income Taxes: The operations of the Separate Account are included in the federal income tax return of the Company, which is taxed as a life insurance company under the provision of the Internal Revenue Code (the Code). Under the current provisions of the Code, the Company does not expect to incur federal income taxes on the earnings of the Separate Account to the extent that the earnings are credited under the contracts. As a result, no charge is currently made to the Separate Account for federal income taxes. The Separate Account is not treated as a regulated investment company under the Code. The Company will periodically review changes in the tax law. A charge may be made in future years for any federal income taxes that would be attributable to the contracts. 3. Fair Value Measurements Assets recorded at fair value in the Separate Account's Statement of Assets and Liabilities are measured and classified in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of valuation inputs: .. Level 1-- Fair value measurements based on quoted prices (unadjusted) in active markets that the Separate Account has the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. The Separate Account does not adjust the quoted price for such instruments. .. Level 2-- Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. .. Level 3-- Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair value positions in Level 3. The circumstances in which there is little, if any, market activity for the asset or liability. Therefore, the Separate Account makes certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability. 8 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Separate Account assets measured at fair value as of December 31, 2018 consist of investments in registered mutual funds that generally trade daily and are measured at fair value using quoted prices in active markets for identical assets, which are classified as Level 1 throughout the year. As such, no transfers between fair value hierarchy levels occurred during the year. See the Schedule of Portfolio Investments for the table presenting information about assets measured at fair value on a recurring basis at December 31, 2018, and respective hierarchy levels. 4. Expenses Expense charges are applied against the current value of the Separate Account and are paid as follows: Separate Account Annual Charges: Deductions for the mortality and expense risk charges and administrative charges are calculated daily, at an annual rate, on the actual prior day's net asset value of the underlying Funds comprising the sub-accounts attributable to the contract owners and are paid to the Company. The mortality risk charge represents compensation to the Company for the mortality risks assumed under the contract, which is the obligation to provide payments during the payout period for the life of the contract and to provide the standard death benefit. The expense risk charge represents compensation to the Company for assuming the risk that the current contract administration charges will be insufficient to cover the cost of administering the contract in the future. The administrative charge reimburses the Company for any administrative expenses incurred under the contract. This includes the expenses for administration and marketing. These charges are included on the mortality and expense risk and administrative charges line in the Statements of Operations and Changes in Net Assets. The separate account annual charge is calculated as a percentage of the net asset value and deducted at an annual rate of 0.75 percent. Monthly Administrative Charge: The Company makes a monthly charge against each policy account for the administrative expenses. These charges are included as part of the contract maintenance charges line in the Statements of Operations and Changes in Net Assets. The Company currently charges $9 per month guaranteed to be no more than $12 per month. Withdrawal Charge: A withdrawal charge is applicable to certain contract withdrawals pursuant to the contract and is payable to the Company. The withdrawal charges are included as part of the payments for contract benefits or terminations line in the Statements of Operations and Changes in Net Assets. During the first ten years a policy is in effect, a withdrawal charge may be assessed by the Company. The maximum withdrawal charge is equal to 50 percent of one "target" premium. This maximum will not vary with premiums paid or when premiums are paid. At the end of the sixth policy year, and at the end of each of the four succeeding policy years, the maximum withdrawal charge will decrease by 20 percent. The current withdrawal charge for EquiBuilder II and EquiBuilder III will equal 30 percent and 25 percent, respectively, of premium payments made during the first policy year up to one "target" premium and 9 percent of any additional premiums paid during the first ten policy years. Cost of Insurance Charge: Since determination of both the insurance rate and the Company's net amount at risk depends upon several factors, the cost of insurance deduction may vary from month to month. Policy accumulation value, specified amount of insurance and certain characteristics of the insured person are among the variables included in the calculation for the monthly cost of insurance deduction. The cost of insurance charge is included as part of the contract maintenance charges line of the Statements of Operations and Changes in Net Assets. Face Amount Increase Charge: The Company charges for an increase in the face amount of insurance. These charges are included as part of the contract maintenance charges line in the Statements of Operations and Changes in Net Assets. 9 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The face amount increase charge is $1.50 per $1,000 increase in the face amount of insurance up to a maximum charge of $300. Policy Loan Interest Charge: A loan may be requested against a policy while the policy has a net cash surrender value. The daily interest charge on the loan is paid to the Company for the expenses of administering and providing policy loans. The interest charge is collected through any loan repayment from the policyholder. Transfer Fee: A transfer fee may be assessed on each transfer of funds in excess of the maximum transactions allowed within a contract year depending on the contract provision. The transfer fee is included as part of the payments for contract benefits or terminations line in the Statements of Operations and Changes in Net Assets. A transfer fee of $25 is assessed on each transfer in excess of four transfers during the policy year. Premium Tax Charge: Certain states charge taxes on premium payments made up to a maximum of 3.50 percent. The Company deducts from each premium payment a charge to cover costs associated with the issuance of the policy, administrative services the Company performs and a premium tax that is applicable to the Company in the state or other jurisdiction of the policy owner. Premium tax charges are included as part of the contract maintenance charges line in the Statements of Operations and Changes in Net Assets. For EquiBuilder III, the Company makes a sales expense deduction equal to 5 percent of each premium paid during any policy year up to a target premium, which is based on the annual premium for a fixed whole life insurance policy on the life of the insured person (no sales expense deduction is made for premium in excess of the target premium paid during that policy year). Optional Rider Charge: Monthly charges are deducted if the contract owner selects additional benefit riders. The charges for any rider selected will vary by policy within a range based on either the personal characteristics of the insured person or the specific coverage chosen under the rider. The rider charges are included as part of contract maintenance charges line in the Statements of Operations and Changes in Net Assets. 5. Purchases and Sales of Investments For the year ended December 31, 2018, the aggregate cost of purchases and proceeds from the sales of investments were:
Sub-accounts Cost of Purchases Proceeds from Sales ------------ ----------------- ------------------- Fidelity VIP Asset Manager: Growth Portfolio Initial Class $ 535,130 $ 744,896 Fidelity VIP Asset Manager Portfolio Initial Class 668,334 995,731 Fidelity VIP Contrafund Portfolio Initial Class 3,957,917 3,800,942 Fidelity VIP Equity-Income Portfolio Initial Class 2,410,636 3,120,053 Fidelity VIP Government Money Market Portfolio Initial Class 1,115,187 1,014,294 Fidelity VIP Growth Portfolio Initial Class 60,109,688 59,278,207 Fidelity VIP High Income Portfolio Initial Class 193,754 346,728 Fidelity VIP Index 500 Portfolio Initial Class 1,132,930 3,362,688 Fidelity VIP Investment Grade Bond Portfolio Initial Class 247,455 331,302 Fidelity VIP Overseas Portfolio Initial Class 332,790 985,367 MFS VIT Growth Series Initial Class 1,210,807 1,527,361 MFS VIT II Core Equity Portfolio Initial Class 953,058 708,071 MFS VIT Investors Trust Series Initial Class 248,454 424,028 MFS VIT Research Series Initial Class 836,346 608,864 MFS VIT Total Return Series Initial Class 487,993 549,947 MFS VIT Utilities Series Initial Class 279,191 1,157,598
10 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Financial Highlights The summary of unit values and units outstanding for sub-accounts, investment income ratios, total return and expense ratios, excluding expenses of the underlying mutual funds, for each of the five years in the period ended December 31, 2018, follows:
December 31, 2018 For the Year Ended December 31, 2018 ------------------------- ------------------------------------ Unit Investment Expense Total Value Net Income Ratio Return Sub-accounts Units ($) Assets ($) Ratio (%)/(a)/ (%)/(b)/ (%)/(c)/ ------------ ------- ------ ---------- ------------- ------- ------- Fidelity VIP Asset Manager: Growth Portfolio Initial Class 16,426 362.04 5,946,660 1.47 0.75 -8.34 Fidelity VIP Asset Manager Portfolio Initial Class 20,958 471.38 9,879,355 1.71 0.75 -6.06 Fidelity VIP Contrafund Portfolio Initial Class 423,703 78.62 33,309,439 0.74 0.75 -7.08 Fidelity VIP Equity-Income Portfolio Initial Class 340,880 80.54 27,454,170 2.30 0.75 -8.98 Fidelity VIP Government Money Market Portfolio Initial Class 9,710 167.74 1,628,735 1.61 0.75 0.89 Fidelity VIP Growth Portfolio Initial Class 544,202 95.84 52,156,663 0.24 0.75 -0.92 Fidelity VIP High Income Portfolio Initial Class 5,911 304.18 1,797,986 5.46 0.75 -4.01 Fidelity VIP Index 500 Portfolio Initial Class 45,534 734.58 33,448,397 1.94 0.75 -5.21 Fidelity VIP Investment Grade Bond Portfolio Initial Class 7,470 337.34 2,519,921 2.42 0.75 -1.28 Fidelity VIP Overseas Portfolio Initial Class 18,530 337.37 6,251,305 1.59 0.75 -15.45 MFS VIT Growth Series Initial Class 39,833 333.22 13,273,188 0.10 0.75 1.90 MFS VIT II Core Equity Portfolio Initial Class 205,099 30.36 6,226,606 0.72 0.75 -4.55 MFS VIT Investors Trust Series Initial Class 11,861 242.97 2,881,806 0.66 0.75 -6.20 MFS VIT Research Series Initial Class 18,183 263.84 4,797,480 0.74 0.75 -5.09 MFS VIT Total Return Series Initial Class 16,121 267.77 4,316,665 2.23 0.75 -6.32 MFS VIT Utilities Series Initial Class 16,546 451.95 7,478,024 1.11 0.75 0.30
December 31, 2017 For the Year Ended December 31, 2017 ------------------------- ------------------------------------ Unit Investment Expense Total Value Net Income Ratio Return Sub-accounts Units ($) Assets ($) Ratio (%)/(a)/ (%)/(b)/ (%)/(c)/ ------------ ------- ------ ---------- ------------- ------- ------- Fidelity VIP Asset Manager: Growth Portfolio Initial Class 17,729 394.99 7,002,648 1.25 0.75 17.84 Fidelity VIP Asset Manager Portfolio Initial Class 22,533 501.79 11,306,705 1.86 0.75 13.25 Fidelity VIP Contrafund Portfolio Initial Class 45,987 846.05 38,907,547 1.00 0.75 20.97 Fidelity VIP Equity-Income Portfolio Initial Class 37,089 884.86 32,818,832 1.67 0.75 12.05 Fidelity VIP Government Money Market Portfolio Initial Class 9,189 166.26 1,527,842 0.66 0.75 -0.08 Fidelity VIP Growth Portfolio Initial Class 58,736 967.29 56,814,401 0.22 0.75 34.13 Fidelity VIP High Income Portfolio Initial Class 6,689 316.90 2,119,613 5.18 0.75 6.14 Fidelity VIP Index 500 Portfolio Initial Class 49,044 774.94 38,006,059 1.78 0.75 20.81 Fidelity VIP Investment Grade Bond Portfolio Initial Class 7,895 341.71 2,697,764 2.32 0.75 3.44 Fidelity VIP Overseas Portfolio Initial Class 20,349 399.01 8,119,287 1.47 0.75 29.31 MFS VIT Growth Series Initial Class 43,214 327.02 14,131,500 0.11 0.75 30.43 MFS VIT II Core Equity Portfolio Initial Class 219,759 31.81 6,989,934 0.95 0.75 23.90 MFS VIT Investors Trust Series Initial Class 13,063 259.03 3,383,613 0.73 0.75 22.43 MFS VIT Research Series Initial Class 19,579 277.98 5,442,555 1.36 0.75 22.45 MFS VIT Total Return Series Initial Class 17,322 285.84 4,951,368 2.32 0.75 11.46 MFS VIT Utilities Series Initial Class 18,595 450.59 8,378,649 4.44 0.75 13.98
December 31, 2016 For the Year Ended December 31, 2016 ------------------------- ------------------------------------ Unit Investment Expense Total Value Net Income Ratio Return Sub-accounts Units ($) Assets ($) Ratio (%)/(a)/ (%)/(b)/ (%)/(c)/ ------------ ------- ------ ---------- ------------- ------- ------- Fidelity VIP Asset Manager: Growth Portfolio Initial Class 19,876 335.19 6,662,181 1.34 0.75 1.70 Fidelity VIP Asset Manager Portfolio Initial Class 24,758 443.07 10,969,644 1.44 0.75 2.30 Fidelity VIP Contrafund Portfolio Initial Class 50,356 699.40 35,219,325 0.78 0.75 7.20 Fidelity VIP Equity-Income Portfolio Initial Class 40,570 789.68 32,037,722 2.23 0.75 17.14 Fidelity VIP Government Money Market Portfolio Initial Class 12,159 166.39 2,023,092 0.21 0.75 -0.54 Fidelity VIP Growth Portfolio Initial Class 65,271 721.18 47,071,863 0.04 0.75 0.05 Fidelity VIP High Income Portfolio Initial Class 7,579 298.57 2,262,979 5.24 0.75 13.75 Fidelity VIP Index 500 Portfolio Initial Class 53,416 641.48 34,265,109 1.41 0.75 11.03 Fidelity VIP Investment Grade Bond Portfolio Initial Class 9,447 330.35 3,120,925 2.35 0.75 3.96 Fidelity VIP Overseas Portfolio Initial Class 21,742 308.56 6,708,662 1.38 0.75 -5.77 MFS VIT Growth Series Initial Class 47,031 250.73 11,791,951 0.04 0.75 1.68 MFS VIT II Core Equity Portfolio Initial Class 245,569 25.67 6,304,401 0.75 0.75 10.55 MFS VIT Investors Trust Series Initial Class 14,015 211.58 2,965,355 0.86 0.75 7.78 MFS VIT Research Series Initial Class 21,609 227.02 4,905,542 0.77 0.75 7.93 MFS VIT Total Return Series Initial Class 19,018 256.45 4,877,064 2.91 0.75 8.28 MFS VIT Utilities Series Initial Class 20,487 395.34 8,099,252 3.96 0.75 10.64
11 SEPARATE ACCOUNT VUL-2 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2015 For the Year Ended December 31, 2015 ------------------------- ------------------------------------ Unit Investment Expense Total Value Net Income Ratio Return Sub-accounts Units ($) Assets ($) Ratio (%)/(a)/ (%)/(b)/ (%)/(c)/ ------------ ------- ------ ---------- ------------- ------- ------- Fidelity VIP Asset Manager: Growth Portfolio Initial Class 21,766 329.58 7,173,810 1.20 0.75 -0.67 Fidelity VIP Asset Manager Portfolio Initial Class 27,184 433.10 11,773,211 1.55 0.75 -0.61 Fidelity VIP Contrafund Portfolio Initial Class 55,107 652.42 35,952,951 1.02 0.75 -0.08 Fidelity VIP Equity-Income Portfolio Initial Class 44,418 674.15 29,944,360 3.10 0.75 -4.68 Fidelity VIP Government Money Market Portfolio Initial Class 12,945 167.30 2,165,680 0.03 0.75 -0.72 Fidelity VIP Growth Portfolio Initial Class 71,151 720.82 51,286,916 0.26 0.75 6.37 Fidelity VIP High Income Portfolio Initial Class 8,339 262.47 2,188,608 6.64 0.75 -4.35 Fidelity VIP Index 500 Portfolio Initial Class 59,049 577.77 34,116,797 1.95 0.75 0.58 Fidelity VIP Investment Grade Bond Portfolio Initial Class 10,105 317.76 3,211,240 2.52 0.75 -1.34 Fidelity VIP Overseas Portfolio Initial Class 24,159 327.45 7,910,816 1.37 0.75 2.85 MFS VIT Growth Series Initial Class 51,341 246.59 12,660,118 0.16 0.75 6.76 MFS VIT II Core Equity Portfolio Initial Class 271,013 23.22 6,293,859 1.16 0.75 132.23 MFS VIT Investors Trust Series Initial Class 15,238 196.31 2,991,568 0.92 0.75 -0.53 MFS VIT Research Series Initial Class 23,841 210.35 5,014,777 0.73 0.75 0.05 MFS VIT Total Return Series Initial Class 20,053 236.83 4,749,235 2.62 0.75 -1.12 MFS VIT Utilities Series Initial Class 23,188 357.32 8,285,488 4.27 0.75 -15.16
December 31, 2014 For the Year Ended December 31, 2014 ------------------------ ------------------------------------ Unit Investment Expense Total Value Net Income Ratio Return Sub-accounts Units ($) Assets ($) Ratio (%)/(a)/ (%)/(b)/ (%)/(c)/ ------------ ------ ------ ---------- ------------- ------- ------- Fidelity VIP Asset Manager: Growth Portfolio Initial Class 24,079 331.79 7,989,205 1.08 0.75 5.08 Fidelity VIP Asset Manager Portfolio Initial Class 30,542 435.74 13,308,223 1.49 0.75 5.04 Fidelity VIP Contrafund Portfolio Initial Class 60,561 652.95 39,543,372 0.94 0.75 11.11 Fidelity VIP Equity-Income Portfolio Initial Class 49,647 707.26 35,113,328 2.79 0.75 7.91 Fidelity VIP Government Money Market Portfolio Initial Class 13,102 168.51 2,207,817 0.01 0.75 -0.74 Fidelity VIP Growth Portfolio Initial Class 77,420 677.63 52,461,617 0.18 0.75 10.47 Fidelity VIP High Income Portfolio Initial Class 8,925 274.40 2,448,885 5.52 0.75 0.40 Fidelity VIP Index 500 Portfolio Initial Class 65,257 574.46 37,487,230 1.60 0.75 12.72 Fidelity VIP Investment Grade Bond Portfolio Initial Class 10,972 322.07 3,533,890 2.14 0.75 5.04 Fidelity VIP Overseas Portfolio Initial Class 26,138 318.38 8,321,591 1.31 0.75 -8.76 MFS VIT Growth Series Initial Class 55,844 230.98 12,899,045 0.10 0.75 8.13 MFS VIT Investors Trust Series Initial Class 16,176 197.36 3,192,530 0.93 0.75 10.18 MFS VIT Research Series Initial Class 25,526 210.24 5,366,578 0.81 0.75 9.38 MFS VIT Total Return Series Initial Class 21,721 239.50 5,202,296 1.88 0.75 7.69 MFS VIT Utilities Series Initial Class 25,735 421.16 10,838,321 2.15 0.75 11.89
(a)These amounts represent the dividends, excluding distributions of capital gains, received by the sub-account from the Funds, net of management fees assessed by the portfolio manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that are assessed against contract owner accounts either through reductions in the unit values or the redemption of units. The recognition of investment income by the sub-account is affected by the timing of the declaration of dividends by the Funds in which the sub-account invests. The average net assets are calculated using the net asset balances at the beginning and end of the year. (b)These amounts represent the annualized contract expenses of the sub-account, consisting of distribution, mortality and expense charges, for each period indicated. The ratios include only those expenses that result in direct reduction to unit values. Charges made directly to contract owners account through the redemption of units and expenses of the Funds have been excluded. For additional information on charges and deductions, see Note 4. (c)These amounts represent the total return for the periods indicated, including changes in the value of the Funds, and expenses assessed through the reduction of unit values. These ratios do not include any expenses assessed through redemption of units. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for each of the periods indicated or from the effective date through the end of the reporting period. Because the total return is presented as a range of minimum and maximum values, based on the product grouping representing the minimum and maximum expense ratios, some individual contract total returns are not within the ranges presented. 7. Subsequent Events Management considered Separate Accounts related events and transactions that occurred after the date of the Statement of Assets and Liabilities, but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that required additional disclosures. Management has evaluated events through April 22, 2019, the date the financial statements were issued, and has determined that no additional items require disclosure. 12 American General Life Insurance Company Audited Statutory Financial Statements At December 31, 2018 and 2017 and for each of the three years ended December 31, 2018 AMERICAN GENERAL LIFE INSURANCE COMPANY TABLE OF CONTENTS TO AUDITED STATUTORY FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
Page ---- STATUTORY FINANCIAL STATEMENTS Independent Auditor's Report.............................................................................................. 2 Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus at December 31, 2018 and 2017................ 4 Statutory Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016................................... 6 Statutory Statements of Changes in Capital and Surplus for the Years Ended December 31, 2018, 2017 and 2016............... 7 Statutory Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016................................... 8 NOTES TO STATUTORY FINANCIAL STATEMENTS 1. Nature of Operations................................................................................................. 9 2. Summary of Significant Accounting Policies........................................................................... 10 3. Investments.......................................................................................................... 21 4. Securities Lending and Repurchase Agreements......................................................................... 29 5. Restricted Assets.................................................................................................... 32 6. Subprime Mortgage Risk Exposure...................................................................................... 32 7. Derivatives.......................................................................................................... 33 8. Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of 36 Credit Risk........................................................................................................ 9. Fair Value Measurements.............................................................................................. 36 10. Aggregate Policy Reserves and Deposit Fund Liabilities............................................................... 42 11. Separate Accounts.................................................................................................... 43 12. Reserves for Guaranteed Policy Benefits and Enhancements............................................................. 46 13. Participating Policy Contracts....................................................................................... 46 14. Premium and Annuity Considerations Deferred and Uncollected.......................................................... 47 15. Reinsurance.......................................................................................................... 47 16. Federal Income Taxes................................................................................................. 50 17. Capital and Surplus.................................................................................................. 56 18. Retirement Plans and Share-Based and Deferred Compensation Plans..................................................... 57 19. Debt................................................................................................................. 58 20. Commitments and Contingencies........................................................................................ 60 21. Related Party Transactions........................................................................................... 62 22. Subsequent Events.................................................................................................... 67 23. Loan-Backed and Structured Security Impairments and Structured Notes Holdings........................................ 68 SUPPLEMENTAL INFORMATION Supplemental Schedule of Assets and Liabilities........................................................................... 74 Supplemental Investment Risks Interrogatories............................................................................. 76 Supplemental Summary Investment Schedule.................................................................................. 82
1 Report of Independent Auditors To the Board of Directors and Shareholder of American General Life Insurance Company We have audited the accompanying statutory financial statements of American General Life Insurance Company (the "Company"), an indirect, wholly-owned subsidiary of American International Group, Inc., which comprise the statutory statements of admitted assets, liabilities and capital and surplus as of December 31, 2018 and 2017, and the related statutory statements of operations and changes in capital and surplus, and of cash flows for each of the three years in the period ended December 31, 2018. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting practices prescribed or permitted by the Texas Department of Insurance. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles As described in Note 2 to the financial statements, the financial statements are prepared by the Company on the basis of the accounting practices prescribed or permitted by the Texas Department of Insurance, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the statutory basis of accounting described in Note 2 and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. Adverse Opinion on U.S. Generally Accepted Accounting Principles In our opinion, because of the significance of the matter discussed in the "Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles" paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2018 and 2017, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 2018. Opinion on Statutory Basis of Accounting In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and surplus of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in accordance with the accounting practices prescribed or permitted by the Texas Department of Insurance described in Note 2. 2 Other Matter Our audit was conducted for the purpose of forming an opinion on the statutory-basis financial statements taken as a whole. The Supplemental Schedule of Assets and Liabilities, Supplemental Investment Risks Interrogatories and Supplemental Summary Investment Schedule (collectively, the "supplemental schedules") of the Company as of December 31, 2018 and for the year then ended are presented to comply with the National Association of Insurance Commissioners' Annual Statement Instructions and Accounting Practices and Procedures Manual and for purposes of additional analysis and are not a required part of the statutory-basis financial statements. The supplemental schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the statutory-basis financial statements. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the statutory-basis financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the statutory-basis financial statements or to the statutory-basis financial statements themselves and other additional procedures, in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplemental schedules are fairly stated, in all material respects, in relation to the statutory-basis financial statements taken as a whole. /s/ PricewaterhouseCoopers LLP Houston, Texas April 22, 2019 3 AMERICAN GENERAL LIFE INSURANCE COMPANY STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND CAPITAL AND SURPLUS
December 31, ----------------- (in millions) 2018 2017 ------------- -------- -------- Admitted assets Cash and investments...................................... Bonds................................................. $ 94,693 $ 94,338 Preferred stock....................................... 303 211 Common stock.......................................... 312 93 Cash, cash equivalents and short-term investments..... 1,547 119 Mortgage loans........................................ 18,928 15,845 Real estate........................................... 197 223 Contract loans........................................ 1,307 1,340 Derivatives........................................... 1,635 655 Securities lending reinvested collateral assets....... 352 2,418 Derivative cash collateral............................ 20 1,027 Other invested assets................................. 4,364 5,033 -------- -------- Total cash and investments................................ 123,658 121,302 Amounts recoverable from reinsurers....................... 306 426 Amounts receivable under reinsurance contracts............ 372 352 Current federal income tax recoverable.................... 266 241 Deferred tax asset........................................ 517 689 Due and accrued investment income......................... 1,379 1,096 Premiums due, deferred and uncollected.................... 142 48 Receivables from affiliates............................... 363 316 Other assets.............................................. 164 131 Separate account assets................................... 49,618 54,104 -------- -------- Total admitted assets........................................ $176,785 $178,705 ======== ========
See accompanying Notes to Statutory Financial Statements. 4 AMERICAN GENERAL LIFE INSURANCE COMPANY STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND CAPITAL AND SURPLUS (CONTINUED)
December 31, ------------------ (in millions, except per share data) 2018 2017 ------------------------------------ -------- -------- Liabilities Policy reserves and contractual liabilities...................................... Life and annuity reserves.................................................... $ 91,355 $ 87,540 Liabilities for deposit-type contracts....................................... 12,012 9,663 Accident and health reserves................................................. 788 812 Premiums received in advance................................................. 11 1 Policy and contract claims................................................... 573 576 Policyholder dividends....................................................... 15 19 -------- -------- Total policy reserves and contractual liabilities................................ 104,754 98,611 Payable to affiliates............................................................ 372 425 Interest maintenance reserve..................................................... 1,278 1,411 Derivatives...................................................................... 209 454 Payable for securities lending................................................... 447 2,460 Repurchase agreements............................................................ 119 1,174 Collateral for derivatives program............................................... 835 45 Funds held under coinsurance..................................................... 10,863 10,435 Accrued expenses and other liabilities........................................... 1,750 1,740 Net transfers from separate accounts due or accrued.............................. (1,394) (1,591) Asset valuation reserve.......................................................... 1,583 1,536 Separate account liabilities..................................................... 49,618 54,021 -------- -------- Total liabilities................................................................... 170,434 170,721 -------- -------- Commitments and contingencies (see Note 20) Capital and surplus Common stock, $10 par value; 600,000 shares authorized, issued and outstanding... 6 6 Preferred stock, $100 par value; 8,500 shares authorized, issued and outstanding. 1 1 Gross paid-in and contributed surplus............................................ 3,510 3,510 Unassigned surplus............................................................... 2,834 4,467 -------- -------- Total capital and surplus........................................................... 6,351 7,984 -------- -------- Total liabilities and capital and surplus........................................... $176,785 $178,705 ======== ========
See accompanying Notes to Statutory Financial Statements. 5 AMERICAN GENERAL LIFE INSURANCE COMPANY STATUTORY STATEMENTS OF OPERATIONS
Years Ended December 31, --------------------------- (in millions) 2018 2017 2016 ------------- -------- ------- -------- Revenues Premiums and annuity considerations.................................................... $(10,325) $11,031 $ 7,561 Net investment income.................................................................. 6,243 5,881 6,090 Amortization of interest maintenance reserve........................................... 141 128 99 Reserve adjustments on reinsurance ceded............................................... 17,732 (1,160) (10,314) Commissions and expense allowances..................................................... 814 798 768 Separate account fees.................................................................. 1,167 1,216 1,025 Other income........................................................................... 437 472 429 -------- ------- -------- Total revenues............................................................................ 16,209 18,366 5,658 -------- ------- -------- Benefits and expenses Death benefits......................................................................... 260 760 1,089 Annuity benefits....................................................................... 1,537 3,374 3,276 Surrender benefits..................................................................... 7,119 6,452 6,125 Other benefits......................................................................... 271 565 591 Change in reserves..................................................................... 3,792 742 (10,216) Commissions............................................................................ 1,131 1,023 1,045 General insurance expenses............................................................. 828 969 1,049 Net transfers (from) to separate accounts.............................................. (774) 1,306 303 Other expenses......................................................................... 638 592 238 -------- ------- -------- Total benefits and expenses............................................................... 14,802 15,783 3,500 -------- ------- -------- Net gain from operations before dividends to policyholders and federal income taxes....... 1,407 2,583 2,158 Dividends to policyholders................................................................ (13) 18 19 -------- ------- -------- Net gain from operations after dividends to policyholders and before federal income taxes. 1,420 2,565 2,139 Federal income tax expense................................................................ 513 1,025 1,182 -------- ------- -------- Net gain from operations.................................................................. 907 1,540 957 Net realized capital (losses) gains....................................................... (342) (928) 634 -------- ------- -------- Net income................................................................................ $ 565 $ 612 $ 1,591 ======== ======= ========
See accompanying Notes to Statutory Financial Statements. 6 AMERICAN GENERAL LIFE INSURANCE COMPANY STATUTORY STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
Gross Paid- Common & In and Preferred Contributed Unassigned Total Capital (in millions) Stock Surplus Surplus and Surplus ------------- --------- ----------- ---------- ------------- Balance, January 1, 2016............................................ $ 7 $4,318 $ 4,569 $ 8,894 --- ------ ------- ------- Net income....................................................... -- -- 1,591 1,591 Change in net unrealized capital gains (losses).................. -- -- (380) (380) Change in net unrealized foreign exchange capital gains (losses). -- -- (277) (277) Change in deferred tax........................................... -- -- 290 290 Change in non-admitted assets.................................... -- -- (243) (243) Change in asset valuation reserve................................ -- -- 310 310 Change in surplus from separate accounts......................... -- -- 48 48 Other changes in surplus in separate accounts.................... -- -- (6) (6) Capital Changes: Return of capital............................................ -- (630) -- (630) Dividends to parent recorded as return of capital................ -- -- 2,185 2,185 Dividends to stockholder......................................... -- -- (2,740) (2,740) Prior period corrections (see Note 2)............................ -- -- (41) (41) --- ------ ------- ------- Balance, December 31, 2016.......................................... $ 7 $3,688 $ 5,306 $ 9,001 === ====== ======= ======= Net income....................................................... -- -- 612 612 Change in net unrealized capital gains (losses).................. -- -- 36 36 Change in net unrealized foreign exchange capital gains (losses). -- -- 271 271 Change in deferred tax........................................... -- -- (1,286) (1,286) Change in non-admitted assets.................................... -- -- 1,001 1,001 Change in asset valuation reserve................................ -- -- 19 19 Change in surplus from separate accounts......................... -- -- 178 178 Other changes in surplus in separate accounts.................... -- -- (178) (178) Cumulative effect of changes in accounting principles............ -- -- 132 132 Capital Changes: Return of capital............................................ -- (178) -- (178) Dividends to parent recorded as return of capital................ -- -- 107 107 Dividends to stockholder......................................... -- -- (1,722) (1,722) Prior period corrections (see Note 2)............................ -- -- (9) (9) --- ------ ------- ------- Balance, December 31, 2017.......................................... $ 7 $3,510 $ 4,467 $ 7,984 === ====== ======= ======= Net income....................................................... -- -- 565 565 Change in net unrealized capital gains (losses).................. -- -- 32 32 Change in net unrealized foreign exchange capital gains (losses). -- -- (256) (256) Change in deferred tax........................................... -- -- 24 24 Change in non-admitted assets.................................... -- -- (292) (292) Change in asset valuation reserve................................ -- -- (47) (47) Change in surplus from separate accounts......................... -- -- 74 74 Other changes in surplus in separate accounts.................... -- -- (74) (74) Dividends to stockholder......................................... -- -- (1,697) (1,697) Prior period corrections (see Note 2)............................ -- -- 38 38 --- ------ ------- ------- Balance, December 31, 2018.......................................... $ 7 $3,510 $ 2,834 $ 6,351 === ====== ======= =======
See accompanying Notes to Statutory Financial Statements. 7 AMERICAN GENERAL LIFE INSURANCE COMPANY STATUTORY STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------- (in millions) 2018 2017 2016 ------------- ------- ------- ------- Cash from operations Premium and annuity considerations, collected, net of reinsurance... $11,771 $10,601 $11,433 Net investment income............................................... 5,468 5,143 5,156 Other income (1,848) 1,148 1,056 ------- ------- ------- Total revenue received.............................................. 15,391 16,892 17,645 ------- ------- ------- Benefits paid....................................................... 9,107 11,051 10,938 Net transfers to (from) separate accounts........................... (971) 1,450 838 Commissions and expenses paid....................................... 2,907 2,959 2,631 Dividends paid to policyholders..................................... (10) 19 22 Federal income taxes................................................ 540 902 1,047 ------- ------- ------- Total benefits and expenses paid.................................... 11,573 16,381 15,476 ------- ------- ------- Net cash provided by operations........................................ 3,818 511 2,169 ======= ======= ======= Cash from investments Proceeds from investments sold, matured or repaid: Bonds........................................................... 18,960 23,013 20,993 Stocks.......................................................... 10 25 558 Mortgage loans.................................................. 1,594 1,727 1,079 Real estate..................................................... 36 32 115 Other invested assets........................................... 882 1,630 2,840 Derivatives..................................................... -- -- 1,185 Securities lending reinvested collateral assets................. 2,066 -- -- Miscellaneous proceeds.......................................... 1,235 1,281 -- ------- ------- ------- Total proceeds from investments sold, matured or repaid............. 24,783 27,708 26,770 ------- ------- ------- Cost of investments acquired: Bonds........................................................... 19,254 21,006 21,386 Stocks.......................................................... 325 64 102 Mortgage loans.................................................. 4,157 4,136 3,190 Real estate..................................................... 36 92 18 Other invested assets........................................... 1,343 1,714 1,147 Securities lending reinvested collateral assets................. -- 279 1,178 Miscellaneous purchases......................................... 1,309 341 1,937 ------- ------- ------- Total cost of investments acquired.................................. 26,424 27,632 28,958 ------- ------- ------- Net adjustment in contract loans.................................... (33) (29) (69) ------- ------- ------- Net cash (used in) provided by investing activities.................... (1,608) 105 (2,119) ======= ======= ======= Cash from financing and miscellaneous sources Cash provided (applied): Return of capital............................................... -- (178) (551) Federal Home Loan Bank advance payments......................... -- -- (100) Net deposits on deposit-type contracts.......................... 1,983 173 359 Dividends to Parent............................................. (1,697) (1,240) (669) Change in securities lending.................................... (2,013) 314 1,183 Other, net...................................................... 945 245 (204) ------- ------- ------- Net cash (used) provided in financing and miscellaneous activities..... (782) (686) 18 ======= ======= ======= Net increase (decrease) in cash, cash equivalents and short-term investments.......................................................... 1,428 (70) 67 Cash, cash equivalents and short-term investments at beginning of year. 119 189 121 ------- ------- ------- Cash, cash equivalents and short-term investments at end of year....... $ 1,547 $ 119 $ 189 ======= ======= ======= Non-cash activities, excluded from above: Non-cash dividends and return of capital............................ $ -- $ -- $(2,156) Non-cash transfer from other invested assets to mortgage loans...... 787 1,468 -- Non-cash AIG Global Real Estate transactions........................ 644 -- -- Non-cash Fortitude Re settlement.................................... 230 -- -- Non-cash tax payment................................................ -- 671 -- Non-cash dividends reclass.......................................... -- 482 -- Non-cash Investment Real Estate sale................................ 128 -- --
See accompanying Notes to Statutory Financial Statements. 8 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS American General Life Insurance Company (AGL or the Company), including its wholly owned subsidiaries, is a wholly owned subsidiary of AGC Life Insurance Company (AGC Life or the Parent), an indirect, wholly owned subsidiary of American International Group, Inc. (AIG Parent). AIG Parent is a holding company, which through its subsidiaries provides a wide range of property casualty insurance, life insurance, retirement products and other financial services to commercial and individual customers in more than 80 countries and jurisdictions. The term "AIG Parent" means American International Group, Inc. and not any of AIG Parent's consolidated subsidiaries. The Company is a stock life insurance company domiciled and licensed under the laws of the State of Texas and is subject to regulation by the Texas Department of Insurance (TDI). The Company is also subject to regulation by the states in which it is authorized to transact business. The Company is licensed in 49 states and the District of Columbia. The Company is a leading provider in the United States of individual term and universal life insurance solutions to middle-income and high-net-worth customers, as well as a leading provider in the United States of fixed and variable annuities. AGL's primary products include term life insurance, universal, variable universal and whole life insurance, accident and health insurance, single- and flexible-premium deferred fixed and variable annuities, fixed index deferred annuities, single-premium immediate and delayed-income annuities, private placement variable annuities, private placement variable universal life, structured settlements, corporate- and bank-owned life insurance, terminal funding annuities, guaranteed investment contracts, funding agreements, stable value wrap products and group benefits. The Company distributes its products through a broad multi-channel distribution network, which includes independent marketing organizations, independent insurance agents and financial advisors, banks, broker dealers, structured settlement brokers and benefit consultants and direct-to-consumer through AIG Direct Insurance Services, Inc. (AIG Direct). SunAmerica Asset Management LLC (SAAMCo), together with its wholly owned distributor, AIG Capital Services, Inc., and its wholly owned servicing agent, SunAmerica Fund Services, Inc., represent the Company's asset management operations. These companies earn fee income by managing, distributing and administering a diversified family of mutual funds, and variable subaccounts offered within the variable annuity and variable universal life products, and by distributing retail mutual funds and providing professional management of individual, corporate and pension plan portfolios. In February 2018, the Company and its U.S. life insurance company affiliates, Variable Annuity Life Insurance Company (VALIC) and The United States Life Insurance Company in the City of New York (USL), each executed their respective Modified Coinsurance (ModCo) Agreements (The Agreements) with Fortitude Reinsurance Company, Ltd (FRL), (formerly DSA Reinsurance Company Limited), a wholly owned AIG subsidiary and registered Class 4 and Class E reinsurer in Bermuda. The Agreements were effective as of January 1, 2017 in respect of certain closed blocks of business (including structured settlements and single premium immediate annuities). Please refer to Note 15 - Reinsurance for further details relating to this agreement. In May 2016, the Company sold AIG Advisor Group, its network of independent broker-dealers, to investment funds affiliated with Lightyear Capital LLC and PSP Investments. The operations of the Company are influenced by many factors, including general economic conditions, financial condition of AIG Parent, monetary and fiscal policies of the United States federal government and policies of state and other regulatory authorities. The level of sales of the Company's insurance and financial products is influenced by many factors, including general market rates of interest, the strength, weakness and volatility of equity markets and terms and conditions of competing products. The Company is exposed to the risks normally associated with a portfolio of fixed income securities, which include interest rate, option, liquidity and credit risks. The Company controls its exposure to these risks by, among other things, closely monitoring and managing the duration and cash flows of its assets and liabilities, monitoring and limiting prepayments and extension risk in its portfolio, maintaining a large percentage of the Company's portfolio in highly liquid securities, engaging in a disciplined process of underwriting, and reviewing and monitoring credit risk. The Company is also exposed to market risk, policyholder behavior risk and mortality/longevity risk. Market volatility and other equity market conditions may affect the Company's exposure to risks related to guaranteed death benefits and 9 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) guaranteed living benefits on variable annuity products, and may reduce fee income on variable product assets held in separate accounts. Such guaranteed benefits are sensitive to equity and interest rate market conditions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements of the Company are presented on the basis of accounting practices prescribed or permitted by the TDI. These accounting practices vary in certain respects from accounting principles generally accepted in the United States of America (U.S. GAAP), as described herein. The TDI recognizes only statutory accounting practices (SAP) prescribed or permitted by the State of Texas for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under the Texas Insurance Law. The National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual (NAIC SAP) has been adopted as a component of prescribed or permitted practices by the State of Texas. The state has adopted certain prescribed accounting practices that differ from those found in the NAIC SAP. In 1984, the Company increased the value of its home office real estate properties to reflect the then current market value in accordance with prescribed guidance. Effective December 31, 2015 and subsequent reporting periods through September 30, 2019, AGL received approval from the TDI to apply a permitted practice in its financial statements allowing AGL to use the criteria established in Actuarial Guideline 43, instead of the criteria established in Statement of Statutory Accounting Principles (SSAP) No. 86, "Accounting for Derivative Instruments and Hedging, Income Generation, and Replication (Synthetic Asset) Transactions" to determine if a hedge is effective for certain interest rate swaps that are used to hedge guaranteed minimum withdrawal benefits. Thus, specific interest rate swaps that AGL has determined are effective hedges were reported at amortized cost, pursuant to the accounting guidance set forth in SSAP 86. Effective December 31, 2017, AGL received approval from the TDI expanding the aforementioned permitted practice to also include swaptions in its 2017 Annual Statement and subsequent reporting periods through September 30, 2019 or any earlier date relative to changes in the SAP framework that addresses this issue. Upon adoption, the effect of this permitted practice was reported as a change in accounting principle, consistent with SSAP No. 3, "Accounting Changes and Corrections of Errors," as of January 1, 2015, while the effect of the expanded permitted practice to include swaptions was reported as a change in accounting principle as of January 1, 2017 and increased surplus by $132 million. The Insurance Commissioner of the State of Texas has the right to permit other specific practices that deviate from prescribed practices. 10 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents a reconciliation of the Company's net income and capital and surplus between NAIC SAP basis and the basis including practices prescribed or permitted by the State of Texas:
December 31, ---------------------- (in millions) SSAP# 2018 2017 2016 ------------- ----- ------ ------ ------ NET INCOME State basis................................................... $ 565 $ 612 $1,591 State permitted practices that increase (decrease) NAIC SAP: Effective interest rate hedges - NII....................... 86 47 6 (12) Effective interest rate hedges - RG(L)..................... 12 (6) (12) State prescribed practices that increase (decrease) NAIC SAP: Depreciation of home office property....................... 40R -- -- -- ------ ------ ------ Net income, NAIC SAP.......................................... $ 624 $ 612 $1,567 ====== ====== ====== SURPLUS State basis................................................... $6,351 $7,984 $9,001 State permitted practices that increase (decrease) NAIC SAP: Effective interest rate hedges............................. 86 (403) (430) (645) State prescribed practices that increase (decrease) NAIC SAP: Depreciation of home office property....................... 40R (24) (24) (24) ------ ------ ------ Statutory capital and surplus, NAIC SAP....................... $5,924 $7,530 $8,332 ====== ====== ======
In the event AGL had not employed any or all of these permitted and prescribed practices, AGL's risk-based capital (RBC) would not have triggered a regulatory event. Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates The preparation of financial statements in conformity with accounting practices prescribed or permitted by the TDI requires management to make estimates and assumptions that affect the reported amounts in the statutory financial statements and the accompanying notes. It also requires disclosure of contingent assets and liabilities at the date of the statutory financial statements and the reported amounts of revenue and expense during the period. The areas of significant judgments and estimates include the following: .. application of other-than-temporary impairments (OTTI); .. estimates with respect to income taxes, including recoverability of deferred tax assets (DTA); .. fair value measurements of certain financial assets; and .. policy reserves for life, annuity and accident and health insurance contracts, including guarantees. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, the Company's Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus, Statutory Statements of Operations and Statutory Statements of Cash Flows could be materially affected. On December 22, 2017, the United States enacted Public Law 115-97, known as the Tax Cuts and Jobs Act ("the Tax Act"). The Tax Act reduces the statutory rate of U.S. federal corporate income tax to 21 percent and enacts numerous other changes generally impacting the Company in tax years beginning January 1, 2018. As of December 31, 2018, the Company has fully completed its accounting for the tax effects of the Tax Act. Although the prescribed measurement period has ended, there are aspects of the Tax Act that remain unclear and additional guidance from the U.S. tax authority is pending. As further guidance is issued by the U.S. tax authority, any resulting changes in the Company's estimates will be treated in accordance with the relevant accounting guidance. The Company does not believe such revisions would have a material impact on statutory capital and surplus. 11 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Significant Accounting Policies Bonds not backed by other loans are carried at amortized cost except for those with a NAIC designation of "6" or "6*". Bonds with a NAIC 6 designation are carried at the lower of amortized cost or fair value, with unrealized losses charged directly to unassigned surplus. Bonds that have not been filed and have not received a designation in over one year from the NAIC's Investment Analysis Office (IAO) receive a "6*" designation and are carried at zero, with the unrealized loss charged directly to unassigned surplus. Bonds filed with the IAO which receive a "6*" designation may carry a value greater than zero. Securities are assigned a NAIC 5* designation if the Company certifies that (1) the documentation necessary to permit a full credit analysis does not exist, (2) the issuer or obligor is current on all contracted interest and principal payments and (3) the Company has an actual expectation of ultimate repayment of all contracted interest and principal. Securities with NAIC 5* designations are deemed to possess the credit characteristics of securities assigned a NAIC 5 designation. The discount or premium on bonds is amortized using the effective yield method. Loan-backed and structured securities (LBaSS) include residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), asset-backed securities (ABS), pass-thru securities, lease-backed securities, equipment trust certificates, loan-backed securities issued by special purpose corporations or trusts, and securities where there is not direct recourse to the issuer. LBaSS are carried on a basis consistent with that of bonds not backed by loans. Income recognition for LBaSS is determined using the effective yield method and estimated cash flows. Prepayment assumptions for single-class and multi-class mortgage-backed securities (MBS) and ABS were obtained from an outside vendor or internal estimates. The Company uses independent pricing services and broker quotes in determining the fair value of its LBaSS. The Company uses the retrospective adjustment method to account for the effect of unscheduled payments affecting high credit quality securities, while securities with less than high credit quality and securities for which the collection of all contractual cash flows is not probable are both accounted for using the prospective adjustment method. RBC charges for LBaSS are based on the final NAIC designations, which are determined with a multi-step approach. The initial designation is used to determine the carrying value of the security. The final NAIC designation is used for reporting and affects RBC. The final NAIC designation is determined in one of three ways. The final NAIC designation for most RMBS and CMBS is determined by financial modeling conducted by BlackRock. RMBS and CMBS that are not financially modeled, primarily due to a lack of publicly available information and most remaining LBaSS are subject to a modified designation based on an NAIC matrix and the Company's statement value for the security. For credit tenant loans, equipment trust certificates, any corporate-like securities rated by the NAIC's IAO, interest only securities, and those securities with an original NAIC designation of 5, 5*, 6 or 6*, the final NAIC designation is based on the IAO or Credit Rating Provider rating and is not subject to a modified designation or financial modeling. Short sale is the sale of a security which is not owned by the Company at the time of sale. Short sales are normally settled by the delivery of a security borrowed by or on behalf of seller. A short sale as defined in Statement of Statutory Accounting Principle (SSAP) No. 103 "Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" is reported as a contra-asset (negative asset) initially reported at fair value, with changes in fair value recognized as unrealized gains and losses. Preferred stocks with NAIC designations of "1" through "3" are carried at amortized cost. All other preferred stocks are stated at the lower of cost, amortized cost or fair value, with unrealized capital losses charged directly to unassigned surplus. Provisions made for impairment are recorded as realized capital losses when declines in fair value are determined to be other than temporary. Unaffiliated common stocks are carried at fair value, with unrealized capital gains and losses credited or charged directly to unassigned surplus. Provisions made for impairment are recorded as realized capital losses when declines in fair value are determined to be other than temporary. For Federal Home Loan Bank (FHLB) capital stock, which is only redeemable at par, the fair value shall be presumed to be par, unless considered other-than-temporarily impaired. The Company has no investments in insurance subsidiary, controlled, and affiliated (SCA) entities. Investments in non-insurance SCA entities are recorded based on the equity of the investee per audited financial statements prepared pursuant to U.S. GAAP, which is adjusted to a statutory basis of accounting, if applicable. All investments in non-insurance SCA entities for which either audited U.S. GAAP financial statements or audited foreign GAAP basis financial 12 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) statements that include a footnote reconciling net income and equity on a foreign GAAP basis to U.S. GAAP are not available, are non-admitted as assets. Undistributed equity in earnings of affiliates is included in unassigned surplus as a component of unrealized capital gains or losses. Dividends received from such affiliates are recorded as investment income when declared. Mortgage and mezzanine real estate loans are carried at unpaid principal balances less allowances for credit losses and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on performing loans is accrued as earned. Mortgage loans are considered impaired when collection of all amounts due under contractual terms is not probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan's effective interest rate, ii) the loan's observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance is established for incurred but not specifically identified impairments, based on statistical models primarily driven by past due status, debt service coverage, loan-to-value ratio, property occupancy, profile of the borrower and of the major property tenants, and economic trends in the market where the property is located. When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount of the loan is charged off against the allowance. Real estate consists of properties occupied by the Company, properties held for the production of income and properties held for sale. Properties occupied by the Company and held for the production of income are carried at depreciated cost, less encumbrances, unless events or circumstances indicate the carrying amount of the asset (amount prior to reduction for encumbrances) may not be recoverable. Properties held for sale are carried at the lower of its depreciated cost or fair value less estimated costs to sell the property and net of encumbrances. Real estate obtained through foreclosure, in satisfaction of a loan, is recorded at the time of foreclosure at the lower of fair value as determined by acceptable appraisal methodologies, or the carrying amount of the related loan. Land is reported at cost. Cash, cash equivalents and short-term investments include cash on hand and amounts due from banks and highly liquid debt instruments that have original maturities within one year of date of purchase and are carried at amortized cost. Short-term investments include interest-bearing money market funds, investment pools and other investments with original maturities within one year from the date of purchase. Contract loans are carried at unpaid balances, which include unpaid principal plus accrued interest, including 90 days or more past due. All loan amounts in excess of the contract cash surrender value are considered non-admitted assets. Derivative instruments used in hedging transactions that meet the criteria of a highly effective hedge are reported in a manner consistent with the hedged asset or liability (hedge accounting). Changes in statement value or cash flow of derivatives that qualify for hedge accounting are recorded consistent with the changes in the statement value or cash flow of the hedged asset or liability. Derivative instruments used in hedging transactions that do not meet or no longer meet the criteria of an effective hedge (ineffective hedges) are accounted for at fair value and the changes in fair value are recorded as unrealized gains or losses. Hedge accounting was not used for any derivative instruments in 2018, except as allowed under the permitted practice described above related to certain hedges beginning in 2015. Other invested assets principally consist of investments in limited partnerships and limited liability companies. Investments in these assets, except for joint ventures, partnerships and limited liability companies with a minor ownership interest, are reported using the equity method. Under SAP, such investments are generally reported based on audited U.S. GAAP equity of the investee, with subsequent adjustment to a statutory basis of accounting, if applicable. Joint ventures, partnerships and limited liability companies in which the Company has a minor ownership interest (i.e., less than 10 percent) or lacks control, are generally recorded based on the underlying audited U.S. GAAP equity of the investee, with some prescribed exceptions. SAP allows the use of (a) the U.S. GAAP equity as set forth in the footnote reconciliation of foreign GAAP equity and income to U.S. GAAP within audited foreign GAAP financial statements or (b) the International Financial Reporting Standards (IFRS) basis equity in audited IFRS financial statements as an 13 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) acceptable basis for the valuation of minor/non-controlled investments. The audited U.S. tax basis equity may also be used in certain circumstances. All other investments in entities for which audited U.S. GAAP financial statements, or another acceptable audited basis of accounting as described above were not available have been non-admitted as assets. Undistributed accumulated earnings of such entities are included in unassigned surplus as a component of unrealized capital gains or losses. Distributions received that are not in excess of the undistributed accumulated earnings are recognized as investment income. Impairments that are determined to be other than temporary are recognized as realized capital losses. Securities lending and repurchase agreements: The Company has a securities lending program, which was approved by its Board of Directors and lends securities from its investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under the program, securities are lent to financial institutions, and in return the Company receives cash as collateral equal to 102 percent of the fair value of the loaned securities. The cash collateral received is invested in short-term investments that may be sold or repledged or partially used for short-term liquidity purposes based on conservative cash flow forecasts. Securities lent by the Company under these transactions may be sold or repledged by the counterparties. The liability for cash collateral received is reported in payable for securities lending in the Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus. The Company monitors the fair value of securities loaned and obtains additional collateral as necessary. At the termination of the transactions, the Company and its counterparties are obligated to return the collateral provided and the securities lent, respectively. These transactions are treated as secured financing arrangements. In addition, the Company is a party to secured financing transactions involving securities sold under agreements to repurchase (repurchase agreements), in which the Company transfers securities in exchange for cash, with an agreement by the Company to repurchase the same or substantially similar securities on agreed upon dates specified in the agreements. Investment income due and accrued is non-admitted from investment income for bonds and other invested assets when collection of interest is overdue by more than 90 days, or is uncertain, and for mortgage loans when loans are foreclosed, or delinquent in payment for greater than 90 days, or when collection of interest is uncertain. Net realized capital gains and losses, which are determined by using the specific identification method, are reflected in income net of applicable federal income taxes and transfers to the interest maintenance reserve. The Company regularly evaluates its investments for other-than-temporary impairment (OTTI) in value. The determination that a security has incurred an OTTI in value and the amount of any loss recognition requires the judgment of the Company's management and a continual review of its investments. For bonds, other than LBaSS, an OTTI shall be considered to have occurred if it is probable that the Company will not be able to collect all amounts due under the contractual terms in effect at the acquisition date of the debt security. If it is determined an OTTI has occurred, the cost basis of bonds are written down to fair value and the amount of the write-down is recognized as a realized capital loss. For LBaSS, a non-interest related OTTI resulting from a decline in value due to fundamental credit problems of the issuer is recognized when the projected discounted cash flows for a particular security are less than its amortized cost. When a non-interest related OTTI occurs, the LBaSS is written down to the present value of future cash flows expected to be collected. An OTTI is also deemed to have occurred if the Company intends to sell the LBaSS or does not have the intent and ability to retain the LBaSS until recovery. If the decline is interest-related, the LBaSS is written down to fair value. In periods subsequent to the recognition of an OTTI loss, the Company generally accretes the difference between the new cost basis and the future cash flows expected to be collected, if applicable, as interest income over the remaining life of the security based on the amount and timing of estimated future cash flows. Non-admitted assets are excluded from admitted assets and the change in the aggregate amount of such assets is reflected as a separate component of unassigned surplus. Non-admitted assets include all assets specifically designated as non-admitted and assets not designated as admitted, such as a negative IMR, a certain portion of DTAs, 14 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) prepaid expenses, electronic data processing (EDP) equipment assets, agents' balances or other receivables over 90 days. Non-admitted assets were $2.9 billion and $2.6 billion at December 31, 2018 and 2017, respectively. Interest maintenance reserve (IMR) is calculated based on methods prescribed by the NAIC and was established to prevent large fluctuations in interest-related investment gains and losses resulting from sales (net of taxes) and interest-related OTTI (net of taxes). An OTTI occurs when the Company, at the reporting date, has the intent to sell an investment or does not have the intent and ability to hold the security before recovery of the cost of the investment. For LBaSS, if the Company recognizes an interest-related OTTI, the non-interest-related OTTI is recorded to the asset valuation reserve, and the interest-related portion to IMR. Such gains and losses are deferred into the IMR and amortized into income using the grouped method over the remaining contractual lives of the securities sold. Asset valuation reserve (AVR) is used to stabilize surplus from fluctuations in the market value of bonds, stocks, mortgage loans, real estate, limited partnerships and other investments. Changes in the AVR are recorded as direct increases or decreases in surplus. Separate account assets and liabilities generally represent funds for which the contract holder, rather than the Company, bears the investment risk. Separate account contract holders have no claim against the assets of the general account of the Company, except for certain guaranteed products. Separate account assets are generally reported at fair value. In addition, certain products with fixed guarantees and market-value-adjusted (MVA) fixed annuity contracts in which the assets are generally carried at amortized cost are required by certain states to be carried in a separate account. The operations of the separate accounts are excluded from the Statutory Statements of Operations and Statutory Statements of Cash Flows of the Company. The Company receives fees for assuming mortality and certain expense risks. Such fees are included in separate account fees in the Statutory Statements of Operations. Reserves for variable annuity contracts are provided in accordance with the Variable Annuity Commissioners' Annuity Reserve Valuation Method (VACARVM) under Actuarial Guideline 43 (AG 43). Reserves for variable universal life accounts are provided in accordance with the Commissioners' Reserve Valuation Method (CRVM). Policy reserves are established according to different methods. Life, annuity, and health reserves are developed by actuarial methods and are determined based on published tables using specified interest rates, mortality or morbidity assumptions, and valuation methods prescribed or permitted by statutes that will provide, in the aggregate, reserves that are greater than or equal to the minimum or guaranteed policy cash values or the amounts required by the TDI. The Company waives the deduction of deferred fractional premiums on the death of the life and annuity policy insured and returns any premium beyond the date of death. The Company reported additional reserves for surrender values in excess of the corresponding policy reserves. The Company performs annual cash flow testing in accordance with the Actuarial Opinion and Memorandum Regulation to ensure adequacy of the reserves. Additional reserves are established where the results of cash flow testing under various interest rate scenarios indicate the need for such reserves or where the net premiums exceed the gross premiums on any insurance in force. Total cash flow testing reserves were $90 million at December 31, 2018. A majority of the Company's variable annuity products are issued with a guaranteed minimum death benefit (GMDB) which provides that, upon the death of a contractholder, the contractholder's beneficiary will receive the greater of (1) the contractholder's account value, or (2) a GMDB that varies by product. Depending on the product, the GMDB may equal the principal invested, adjusted for withdrawals; or the greatest contract value, adjusted for withdrawals, at the specified contract anniversaries; or the principal invested, adjusted for withdrawals, accumulated at the specified rate per annum. These benefits have issue age and other restrictions to reduce mortality risk exposure. The Company bears the risk that death claims following a decline in the financial markets may exceed contract holder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. Death benefits on GMDB policies generally reduce on a proportional basis or on a dollar-for-dollar basis when a partial withdrawal occurs. Reserves for GMDB benefits are included in the VACARVM reserve. AG 43 requires the Company to perform a stochastic valuation analysis of the total reserves held for all variable annuity contracts with GMDB. These reserves are 15 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) derived by using the 70 percent Conditional Tail Expectation of the modeled reserves and are based on prudent estimate assumptions. In addition, a deterministic valuation is also performed using assumptions prescribed in AG 43. The greater of these two reserve balances is the AG 43 reserve. However, the Company is currently holding reserves at the C3 Phase II Total Asset Requirement level, which is higher than the AG 43 amount. Life policies underwritten as substandard are charged extra premiums. Reserves are computed for a substandard policy by adding the reserve for an otherwise identical non-substandard policy plus a factor times the extra premium charge for the year. The factor varies by duration, type of plan, and underwriting. In addition, an extra mortality reserve is reported for ordinary life insurance policies classified as group conversions. Substandard structured settlement annuity reserves are determined by making a constant addition to the mortality rate of the applicable valuation mortality table so that the life expectancy on the adjusted table is equal to the life expectancy determined by the Company's underwriters at issue. The Company had $66.3 billion of insurance in-force and $1.5 billion of reserves as of December 31, 2018, and $56.8 billion of insurance in-force and $1.3 billion of reserves as of December 31, 2017, for which the gross premiums are less than the net premiums according to the standard of valuation set by the TDI. Tabular interest, tabular less actual reserves released, and tabular cost have been determined by formula, except for universal life insurance and deferred annuity reserves, which include fund accumulations for which tabular interest has been determined from basic data. For the determination of tabular interest on funds not involving life contingencies, the actual credited interest is used. Liabilities for deposit-type contracts, which include supplementary contracts without life contingencies and annuities certain, are based on the discounting of future payments at an annual statutory effective rate. Tabular interest on other funds not involving life contingencies is based on the interest rate at which the liability accrues. Policy and contract claims represent the ultimate net cost of all reported and unreported claims incurred during the year. Reserves for unpaid claims are estimated using individual case-basis valuations and statistical analyses. Those estimates are subject to the effects of trends in claim severity and frequency. The estimates are continually reviewed and adjusted as necessary, as experience develops or new information becomes known; such adjustments are included in current operations. Reserves for future policy benefits to be paid on life and accident and health policies, incurred in the statement period, but not yet reported, were established using historical data from claim lag experience. The data is aggregated from product specific studies performed on the Company's business. Premiums and annuity considerations and related expenses are recognized over different periods. Life premiums are recognized as income over the premium paying periods of the related policies. Annuity considerations are recognized as revenue when received. Premiums for deposit-type products are credited directly to the respective reserves and are not recorded in the Statutory Statement of Operations. Health premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies. Acquisition costs such as commissions and other expenses related to the production of new business are charged to the Statutory Statements of Operations as incurred. Reinsurance premiums and benefits paid or provided are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Annuity and deposit-type contract surrender benefits are reported on a cash basis, and include annuity benefits, payments under supplementary contracts with life contingencies, surrenders and withdrawals. Withdrawals from deposit-type contracts directly reduce the liability for deposit-type contracts and are not reported in the Statutory Statements of Operations. General insurance expenses include allocated expenses pursuant to a cost allocation agreement. The Company purchases administrative, accounting, marketing and data processing services from AIG Parent or its subsidiaries and is charged based on estimated levels of usage, transactions or time incurred in providing the respective services. The allocation of costs for investment management services purchased from AIG Parent or its subsidiaries is based on the level of assets under management. 16 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Federal income tax expense (benefit) is recognized and computed on a separate company basis pursuant to a tax sharing agreement with AIG Parent, because the Company is included in the consolidated federal income tax return of its ultimate parent, AIG Parent. To the extent that benefits for net operating losses, foreign tax credits or net capital losses are utilized on a consolidated basis, the Company would recognize tax benefits based upon the amount of those deductions and credits utilized in the consolidated federal income tax return. The federal income tax expense or benefit reflected in the Statutory Statements of Operations represents income taxes provided on income that is currently taxable, but excludes tax on the net realized capital gains or losses. Income taxes on capital gains or losses reflect differences in the recognition of capital gains or losses on a statutory accounting basis versus a tax accounting basis. The most significant of such differences involve impairments of investments, which are recorded as realized losses in the Statutory Statements of Operations but are not recognized for tax purposes, and the deferral of net capital gains and losses into the IMR for statutory income but not for taxable income. Capital gains and losses on certain related-party transactions are recognized for statutory financial reporting purposes but are deferred for income tax reporting purposes until the security is sold to an outside party. A deferred tax asset (DTA) or deferred tax liability (DTL) is included in the Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus, which reflects the expected future tax consequences of temporary differences between the statement values of assets and liabilities for statutory financial reporting purposes and the amounts used for income tax reporting purposes. The change in the net DTA or DTL is reflected in a separate component of unassigned surplus. Net DTA are limited in their admissibility. Accounting Changes There were no new accounting standards that were effective during the periods covered by this statement that had a material impact on the operations of the Company. Correction of Errors SAP requires that corrections of errors related to prior periods be reported as adjustments to unassigned surplus to the extent that they are not material to prior periods. In 2018, six out-of-period errors were identified and corrected, which increased unassigned surplus by $38 million. The most significant of these were in universal life business reflecting a reduction in reserves and adjustments to reinsurance premiums, partially offset by an increase in annuity reserves. In 2017, certain prior year errors were identified and corrected, which increased reserves and decreased unassigned surplus by $9 million. The most significant of these was an increase in universal life reserves and a decrease in deferred annuity reserves from the correction of the cash values in the policy administration system. In 2016, certain prior year errors were identified and corrected, which decreased unassigned surplus by $41 million. Differences in Statutory Accounting and U.S. GAAP Accounting The accompanying statutory financial statements have been prepared in accordance with accounting practices prescribed or permitted by the TDI. These accounting practices vary in certain respects from U.S. GAAP. The primary differences between NAIC SAP and U.S. GAAP are as follows. The objectives of U.S. GAAP differ from the objectives of SAP. U.S. GAAP is designed to measure the entity as a going concern and to produce general purpose financial statements to meet the varying needs of the different users of financial statements. SAP is designed to address the accounting requirements of regulators, who are the primary users of statutory-basis financial statements and whose primary objective is to measure solvency. As a result, U.S. GAAP stresses measurement of earnings and financial condition of a business from period to period, while SAP stresses measurement of the ability of the insurer to pay claims in the future. 17 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Investments. Under SAP, investments in bonds and preferred stocks are generally reported at amortized cost. However, if bonds are designated category "6" and preferred stocks are designated categories "4 - 6" by the NAIC, these investments are reported at the lesser of amortized cost or fair value with a credit or charge to unrealized investment gains or losses. For U.S. GAAP, such fixed-maturity investments are designated at purchase as held-to-maturity, trading, or available-for-sale. Held-to-maturity fixed-maturity investments are reported at amortized cost, and the remaining fixed-maturity investments are reported at fair value, with unrealized capital gains and losses reported in operations for those designated as trading and as a component of other comprehensive income for those designated as available-for-sale. Under SAP, all single- and multi-class MBS or other ABS (e.g., Collateralized Mortgage Obligations (CMO) are adjusted for the effects of changes in prepayment assumptions on the related accretion of discount or amortization of premium with respect to such securities using either the retrospective or prospective method. For LBaSS subsequent to July 1, 2009, if it is determined that a decline in fair value is other than temporary the cost basis of the security is written down to the discounted estimated future cash flows. Bonds, other than LBaSS, that are other-than-temporarily impaired are written down to fair value. For U.S. GAAP purposes, all securities, purchased or retained, that represent beneficial interests in securitized assets (e.g., CMO, MBS and ABS securities), other than high credit quality securities, would be adjusted using the prospective method when there is a change in estimated future cash flows. If high-credit quality securities must be adjusted, the retrospective method would be used. For all bonds, if it is determined that a decline in fair value is other-than-temporary, the cost basis of the security would be written down to the discounted estimated future cash flows, while the non-credit portion of the impairment would be recorded as an unrealized loss in other comprehensive income. Under SAP, when it is probable that the insurer will be unable to collect all amounts due according to the contractual terms of the mortgage agreement, valuation allowances are established for temporarily-impaired mortgage loans based on the difference between the unpaid loan balance and the estimated fair value of the underlying real estate, less estimated costs to obtain and sell. The initial valuation allowance and subsequent changes in the allowance for mortgage loans are charged or credited directly to unassigned surplus rather than as a component of earnings as would be required under U.S. GAAP. If the impairment is other-than-temporary, a direct write down is recognized as a realized loss, and a new cost basis is established. Under U.S. GAAP, valuation allowances would be established when the insurer determines it is probable that it will be unable to collect principal and interest due according to the contractual terms of the loan agreement. Such U.S. GAAP allowances would be based on the difference between the unpaid loan balance and the present value of expected future cash flows discounted at the loan's original effective interest rate or, if foreclosure is probable, on the estimated fair value of the underlying real estate. Under SAP, joint ventures, partnerships and limited liability companies in which the insurer has a minor ownership interest (i.e., less than 10 percent) or lacks control are generally recorded based on the underlying audited U.S. GAAP basis equity of the investee. Under U.S. GAAP, joint ventures, partnerships and limited liability companies in which the insurer has a significant ownership interest or is deemed to have control are accounted for under the equity method, where that is not the case, such investments are carried at fair value with changes in fair value recognized in earnings in 2018 for equity securities previously designated as available-for-sale and through net income for equity securities measured at fair value at the Company's election. Prior to 2018, equity securities designated as available-for-sale were carried at fair value with changes in fair value recorded through other comprehensive income. Real Estate. Under SAP, investments in real estate are reported net of related obligations; under U.S. GAAP, investments in real estate are reported on a gross basis. Under SAP, real estate owned and occupied by the insurer is included in investments; under U.S. GAAP, real estate owned and occupied by the insurer is reported as an operating asset, and operating income and expenses include rent for the insurer's occupancy of those properties. Derivatives. Under SAP, derivative instruments used in hedging transactions that do not meet or no longer meet the criteria of an effective hedge are accounted for at fair value with the changes in fair value recorded as unrealized capital gains or losses. Under U.S. GAAP, such derivative instruments are accounted for at fair value with the changes in fair value recorded as realized capital gains or losses. Under U.S. GAAP, fair value measurement for free standing derivatives incorporate either counterparty's credit risk for derivative assets or the insurer's credit risk for derivative liabilities by determining the explicit cost to protect against credit exposure. This credit exposure evaluation takes into consideration observable credit default swap rates. Under SAP, non-performance risk (own credit-risk) is not reflected in the fair value calculations for derivative liabilities. Under U.S. GAAP, index life insurance features in certain variable universal life contracts and certain guaranteed features of variable annuities are bifurcated and accounted for 18 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) separately as embedded policy derivatives. Under SAP, embedded derivatives are not bifurcated or accounted for separately from the host contract. Interest Maintenance Reserve. Under SAP, the insurer is required to maintain an IMR. IMR is calculated based on methods prescribed by the NAIC and was established to prevent large fluctuations in interest-related capital gains and losses realized through sales or OTTI. IMR applies to all types of fixed maturity investments, including bonds, preferred stocks, MBS, ABS and mortgage loans. After-tax capital gains or losses realized upon the sale or impairment of such investments resulting from changes in the overall level of interest rates are excluded from current period net income and transferred to the IMR. The transferred after-tax net realized capital gains or losses are then amortized into income over the remaining period to maturity of the divested asset. Realized capital gains and losses are reported net of tax and transfers to the IMR, after net gain from operations. Any negative IMR balance is treated as non-admitted asset. This reserve is not required under U.S. GAAP and pre-tax realized capital gains and losses are reported as component of total revenues, with related taxes included in taxes from operations. Asset Valuation Reserve. Under SAP, the insurer is required to maintain an AVR, which is computed in accordance with a prescribed formula and represents a provision for possible fluctuations in the value of bonds, equity securities, mortgage loans, real estate, and other invested assets. The level of AVR is based on both the type of investment and its credit rating. Under SAP, AVR is included in total adjusted capital for RBC analysis purposes. Changes to AVR are charged or credited directly to unassigned surplus. This reserve is not required under U.S. GAAP. Subsidiaries. Under SAP, investments in insurance subsidiaries are recorded based upon the underlying audited statutory equity of a subsidiary with all undistributed earnings or losses shown as an unrealized capital gain or loss in unassigned surplus. Dividends received by the parent company from its subsidiaries are recorded through net investment income. Under U.S. GAAP, subsidiaries' financial statements are combined with the parent company's financial statements through consolidation. All intercompany balances and transactions are eliminated under U.S. GAAP. Dividends received by the parent company from its subsidiaries reduce the parent company's investment in the subsidiaries. Policy Acquisition Costs and Sales Inducements. Under SAP, policy acquisition costs are expensed when incurred. Under U.S. GAAP, acquisition costs that are incremental and directly related to the successful acquisition of new and renewal of existing insurance and investment-type contracts, are deferred and amortized, generally in proportion to the present value of expected future gross profit margins. For all other insurance contracts, to the extent recoverable from future policy revenues, deferred policy acquisition costs (DAC) are amortized, with interest, over the premium-paying period of the related contracts, using assumptions that are consistent with those used in computing policy benefit reserves. Under SAP, sales inducements are expensed when incurred. Under U.S. GAAP, certain sales inducements on interest-sensitive life insurance contracts and deferred annuities are deferred and amortized over the life of the contract using the same methodology and assumptions used to amortize DAC. Deferred Premiums. Under SAP, when deferred premiums exist, statutory deferred premiums are held as a statutory asset, while under U.S. GAAP, deferred premiums are held as a contra-liability in the future policy benefits liability. Non-admitted Assets. Certain assets designated as "non-admitted," principally any negative IMR, agents' balances or unsecured loans or advances to agents, certain DTAs, furniture, equipment and computer software, receivables over 90 days and prepaid expenses, as well as other assets not specifically identified as admitted assets within the NAIC SAP, are excluded from the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus and are charged directly to unassigned surplus. Under U.S. GAAP, such assets are included in the balance sheet. Universal Life and Annuity Policies. Under SAP, revenues for universal life and annuity policies containing mortality or morbidity risk considerations consist of the entire premium received, and benefits incurred consist of the total of death benefits paid and the change in policy reserves. Payments received on contracts that do not incorporate any mortality or morbidity risk considerations (deposit-type contracts) are credited directly to an appropriate liability for deposit-type contract account without recognizing premium income. Interest credited to deposit-type contracts is recorded as an expense in the Statutory Statements of Operations as incurred. Payments that represent a return of policyholder balances are recorded as a direct reduction of the liability for deposit-type contracts, rather than a benefit expense. Under U.S. GAAP, premiums received in excess of policy charges are not recognized as premium revenue, and benefits represent the excess of benefits paid over the policy account value and interest credited to the account values. 19 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Benefit Reserves. Under SAP, loading is the difference between the gross and valuation net premium. Valuation net premium is calculated using valuation assumptions which are different for statutory and U.S. GAAP. Statutory valuation assumptions are set by the insurer within limits as defined by statutory law. U.S. GAAP valuation assumptions are set by the insurer based on management's estimates and judgment. Policyholder funds not involving life contingencies use different valuation assumptions for SAP and U.S. GAAP. Under SAP, prescribed rates of interest related to payout annuities are used in the discounting of expected benefit payments, while under U.S. GAAP, the insurer's best estimates of interest rates are used. Under SAP, the Commissioners' Reserve Valuation Method is used for the majority of individual insurance reserves. Under U.S. GAAP, individual insurance policyholder liabilities for traditional forms of insurance are generally established using the net level premium method. For interest-sensitive policies, a liability for policyholder account balances is established under U.S. GAAP based on the contract value that has accrued to the benefit of the policyholder. Policy assumptions used in the estimation of policyholder liabilities are generally prescribed under SAP. Under U.S. GAAP, policy assumptions are based upon best estimates as of the date the policy was issued, with provisions for the risk of adverse deviation. Under SAP, the CARVM is used for the majority of individual deferred annuity reserves, while under U.S. GAAP, individual deferred annuity policyholder liabilities are generally equal to the contract value that has accrued to the benefit of the policyholder, together with liabilities for certain contractual guarantees, if applicable. Under SAP, reserves for fixed rate deposit-type contracts are based upon their accumulated values, discounted at an annual statutory effective rate, while under U.S. GAAP, reserves for deposit-type contracts are recorded at their accumulated values. Reinsurance. Under SAP, policy and contract liabilities ceded to reinsurers are reported as reductions of the related reserves rather than as assets as required under U.S. GAAP. Under SAP, a liability for reinsurance balances has been provided for unsecured policy reserves, unearned premiums, and unpaid losses ceded to reinsurers not licensed to assume such business. Changes to these amounts are credited or charged directly to unassigned surplus. Under U.S. GAAP, an allowance for amounts deemed uncollectible would be established through a charge to earnings. Under SAP, the criteria used to demonstrate risk transfer varies from U.S. GAAP, which may result in transactions that are accounted for as reinsurance for SAP and deposit accounting for U.S. GAAP. Under SAP, the reserve credit permitted for unauthorized reinsurers is less than or equal to the amount of letter of credit or funds held in trust by the reinsurer. Under U.S. GAAP, assumed and ceded reinsurance is reflected on a gross basis in the balance sheet, and certain commissions allowed by reinsurers on ceded business are deferred and amortized on a basis consistent with DAC. Policyholder Dividend Liabilities. Under SAP, policyholder dividends are recognized when declared. Under U.S. GAAP, policyholder dividends are recognized over the term of the related policies. Separate Accounts. Under SAP, separate account surplus created through the use of the CRVM, the VACARVM or other reserving methods is reported by the general account as an unsettled transfer from the separate account. The net change on such transfers is included as a part of the net gain from operations in the general account. This is not required under U.S. GAAP. Separate accounts include certain non-unitized assets which primarily represent MVA fixed options of variable annuity contracts issued in various states. Under SAP, these contracts are accounted for in the separate account financial statements, while under U.S. GAAP, they are accounted for in the general account. Deferred Income Taxes. Under SAP, statutory DTAs that are more likely than not to be realized are limited to: 1) the amount of federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse by the end of the subsequent calendar year, plus 2) the lesser of the remaining gross DTA expected to be realized within a maximum three years of the reporting date or a maximum 15 percent of the capital and surplus excluding any net DTA, EDP equipment and operating software and any net positive goodwill, plus 3) the amount of the remaining gross DTA that can be offset against existing gross DTLs. The remaining DTAs are non-admitted. Deferred taxes do not include amounts for state taxes. Under U.S. GAAP, state taxes are included in the computation of deferred taxes, all DTAs are recorded and a valuation allowance is established if it is more likely than not that some portion of the DTA will not be realized. Under SAP, income tax expense is based upon taxes currently 20 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) payable. Changes in deferred taxes are reported in surplus and subject to admissibility limits. Under U.S. GAAP, changes in deferred taxes are recorded in income tax expense. Offsetting of Assets and Liabilities. Under SAP, offsetting of assets and liabilities is not permitted when there are master netting agreements unless four requirements for valid right of offset are met. The requirements include 1) each of the two parties owes the other determinable amounts, 2) the reporting party has the right to set off the amount owed with the amount owed by the other party, 3) the reporting party intends to set off, and 4) the right of setoff is enforceable. The prohibition against offsetting extends to derivatives and collateral posted against derivative positions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. Under U.S. GAAP, these amounts under master netting arrangements may be offset and presented on a net basis. 3. INVESTMENTS Bonds and Equity Securities The following table presents the statement value, gross unrealized gain, gross unrealized loss and the estimated fair value of bonds and equity securities by major security type:
Gross Gross Statement Unrealized Unrealized (in millions) Value Gains Losses Fair Value ------------- --------- ---------- ---------- ---------- December 31, 2018 Bonds: U.S. government obligations................................... $ 1,754 $ 45 $ (42) $ 1,757 All other governments......................................... 3,046 77 (144) 2,979 States, territories and possessions........................... 309 22 (1) 330 Political subdivisions of states, territories and possessions. 376 36 (4) 408 Special revenue............................................... 8,642 357 (135) 8,864 Industrial and miscellaneous.................................. 79,780 3,574 (1,954) 81,400 Hybrid securities............................................. 785 132 (19) 898 Parent, subsidiaries and affiliates........................... -- -- -- -- ------- ------ ------- -------- Total bonds...................................................... 94,692 4,243 (2,299) 96,636 ------- ------ ------- -------- Preferred stock............................................... 303 12 (1) 314 Common stock*................................................. 312 -- -- 312 ------- ------ ------- -------- Total equity securities.......................................... 615 12 (1) 626 ------- ------ ------- -------- Total............................................................ $95,307 $4,255 $(2,300) $ 97,262 ======= ====== ======= ======== December 31, 2017................................................ Bonds: U.S. government obligations................................... $ 1,215 $ 59 $ (9) $ 1,265 All other government.......................................... 2,878 210 (31) 3,057 States, territories and possessions........................... 396 46 -- 442 Political subdivisions of states, territories and possessions. 398 63 (1) 460 Special revenue............................................... 8,360 567 (56) 8,871 Industrial and miscellaneous.................................. 76,098 6,461 (418) 82,141 Hybrid securities............................................. 578 207 (3) 782 Parent, subsidiaries and affiliates........................... 4,415 437 -- 4,852 ------- ------ ------- -------- Total bonds...................................................... 94,338 8,050 (518) 101,870 ------- ------ ------- -------- Preferred stock............................................... 211 18 -- 229 Common stock*................................................. 93 -- -- 93 ------- ------ ------- -------- Total equity securities.......................................... 304 18 -- 322 ------- ------ ------- -------- Total............................................................ $94,642 $8,068 $ (518) $102,192 ======= ====== ======= ========
* Common stock includes $109 million and $6 million of investments in affiliates at December 31, 2018 and 2017, respectively. 21 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Bonds and Equity Securities in Loss Positions The following table summarizes the fair value and gross unrealized losses (where fair value is less than amortized cost) on bonds and equity securities, including amounts on NAIC 6 and 6* bonds, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:
Less than 12 Months 12 Months or More Total ----------------- ----------------- ----------------- Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized (in millions) Value Losses Value Losses Value Losses ------------- ------- ---------- ------- ---------- ------- ---------- December 31, 2018 Bonds: U.S. government obligations........................ $ 317 $ (11) $ 751 $ (31) $ 1,068 $ (42) All other government............................... 1,295 (85) 610 (58) 1,905 (143) U.S. States, territories and possessions........... 67 (1) -- -- 67 (1) Political subdivisions of states, territories and possessions...................................... 85 (1) 34 (3) 119 (4) Special revenue.................................... 1,698 (46) 2,313 (89) 4,011 (135) Industrial and miscellaneous....................... 26,952 (1,193) 9,726 (778) 36,678 (1,971) Hybrid securities.................................. 174 (11) 58 (8) 232 (19) Parent, subsidiaries and affiliates................ -- -- -- -- -- -- ------- ------- ------- ----- ------- ------- Total bonds........................................... 30,588 (1,348) 13,492 (967) 44,080 (2,315) ======= ======= ======= ===== ======= ======= Preferred stock.................................... 95 (1) 5 -- 100 (1) Common stock....................................... 61 (14) -- -- 61 (14) ------- ------- ------- ----- ------- ------- Total equity securities............................... 156 (15) 5 -- 161 (15) ------- ------- ------- ----- ------- ------- Total................................................. $30,744 $(1,363) $13,497 $(967) $44,241 $(2,330) ======= ======= ======= ===== ======= ======= December 31, 2017 Bonds: U.S. government obligations........................ $ 336 $ (4) $ 76 $ (5) $ 412 $ (9) All other government............................... 473 (25) 145 (6) 618 (31) U.S States, territories and possessions............ 25 -- 5 -- 30 -- Political subdivisions of states, territories and possessions...................................... -- -- -- -- -- -- Special revenue.................................... 1,609 (23) 758 (33) 2,367 (56) Industrial and miscellaneous....................... 7,272 (235) 3,713 (191) 10,985 (426) Hybrid securities.................................. 54 (3) 8 -- 62 (3) Parent, subsidiaries and affiliates................ 136 -- -- -- 136 -- ------- ------- ------- ----- ------- ------- Total bonds........................................... 9,905 (290) 4,705 (235) 14,610 (525) ======= ======= ======= ===== ======= ======= Preferred stock.................................... 5 -- 5 -- 10 -- Common stock....................................... 1 -- -- -- 1 -- ------- ------- ------- ----- ------- ------- Total equity securities............................... 6 -- 5 -- 11 -- ------- ------- ------- ----- ------- ------- Total................................................. $ 9,911 $ (290) $ 4,710 $(235) $14,621 $ (525) ======= ======= ======= ===== ======= =======
As of December 31, 2018 and 2017, the number of bonds and equity securities in an unrealized loss position was 3,983 and 1,814, respectively. Bonds comprised 3,916 of the total, of which 1,397 were in a continuous loss position greater than 12 months at December 31, 2018. Bonds comprised 1,778 of the total, of which 526 were in a continuous loss position greater than 12 months at December 31, 2017. The Company did not recognize the unrealized losses in earnings on these fixed maturity securities at December 31, 2018 and 2017, respectively, because the Company neither intends to sell the securities nor does the Company believe that it is more likely than not that the Company will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, the Company performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data. 22 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Contractual Maturities of Bonds The following table presents the statement value and fair value of bonds by contractual maturity:
Statement Fair (in millions) Value Value ------------- --------- ------- December 31, 2018 Due in one year or less................ $ 1,217 $ 1,226 Due after one year through five years.. 10,609 10,687 Due after five years through ten years. 15,586 15,475 Due after ten years.................... 37,210 37,552 LBaSS.................................. 30,129 31,757 ------- ------- Total.................................. $94,751 $96,697 ======= =======
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. Bonds in or near default as to payment of principal or interest had a statement value of $154 million and $175 million at December 31, 2018 and 2017, respectively, which is the fair value. At December 31, 2018 and 2017, the Company had no income excluded from due and accrued for bonds. At December 31, 2018, the Company's bond portfolio included bonds totaling $6.0 billion not rated investment grade by the NAIC designations (categories 3-6). These bonds accounted for 3 percent of the Company's total assets and 5 percent of invested assets. These below investment grade securities, excluding structured securities, span across 16 industries. At December 31, 2017, the Company's bond portfolio included bonds totaling $5.5 billion not rated investment grade by the NAIC designations (categories 3-6). These bonds accounted for 3 percent of the Company's total assets and 5 percent of invested assets. These below investment grade securities, excluding structured securities, span across 15 industries. The following table presents the industries that constitute more than 10% of the below investment grade securities:
December 31, ---------- 2018 2017 ---- ---- Consumer cyclical.... 17.2% 14.9% Consumer Noncyclical. 16.9 14.2 Energy............... 12.0 16.8
LBaSS The Company determines fair value of LBaSS based on the amount at which a security could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The majority of the Company's ABS, RMBS, CMBS, and collateralized debt obligations (CDO) are priced by approved independent third-party valuation service providers and broker dealer quotations. Small portions of the LBaSS that are not traded in active markets are priced by market standard internal valuation methodologies, which include discounted cash flow methodologies and matrix pricing. The estimated fair values are based on available market information and management's judgments. The following table presents the statement value and fair value of LBaSS:
December 31, 2018 December 31, 2017 ----------------- ----------------- Statement Fair Statement Fair (in millions) Value Value Value Value ------------- --------- ------- --------- ------- Loan-backed and structured securities. $30,129 $31,757 $31,991 $34,474 ======= ======= ======= =======
Prepayment assumptions for single class, multi-class mortgage-backed and ABS were obtained from independent third-party valuation service providers or internal estimates. These assumptions are consistent with the current interest rate and economic environment. 23 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) At December 31, 2018 and 2017, the Company had exposure to a variety of LBaSS. These securities could have significant concentrations of credit risk by country, geographical region, property type, servicer or other characteristics. As part of the quarterly surveillance process, the Company takes into account many of these characteristics in making the OTTI assessment. At December 31, 2018 and 2017, the Company did not have any LBaSS with a recognized OTTI due to the intent to sell or an inability or lack of intent to retain the security for a period of time sufficient to recover the amortized cost basis. During 2018, 2017 and 2016, the Company recognized total OTTI of $47 million, $54 million and $118 million, respectively, on LBaSS that were still held by the Company. In addition, at December 31, 2018 and 2017, the Company held loan-backed impaired securities (fair value is less than cost or amortized cost) for which an OTTI had not been recognized in earnings as a realized loss. Such impairments include securities with a recognized OTTI for non-interest (credit) related declines that were recognized in earnings, but for which an associated interest-related decline has not been recognized in earnings as a realized capital loss. The following table summarizes the fair value and aggregate amount of unrealized losses on LBaSS and length of time that individual securities have been in a continuous unrealized loss position:
Less than 12 Months 12 Months or More Total ------------------ ---------------- ----------------- Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized (in millions) Value Losses Value Losses Value Losses ------------- ------ ---------- ------ ---------- ------- ---------- December 31, 2018 LBaSS.......... $6,672 $(143) $3,696 $(137) $10,368 $(280) December 31, 2017. LBaSS.......... $3,896 $ (59) $1,667 $ (81) $ 5,563 $(140) ====== ===== ====== ===== ======= =====
In its OTTI assessment, the Company considers all information relevant to the collectability of the security, including past history, current conditions and reasonable forecasts when developing an estimate of future cash flows. Relevant analyst reports and forecasts for the asset class also receive appropriate consideration. The Company also considers how credit enhancements affect the expected performance of the security. In addition, the Company generally considers its cash and working capital requirements and expected cash flows in relation to its business plans and how such forecasts affect the intent and ability to hold such securities to recovery of their amortized cost. The Company does not have any LBaSS for which it is not practicable to estimate fair values. The following table presents the rollforward of non-interest related OTTI for LBaSS:
December 31, ------------- (in millions) 2018 2017 ------------- ------ ------ Balance, beginning of year.............................................................................. $1,535 $1,481 Increases due to: Credit impairment on new securities subject to impairment losses..................................... 9 31 Additional credit impairment on previously impaired investments...................................... 38 30 Reduction due to: Credit impaired securities fully disposed for which there was no prior intent or requirement to sell. 180 7 ------ ------ Balance, end of year.................................................................................... $1,402 $1,535 ====== ======
See Note 23 for a list with each LBaSS at a CUSIP level where the present value of cash flows expected to be collected is less than the amortized cost basis during the current year and a list of the Company's structured notes holding at December 31, 2018. Mortgage Loans Mortgage loans had outstanding principal balances of $19.1 billion and $16.0 billion at December 31, 2018 and 2017, respectively. Contractual interest rates range from 1.90 percent to 10.10 percent. The mortgage loans at December 31, 2018 had maturity dates ranging from 2019 to 2055. 24 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The Company's mortgage loans are collateralized by a variety of commercial real estate property types located throughout the U.S. and Canada. The commercial mortgage loans are non-recourse to the borrower. The following tables present the geographic and property-type distribution of the Company's mortgage loan portfolio:
December 31, ------------ 2018 2017 ----- ----- Geographic distribution: Mid-Atlantic............. 26.3% 28.2% Foreign.................. 21.9 16.0 Pacific.................. 15.6 17.3 South Atlantic........... 12.6 12.9 West South Central....... 7.4 6.8 New England.............. 5.6 7.0 East North Central....... 5.1 5.1 Mountain................. 4.1 4.8 East South Central....... 0.8 0.8 West North Central....... 0.6 1.1 ----- ----- Total....................... 100.0% 100.0% ===== ===== Property type distribution: Multi-family............. 31.1% 24.0% Office................... 28.6 28.7 Retail................... 13.9 15.2 Industrial............... 8.1 6.9 Hotel/Motel.............. 7.6 9.1 Other.................... 10.7 16.1 ----- ----- Total....................... 100.0% 100.0% ===== =====
At December 31, 2018, there were 244 mortgage loans with outstanding balances of $20 million or more, which loans collectively, aggregated approximately 82 percent of this portfolio. The following table presents the minimum and maximum lending rates for new mortgage loans during 2018 and 2017:
Years Ended December 31, ------------------------------ 2018 2017 -------------- -------------- (in millions) Maximum Minimum Maximum Minimum ------------- ------- ------- ------- ------- Multi-family.. 5.75% 2.05% 7.37% 2.10% Retail........ 5.48 3.82 5.06 2.53 Office........ 5.10 3.02 9.17 1.90 Hotel......... 4.80 3.00 4.61 4.25 Industrial.... 4.53 2.11 4.97 2.15 Other......... 5.39 3.16 5.00 3.00
The Company did not reduce any interest rates during 2018 and 2017. The maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgage was 95.0 percent for both 2018 and 2017. At December 31, 2018, the Company held $181 million in impaired mortgages with $12 million of related allowances for credit losses and $169 million in impaired loans without a related allowance. At December 31, 2017, the Company held $217 million in impaired mortgages with $12 million of related allowances for credit losses and $205 million in impaired loans without a related allowance. The Company's average recorded investment in impaired loans was $201 million and $273 million, at December 31, 2018 and 2017, respectively. The Company recognized interest income of $5 million, $3 million and $12 million, in 2018, 2017 and 2016, respectively. 25 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents a rollforward of the changes in the allowance for losses on mortgage loans receivable:
December 31, --------------- (in millions) 2018 2017 2016 ------------- ---- ---- ---- Balance, beginning of year............................................ $129 $ 89 $72 Additions (reductions) charged to unrealized capital loss.......... 43 53 17 Direct write-downs charged against allowance....................... -- (13) -- ---- ---- --- Balance, end of year.................................................. $172 $129 $89 ==== ==== ===
During 2018, the Company did not derecognize any mortgage loans and did not recognize any real estate collateral as a result of foreclosure. The mortgage loan portfolio has been originated by the Company under strict underwriting standards. Commercial mortgage loans on properties such as offices, hotels and shopping centers generally represent a higher level of risk than do mortgage loans secured by multi-family residences. This greater risk is due to several factors, including the larger size of such loans and the more immediate effects of general economic conditions on these commercial property types. However, due to the Company's strict underwriting standards, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields. The following table presents the age analysis of mortgage loans:
December 31, --------------- (in millions) 2018 2017 ------------- ------- ------- Current................................. $18,922 $15,834 30 - 59 days past due................... 4 8 60 - 89 days past due................... 1 2 90 - 179 days past due.................. 1 1 ------- ------- Total................................... $18,928 $15,845 ======= =======
At December 31, 2018 and 2017, the Company had mortgage loans outstanding under participant or co-lender agreements of $15.8 billion and $13.2 billion, respectively. The Company had $169 million and $205 million in restructured loans at December 31, 2018 and 2017, respectively. Troubled Debt Restructuring The Company held no restructured debt for which impairment was recognized for both December 31, 2018 and 2017. At December 31, 2018, the Company had no outstanding commitments to debtors that hold loans with restructured terms. The Company has an outstanding commitment of $4 million to debtors that hold loans with restructured terms, at December 31, 2017. Real Estate The following table presents the components of the Company's investment in real estate:
December 31, ------------ (in millions) 2018 2017 ------------- ---- ---- Properties occupied by the Company.......................... $ 53 $ 42 Properties held for production of income.................... 110 181 Properties held for sale.................................... 34 -- ---- ---- Total....................................................... $197 $223 ==== ====
The Company recognized gains of $1 million, $13 million and $16 million on the sale of real estate property in 2018, 2017 and 2016, respectively. The Company recognized $11 million of impairment write-downs for its investment in real estate during 2018. The Company did not recognize any impairment write-downs for its investment in real estate during 2017. The Company recognized $2 million of impairment write-downs for its investment in real estate during 2016. 26 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Other Invested Assets The following table presents the components of the Company's other invested assets:
December 31, -------------- (in millions) 2018 2017 ------------- ------ ------ Investments in limited liability companies........ $1,474 $2,201 Investments in limited partnerships............... 1,877 1,759 Other unaffiliated investments.................... 1,026 693 Receivable for securities......................... 138 541 Initial margin for futures........................ 2 20 Non-admitted assets............................... (153) (181) ------ ------ Total............................................. $4,364 $5,033 ====== ======
The Company utilizes the look-through approach in valuing its investments in affiliated joint ventures or partnerships that have the characteristics of real estate investments. These affiliated real estate investments had an aggregate value of $912 million at December 31, 2018. The financial statements for the related holding companies are not audited and the Company has limited the value of its investment in these holding companies to the value contained in the audited financial statements of the lower tier entities owned by each of the respective intermediate holding company entities as adjusted by SAP, if applicable. All liabilities, commitments, contingencies, guarantees, or obligations of these holding company entities, which are required to be recorded as liabilities, commitments, contingencies, guarantees or obligations under applicable accounting guidance, are reflected in the Company's determination of the carrying value of the investment in each of the respective holding company entities, if applicable. The Company recorded impairment write-downs in joint ventures was $44 million, $89 million and $148 million during 2018, 2017 and 2016, respectively. Net Investment Income The following table presents the components of net investment income:
Years ended December 31, ---------------------- (in millions) 2018 2017 2016 ------------- ------ ------ ------ Bonds............................................. $4,897 $4,788 $5,026 Preferred stocks.................................. 13 11 15 Common stocks..................................... 5 3 2 Cash and short-term investments................... 29 22 4 Mortgage loans.................................... 798 675 508 Real estate*...................................... 50 53 60 Contract loans.................................... 82 87 90 Derivatives....................................... 210 (121) (106) Investment income from affiliates................. 165 372 426 Other invested assets............................. 239 250 325 ------ ------ ------ Gross investment income........................... 6,488 6,140 6,350 Investment expenses............................... (245) (259) (260) ------ ------ ------ Net investment income............................. $6,243 $5,881 $6,090 ====== ====== ======
* Includes amounts for the occupancy of Company-owned property of $11 million in both 2018 and 2017, and $16 million in 2016. 27 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Net Realized and Unrealized Capital Gains (Losses) The following table presents the components of Net realized capital gains (losses):
Years Ended December 31, --------------------- (in millions) 2018 2017 2016 ------------- ----- ------- ----- Bonds............................................. $ (81) $ 109 $(406) Preferred stocks.................................. -- 1 -- Common stocks..................................... -- -- 303 Cash and short-term investments................... (2) (13) (8) Mortgage loans.................................... (26) 6 (13) Real estate....................................... (10) 7 41 Derivatives....................................... (330) (1,412) 377 Other invested assets............................. 28 65 504 ----- ------- ----- Realized capital (losses) gains................... (421) (1,237) 798 Federal income tax benefit (expense).............. 88 433 (279) Net (gains) losses transferred to IMR............. (9) (124) 115 ----- ------- ----- Net realized capital (losses) gains............... $(342) $ (928) $ 634 ===== ======= =====
During 2018, 2017 and 2016, the Company recognized $192 million, $98 million and $237 million, respectively, of impairment write-downs in accordance with the impairment policy described in Note 2. The following table presents the proceeds from sales of bonds and equities and the related gross realized capital gains and gross realized capital losses:
Years Ended December 31, ----------------------- (in millions) 2018 2017 2016 ------------- ------ ------ ------- Proceeds.......................................... $8,165 $7,403 $11,470 ------ ------ ------- Gross realized capital gains...................... $ 191 $ 330 $ 337 Gross realized capital losses..................... (176) (87) (446) ------ ------ ------- Net realized capital gains (losses)............... $ 15 $ 243 $ (109) ====== ====== =======
The following table presents the net change in unrealized capital gains (losses) of investments (including foreign exchange capital gains (losses):
Years Ended December 31, ----------------------- (in millions) 2018 2017 2016 ------------- ----- ----- ----- Bonds................................................................. $(171) $ 253 $(107) Preferred and common stocks........................................... (12) (3) (53) Mortgage loans........................................................ (248) 179 (203) Derivatives........................................................... 88 (107) 207 Other invested assets................................................. (6) 32 (865) Other................................................................. 32 (71) -- Federal income tax benefit............................................ 93 24 364 ----- ----- ----- Net change in unrealized (losses) gains of investments................ $(224) $ 307 $(657) ===== ===== =====
28 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 5* Securities Measured at Aggregate Book Adjusted Carrying Value and Fair Value The following table presents 5* Securities measured at aggregate book adjusted carrying value (BACV) and aggregate fair value at December 31:
Number Aggregate of 5* Aggregate Fair Investment Securities BACV Value ---------- ---------- --------- --------- (in millions) ------------- 2018 Bonds - AC........................................ 23 $296 $294 LBass - AC........................................ 2 34 34 Preferred Stock - AC.............................. 4 5 8 Preferred Stock - FV.............................. -- -- -- -- ---- ---- Total............................................. 29 $336 $336 == ==== ==== 2017 Bonds - AC........................................ 16 $135 $135 LBass - AC........................................ -- -- -- Preferred Stock - AC.............................. -- -- -- Preferred Stock - FV.............................. -- -- -- -- ---- ---- Total............................................. 16 $135 $135 == ==== ==== AC - Amortized Cost FV - Fair Value
4. SECURITIES LENDING AND REPURCHASE AGREEMENTS Securities Lending As of December 31, 2018 and 2017, the Company had bonds loaned with a fair value of approximately $438 million and $2.4 billion, respectively, pursuant to the securities lending program. The following table presents the aggregate fair value of cash collateral received related to the securities lending program and the terms of the contractually obligated collateral positions:
December 31, ----------- (in millions) 2018 2017 ------------- ---- ------ 30 days or less................................... $148 $ 514 31 to 60 days..................................... 68 899 61 to 90 days..................................... 231 1,047 ---- ------ Subtotal.......................................... 447 2,460 Securities collateral received.................... -- -- ---- ------ Total collateral received......................... $447 $2,460 ==== ======
The following table presents the aggregate amortized cost and fair value of cash collateral reinvested related to the securities lending program by maturity date:
December 31, 2018 December 31, 2017 -------------------- -------------------- Amortized Amortized (in millions) Cost Fair Value Cost Fair Value ------------- --------- ---------- --------- ---------- Open positions.............. $352 $352 $2,418 $2,418 ---- ---- ------ ------ Subtotal.................... 352 352 2,418 2,418 Securities collateral received.................. -- -- -- -- ---- ---- ------ ------ Total collateral reinvested. $352 $352 $2,418 $2,418 ==== ==== ====== ======
29 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Repurchase Agreements At December 31, 2018 and 2017, bonds with a fair value of approximately $124 million and $1.2 billion, respectively, were subject to repurchase agreements to secure amounts borrowed by the Company. The following table presents the aggregate fair value of cash collateral received related to the repurchase agreement program and the terms of the contractually obligated collateral positions:
December 31, ----------- (in millions) 2018 2017 ------------- ---- ------ Open positions.................................... $119 $ -- 30 days or less................................... -- 354 31 to 60 days..................................... -- 439 61 to 90 days..................................... -- 381 Greater than 90 days.............................. -- -- ---- ------ Subtotal.......................................... 119 1,174 Securities collateral received.................... -- -- ---- ------ Total collateral received......................... $119 $1,174 ==== ======
The following table presents the original (flow) and residual maturity for bi-lateral repurchase agreement transactions for the year ended December 31, 2018:
FIRST QUARTER SECOND QUARTER ------------------------------- ------------------------------- Average Average Daily Ending Daily Ending (in millions) Minimum Maximum Balance Balance Minimum Maximum Balance Balance ------------- ------- ------- ------- ------- ------- ------- ------- ------- Open - No Maturity...................... $ 47 $262 $110 $148 $ 98 $ 225 $119 $ 24 Overnight............................... -- 366 32 -- -- 318 61 -- 2 Days to 1 Week........................ -- 357 107 -- -- 732 172 5 > 1 Week to 1 Month..................... -- 512 199 -- 176 1,044 624 65 > 1 Month to 3 Months................... -- 861 290 -- 34 1,615 636 31 > 3 Months to 1 Year.................... -- 128 13 -- -- -- -- -- > 1 Year................................ -- -- -- -- -- -- -- -- THIRD QUARTER FOURTH QUARTER ------------------------------- ------------------------------- Average Average Daily Ending Daily Ending (in millions) Minimum Maximum Balance Balance Minimum Maximum Balance Balance ------------- ------- ------- ------- ------- ------- ------- ------- ------- Open - No Maturity...................... $107 $158 $125 $137 $111 $ 140 $128 $119 Overnight............................... -- 93 16 93 1 121 11 -- 2 Days to 1 Week........................ -- -- -- -- 13 13 13 -- > 1 Week to 1 Month..................... -- -- -- -- -- -- -- -- > 1 Month to 3 Months................... -- -- -- -- -- -- -- -- > 3 Months to 1 Year.................... -- -- -- -- -- -- -- -- > 1 Year................................ -- -- -- -- -- -- -- --
30 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents the Company's liability to return collateral for the year ended December 31, 2018:
FIRST QUARTER SECOND QUARTER ------------------------------- ------------------------------- Average Average Daily Ending Daily Ending (in millions) Minimum Maximum Balance Balance Minimum Maximum Balance Balance ------------- ------- ------- ------- ------- ------- ------- ------- ------- Cash (Collateral - All).............. $ 47 $2,485 $751 $148 $308 $3,933 $1,612 $124 THIRD QUARTER FOURTH QUARTER ------------------------------- ------------------------------- Average Average Daily Ending Daily Ending Minimum Maximum Balance Balance Minimum Maximum Balance Balance ------- ------- ------- ------- ------- ------- ------- ------- Cash (Collateral - All).............. $107 $ 251 $140 $230 $124 $ 273 $ 151 $119
The Company requires a minimum of 95 percent of the fair value of securities sold under the repurchase agreements to be maintained as collateral. Cash collateral received is invested in corporate bonds and the offsetting collateral liability for repurchase agreements is included in other liabilities. The following table presents the aggregate amortized cost and fair value of cash collateral reinvested related to the repurchase agreement program by maturity date:
December 31, 2018 December 31, 2017 ----------------- ---------------- Amortized Fair Amortized Fair (in millions) Cost Value Cost Value ------------- --------- ----- --------- ------ Open positions.......................... $129 $124 $ -- $ -- Greater than three years................ -- -- 1,095 1,196 ---- ---- ------ ------ Subtotal................................ 129 124 1,095 1,196 Securities collateral received.......... -- -- -- -- ---- ---- ------ ------ Total collateral reinvested............. $129 $124 $1,095 $1,196 ==== ==== ====== ======
The following table presents the fair value of securities under bi-lateral repurchase agreement transactions for the year ended December 31, 2018:
FIRST QUARTER SECOND QUARTER ------------------------------- ------------------------------- Average Average Daily Ending Daily Ending (in millions) Minimum Maximum Balance Balance Minimum Maximum Balance Balance ------------- ------- ------- ------- ------- ------- ------- ------- ------- BACV.................................... $-- $-- $-- $128 $-- $-- $-- $109 Non-admitted - Subset of BACV........... -- -- -- -- -- -- -- -- Fair Value.............................. -- -- -- 134 -- -- -- 108 THIRD QUARTER FOURTH QUARTER ------------------------------- ------------------------------- Average Average Daily Ending Daily Ending (in millions) Minimum Maximum Balance Balance Minimum Maximum Balance Balance ------------- ------- ------- ------- ------- ------- ------- ------- ------- BACV.................................... $-- $-- $-- $242 $-- $-- $-- $129 Non-admitted - Subset of BACV........... -- -- -- -- -- -- -- -- Fair Value.............................. -- -- -- 233 -- -- -- 124
31 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents the fair value of securities under bi-lateral repurchase agreement transactions for the year ended December 31, 2018:
1 2 3 4 5 6 7 8 Non- (in millions) None NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Admitted ------------- ---- ------ ------ ------ ------ ------ ------ -------- Bonds - FV... $-- $27 $66 $16 $16 $-- $-- $-- === === === === === === === ===
5. RESTRICTED ASSETS The Company has restricted assets as detailed below. Assets under restriction are general account assets and are not part of the Separate Accounts. The following table presents the carrying value of the Company's restricted assets:
December 31, ------------- (in millions) 2018 2017 ------------- ------ ------ On deposit with states............ $ 48 $ 48 Securities lending................ 425 2,112 Collateral held on securities lending......................... 447 2,460 FHLB stock and collateral pledged. 3,851 1,042 Subject to repurchase agreements.. 129 1,095 Collateral for derivatives........ 580 1,559 Guaranteed interest contracts..... 44 117 Other restricted assets........... 78 -- ------ ------ Total............................. $5,602 $8,433 ====== ======
6. SUBPRIME MORTGAGE RISK EXPOSURE The following features are commonly recognized characteristics of subprime mortgage loans: .. An interest rate above prime to borrowers who do not qualify for prime rate loans; .. Borrowers with low credit ratings (FICO scores); .. Interest-only or negative amortizing loans; .. Unconventionally high initial loan-to-value ratios; .. Low initial payments based on a fixed introductory rate that expires after a short initial period, then adjusts to a variable index rate plus a margin for the remaining term of the loan; .. Borrowers with less than conventional documentation of their income and/or net assets; .. Very high or no limits on how much the payment amount or the interest rate may increase at reset periods, potentially causing a substantial increase in the monthly payment amount; and/or, .. Substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period. Non-agency RMBS can belong to one of several different categories depending on the characteristics of the borrower, the property and the loan used to finance the property. Categorization is a function of FICO score, the type of loan, loan-to-value ratio, and property type and loan documentation. Generally, subprime loans are made to borrowers with low FICO scores, low levels of equity and reduced income/asset documentation. Due to these characteristics, subprime borrowers pay a substantially higher interest rate than prime borrowers. In addition, they often utilize mortgage products that reduce their monthly payments in the near-term. These include adjustable-rate mortgages with low initial rates or interest-only loans. Borrowers in products like this often experience significant "payment shock" when the teaser payment resets upwards after the initial fixed period. The primary classification mechanism the Company uses for subprime loans is FICO score. Specifically, a pool with an average FICO at origination less than 650 is considered to be subprime. However, the Company may subjectively adjust this classification based on an assessment of the other parameters mentioned above. 32 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) To monitor subprime securities, the Company uses a model with vintage-specific assumptions for delinquency roll rates, loss severities and the timing of losses. As and when needed, these vintage-based assumptions are supplemented with deal-specific information including, but not limited to, geographic distribution, realized loss severities, trigger status and scenario analysis. The Company has no direct exposure through investments in subprime mortgage loans. The Company's exposure is through other investments, primarily in RMBS, as described above. The following table presents information regarding the Company's investments with subprime exposures:
Book Adjusted OTTI Statement Recognized (in millions) Actual Cost Value Fair Value to Date ------------- ----------- --------- ---------- ---------- December 31, 2018 In general account: RMBS................................. $1,210 $1,167 $1,390 $(15) CDOs................................. 911 923 957 (8) CMBS................................. 11 11 10 -- ------ ------ ------ ---- Total subprime exposure................. $2,132 $2,101 $2,357 $(23) ====== ====== ====== ==== December 31, 2017 In general account: RMBS................................. $1,152 $1,174 $1,419 $(22) CDOs................................. 1,013 1,017 1,055 (22) ------ ------ ------ ---- Total subprime exposure................. $2,165 $2,191 $2,474 $(44) ====== ====== ====== ====
The Company has no underwriting exposure to subprime mortgage risk through mortgage guaranty or financial guaranty insurance coverage. 7. DERIVATIVES The Company has taken positions in certain derivative financial instruments to mitigate or hedge the impact of changes in interest rates, foreign currencies, equity markets, swap spreads, volatility, correlations and yield curve risk on cash flows from investment income, policyholder liabilities and equity. Financial instruments used by the Company for such purposes include interest rate swaps, interest rate swaptions, cross-currency swaps, futures and futures options on equity indices, and futures and futures options on government securities. The Company does not engage in the use of derivative instruments for speculative purposes and is neither a dealer nor trader in derivative instruments. All derivative instruments are recognized in the financial statements. As discussed in Note 2, the Company received approval from the TDI to apply a permitted practice, whereby certain interest rate swaps and swaptions that are used to hedge guaranteed minimum withdrawal benefits are reported at amortized cost. The cost basis of these swaps is carried on the balance sheet and amortized into net investment income over the life of the swap. Periodic cash settlements are also recognized in net investment income. All other derivative financial instruments that do not qualify for hedge accounting are carried at fair value and the changes in fair value are recorded in surplus as unrealized gains or losses, net of deferred taxes. The statement value of the Company's exchange traded futures contracts reflects the one-day lag in the net cash settlement of these contracts. The Company recognized a net unrealized capital gain of $88 million in 2018, an unrealized capital loss of $107 million in 2017 and an unrealized gain of $207 million in 2016, related to derivatives that did not qualify for hedge accounting. Refer to Note 3 for disclosures related to net realized capital gains (losses). Swaps, Options, and Futures Interest rate or cross-currency swap agreements are agreements to exchange with a counterparty, at specified intervals, payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) or in 33 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) different currencies, based on an underlying principal balance, notional amount. Generally no cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is usually made by one counterparty at each contractual payment due date, and this net payment is included in the Statutory Statement of Operations. Options are contracts that grant the purchaser, for a premium payment, the right, but not the obligation, either to purchase or sell a financial instrument at a specified price within a specified period of time. The Company purchases call options on the S&P 500 Index to offset the risk of certain guarantees of specific equity-index annuity and universal life policy values. The Company also purchases put options on the S&P 500 Index to offset volatility risk arising from minimum guarantees embedded in variable annuities. The options are carried at fair value, with changes in fair value recognized in unrealized investment gains and losses. Financial futures are contracts between two parties that commit one party to purchase and the other to sell a particular commodity or financial instrument at a price determined on the final settlement day of the contract. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The Company uses futures contracts on Euro dollar deposits, U.S. Treasury Notes, U.S. Treasury Bonds, the S&P 500 Index, MidCap 400, Russell 2000, MSCI EAFE, foreign government debt securities, and foreign denominated equity indices to offset the risk of certain guarantees on annuity policy values. Interest Rate Risk Interest rate derivatives are used to manage interest rate risk associated with certain guarantees of variable annuities and equity indexed annuities and certain bonds. The Company's interest rate hedging derivative instruments include (1) interest rate swaps and swaptions; (2) listed futures on government securities; and (3) listed futures options on government securities. Currency Risk Foreign exchange contracts used by the Company include cross-currency swaps, which are used to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company holds. Equity Risk Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities. Credit Risk The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. For over-the-counter (OTC) derivatives, the Company's net credit exposure is determined based on master netting agreements, which take into consideration all derivative positions with the counterparty, as well as collateral posted by the counterparty at the balance sheet date. The Company is exposed to credit risk when the net position with a particular counterparty results in an asset that exceeds collateral pledged by that counterparty. For OTC contracts, the Company generally uses an International Swaps and Derivative Association Master Agreement (ISDA Master Agreement) and Credit Support Annexes with bilateral collateral provisions to reduce counterparty credit exposures. An ISDA Master Agreement is an agreement between two counterparties, which may cover multiple derivative transactions and such ISDA Master Agreement generally provides for the net settlement of all or a specified group of these derivative transactions, as well as transferred collateral, through a single payment, in a single currency, in the event of a default affecting any one derivative transaction or a termination event affecting all or a specified group of the transactions. The Company minimizes the risk that counterparties might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value and may require additional collateral to be posted upon the occurrence of certain events or circumstances. In the unlikely event of a failure to perform by any of the 34 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) counterparties to these derivative transactions, there would not be a material effect on the Company's admitted assets, liabilities or capital and surplus. The Company has also entered into exchange-traded options and futures contracts. Under exchange-traded futures contracts, the Company agrees to purchase a specified number of contracts with other parties and to post or receive variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The parties with whom the Company enters into exchange-traded futures are regulated futures commission merchants who are members of a trading exchange. The credit risk of exchange-traded futures is partially mitigated because variation margin is settled daily in cash. Exchange-traded option contracts are not subject to daily margin settlements and amounts due to the Company based upon favorable movements in the underlying securities or indices are owed upon exercise. The following table presents the notional amounts, statement values and fair values of the Company's derivative instruments:
December 31, 2018 December 31, 2017 ----------------------------- ----------------------------- Contract or Contract or Notional Statement Fair Notional Statement Fair (in millions) Amount Value Value Amount Value Value ------------- ----------- --------- ------- ----------- --------- ------- Assets: Interest rate contracts.............. $26,901 $ 1,360 $ 1,080 $24,647 $ 669 $ 349 Foreign exchange contracts........... 6,331 511 511 2,302 398 398 Equity contracts..................... 45,769 902 902 25,379 1,137 1,137 ------- ------- ------- ------- ------- ------- Derivative assets, gross................ 79,001 2,773 2,493 52,328 2,204 1,884 Counter party netting*............... -- (1,138) (1,399) -- (1,549) (1,549) ------- ------- ------- ------- ------- ------- Derivative assets, net.................. $79,001 $ 1,635 $ 1,094 $52,328 $ 655 $ 335 ======= ======= ======= ======= ======= ======= Liabilities: Interest rate contracts.............. $16,121 $ 426 $ 549 $20,310 $ 661 $ 771 Foreign exchange contracts........... 2,328 266 266 4,796 448 448 Equity contracts..................... 33,886 649 649 11,318 889 889 Other contracts...................... 58 6 6 59 5 5 ------- ------- ------- ------- ------- ------- Derivative liabilities, gross........... 52,393 1,347 1,470 36,483 2,003 2,113 Counter party netting*............... -- (1,138) (1,399) -- (1,549) (1,549) ------- ------- ------- ------- ------- ------- Derivative liabilities, net............. $52,393 $ 209 $ 71 $36,483 $ 454 $ 564 ======= ======= ======= ======= ======= =======
* Represents netting of derivative exposures covered by a qualifying master netting agreement. The Company has a right of offset of its derivatives asset and liability positions with various counterparties. The following table presents the effect of the right of offsets:
December 31, 2018 December 31, 2017 ------------------- ------------------- (in millions) Assets Liabilities Assets Liabilities ------------- ------- ----------- ------- ----------- Gross amount recognized.................................................... $ 2,773 $(1,347) $ 2,204 $(2,003) Amount offset.............................................................. (1,138) 1,138 (1,549) 1,549 ------- ------- ------- ------- Net amount presented in the Statement of Admitted Assets, Liabilities, and Capital and Surplus...................................................... $ 1,635 $ (209) $ 655 $ (454) ======= ======= ======= =======
35 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 8. INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK The following table presents the Company's derivative financial instruments with concentrations of credit risk:
December 31, 2018 December 31, 2017 ----------------- ----------------- Contract Contract or Final or Final Notional Maturity Notional Maturity (in millions) Amount Date Amount Date ------------- -------- -------- -------- -------- Derivative assets: Interest rate contracts.... $26,901 2055 $24,646 2049 Foreign exchange contracts. 6,331 2056 2,302 2035 Equity contracts........... 45,769 2028 25,379 2028 Derivative liabilities: Interest rate contracts.... 16,121 2056 20,310 2056 Foreign exchange contracts. 2,328 2051 4,796 2056 Equity contracts........... 33,886 2022 11,318 2022 Other contracts............ 58 2042 59 2042
The credit exposure to the Company's derivative contracts is limited to the fair value of such contracts that are favorable to the Company at the reporting date. The credit exposure to the Company's derivative contracts aggregated $466 million and $710 million at December 31, 2018 and 2017, respectively. 9. FAIR VALUE MEASUREMENTS Fair Value Measurements The Company carries certain financial instruments at fair value. The Company defines the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions. The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions. Fair Value Hierarchy Assets and liabilities recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of three "levels" based on the observability of valuation inputs: .. Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets that the Company has the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. The Company does not adjust the quoted price for such instruments. .. Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. 36 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) .. Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, the Company must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In those cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Bonds: Fair value is based principally on value from independent third-party valuation service providers, broker quotes and other independent information. Preferred stocks: Fair value of unaffiliated preferred stocks is based principally on value from independent third-party service providers, broker quotes and other independent information. Cash, cash equivalents and short term investments: Carrying amount approximate fair value because of the relatively short period of time between origination and expected realization and their limited exposure to credit risk. Mortgage loans: Fair values are primarily determined by discounting future cash flows to the present at current market rates, using expected prepayment rates. Contract loans: Carrying amounts, which approximate fair value, are generally equal to unpaid principal amount as of each reporting date. No consideration is given to credit risk because contract loans are effectively collateralized by the cash surrender value of the policies. Securities lending reinvested collateral assets: Securities lending assets are generally invested in short-term investments and thus carrying amounts approximate fair values because of the relatively short period of time between origination and expected realizations. Separate account assets: Variable annuity and variable universal life assets are carried at the market value of the underlying securities. Certain separate account assets related to market value adjustment fixed annuity contracts are carried at book value. Fair value is based principally on the value from independent third-party valuation service providers, broker quotes and other independent information. Policy reserves and contractual liabilities: Fair value for investment contracts (those without significant mortality risk) not accounted for at fair value were estimated for disclosure purposes using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. When no similar contracts are being offered, the discount rate is the appropriate swap rates (if available) or current risk-free interest rates consistent with the currency in which cash flows are denominated. Payable for securities lending: Cash collateral received from the securities lending program is invested in short-term investments and the offsetting liability is included in payable for securities lending. The carrying amount of this liability approximates fair value because of the relatively short period between origination of the liability and expected settlement. Receivables/payables for securities: Such amounts represent transactions of a short-term nature for which the statement value is considered a reasonable estimate of fair value. 37 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Fair Value Information about Financial Instruments Not Measured at Fair Value The following table presents the aggregate fair values of the Company's financial instruments not measured at fair value compared to their statement values:
Admitted Aggregate Assets or (in millions) Fair Value Liabilities Level 1 Level 2 Level 3 ------------- ---------- ----------- ------- ------- ------- December 31, 2018 Assets: Bonds............................................. $ 96,620 $94,675 $ 35 $79,744 $16,841 Preferred stocks.................................. 240 228 6 220 14 Common stocks..................................... 138 138 -- 138 -- Cash, cash equivalents and short-term investments. 1,547 1,547 1,228 319 -- Mortgage loans.................................... 19,182 18,928 -- -- 19,182 Contract loans.................................... 1,307 1,307 -- -- 1,307 Derivatives....................................... 404 807 -- 404 -- Receivables for securities........................ 138 138 -- 138 -- Securities lending reinvested collateral assets... 352 352 -- 352 -- Separate account assets........................... 5,484 5,618 -- 5,484 -- Liabilities: Policy reserves and contractual liabilities....... 11,843 11,191 -- 339 11,504 Payable for securities............................ 362 362 -- 362 -- Payable for securities lending.................... 447 447 -- 447 -- ======== ======= ====== ======= ======= December 31, 2017.................................... Assets: Bonds............................................. $101,792 $94,260 $ 200 $82,367 $19,225 Preferred stocks.................................. 229 211 11 205 13 Common stocks..................................... 38 38 -- 38 -- Cash, cash equivalents and short-term investments. 119 119 (96) 215 -- Mortgage loans.................................... 16,156 15,845 -- -- 16,156 Contract loans.................................... 1,340 1,340 -- -- 1,340 Receivables for securities........................ 541 541 -- 541 -- Securities lending reinvested collateral assets... 2,418 2,418 -- 2,418 -- Separate account assets........................... 4,470 4,553 -- 4,092 378 Liabilities: Policy reserves and contractual liabilities....... 7,673 6,507 -- 386 7,287 Derivatives....................................... 548 118 -- 548 -- Payable for securities............................ 554 554 -- 554 -- Payable for securities lending.................... 2,460 2,460 -- 2,460 -- ======== ======= ====== ======= =======
Valuation Methodologies of Financial Instruments Measured at Fair Value Bonds Bonds with NAIC 6 or 6* designations and preferred stocks with NAIC 4, 5 or 6 designations are carried at the lower of amortized cost or fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Whenever available, the Company obtains quoted prices in active markets for identical assets at the balance sheet date to measure bonds at fair value. Market price data generally is obtained from exchange or dealer markets. The Company estimates the fair value of securities not traded in active markets, by referring to traded securities with similar attributes, using dealer quotations, a matrix pricing methodology, discounted cash flow analyses or internal valuation models. This methodology considers such factors as the issuer's industry, the security's rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For bonds that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used. 38 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Fair values for bonds and preferred stocks based on observable market prices for identical or similar instruments implicitly include the incorporation of counterparty credit risk. Fair values for bonds and preferred stocks based on internal models incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information. Common Stocks (Unaffiliated) Whenever available, the Company obtains quoted prices in active markets for identical assets at the balance sheet date to measure equity securities at fair value. Market price data is generally obtained from exchanges or dealer markets. Freestanding Derivatives Derivative assets and liabilities can be exchange-traded or traded OTC. The Company generally values exchange-traded derivatives, such as futures and options, using quoted prices in active markets for identical derivatives at the balance sheet date. OTC derivatives are valued using market transactions and other observable market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models can require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment. Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. When the Company does not have corroborating market evidence to support significant model inputs and cannot verify the model using market transactions, the transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so the model value at inception equals the transaction price. Subsequent to initial recognition, the Company updates valuation inputs when corroborated by evidence such as similar market transactions, independent third-party valuation services and/or broker or dealer quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. Separate Account Assets Separate account assets are comprised primarily of registered and open-ended variable funds that trade daily and are measured at fair value using quoted prices in active markets for identical assets. Certain separate account assets are carried at amortized cost. 39 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Assets and Liabilities Measured at Fair Value The following table presents information about assets and liabilities measured at fair value:
Counterparty (in millions) Level 1 Level 2 Level 3 Netting* Total ------------- ------- ------- ------- ------------ ------- December 31, 2018 Assets at fair value: Bonds.................................. U.S. special revenue................ $ -- $ -- $ 1 $ -- $ 1 Industrial and miscellaneous........ -- 4 13 -- 17 ------- ------ ---- ------- ------- Total bonds......................... -- 4 14 -- 18 ------- ------ ---- ------- ------- Preferred stock........................ Industrial and miscellaneous........ -- -- 75 -- 75 ------- ------ ---- ------- ------- Total preferred stock............... -- -- 75 -- 75 ------- ------ ---- ------- ------- Common stock........................... Industrial and miscellaneous........ 21 -- 3 -- 24 Mutual funds........................ 41 -- -- -- 41 ------- ------ ---- ------- ------- Total common stock.................. 62 -- 3 -- 65 ------- ------ ---- ------- ------- Derivative assets: Interest rate contracts............. -- 212 -- -- 212 Foreign exchange contracts.......... -- 511 -- -- 511 Equity contracts.................... 129 704 69 -- 902 Counterparty netting................ -- -- -- (1,138) (1,138) ------- ------ ---- ------- ------- Total derivative assets................ 129 1,427 69 (1,138) 487 ------- ------ ---- ------- ------- Separate account assets................ 42,094 1,905 -- -- 43,999 ------- ------ ---- ------- ------- Total assets at fair value............. $42,285 $3,336 $161 $(1,138) $44,644 ======= ====== ==== ======= ======= Liabilities at fair value: Derivative liabilities: Interest rate contracts............. $ 3 $ 82 $ -- $ -- $ 85 Foreign exchange contracts.......... -- 266 -- -- 266 Equity contracts.................... 9 640 -- -- 649 Other contracts..................... -- -- 6 -- 6 Counterparty netting................ -- -- -- (1,138) (1,138) ------- ------ ---- ------- ------- Total derivative liabilities........... 12 988 6 (1,138) (132) ------- ------ ---- ------- ------- Total liabilities at fair value........ $ 12 $ 988 $ 6 $(1,138) $ (132) ======= ====== ==== ======= ======= December 31, 2017...................... Assets at fair value: Bonds.................................. Industrial and miscellaneous........ $ -- $ 76 $ 2 $ -- $ 78 ------- ------ ---- ------- ------- Total bonds......................... -- 76 2 -- 78 ------- ------ ---- ------- ------- Common stock........................... Industrial and miscellaneous........ 2 -- 3 -- 5 Mutual funds........................ 44 -- -- -- 44 Parent, subsidiaries and affiliates. 6 -- -- -- 6 ------- ------ ---- ------- ------- Total common stock.................. 52 -- 3 -- 55 ------- ------ ---- ------- ------- Derivative assets: Interest rate contracts............. -- 232 -- -- 232 Foreign exchange contracts.......... -- 398 -- -- 398 Equity contracts.................... 181 877 78 -- 1,136 Counterparty netting................ -- -- -- (1,549) (1,549) ------- ------ ---- ------- ------- Total derivative assets................ 181 1,507 78 (1,549) 217 ------- ------ ---- ------- ------- Separate account assets................ 47,609 1,941 -- -- 49,550 ------- ------ ---- ------- ------- Total assets at fair value............. $47,842 $3,524 $ 83 $(1,549) $49,900 ======= ====== ==== ======= ======= Liabilities at fair value: Derivative liabilities: Interest rate contracts............. $ 2 $ 105 $ -- $ -- $ 107 Foreign exchange contracts.......... -- 448 -- -- 448 Equity contracts.................... 1 888 -- -- 889 Other contracts..................... -- -- 5 -- 5 Counterparty netting................ -- -- -- (1,549) (1,549) ------- ------ ---- ------- ------- Total derivative liabilities........... 3 1,441 5 (1,549) (100) ------- ------ ---- ------- ------- Total liabilities at fair value........ $ 3 $1,441 $ 5 $(1,549) $ (100) ======= ====== ==== ======= =======
* Represents netting of derivative exposures covered by a qualifying master netting agreement. 40 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Changes in Level 3 Fair Value Measurements The following tables present changes in Level 3 assets and liabilities measured at fair value and the gains (losses) related to the Level 3 assets and liabilities that remained on the Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus:
Preferred Common Derivative Total Derivative (in millions) Bonds Stocks Stocks Assets Assets Liabilities ------------- ----- --------- ------ ---------- ------ ----------- Balance, January 1, 2016........................... $ 163 -- $-- $ 53 $ 216 $ 8 Total realized/unrealized capital gains or losses: Included in net income.......................... 20 -- -- 4 24 2 Included in surplus............................. 2 -- -- 3 5 (3) Purchases, issuances and settlements............... 210 -- -- (5) 205 (2) Transfers into Level 3............................. 81 -- -- -- 81 -- Transfers out of Level 3........................... (316) -- -- -- (316) -- ----- -- --- ---- ----- --- Balance, December 31, 2016......................... $ 160 -- $-- $ 55 $ 215 $ 5 ===== == === ==== ===== === Total realized/unrealized capital gains or losses: Included in net income.......................... (5) -- -- 15 10 1 Included in surplus............................. 17 -- -- 24 41 -- Purchases, issuances and settlements............... 45 -- 3 (15) 33 (1) Transfers into Level 3............................. 1 -- -- -- 1 -- Transfers out of Level 3........................... (216) -- -- -- (216) -- ----- -- --- ---- ----- --- Balance, December 31, 2017......................... $ 2 -- $ 3 $ 79 $ 84 $ 5 ===== == === ==== ===== === Total realized/unrealized capital gains or losses: Included in net income.......................... (1) -- -- 13 12 1 Included in surplus............................. (1) -- 6 (44) (39) 1 Purchases, issuances and settlements............... 12 75 1 21 109 (1) Transfers into Level 3............................. 17 -- -- -- 17 -- Transfers out of Level 3........................... (15) -- (7) -- (22) -- ----- -- --- ---- ----- --- Balance, December 31, 2018 $ 14 75 $ 3 $ 69 $ 161 $ 6 ===== == === ==== ===== ===
Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data or when the asset is no longer carried at fair value. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant inputs becoming observable or when a long-term interest rate significant to a valuation becomes short-term and thus observable. Transfers out of level 3 can also occur due to favorable credit migration resulting in a higher NAIC designation. Securities are generally transferred into Level 3 due to a decrease in market transparency, downward credit migration and an overall increase in price disparity for certain individual security types. The Company's policy is to recognize transfers in and out at the end of the reporting period, consistent with the date of the determination of fair value. In both 2018 and 2017, there were no transfers between Level 1 and Level 2 securities and transfers between Level 2 and Level 3 securities were less than one million. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized capital gains (losses) on instruments held at December 31, 2018 and 2017 may include changes in fair value that were attributable to both observable and unobservable inputs. Quantitative Information About Level 3 Fair Value Measurements The Company had no quantitative information about level 3 fair value measurements to report at December 31, 2018. 41 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Gross Basis Fair Value Measurements The following table presents the Company's derivative assets and liabilities measured at fair value, on a gross basis, before counterparty and cash collateral netting:
(in millions) Level 1 Level 2 Level 3 Total ------------- ------- ------- ------- ------ December 31, 2018 Derivative assets at fair value...... $129 $1,427 $69 $1,625 Derivative liabilities at fair value. 12 988 6 1,006 December 31, 2017.................... Derivative assets at fair value...... $181 $1,508 $78 $1,767 Derivative liabilities at fair value. 3 1,441 5 1,449
10. AGGREGATE POLICY RESERVES AND DEPOSIT FUND LIABILITIES The following table presents the Company's reserves by major category:
Years ended December 31, ------------------ (in millions) 2018 2017 ------------- -------- -------- Life insurance........................................................ $ 37,837 $ 36,825 Annuities (excluding supplementary contracts with life contingencies). 72,274 69,334 Supplementary contracts with life contingencies....................... 517 467 Accidental death benefits............................................. 20 21 Disability - active lives............................................. 34 36 Disability - disabled lives........................................... 255 269 Excess of AG 43 reserves over basic reserves.......................... 1,303 910 Deficiency reserves................................................... 1,497 1,266 Other miscellaneous reserve........................................... 832 688 -------- -------- Gross life and annuity reserves.................................... 114,569 109,816 Reinsurance ceded.................................................. (23,214) (22,276) -------- -------- Net life and annuity reserves......................................... 91,355 87,540 -------- -------- Accident and health reserves.......................................... Unearned premium reserves.......................................... 11 13 Present value of amounts not yet due on claims..................... 255 282 Additional contract reserves....................................... 544 547 -------- -------- Gross accident and health reserves................................. 810 842 Reinsurance ceded.................................................. (22) (30) -------- -------- Net accident and health reserves...................................... 788 812 -------- -------- Aggregate policy reserves............................................. $ 92,143 $ 88,352 ======== ========
42 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents the withdrawal characteristics of annuity actuarial reserves and deposit-type contract funds and other liabilities without life contingencies:
Separate Separate Accounts Accounts General With Non- (in millions) Account Guarantee* Guaranteed* Total Percent ------------- ------- ---------- ----------- -------- ------- December 31, 2018 Subject to discretionary withdrawal............................... With fair value adjustment..................................... $16,120 $1,482 $ -- $ 17,602 13.6% At book value less current surrender charge of 5% or more...... 9,677 -- -- 9,677 7.5 At fair value.................................................. -- 71 39,763 39,834 30.8 ------- ------ ------- -------- ----- Total with adjustment or at fair value............................ 25,797 1,553 39,763 67,113 51.9 At book value with minimal or no charge or no adjustment.......... 31,229 -- 1 31,230 24.1 Not subject to discretionary withdrawal........................... 27,794 3,187 83 31,064 24.0 ------- ------ ------- -------- ----- Annuity reserves and deposit fund liabilities, before reinsurance. 84,820 4,740 39,847 129,407 100.0% ===== Less: Reinsurance ceded........................................... 321 -- -- 321 ------- ------ ------- -------- Net annuity reserves and deposit fund liabilities................. $84,499 $4,740 $39,847 $129,086 ======= ====== ======= ======== December 31, 2017................................................. Subject to discretionary withdrawal............................... With fair value adjustment..................................... $13,452 $1,254 $ -- $ 14,706 11.5% At book value less current surrender charge of 5% or more...... 7,872 -- -- 7,872 6.1 At fair value.................................................. -- 88 44,892 44,980 35.1 ------- ------ ------- -------- ----- Total with adjustment or at fair value............................ 21,324 1,342 44,892 67,558 52.7 At book value with minimal or no charge or no adjustment.......... 32,754 -- 2 32,756 25.5 Not subject to discretionary withdrawal........................... 25,419 2,500 86 28,005 21.8 ------- ------ ------- -------- ----- Annuity reserves and deposit fund liabilities, before reinsurance. 79,497 3,842 44,980 128,319 100.0% ===== Less: Reinsurance ceded........................................... 321 -- -- 321 ------- ------ ------- -------- Net annuity reserves and deposit fund liabilities................. $79,176 $3,842 $44,980 $127,998 ======= ====== ======= ========
* Represents annuity reserves reported in separate accounts liabilities. 11. SEPARATE ACCOUNTS Separate Accounts The separate accounts held by the Company consist primarily of variable life insurance policies and variable annuities. These contracts generally are non-guaranteed in nature such that the benefit is determined by the performance and/or market value of the investments held in the separate account. The net investment experience of the separate account is credited directly to the policyholder and can be positive or negative. Certain other separate accounts relate to MVA fixed annuity contracts in which the assets are carried at amortized cost. These policies are required to be held in the Company's separate account by certain states, including Texas. Certain other separate accounts relate to flexible premium adjustable life insurance and terminal funding annuities in which the assets are carried at amortized cost. These contracts provide the greater of guaranteed interest returns defined in the policy or interest in excess of the guaranteed rate as defined by the Company. The Company does not engage in securities lending transactions within the separate accounts. In accordance with the products/transactions recorded within the separate account, some assets are considered legally insulated whereas others are not legally insulated from the general account. The legal insulation of the separate account assets prevents such assets from being generally available to satisfy claims resulting from the general account. 43 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents separate account assets by product or transaction:
December 31, 2018 December 31, 2017 -------------------- -------------------- Separate Separate Accounts Accounts Assets Assets Legally (Not Legally (Not Insulated Legally Insulated Legally (in millions) Assets Insulated) Assets Insulated) ------------- --------- ---------- --------- ---------- Variable annuities.................................. $40,920 $ -- $46,234 $ -- Variable life....................................... 3,055 -- 3,286 -- Bank-owned life insurance--hybrid................... 804 -- 653 -- Deferred annuities with MVA features................ 225 -- 387 -- Terminal funding.................................... 3,175 -- 2,489 -- Annuities with MVA features......................... -- 1,243 -- 866 Fixed annuities excess interest adjustment features. -- 196 -- 189 ------- ------ ------- ------ Total............................................... $48,179 $1,439 $53,049 $1,055 ======= ====== ======= ======
Some separate account liabilities are guaranteed by the general account. To compensate the general account for the risks taken, the separate accounts pay risk charges to the general account. If claims were filed on all contracts, the current total maximum guarantee the general account would provide to the separate account as of December 31, 2018 and 2017 is $6.7 billion and $5.8 billion, respectively. There was no separate account business seed money at December 31, for both 2018 and 2017. The following table presents the risk charges paid by the separate accounts and the guarantees paid by the general account:
Risk Charge paid by Guarantees the Paid by the Separate General (in millions) Account Account ------------- -------- ----------- 2018...... $324 $41 2017...... 292 40 2016...... 330 52 2015...... 279 52 2014...... 204 43
44 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents information regarding the separate accounts:
Non-indexed Non-indexed Guarantee Guarantee Non-guaranteed less than or more than Separate (in millions) Indexed equal to 4% 4% Accounts Total ------------- ------- ------------ ----------- -------------- ------- December 31, 2018 Premiums, considerations or deposits............ $241 $ -- $ 43 $ 3,090 $ 3,374 ==== ====== ==== ======= ======= Reserves for accounts with assets at: Market value................................. $ -- $ -- $ -- $42,885 $42,885 Amortized costs.............................. 958 3,769 415 -- 5,142 ---- ------ ---- ------- ------- Total reserves.................................. $958 $3,769 $415 $42,885 $48,027 ==== ====== ==== ======= ======= By withdrawal characteristics: Subject to discretionary withdrawal with MVA. $958 $2,199 $415 $ -- $ 3,572 At market value.............................. -- -- -- 42,802 42,802 ---- ------ ---- ------- ------- Subtotal........................................ 958 2,199 415 42,802 46,374 Not subject to discretionary withdrawal......... -- 1,570 -- 83 1,653 ---- ------ ---- ------- ------- Total reserves.................................. $958 $3,769 $415 $42,885 $48,027 ==== ====== ==== ======= ======= December 31, 2017............................... Premiums, considerations or deposits............ $185 $ -- $ 70 $ 4,444 $ 4,699 ==== ====== ==== ======= ======= Reserves for accounts with assets at: Market value................................. $ -- $ -- $ -- $48,116 $48,116 Amortized costs.............................. 739 3,096 395 -- 4,230 ---- ------ ---- ------- ------- Total reserves.................................. $739 $3,096 $395 $48,116 $52,346 ==== ====== ==== ======= ======= By withdrawal characteristics: Subject to discretionary withdrawal with MVA. $739 $ 596 $395 $ -- $ 1,730 At market value.............................. -- -- -- 48,030 48,030 ---- ------ ---- ------- ------- Subtotal........................................ 739 596 395 48,030 49,760 Not subject to discretionary withdrawal......... -- 2,500 -- 86 2,586 ---- ------ ---- ------- ------- Total reserves.................................. $739 $3,096 $395 $48,116 $52,346 ==== ====== ==== ======= ======= December 31, 2016............................... Premiums, considerations or deposits............ $222 $ 1 $106 $ 3,040 $ 3,369 ==== ====== ==== ======= ======= Reserves for accounts with assets at: Market value................................. $ -- $ -- $ -- $42,715 $42,715 Amortized costs.............................. 586 1,075 343 -- 2,004 ---- ------ ---- ------- ------- Total reserves.................................. $586 $1,075 $343 $42,715 $44,719 ==== ====== ==== ======= ======= By withdrawal characteristics: Subject to discretionary withdrawal with MVA. $586 $ 621 $343 $ -- $ 1,550 At market value.............................. -- -- -- 42,632 42,632 ---- ------ ---- ------- ------- Subtotal........................................ 586 621 343 42,632 44,182 Not subject to discretionary withdrawal......... -- 454 -- 83 537 ---- ------ ---- ------- ------- Total reserves.................................. $586 $1,075 $343 $42,715 $44,719 ==== ====== ==== ======= =======
Reconciliation of Net Transfers to or from Separate Accounts The following table presents a reconciliation of the net transfers to (from) separate accounts:
Years ended December 31, ------------------------- (in millions) 2018 2017 2016 ------------- ------- ------- ------- Transfers to separate accounts.................................. $ 3,373 $ 4,699 $ 3,356 Transfers from separate accounts................................ (4,147) (3,393) (3,055) ------- ------- ------- Net transfers to (from) separate accounts....................... (774) 1,306 301 Reconciling adjustments: Deposit-type contracts....................................... -- -- 2 ------- ------- ------- Total reconciling adjustments................................... -- -- 2 ------- ------- ------- Transfers as reported in the Statutory Statements of Operations. $ (774) $ 1,306 $ 303 ======= ======= =======
45 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 12. RESERVES FOR GUARANTEED POLICY BENEFITS AND ENHANCEMENTS Variable annuity contracts may include certain contractually guaranteed benefits to the contract holder. These guaranteed features include GMDB that are payable in the event of death, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits include guaranteed minimum withdrawal benefits (GMWB) and, to a lesser extent, guaranteed minimum accumulation benefits (GMAB), which are no longer offered. A variable annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder generally can only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the features are mutually exclusive. A policyholder cannot purchase more than one living benefit on one contract. The net amount at risk for each feature is calculated irrespective of the existence of other features; as a result, the net amount at risk for each feature is not additive to that of other features. Reserves for GMDB, GMIB and GMWB were included in the VACARVM reserves. Total reserves in excess of basic reserves were $1.3 billion and $910 million at December 31, 2018 and 2017, respectively. The Company chose to record reserves in excess of AG 43 minimum reserves at both December 31, 2018 and 2017, such that the reserves in both periods equal the C3 Phase II Total Asset Requirement level. GMDB and GMIB Depending on the product, the GMDB feature may provide a death benefit of either (a) total deposits made to the contract less any partial withdrawals plus a minimum return or (b) the highest contract value attained, typically on any anniversary date minus any subsequent withdrawals following the contract anniversary. GMIB guarantees a minimum level of periodic income payments upon annuitization. GMDB is the Company's most widely offered benefit; variable annuity contracts may also include GMIB to a lesser extent, which is no longer offered. The net amount at risk, which represents the guaranteed benefit exposure in excess of the current account value if death claims were filed on all contracts related to GMDB, was $2.3 billion and $1.0 billion at December 31, 2018 and 2017, respectively. GMWB Certain of the Company's variable annuity contracts offer optional GMWB. With a GMWB, the contract holder can monetize the excess of the guaranteed amount over the account value of the contract only through a series of withdrawals that do not exceed a specific percentage per year of the guaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder will receive a series of annuity payments equal to the remaining guaranteed amount, and, for lifetime GMWB products, the annuity payments continue as long as the covered person(s) are living. The net amount at risk for GMWB represents the present value of minimum guaranteed withdrawal payments, in accordance with contract terms, in excess of account value. The net amount at risk related to these guarantees was $185 million and $375 million at December 31, 2018 and 2017, respectively. The Company uses derivative instruments and other financial instruments to mitigate a portion of the exposure that arises from GMWB. 13. PARTICIPATING POLICY CONTRACTS Participating policy contracts entitle a policyholder to share in earnings through dividend payments. These contracts represented 0.01 percent, 0.01 percent and 0.75 percent of gross insurance in-force at December 31, 2018, 2017 and 2016, respectively. Policyholder dividends for the years ended December 31, 2018 and 2017 were ($13) million, $18 million and $19 million, respectively. 46 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 14. PREMIUM AND ANNUITY CONSIDERATION DEFERRED AND UNCOLLECTED The following table presents the deferred and uncollected insurance premiums and annuity consideration (before deduction for amounts non-admitted):
December 31, 2018 December 31, 2017 ---------------- ---------------- Net of Net of (in millions) Gross Loading Gross Loading ------------- ----- ------- ----- ------- Ordinary new business. $ (10) $(10) $ (4) $(4) Ordinary renewal...... (395) 147 (473) 41 Group life............ 1 1 6 6 ----- ---- ----- --- Total................. $(404) $138 $(471) $43 ===== ==== ===== ===
15. REINSURANCE In the ordinary course of business, the Company utilizes internal and third-party reinsurance relationships to manage insurance risks and to facilitate capital management strategies. Long-duration reinsurance is effected principally under yearly renewable term treaties. Pools of highly-rated third party reinsurers are utilized to manage net amounts at risk in excess of retention limits. Reinsurance agreements do not relieve the Company of its direct obligations from its beneficiaries. Thus, a credit exposure exists with respect to reinsurance ceded to the extent that any reinsurer fails to meet the obligations assumed under any reinsurance agreement. In addition, the Company assumes reinsurance from other insurance companies. Reinsurance premiums assumed in 2018, 2017 and 2016 were $26 million, $30 million and $33 million, respectively. Reinsurance premiums ceded in 2018, 2017 and 2016 were $25.2 billion, $2.6 billion and $6.1 billion, respectively. Additionally, reserves on reinsurance assumed were $1.4 billion at both December 31, 2018, 2017 and 2016. The reserve credit taken on reinsurance ceded was $23.3 billion, $22.3 billion and $21.2 billion at December 31, 2018, 2017 and 2016, respectively. Amounts payable or recoverable for reinsurance on policy and contract liabilities are not subject to periodic or maximum limits. At December 31, 2018 and 2017, the Company's reinsurance recoverables were $306 million and $426 million, respectively. The Company does not have any reinsurance agreements in effect under which the reinsurer may unilaterally cancel any reinsurance for reasons other than for nonpayment of premium or other similar credits. The Company has no reinsurance agreements in effect such that the amount of losses paid or accrued through the statement date may result in a payment to the reinsurer of amounts which, in aggregate and allowing for offset of mutual credits from other reinsurance agreements with the same reinsurer, exceed the total revenue collected under the reinsured policies. The NAIC Model Regulation "Valuation of Life Insurance Policies" (Regulation XXX) requires U.S. life insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). In addition, NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs. Prior to 2016, the Company managed the capital impact of statutory reserve requirements under Regulation XXX and Guideline AXXX through intercompany reinsurance transactions. Regulation XXX and Guideline AXXX reserves related to new and in-force business (term and universal life) were ceded to the Parent under a coinsurance/modified coinsurance agreement effective January 1, 2011 (the AGC Co/Modco Agreement), prior to the recapture of in-force business effective December 31, 2016. New business is still ceded under this treaty. In 2018, the AGC Life Co/Modco Agreement increased the Company's pre-tax earnings by $382 million, while in 2017, the AGC Life Co/Modco Agreement increased pre-tax earnings by $289 million. In 2016, the AGC Life Co/Modco Agreement decreased pre-tax earnings by $6.3 billion. The pretax loss from the 2016 recapture was $6.5 billion. In September 2016, the Company entered into a reinsurance agreement with Hannover Life Reassurance Company of America (Hannover), effective July 1, 2016, under which the Company ceded approximately $5 billion of reserves to Hannover, which included a block of whole life policies on a coinsurance with funds withheld basis and a block of current assumption universal life business on a yearly renewable term basis. This reinsurance agreement released 47 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) excess statutory capital of approximately $1 billion, which was included in dividends paid ultimately by the Company to AIG in September 2016. Effective December 31, 2016, the Company recaptured certain term and universal life reserves that had been ceded to AGC Life and concurrently amended the July 1, 2016 reinsurance treaty with Hannover to add this in-force term and guaranteed universal life business on a coinsurance basis and additional universal life on a yearly renewable term basis. The Company ceded approximately $14 billion of such reserves to Hannover under the treaty amendment, which was effective December 31, 2016. In 2017, the coinsurance reserve was increased as a result of actuarial reserve changes impacting prior periods. The amount of the reserve increase as of January 1, 2017 was $155 million, with the after tax increase of $107 million reported as an adjustment to the Change in Surplus as a Result of Reinsurance.
December 31, 2016 July 1, 2016 ------------------- Increase (Decrease) Cession to Cession to Net Impact of (in millions) Hannover Recapture Hannover Reinsurance ------------------- ------------ --------- ---------- ------------- Statement of Admitted Assets, Liabilities and Capital and Surplus................................................. Deferred and uncollected premium....................... $ (38) $ -- $ (764) $ (802) Aggregate reserve for life contracts................... (5,349) 6,482 (14,266) (13,133) Current federal income taxes due....................... 47 (1,790) 2,501 758 Funds held under coinsurance........................... 4,492 -- 5,482 9,974 ------- ------- -------- -------- Total capital and surplus.............................. $ 772 $(4,692) $ 5,519 $ 1,599 ------- ------- -------- -------- Statement of Operations................................... Premiums.................................................. $(5,349) $15,806 $(14,266) $ (3,809) Commissions on reinsurance ceded.......................... 47 (6,482) 6,607 172 Reserve adjustments on reinsurance ceded.................. -- (9,324) -- (9,324) ------- ------- -------- -------- Total revenue............................................. (5,302) -- (7,659) (12,961) Increase in aggregate reserves for life................... (5,349) 6,482 (14,266) (13,133) Federal income tax expense (benefit)...................... 47 (1,790) 2,501 758 ------- ------- -------- -------- Net income................................................ $ -- $(4,692) $ 4,106 $ (586) ------- ------- -------- -------- Capital and Surplus Account Change in surplus as a result of reinsurance.............. $ 772 $ -- $ 1,413 $ 2,185 ------- ------- -------- --------
In February 2018, the Company and its U.S. life insurance company affiliates, VALIC and USL, each executed their respective Modified Coinsurance (ModCo) Agreements (The Agreements) with Fortitude Reinsurance Company, Ltd (FRL), (formerly DSA Reinsurance Company Limited), a wholly owned AIG subsidiary and registered Class 4 and Class E reinsurer in Bermuda. The Agreements were effective as of January 1, 2017 in respect of certain closed blocks of business (including structured settlements and single premium immediate annuities). Fortitude Group Holdings, LLC (Fortitude Holdings) was formed by AIG to act as a holding company for FRL. On November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TC Group Cayman Investment Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P. Subsequent to this sale, Fortitude Holdings owns 100 percent of the outstanding common shares of FRL and AIG has an 80.1 percent ownership interest in Fortitude Holdings. The initial consideration represented the book value of ModCo Assets held by the Company on behalf of FRL and was equal to the ModCo Reserves ceded at the effective date. While there was no net impact from the initial accounting as of the effective date, there was a significant offsetting impact on certain individual line items in the Summary of Operations. Pursuant to the regulatory approval received in February 2018, the Company has reported all of the ceded activity for this Agreement from the effective date (January 1, 2017) through December 31, 2018 in its 2018 Annual Statement. Total returns on the ModCo Assets subsequent to the effective date inure to the benefit of FRL and are reported with the ModCo reserve adjustments. The Company did not receive a ceding commission at contract inception. 48 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The Company completed its initial settlement with FRL in June 2018 and settles all payable or receivable balances quarterly. The table below presents the impact of this transaction by line item in the Company's statements of assets, liabilities, surplus and other funds and on the summary of operations:
Balance as of December 31, 2018 ------------- Statutory Statements of Assets, Liabilities and Capital and Surplus Funds withheld...................................................... $152 ----
As of and Year As of and Year Ended Ended Increase (Decrease) Initial December 31, December 31, (in millions) Accounting 2017 2018 Total ------------------- ---------- -------------- -------------- -------- Statutory Statement of Operations Premiums and annuity considerations........................................... $(22,152) $ (311) $ (291) $(22,754) Commissions and expense allowances............................................ -- 57 53 110 Reserve adjustments on reinsurance ceded...................................... 22,152 (1,699) (1,778) 18,675 -------- ------- ------- -------- Total revenues................................................................ -- (1,953) (2,016) (3,969) -------- ------- ------- -------- Death benefits................................................................ -- (249) (249) (498) Annuity benefits.............................................................. -- (1,040) (1,019) (2,059) Surrender benefits............................................................ -- (131) (133) (264) Other benefits................................................................ -- (164) (334) (498) Other expenses................................................................ -- -- (1) (1) -------- ------- ------- -------- Total benefits and expenses................................................... -- (1,584) (1,736) (3,320) -------- ------- ------- -------- Net gain from operations before dividends to policyholders and federal income taxes -- (369) (280) (649) Dividends to policyholders.................................................... -- (13) (12) (25) -------- ------- ------- -------- Net gain from operations after dividends to policyholders and before federal income taxes $ -- $ (356) $ (268) $ (624) -------- ------- ------- --------
During 2018, 2017 and 2016, the Company commuted reinsurance treaties with non-affiliated reinsurers, which resulted in increases in the Company's pre-tax earnings of $529 thousand, $500 thousand and $1.7 million, respectively. The Company has an annuity Co/Modco agreement with an affiliate, AIG Life of Bermuda, Ltd. (AIGB), in which AIGB reinsures certain deferred annuity contracts issued between 2003 and 2007. The agreement is such that the Company retains and controls assets held in relation to the related reserve. As of December 31, 2018 and 2017, the assets and liabilities resulting from the agreement and recorded in the accompanying financial statements were $7.2 billion and $8.1 billion, respectively. In 2018, the Agreement decreased the Company's pre-tax earnings by $1 million and $2 million in 2017 and 2016, respectively. 49 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 16. FEDERAL INCOME TAXES U.S. Tax Reform Overview On December 22, 2017, the United States enacted Public Law 115-97, known as the Tax Cuts and Jobs Act ("the Tax Act"). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting the Company. Consistent with Staff Accounting Bulletin No. 118 released by the Securities and Exchange Commission, the NAIC issued INT 18-01: Updated Tax Estimates under the Tax Cuts and Jobs Act ("INT 18-01"), which provided guidance on statutory accounting for the tax effects of the Tax Act. INT 18-01 addressed situations where accounting for certain income tax effects of the Tax Act under SSAP 101, Income Taxes, ("SSAP 101") may be incomplete upon issuance of an entity's financial statements and provides a one-year measurement period from enactment date to complete the accounting under SSAP 101. In accordance with INT 18-01, a company was required to reflect the following: .. Income tax effects of those aspects of the Tax Act for which accounting under SSAP 101 is complete. .. Provisional estimate of income tax effects of the Tax Act to the extent accounting is incomplete but a reasonable estimate is determinable. .. If a provisional estimate cannot be determined, SSAP 101 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the Tax Act. At December 31, 2017, the Company originally recorded a provisional estimate of income tax effects of the Tax Act of $1.7 billion attributable to the reduction in the U.S. corporate income tax. The Company's provisional estimate was based in part on a reasonable estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. The Company filed its 2017 consolidated U.S. income tax return and has completed its review of the primary impact of the Tax Act provisions on its deferred taxes. As a result, the Company considers the accounting for the effects of the rate change on deferred tax balances to be complete and no material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any resulting changes in the Company's estimates will be treated in accordance with the relevant accounting guidance. The Tax Act includes provisions for Global Intangible Low-Taxed Income ("GILTI"), under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of foreign corporations and for Base Erosion and Anti-Abuse Tax ("BEAT"), under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and while certain formal guidance was issued by the U.S. tax authority, there are still aspects of the Tax Act that remain unclear and additional guidance is expected in 2019. Such guidance may result in changes to the interpretations and assumptions the Company made and actions the Company may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, the Company treats BEAT as a period tax charge in the period the tax is incurred and has made an accounting policy election to treat GILTI taxes in a similar manner. No provision for income tax related to GILTI or BEAT was recorded as of December 31, 2018. Tax effects for which a reasonable estimate can be determined Provisions Impacting Life Insurance Companies The Tax Act modified computations of insurance reserves for Life insurance companies. Specifically, the Act directs that tax reserves be computed with reference to the NAIC reserves. Adjustments related to the differences in insurance reserves balances computed historically versus under the Tax Act have to be taken into income over eight years. Accordingly, these changes give rise to new deferred tax liabilities. At December 31, 2017, the Company recorded a provisional estimate of $499 million with respect to such deferred tax liabilities. This increase in deferred tax liabilities 50 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) was offset by an increase in the deferred tax asset related to insurance reserves as a result of applying the new provisions of the Tax Act. As of December 31, 2018, the Company has completed the review and accounting of the tax reserve computations, and recorded offsetting decreases of $192 million to both deferred tax liabilities and deferred tax assets. Provisions Impacting Projections of Taxable Income and Admissibility of Deferred Tax Assets Certain provisions of the Tax Act impact the Company's projections of future taxable income used in analyzing realizability of its deferred tax assets. In certain instances, provisional estimates have been included in the Company's future taxable income projections for these specific provisions to reflect application of the new tax law. The Company does not currently anticipate that its reliance on provisional estimates would have a material impact on its determination of realizability of its deferred tax assets. Tax effects for which no estimate can be determined The Tax Act may affect the results in certain investments and partnerships in which the Company is a non-controlling interest owner. At December 31, 2017, the information needed to determine a provisional estimate was not available (such as for interest deduction limitations in those entities and the changed definition of a U.S. Shareholder), and accordingly, no provisional estimates were recorded. The Company has since completed its review of these investments and partnerships. The Company considers the accounting for this item to be complete and no measurement period change was recorded. U.S. Tax Reform - INT 18-01 Measurement Period Completion As of December 31, 2018, the Company has fully completed its accounting for the tax effects of the Tax Act. Although the prescribed measurement period has ended, there are aspects of the Tax Act that remain unclear and additional guidance from the U.S. tax authority is pending. As further guidance is issued by the U.S. tax authority, any resulting changes in the Company's estimates will be treated in accordance with the relevant accounting guidance. The following table presents the components of the net deferred tax assets and liabilities:
December 31, 2018 December 31, 2017 Change ----------------------- ----------------------- ---------------------- (in millions) Ordinary Capital Total Ordinary Capital Total Ordinary Capital Total ------------- -------- ------- ------ -------- ------- ------ -------- ------- ----- Gross DTA................................ $1,837 $1,645 $3,482 $1,916 $1,395 $3,311 $ (79) $250 $ 171 Statutory valuation allowance adjustment. -- 220 220 -- -- -- -- 220 220 ------ ------ ------ ------ ------ ------ ----- ---- ----- Adjusted gross DTA....................... 1,837 1,425 3,262 1,916 1,395 3,311 (79) 30 (49) DTA non-admitted......................... 928 1,425 2,353 670 1,395 2,065 258 30 288 ------ ------ ------ ------ ------ ------ ----- ---- ----- Net admitted DTA......................... 909 -- 909 1,246 -- 1,246 (337) -- (337) DTL...................................... 392 -- 392 557 -- 557 (165) -- (165) ------ ------ ------ ------ ------ ------ ----- ---- ----- Total.................................... $ 517 $ -- $ 517 $ 689 $ -- $ 689 $(172) $ -- $(172) ====== ====== ====== ====== ====== ====== ===== ==== =====
51 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents the ordinary and capital DTA admitted assets as the result of the application of SSAP 101:
December 31, 2018 December 31, 2017 Change ----------------------- ----------------------- ---------------------- (in millions) Ordinary Capital Total Ordinary Capital Total Ordinary Capital Total ------------- -------- ------- ------ -------- ------- ------ -------- ------- ----- Admission calculation components................... SSAP 101 Federal income taxes paid in prior years recoverable through loss carry backs.......... $ -- $-- $ -- $ -- $-- $ -- $ -- $-- $ -- Adjusted gross DTA expected to be realized (excluding amount of DTA from above) after application of the threshold limitation....... 517 -- 517 689 -- 689 (172) -- (172) 1. Adjusted gross DTA expected to be realized following the reporting date..... 517 -- 517 689 -- 689 (172) -- (172) 2. Adjusted gross DTA allowed per limitation threshold...................... -- -- 1,114 -- -- 1,301 -- -- (187) Adjusted gross DTA (excluding the amount of DTA from above) offset by gross DTL........... 392 -- 392 557 -- 557 (165) -- (165) ---- --- ------ ------ --- ------ ----- --- ----- DTA admitted as the result of application of SSAP 101.............................................. $909 $-- $ 909 $1,246 $-- $1,246 $(337) $-- $(337) ==== === ====== ====== === ====== ===== === =====
The following table presents the ratio percentage and amount of adjusted capital to determine the recovery period and threshold limitation amount:
Years ended December 31, -------------- ($ in millions) 2018 2017 --------------- ------ ------ Ratio percentage used to determine recovery period and threshold limitation amount..................................................................... 738% 869% Amount of adjusted capital and surplus used to determine recovery period and threshold limitation amount................................................ $7,423 $8,676 ====== ======
The Company has no tax planning strategies used in the determination of adjusted gross DTA's or net admitted DTA's. The Company's planning strategy does not include the use of reinsurance. The Company is not aware of any significant DTLs that are not recognized in the statutory financial statements. 52 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following tables present the major components of the current income tax expense and net deferred tax assets (liabilities):
Years Ended December 31, ------------------------ (in millions) 2018 2017 2016 ------------- ---- ------ ------ Current income tax expense.......................... Federal.......................................... $513 $1,025 $1,182 Foreign.......................................... -- -- -- ---- ------ ------ Subtotal......................................... 513 1,025 1,182 Federal income tax on net capital gains (losses). (88) (433) 279 ---- ------ ------ Federal income tax incurred...................... $425 $ 592 $1,461 ==== ====== ======
Years Ended December 31, ------------- (in millions) 2018 2017 Change ------------- ------ ------ ------ Deferred tax assets: Ordinary: Policyholder reserves...................................................... $ 812 $ 959 $(147) Investments................................................................ 50 70 (20) Deferred acquisition costs................................................. 366 366 -- Fixed assets............................................................... 373 282 91 Compensation and benefits accrual.......................................... 41 3 38 Tax credit carryforward.................................................... 151 160 (9) Other (including items less than 5% of total ordinary tax assets).......... 44 76 (32) ------ ------ ----- Subtotal................................................................... 1,837 1,916 (79) Statutory valuation allowance adjustment................................... -- -- -- Non-admitted............................................................... 928 670 258 ------ ------ ----- Admitted ordinary deferred tax assets...................................... 909 1,246 (337) ------ ------ ----- Capital: Investments................................................................ 1,645 1,395 250 ------ ------ ----- Subtotal................................................................... 1,645 1,395 250 Statutory valuation allowance adjustment....................................... 220 -- 220 Non-admitted................................................................... 1,425 1,395 30 ------ ------ ----- Admitted capital deferred tax assets........................................... -- -- -- ------ ------ ----- Admitted deferred tax assets...................................................... 909 1,246 (337) ------ ------ ----- Deferred tax liabilities: Ordinary: Deferred and uncollected premium........................................... 78 58 20 Policyholder reserves...................................................... 269 499 (230) Other (including items less than 5% of total ordinary tax liabilities)..... 45 -- 45 ------ ------ ----- Subtotal................................................................... 392 557 (165) ------ ------ ----- Capital: Other (including items less than 5% of total capital tax liabilities)...... -- -- -- ------ ------ ----- Subtotal................................................................... -- -- -- ------ ------ ----- Deferred tax liabilities.......................................................... 392 557 (165) ------ ------ ----- Net deferred tax assets (liabilities)............................................. $ 517 $ 689 $(172) ------ ------ -----
53 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The change in net deferred income taxes is comprised of the following (this analysis is exclusive of non-admitted assets as the change in non-admitted assets and the change in net deferred income taxes are reported in separate components of capital and surplus):
Years Ended December 31, ------------- (in millions) 2018 2017 Change ------------- ------ ------ ------ Total adjusted deferred tax assets. $3,262 $3,311 $ (49) Total deferred tax liabilities..... 392 557 (165) ------ ------ ----- Net adjusted deferred tax assets... $2,870 $2,754 116 ====== ====== Tax effect of unrealized gains (losses)......................... (93) Transfer of deferred item to subsidiary....................... 1 ----- Change in net deferred income tax.. $ 24 =====
The provision for incurred federal taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The following table presents the significant items causing this difference:
December 31, 2018 December 31, 2017 December 31, 2016 --------------- ---------------- ---------------- Effective Effective Effective (in millions) Amount Tax Rate Amount Tax Rate Amount Tax Rate ------------- ------ --------- ------ --------- ------ --------- Income tax expense at applicable rate...... $208 21.0% $ 465 35.0% $1,028 35.0% Change in valuation adjustment............. 220 22.2 (366) (27.6) (554) (18.9) Amortization of interest maintenance reserve.................................. (30) (3.0) (43) (3.3) (35) (1.2) Disregarded entities....................... 20 2.1 23 1.8 67 2.3 Dividends received deduction............... (20) (2.1) (47) (3.6) (69) (2.3) Change in non-admitted assets.............. (13) (1.3) (1) (0.1) 10 0.4 Surplus adjustments........................ 8 0.8 (3) (0.2) (15) (0.5) Prior year return true-ups and adjustments. 7 0.7 (32) (2.4) (29) (1.0) Other permanent adjustments................ 1 0.1 9 0.7 7 0.3 Impact of Tax Act.......................... -- -- 1,836 138.3 -- -- Reinsurance................................ -- -- 37 2.8 765 26.0 Gain on sale of subsidiaries............... -- -- -- -- (22) (0.8) Separate account income.................... -- -- -- -- 18 0.6 ---- ---- ------ ----- ------ ----- Statutory income tax expense (benefit)..... $401 40.5% $1,878 141.4% $1,171 39.9% ==== ==== ====== ===== ====== ===== Federal income taxes incurred.............. $425 42.9% $ 592 44.6% $1,461 49.8% Change in net deferred income taxes........ (24) (2.4) 1,286 96.8 (290) (9.9) ---- ---- ------ ----- ------ ----- Statutory income tax expense............... $401 40.5% $1,878 141.4% $1,171 39.9% ==== ==== ====== ===== ====== =====
At December 31, 2018, the Company had the following foreign tax credits carryforwards:
(in millions) ------------- Year Expires Amount ------------ ------ 2019....... $ 4 2020....... 8 2021....... 8 2022....... 7 2023....... 1 2024....... 1 --- Total...... $29 ===
At December 31, 2018, the Company had no operating loss carryforwards or capital loss carryforwards. At December 31, 2018, the Company had an alternative minimum tax credit of $6 million. 54 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) At December 31, 2018, the Company had the following general business credit carryforwards:
(in millions) ------------- Year Expires Amount ------------ ------ 2025....... $ 9 2026....... 9 2027....... 13 2028....... 13 2029....... 19 2030....... 38 2031....... 7 2032....... 8 ---- Total...... $116 ====
At December 31, 2018, the Company had $273 thousand in charitable contribution carryforwards, which expire in 2021. The following table presents income tax incurred that is available for recoupment in the event of future net losses:
(in millions) ------------- December 31, Capital ------------ ------- 2016....... $202 2017....... 198 2018....... 13 ---- Total...... $413 ====
In general, realization of DTAs depends on a company's ability to generate sufficient taxable income of the appropriate character within the carryforward periods in the jurisdictions in which the net operating losses and deductible temporary differences were incurred. In accordance with the requirements established in SSAP 101, the Company assessed its ability to realize DTAs of $3.5 billion and concluded that a valuation allowance of $220 million was required at December 31, 2018. Similarly, the Company concluded that no valuation allowance was required on the DTAs of $3.3 billion at December 31, 2017. The Company had no deposits admitted under Internal Revenue Code Section 6603. The Company joins in the filing of a consolidated federal income tax return with AIG Parent. The Company has a written agreement with AIG Parent under which each subsidiary agrees to pay AIG Parent an amount equal to the consolidated federal income tax expense multiplied by the ratio that the subsidiary's separate return tax liability bears to the consolidated tax liability, plus one hundred percent of the excess of the subsidiary's separate return tax liability over the allocated consolidated tax liability. AIG Parent agrees to pay each subsidiary for the tax benefits, if any, of net operating losses, net capital losses and tax credits which are not usable by the subsidiary but which are used by other members of the consolidated group. The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits, excluding interest and penalties:
Years Ended December 31, ----------- (in millions) 2018 2017 ------------- ---- ---- Gross unrecognized tax benefits at beginning of year. $16 $22 Increases in tax position for prior years......... 1 -- Decreases in tax position for prior years......... -- (6) --- --- Gross unrecognized tax benefits at end of year....... $17 $16 === ===
As of December 31, 2018 and 2017, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $17 million and $16 million respectively. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2018 and 2017, the Company had accrued liabilities of $5.7 million and $4 million, respectively, for the payment of 55 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) interest (net of the federal benefit) and penalties. In both 2018 & 2017, the Company recognized expense of less than $1 million interest (net of the federal benefit) and penalties. In 2016, the Company recognized income of $3 million of interest (net of the federal benefit) and penalties. The Company regularly evaluates proposed adjustments by taxing authorities. At December 31, 2018, such proposed adjustments would not have resulted in a material change to the Company's financial condition, although it is possible that the effect could be material to the Company's results of operations for an individual reporting period. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next twelve months, based on the information currently available, the Company does not expect any change to be material to its financial condition. The Company is currently under Internal Revenue Service (IRS) examinations for the taxable years 2007-2013. Although the final outcome of possible issues raised in any future examination are uncertain, the Company believes that the ultimate liability, including interest, will not materially exceed amounts recorded in the financial statements. The Company's taxable years 2001-2018 remain subject to examination by major tax jurisdictions. 17. CAPITAL AND SURPLUS RBC standards are designed to measure the adequacy of an insurer's statutory capital and surplus in relation to the risks inherent in its business. The RBC standards consist of formulas that establish capital requirements relating to asset, insurance, business and interest rate risks. The standards are intended to help identify companies that are under-capitalized, and require specific regulatory actions in the event an insurer's RBC is deficient. The RBC formula develops a risk-adjusted target level of adjusted statutory capital and surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only because of the insurer's size, but also on the risk profile of the insurer's operations. At December 31, 2018, the Company exceeded RBC requirements that would require any regulatory action. Dividends that the Company may pay to the Parent in any year without prior approval of the TDI are limited by statute. The maximum amount of dividends in a 12-month period, measured retrospectively from the date of payment, which the Company can pay without the Company obtaining the prior approval of the TDI is limited to the greater of: (1) 10 percent of the Company's statutory surplus as regards to policyholders at the preceding December 31; or (2) the preceding year's statutory net gain from operations. Additionally, unless prior approval of the TDI is obtained, dividends can only be paid out of the Company's unassigned surplus. Subject to the TDI requirements, the maximum dividend payout that may be made in 2019 without prior approval of the TDI is $906 million. Dividend payments in excess of positive retained earnings are classified and reported as a return of capital. 56 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Dividends are paid as determined by the Board of Directors and are noncumulative. The following table presents the dividends paid by the Company during 2018, 2017 and 2016:
Amount Date Type Cash or Non-cash (in millions) ---- ---- ---------------- ------------- 2018 March 27, 2018............. Extraordinary Cash $ 337 June 26, 2018.............. Extraordinary Cash 680 September 24, 2018......... Extraordinary Cash 680 2017 March 30, 2017............. Extraordinary Cash $ 452 March 30, 2017............. Extraordinary Non-Cash 482 March 30, 2017............. Return of Capital Cash 178 June 29, 2017.............. Extraordinary Cash 538 September 28, 2017......... Extraordinary Cash 50 December 26, 2017.......... Extraordinary Cash 200 2016 March 28, 2016............. Ordinary Cash $ 80 March 28, 2016............. Ordinary Non-Cash 420 June 28, 2016.............. Return of Capital Cash 233 June 28, 2016.............. Extraordinary Cash 288 September 27, 2016......... Extraordinary Non-Cash 1,154 September 27, 2016......... Extraordinary Cash 23 September 28, 2016......... Extraordinary Cash 267 September 28, 2016......... Return of Capital Cash 318 December 27, 2016.......... Extraordinary Non-Cash 497 December 27, 2016.......... Return of Capital Non-Cash 85 December 28, 2016.......... Extraordinary Cash 11
The Company's cumulative preferred stock has an $80 dividend rate and is redeemable at $1,000 per share. The holder of this stock, the Parent, is entitled to one vote per share. 18. RETIREMENT PLANS AND SHARE-BASED AND DEFERRED COMPENSATION PLANS The Company does not directly sponsor any defined benefit or defined contribution plans and does not participate in any multi-employer plans. Employee Retirement Plan The Company's employees participate in various AIG Parent-sponsored defined benefit pension and postretirement plans. AIG Parent, as sponsor, is ultimately responsible for the maintenance of these plans in compliance with applicable laws. The Company is not directly liable for obligations under these plans; its obligation results from AIG Parent's allocation of the Company's share of expenses from the plans based on participants' earnings for the pension plans and on estimated claims less contributions from participants for the postretirement plans. Effective January 1, 2016, the U.S. defined benefit pension plans were frozen. Consequently, these plans are closed to new participants and current participants no longer earn benefits. However, interest credits continue to accrue on the existing cash balance accounts and participants are continuing to accrue years of service for purposes of vesting and early retirement eligibility and subsidies as they continue to be employed by AIG Parent and its subsidiaries. 57 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents information about employee-related costs (expense credits) allocated to the Company:
Years ended December 31, --------------- (in millions) 2018 2017 2016 ------------- ---- ---- ---- Defined benefit plans.................................. $(12) $2 $20 Postretirement medical and life insurance plans........ 1 2 2 ---- -- --- Total.................................................. $(11) $4 $22 ==== == ===
Defined Contribution Plan AIG Parent sponsors a 401(k) plan which provides for pre-tax salary reduction contributions by its U.S. employees. The Company made matching contributions of 100 percent of the first six percent of participant contributions, subject to IRS-imposed limitations. Effective January 1, 2016, AIG Parent provides participants in the plan an additional fully vested, non-elective, non-discretionary employer contribution equal to three percent of the participant's annual base compensation for the plan year, paid each pay period regardless of whether the participant currently contributes to the plan, and subject to the IRS-imposed limitations. The Company's pre-tax expense associated with this plan was $27 million, $26 million and $28 million in 2018, 2017 and 2016, respectively. Share-based and Deferred Compensation Plans During 2016 and 2015, certain Company employees were granted performance share units under the AIG Parent 2013 Long Term Incentive Plan that provide them the opportunity to receive shares of AIG Parent common stock based on AIG Parent achieving specified performance goals at the end of a three-year performance period and the employee satisfies service requirements. The Company recognized compensation expense of $28 million, $33 million and $20 million for awards granted in 2018, 2017 and 2016, respectively. Prior to 2013, some of the Company's officers and key employees were granted restricted stock units and stock appreciation rights that provide for cash settlement linked to the value of AIG Parent common stock if certain requirements were met. The Company did not recognize any expense for unsettled awards during 2018, 2017 and 2016. 19. DEBT The Company is a member of the Federal Home Loan Bank (FHLB) of Dallas. The Company's interest in the stock of FHLB of San Francisco was redeemed on March 24, 2016. Membership with the FHLB provides the Company with collateralized borrowing opportunities, primarily as an additional source of liquidity or for other uses deemed appropriate by management. The Company's ownership in the FHLB stock is reported as common stock. Pursuant to the membership terms, the Company elected to pledge such stock to the FHLB as collateral for the Company's obligations under agreements entered into with the FHLB. Cash advances obtained from the FHLB are reported in and accounted for as borrowed money. The Company may periodically obtain cash advances on a same-day basis, up to a limit determined by management and applicable laws. The Company is required to pledge certain mortgage-backed securities, government and agency securities and other qualifying assets to secure advances obtained from the FHLB. To provide adequate collateral for potential advances, the Company has pledged securities to the FHLB in excess of outstanding borrowings. Upon any event of default by the Company, the recovery by the FHLB would generally be limited to the amount of the Company's liability under advances borrowed. 58 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The following table presents the aggregate carrying value of stock held with the FHLB of Dallas and the classification of the stock:
December 31, ------------- (in millions) 2018 2017 ------------- ------ ------ Membership stock - Class B................................................................ $ 7 $ 7 Activity stock............................................................................ 129 25 Excess stock.............................................................................. 2 6 ------ ------ Total..................................................................................... $ 138 $ 38 ====== ====== Actual or estimated borrowing capacity as determined by the insurer....................... $4,928 $7,039 ====== ======
The Company did not hold any Class A at December 31, 2018 or 2017. The following table presents the amount of collateral pledged, including FHLB common stock held, to secure advances from the FHLB:
December 31, 2018 December 31, 2017 -------------------- -------------------- Amortized Amortized (in millions) Cost Fair Value Cost Fair Value ------------- --------- ---------- --------- ---------- Amount pledged......................................... $3,851 $3,833 $1,042 $1,067 Maximum amount pledged during reporting period......... 4,389 4,349 1,310 1,352 ====== ====== ====== ======
The Company's borrowing capacity determined quarterly based upon the borrowing limit imposed by statute in the state of domicile. The following table presents the outstanding funding agreements and maximum borrowings from the FHLB:
December 31, ------------- (in millions) 2018 2017 ------------- ------ ------ Amount outstanding..................................... $3,148 $ 606 Maximum amount borrowed during reporting period........ $3,323 $1,005 ------ ------
. While the funding agreements are presented herein to show all amounts received from FHLB, the funding agreements are treated as deposit-type contracts, consistent with the other funding agreements for which the Company's intent is to earn a spread and not to fund operations. The Company had no debt outstanding with the FHLB at December 31, 2018 or 2017. The following table reflects the principal amounts of the funding agreements issued to the FHLB:
(in millions) ------------- Funding Agreements Date Issued Amounts ------------------ ----------------- ------- 10-year floating rate................... February 15, 2018 $1,148 10-year floating rate................... February 15, 2018 1,277 10-year floating rate................... February 15, 2018 175 10-year floating rate................... February 6, 2018 87 10-year floating rate................... January 25, 2018 31 10-year floating rate................... January 13, 2017 57 10-year floating rate................... February 1, 2017 67 7-year floating rate.................... May 24, 2017 52 10-year floating rate................... July 20, 2016 254
59 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 20. COMMITMENTS AND CONTINGENCIES Commitments The Company had commitments to provide funding to various limited partnerships totaling $2.4 billion and $763 million at December 31, 2018 and 2017, respectively. The commitments to invest in limited partnerships and other funds may be called at the discretion of each fund, as needed and subject to the provisions of such fund's governing documents, for funding new investments, follow-on investments and/or fees and other expenses of the fund. Of the total commitments at December 31, 2018, $744 million are currently expected to expire in 2019, and the remainder by 2020 based on the expected life cycle of the related funds and the Company's historical funding trends for such commitments. At December 31, 2018 and 2017, the Company had $1.3 billion and $1.1 billion, respectively, of outstanding commitments related to various funding obligations associated with its investments in commercial mortgage loans. Of the total current commitments, $659 million are expected to expire in 2019 and the remainder by 2033, based on the expected life cycle of the related loans and the Company's historical funding trends for such commitments. The Company has various long-term, noncancelable operating leases, primarily for office space and equipment, which expire at various dates over the next several years. At December 31, 2018, the future minimum lease payments under the operating leases are as follows:
(in millions) ------------- 2019.................................... $16 2020.................................... 16 2021.................................... 16 2022.................................... 20 2023.................................... 12 Remaining years after 2023.............. 17 --- Total................................... $97 ===
Rent expense was $17 million, $20 million and $22 million in 2018, 2017 and 2016, respectively. Contingencies Legal Matters Various lawsuits against the Company have arisen in the ordinary course of business. The Company believes it is unlikely that contingent liabilities arising from such lawsuits will have a material adverse effect on the Company's financial position, results of operations or cash flows. Regulatory Matters All fifty states and the District of Columbia have laws requiring solvent life insurance companies, through participation in guaranty associations, to pay assessments to protect the interests of policyholders of insolvent life insurance companies. These state insurance guaranty associations generally levy assessments, up to prescribed limits, on member insurers in a particular state based on the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Such assessments are used to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. The Company accrues liabilities for guaranty fund assessments when an assessment is probable and can be reasonably estimated. The Company estimates the liability using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations. While the Company cannot predict the amount and 60 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) timing of any future guaranty fund assessments, the Company has established reserves it believes are adequate for assessments relating to insurance companies that are currently subject to insolvency proceedings. The Company had accrued $40 million for these guarantee fund assessments at both December 31, 2018 and 2017, respectively. The Company has recorded receivables of $34 million at both December 31, 2018 and 2017, for expected recoveries against the payment of future premium taxes. During 1997 and 1998, the Company participated in a workers' compensation underwriting pool with a third party insurance company. Both companies share equally in the pool. Collectively, the workers' compensation business is assumed from over 50 ceding companies and retro-ceded to 15 programs. The business covers risks primarily from the 1997 and 1998 underwriting years but also includes risk from the 1996 underwriting year. There were no reinsurance recoverables on claim liabilities and reserves included in these financial statements related to the workers' compensation business at both December 31, 2018 and 2017. While not included in these statutory financial statements, the Company is contingently liable for losses incurred by its 50 percent pool participant should that third party become insolvent or otherwise unable to meet its obligations under the pool agreement. At December 31, 2018 and 2017, the Company had admitted assets of $142 million and $48 million, respectively, in premiums receivable due from policyholders (or agents). The Company routinely evaluates the collectability of these receivables. Based upon Company experience, the potential for any loss is not believed to be material to the Company's financial condition. During 2018 and 2017, the Company wrote accident and health insurance premiums that were subject to the risk-sharing provisions of the Affordable Care Act (ACA). However, the Company had no balances for the risk corridors program due to exclusion from the program. There was no financial impact of risk-sharing provisions on assets, liabilities or operations, related to the Permanent ACA Risk Adjustment Program. In addition, there was no financial impact of risk-sharing provisions on assets and liabilities related to the Transitional ACA Reinsurance Program. Under this program, the Company has recorded an insignificant amount in reinsurance recoveries due to ACA Reinsurance payments. Various federal, state or other regulatory agencies may from time to time review, examine or inquire into the operations, practices and procedures of the Company, such as through financial examinations, subpoenas, investigations, market conduct exams or other regulatory inquiries. Based on the current status of pending regulatory examinations, investigations, and inquiries involving the Company, the Company believes it is not likely that these regulatory examinations, investigations, or inquiries will have a material adverse effect on the financial position, results of operations or cash flows of the Company. The Company provides products and services that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), or the Internal Revenue Code of 1986, as amended (the Internal Revenue Code). Plans subject to ERISA include certain pension and profit sharing plans and welfare plans, including health, life and disability plans. As a result, the Company's activities are subject to the restrictions imposed by ERISA and the Internal Revenue Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that, fiduciaries may not cause a covered plan to engage in certain prohibited transactions. The SEC, federal and state lawmakers and state insurance regulators continue their efforts at evaluating what is an appropriate regulatory framework around a standard of care for the sale of investment products and services. For example, on April 18, 2018, the SEC proposed a package of rulemakings and interpretations designed to address the standard of care issues and the transparency of retail investors' relationships with investment advisors and broker-dealers. Additionally, on July 18, 2018, the New York State Department of Financial Services adopted a best interest standard of care regulation applicable to annuity and life transactions through issuance of the First Amendment to Insurance Regulation 187 - Suitability and Best Interests in Life Insurance and Annuity Transactions (Regulation 187). The compliance date for Regulation 187 is August 1, 2019 for annuity products and February 1, 2020 for life products. As amended, Regulation 187 requires producers to act in their client's best interest when making point-of-sale and inforce recommendations, and provide in writing the basis for the recommendation, as well as the facts and analysis to support the recommendation. The amended regulation also imposes additional duties on life insurance companies in relation to these transactions, such as requiring insurers to establish and maintain procedures designed to prevent 61 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) financial exploitation and abuse. The Company will implement and enhance processes and procedures, where needed, to comply with this regulation. Other states, such as Nevada, Maryland and New Jersey, have also proposed similar standard of care regulations applicable to insurance producers and/or insurance companies. The Company continues to closely follow these proposals and other relevant federal and state-level regulatory and legislative developments in this area. While management cannot predict the long-term impact of these developments on the Company's businesses, the Company believes its diverse product offerings and distribution relationships position the Company to compete effectively in this evolving marketplace. Business Interruption Insurance Recoveries In 2017, the Company recorded $6 million in business interruption insurance recoveries related to the flooding and property damage that occurred at the Company's main administrative office located in Houston, Texas. In August 2017, Hurricane Harvey made landfall in Texas and Louisiana causing widespread flooding and property damage in various southern counties within the region. The recoveries were included within aggregate write-ins for miscellaneous income on the Summary of Operations. 21. RELATED PARTY TRANSACTIONS Events Related to AIG Parent AIG Parent formed Fortitude Group Holdings, LLC (Fortitude Holdings) to act as a holding company for Fortitude Re. On November 13, 2018, AIG Parent completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TC Group Cayman Investment Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P. (Carlyle) (the Fortitude Re Closing). Fortitude Holdings owns 100 percent of the outstanding common shares of Fortitude Re and AIG Parent has an 80.1 percent ownership interest in Fortitude Holdings. In connection with the sale, AIG Parent agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment management fee payments within thirty-six months following the Fortitude Re Closing. AIG Parent also will be required to pay a proportionate amount of an agreed make-whole fee to the extent AIG Parent fails to satisfy such investment commitment targets. In connection with the Fortitude Re Closing, the Company's insurance company subsidiaries, VALIC and USL, have each also entered into an investment management agreement with a Carlyle affiliate pursuant to which such subsidiary retained the Carlyle affiliate to manage certain assets in its general account investment portfolio. On September 25, 2017, AIG Parent announced organizational changes designed to position AIG Parent a growing, more profitable insurer that is focused on underwriting excellence. In the fourth quarter of 2017, AIG Parent finalized its plan to reorganize its operating model. Commercial Insurance and Consumer Insurance segments transitioned to General Insurance and Life and Retirement, respectively. AIG Parent's core businesses include General Insurance, Life and Retirement and Other Operations. General Insurance consists of two operating segments - North America and International. Life and Retirement consists of four operating segments - Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Blackboard U.S. Holdings, Inc. (Blackboard), AIG Parent's technology-driven subsidiary, is reported within Other Operations. AIG Parent also reports a Legacy Portfolio consisting of run-off insurance lines and legacy investments, which are considered non-core. AIG Parent continues to execute initiatives focused on organizational simplification, operational efficiency, and business rationalization. In keeping with AIG's broad and ongoing efforts to transform for long-term competitiveness, AIG Parent recognized restructuring costs of $395 million, $413 million and $694 million of pre-tax restructuring and other costs in 2018, 2017 and 2016, respectively, primarily comprised of employee severance charges. Additional information on AIG Parent is publicly available in AIG Parent's regulatory filings with the SEC, which can be found at www.sec.gov. Information regarding AIG Parent as described herein is qualified by regulatory filings AIG Parent files from time to time with the SEC. 62 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Selkirk Transactions During 2013 and 2014, the Company entered into securitization transactions in which portfolios of the Company's commercial mortgage loans were transferred to special purpose entities, with the Company retaining a significant beneficial interest in the securitized loans. As consideration for the transferred loans, the Company received beneficial interests in certain special purpose entities and cash proceeds from the securitized notes issued to third party investors by other special purpose entities. The transfer was accounted for as a sale and the Company derecognized the commercial mortgage loans transferred. The beneficial interests in loan-backed and structured securities and equity interests received by the Company were initially recognized at fair value as unaffiliated investments, as these securities are non-recourse to the issuer, and interest and principal payments are dependent upon the cash flows from the underlying unaffiliated mortgage loans. Lighthouse VI During 2013, the Company, along with an affiliate, executed three transactions in which a portfolio of securities was, in each transaction, transferred into a newly established Common Trust Fund (CTF) in exchange for proportionate interests in all assets within each CTF as evidenced by specific securities controlled by and included within the Company's Representative Security Account (RSA). In each transaction, a portion of the Company's securities were transferred to the RSA of the affiliate, VALIC, in exchange for other VALIC securities. During 2015, the Company transferred securities to two separate CTFs, of which 20% were then transferred to the RSA of VALIC. The transfer was accounted for as a sale by the Company to VALIC. The remaining 80% of the securities were transferred to the Company's RSA. Ambrose During 2013 and 2014, the Company entered into securitization transactions in which the Company transferred portfolios of high grade corporate securities, and structured securities acquired from AIG, to newly formed special purpose entities (the Ambrose entities). As consideration for the transferred securities, the Company received beneficial interests in tranches of structured securities issued by each Ambrose entity. These structured securities were designed to closely replicate the interest and principal amortization payments of the transferred securities. The Ambrose entities received capital commitments from a non-U.S. subsidiary of AIG, which are guaranteed by AIG. Pursuant to these capital commitments, the promissor will contribute funds to the respective Ambrose entity upon demand. These capital commitments received by the Ambrose entities range from $300 million to $400 million per entity. American Home and National Union Guarantees The Company has a General Guarantee Agreement with American Home Assurance Company (American Home), an indirect wholly owned subsidiary of AIG Parent. Pursuant to the terms of this agreement, American Home has unconditionally and irrevocably guaranteed insurance policies the Company issued between March 3, 2003 and December 29, 2006. The Company, as successor-in-interest to American General Life and Accident Insurance Company (AGLA) has a General Guarantee Agreement with American Home. Pursuant to the terms of this agreement, American Home has unconditionally and irrevocably guaranteed policies of insurance issued by AGLA between March 3, 2003 and September 30, 2010. 63 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) The Company, as successor-in-interest to SunAmerica Annuity and Life Assurance Company (SAAL) and SunAmerica Life Insurance Company (SALIC) has a General Guarantee Agreement with American Home. Pursuant to the terms of this agreement, American Home has unconditionally and irrevocably guaranteed policies of insurance issued by SAAL and SALIC between January 4, 1999 and December 29, 2006. The Company, as successor-in-interest to American General Life Insurance Company of Delaware, formerly known as AIG Life Insurance Company (AIG Life), has a General Guarantee Agreement with National Union Fire Insurance Company of Pittsburg, Pa. (National Union), an indirect wholly owned subsidiary of AIG Parent. Pursuant to the terms of this agreement, National Union has unconditionally and irrevocably guaranteed insurance policies issued by AIG Life between July 13, 1998 and April 30, 2010. American Home's and National Union's audited statutory financial statements are filed with the SEC in the Company's registration statements for variable products that are subject to the Guarantees. Cut-Through Agreement The Company and AIG Life of Bermuda, Ltd. ("AIGB") entered into a Cut-through Agreement in which insureds, their beneficiaries and owners were granted a direct right of action against the Company in the event AIGB becomes insolvent or otherwise cannot or refuses to perform its obligations under certain life insurance policies issued by AIGB. The Cut-through Agreement was approved by the TDI. The amount of the retained liability on AIGB's books related to this agreement was approximately $330,000 and $355,000 at December 31, 2018 and 2017, respectively. The Company believes the probability of loss under this agreement is remote. No liability has been recognized in relation to this guarantee due to immateriality. Affiliate Transactions The Company purchases or sells securities, at fair market value, to or from affiliates in the ordinary course of business. In 2018, the Company and several of its U.S. insurance company affiliates restructured their respective ownership interests in certain real estate equity investments previously originated by an affiliate, AIG Global Real Estate Investment Corp. (including its investment management affiliates, "AIGGRE"), by contributing such interests to three separate real estate investment funds managed by AIGGRE - AIGGRE U.S. Real Estate Fund I, LP ("U.S. Fund I"), AIGGRE U.S. Real Estate Fund II, LP ("U.S. Fund II" and, together with U.S. Fund I, the "U.S. Funds"), and AIGGRE Europe Real Estate Fund I S.C.SP ("Europe Fund I"). The U.S. Funds each closed on November 1, 2018. In connection with the closing of U.S. Fund I, the Company made a capital commitment to the fund of up to $288 million (representing an approximately 24% equity interest therein), and contributed to the fund a combination of the Company's interests in certain real estate equity investments (with an aggregate fair value of approximately $150.8 million) and cash (approximately $41.7 million). In connection with the closing of U.S. Fund II, the Company made a capital commitment to the fund of up to $675 million (representing approximately 25% equity interest therein), and contributed to the fund the Company's interests in certain real estate equity investments with an aggregate fair value of approximately $527.4 million and received a cash payment from the fund of approximately $7.4 million. Further, Europe Fund I closed on November 2, 2018. In connection with the closing of Europe Fund I, the Company made a capital commitment to the fund of up to $189.1 million (representing an approximately 29% equity interest therein), and contributed to the fund the Company's interests in certain real estate equity investments with an aggregate fair value of approximately $143 million and received a cash payment from the fund of approximately $18.9 million. As a result of this transaction, the Company received equity in the Funds equaling the fair value of the assets transferred. The transfer is accounted for at fair value with any gain deferred until permanence of transfer of risk and rewards can be established. Any loss is recognized immediately, if any. The difference between the carrying value of the assets transferred and consideration received is recorded as a basis difference, which will be admitted subject to applicable limits and amortized over the duration of the Funds. At December 31, 2018, the Company's unfunded capital commitment to U.S. Fund I, U.S. Fund II and Europe Fund I were approximately $94.9 million, $145.5 million and $86 million, respectively. 64 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) In February 2018, the Company executed a Modified Coinsurance (ModCo) Agreement with Fortitude Reinsurance Company, Ltd (FRL), (formerly DSA Reinsurance Company Limited), an AIG subsidiary and registered Class 4 and Class E reinsurer in Bermuda. See Note 15 for additional information regarding this reinsurance transaction. In October 2017, the Company's subsidiary, AIG Home Loan 2, transferred a portfolio of U.S. residential mortgage loans with a carrying value of $410 million to a newly formed special purpose vehicle. The transaction involved securitization of the transferred loans and the special purpose vehicle issued residential mortgage-backed securities. The residential mortgage-backed securities purchased by the Company from the special purpose vehicle are accounted for as non-affiliated securities and are valued and reported in accordance with the designation assigned by the NAIC Securities Valuation Office and SSAP 43 - Revised - Loan-Backed and Structured Securities. In May 2017, the Company's wholly owned subsidiary, AIG Home Loan 2, LLC, transferred certain residential mortgage loans (RMLs) to the Company as a return of capital distribution. The RMLs were recorded by the Company in the amount of $1.5 billion, which was the loans' adjusted carrying value at the time of transfer. Prior to the transfer, the RMLs were indirectly owned by the Company through its investment in AIG Home Loan 2, LLC, which was reported on Schedule BA. After the transfer, the RMLs are directly owned by the Company and reported as Schedule B assets. In February 2017, the Company purchased commercial mortgage loans from certain affiliated AIG domestic property casualty insurance companies for initial cash consideration totaling approximately $843 million, based on the outstanding principal balance of each loan, which was ultimately trued up to fair value based on underlying property appraisals and valuations. In January and February 2017, the Company purchased investment grade private placement bonds from certain affiliated AIG domestic property casualty insurance companies, at fair market value, for cash consideration totaling approximately $425 million. During 2016, the Company transferred certain hedge fund and private equity investments at fair market value to American Home, in exchange for cash and marketable securities totaling approximately $284 million as part of an initiative to improve asset-liability management in AIG Parent's domestic life and property casualty insurance companies. Financing Agreements On January 1, 2015, the Company and certain of its affiliates entered into a revolving loan facility with AIG Parent, in which the Company and each such affiliate can borrow monies from AIG Parent subject to certain terms and conditions. Principal amounts borrowed under this facility may be repaid and re-borrowed, in whole or in part, from time to time, without penalty. However, the total aggregate amount of loans borrowed by all borrowers under the facility cannot exceed $500 million. The loan facility also sets forth individual borrowing limits for each borrower, with the Company's maximum borrowing limit being $500 million. At both December 31, 2018 and 2017, the Company did not have notes payable balance outstanding under this facility. 65 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Investments in Subsidiary, Controlled and Affiliated The following table presents information regarding the Company's investments in non-insurance SCA entities as of December 31, 2018:
Gross Non-admitted Admitted Asset (in millions) Amount Amount Amount Date of NAIC Filing ------------- ------ ------------ -------------- ------------------- AIG Inc........................................... $ 4 $ -- $ 4 7/27/2018 AIG Direct - SER B................................ 3 3 -- NA AIG Direct - SER A................................ 3 3 -- NA AIG Direct - NON VOTING........................... 1 1 -- NA UG Corp COM....................................... 2 2 -- NA AGL Assignment Co LLC............................. 5 5 -- NA AGLIC INVESTMENTS BERMUDA LTD..................... 105 -- 105 Not Applicable AIG Home Loan 2, LLC.............................. 80 -- 80 Not Applicable SunAmerica Affordable Housing LLC................. 682 -- 682 Not Applicable SunAmerica Asset Management LLC................... 123 123 -- Not Applicable Selkirk No. 1 Investments......................... 13 -- 13 Not Applicable Selkirk No. 3A Investments........................ 5 -- 5 Not Applicable ------ ---- ---- Total............................................. $1,026 $137 $889 ====== ==== ====
Operating Agreements The Company's short-term investments included investments in a Liquidity Pool, which are funds managed by an affiliate, AIG Capital Management Corporation, in the amount of $261 million and $215 million at December 31, 2018 and 2017, respectively. Pursuant to service and expense agreements, AIG and affiliates provide, or cause to be provided, administrative, marketing, investment management, accounting, occupancy, and data processing services to the Company. The allocation of costs for services is based generally on estimated levels of usage, transactions or time incurred in providing the respective services. Generally, these agreements provide for the allocation of costs upon either the specific identification basis or a proportional cost allocation basis which management believes to be reasonable. In all cases, billed amounts pursuant to these agreements do not exceed the cost to AIG or the affiliate providing the service. The Company was charged $97 million and $86 million, as part of the cost sharing expenses attributed to the Company but incurred by AIG and affiliates in 2018 and 2017, respectively. The Company is also party to several other service and/or cost sharing agreements with its affiliates. The Company was charged $106 million, $114 million and $109 million under such agreements for expenses attributed to the Company but incurred by affiliates in 2018, 2017 and 2016, respectively. Pursuant to an amended and restated investment advisory agreement, the majority of the Company's invested assets are managed by an affiliate. The investment management fees incurred were $104 million in 2018 and $103 million in 2017 and 2016, respectively. The majority of the Company's Swap agreements are entered into with an affiliated counterparty, AIG Markets, Inc. (See Note 7). Other The Company engages in structured settlement transactions, certain of which involve affiliated property and casualty insurance companies that are subsidiaries of AIG Parent. In a structured settlement arrangement, a property and casualty insurance policy claimant has agreed to settle a casualty insurance claim in exchange for fixed payments over either a fixed determinable period of time or a life contingent period. In such claim settlement arrangements, a casualty insurance claim payment provides the funding for the purchase of a single premium immediate annuity issued by the Company for the ultimate benefit of the claimant. In certain structured settlement arrangements, the affiliated property and casualty insurance company remains contingently liable for the payments to the claimant. 66 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 22. SUBSEQUENT EVENTS Management considers events or transactions that occur after the reporting date, but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures. The Company has evaluated subsequent events through April 22, 2019, the date the financial statements were issued. In January 2019, AGL and several of its U.S. insurance company affiliates established AIGGRE U.S. Real Estate Fund III, LP ("U.S. Fund III"), a real estate investment fund managed by AIGGRE. At the closing of U.S. Fund III on January 2, 2019, the Company made a capital commitment to the fund of up to $655 million, which represents approximately 43.7% equity interests in the fund. In connection with the closing of U.S. Fund III, the Company contributed to the fund its interests in certain real estate equity investments with an aggregate fair value of approximately $142.5 million and received a cash payment of approximately $39 million. The Company's unfunded capital commitment to U.S. Fund III at January 2, 2019 upon the closing of U.S. Fund III was approximately $551.4 million. 67 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) 23. LOAN-BACKED AND STRUCTURED SECURITY IMPAIRMENTS AND STRUCTURED NOTES HOLDINGS LBaSS The following table presents the LBaSS held by the Company at December 31, 2018 for which it had recognized non-interest related OTTI subsequent to the adoption of SSAP 43R:
(in thousands) Amortized Cost Present Date of Before Value of Financial Current Projected Amortized Fair Value Statement Period Cash Recognized Cost After at Time of Where CUSIP OTTI Flows OTTI OTTI OTTI Reported ----- --------- --------- ---------- ---------- ---------- ---------- 02660LAB6....... $ 8,229 $ 7,963 $ 266 $ 7,963 $ 7,428 03/31/2018 75114NAA2....... 5,616 5,421 195 5,421 5,127 03/31/2018 17307G2Z0....... 3,252 3,212 40 3,212 3,133 03/31/2018 02660KAA0....... 15,540 14,921 619 14,921 14,648 03/31/2018 94985JBP4....... 1,979 1,880 99 1,880 1,816 03/31/2018 02147HAD4....... 7,479 7,213 266 7,213 7,069 03/31/2018 761118WQ7....... 8,639 8,277 362 8,277 7,559 03/31/2018 02147HAF9....... 3,920 3,855 65 3,855 3,808 03/31/2018 93934FNJ7....... 20,785 20,473 312 20,473 18,745 03/31/2018 59020UZ57....... 15,154 15,056 98 15,056 14,702 03/31/2018 43710EAD2....... 4,554 4,450 104 4,450 4,307 03/31/2018 12498FAC4....... 94 -- 94 -- 48 03/31/2018 94979XAD9....... 157 62 95 62 5 03/31/2018 74160MCZ3....... 223 217 6 217 218 03/31/2018 05946XMG5....... 602 273 329 273 386 03/31/2018 74160MEH1....... 1,086 1,026 60 1,026 1,077 03/31/2018 026930AA5....... 4,542 4,493 49 4,493 4,394 03/31/2018 43709XAF8....... 8,552 8,174 378 8,174 8,087 03/31/2018 466247KL6....... 506 292 214 292 481 03/31/2018 25702@AA4....... 1,499 898 601 898 898 03/31/2018 25702@AB2....... 1,499 898 601 898 898 03/31/2018 76110WLB0....... 890 708 182 708 888 03/31/2018 -------- -------- ------ -------- -------- Quarterly Total $114,797 $109,762 $5,035 $109,762 $105,722 ======== ======== ====== ======== ======== 25702@AA4....... $ 1,996 $ 1,804 $ 192 $ 1,804 $ 1,795 06/30/2018 25702@AB2....... 1,996 1,804 192 1,804 1,795 06/30/2018 007036UQ7....... 8,853 8,520 333 8,520 7,884 06/30/2018 32051GPM1....... 6,874 6,704 170 6,704 6,658 06/30/2018 94983KAA7....... 38,051 37,984 67 37,984 37,386 06/30/2018 32051GJ55....... 2,606 2,587 19 2,587 2,596 06/30/2018 02147HAC6....... 2,718 2,684 34 2,684 2,703 06/30/2018 69371VBH9....... 1,369 1,318 51 1,318 1,360 06/30/2018 12489WQX5....... 16,318 16,260 58 16,260 16,092 06/30/2018 466247PE7....... 7,410 7,375 35 7,375 7,313 06/30/2018 36298NBA1....... 5,702 5,175 527 5,175 5,620 06/30/2018 617451CZ0....... 186 -- 186 -- 148 06/30/2018 -------- -------- ------ -------- -------- Quarterly Total $ 94,079 $ 92,215 $1,864 $ 92,215 $ 91,350 ======== ======== ====== ======== ======== 92922F3L0....... $ 31,808 $ 29,215 $2,593 $ 29,215 $ 30,712 09/30/2018 264407AA5....... 39,067 35,474 3,593 35,474 33,995 09/30/2018 45660L6N4....... 21,021 20,763 258 20,763 19,245 09/30/2018 92925VAF7....... 11,068 10,637 431 10,637 11,047 09/30/2018 93364FAD3....... 11,844 11,484 360 11,484 11,233 09/30/2018 68384CAB2....... 32,305 31,916 389 31,916 31,753 09/30/2018 939355AD5....... 25,805 25,601 204 25,601 25,620 09/30/2018 152314DP2....... 5,999 5,823 176 5,823 5,964 09/30/2018 -------- -------- ------ -------- --------
68 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued)
(in thousands) Amortized Cost Present Date of Before Value of Financial Current Projected Amortized Fair Value Statement Period Cash Recognized Cost After at Time of Where CUSIP OTTI Flows OTTI OTTI OTTI Reported ----- --------- --------- ---------- ---------- ---------- ---------- 92990GAA1....... $ 6,416 $ 6,342 $ 74 $ 6,342 $ 6,254 09/30/2018 59020UFA8....... 1,720 1,643 77 1,643 1,533 09/30/2018 126671Z74....... 493 491 2 491 479 09/30/2018 466247KL6....... 317 170 147 170 248 09/30/2018 12669E2X3....... 1,778 1,767 11 1,767 1,689 09/30/2018 073868AA9....... 2,338 2,238 100 2,238 2,331 09/30/2018 04542BGW6....... 561 560 1 560 543 09/30/2018 12489WHZ0....... 599 598 1 598 576 09/30/2018 31359UPW9....... 916 791 125 791 740 09/30/2018 939336ZV8....... 650 591 59 591 649 09/30/2018 92922FEC8....... 1,677 1,669 8 1,669 1,647 09/30/2018 161546HD1....... 1,653 1,651 2 1,651 1,638 09/30/2018 939336C92....... 870 866 4 866 863 09/30/2018 94981XAF0....... 913 912 1 912 839 09/30/2018 94979XAC1....... 433 430 3 430 354 09/30/2018 43739EBC0....... 1,986 1,981 5 1,981 1,871 09/30/2018 45254NJN8....... 378 376 2 376 365 09/30/2018 03072SNF8....... 1,940 1,939 1 1,939 1,896 09/30/2018 12669FTC7....... 2,531 2,153 378 2,153 2,387 09/30/2018 466247BG7....... 112 101 11 101 106 09/30/2018 03072SKS3....... 634 633 1 633 620 09/30/2018 5899297K8....... 8,054 8,053 1 8,053 7,993 09/30/2018 35729PPX2....... 9,797 9,747 50 9,747 9,796 09/30/2018 94984MAB0....... 2,201 2,187 14 2,187 2,183 09/30/2018 94979UAL7....... 1,593 1,585 8 1,585 1,336 09/30/2018 94980PAL5....... 385 385 -- 385 365 09/30/2018 12652CBB4....... 12,814 12,796 18 12,796 12,120 09/30/2018 12652CBC2....... 4,406 4,392 14 4,392 4,263 09/30/2018 126694PP7....... 6,295 6,228 67 6,228 6,216 09/30/2018 22541QQK1....... 896 710 186 710 767 09/30/2018 76110WVJ2....... 6,681 5,899 782 5,899 6,101 09/30/2018 949769AJ2....... 550 550 -- 550 519 09/30/2018 466247DF7....... 1,619 1,610 9 1,610 1,603 09/30/2018 32027NGD7....... 808 806 2 806 796 09/30/2018 45254NJP3....... 180 180 -- 180 173 09/30/2018 05948XTP6....... 292 240 52 240 280 09/30/2018 81746VCD0....... 5,271 5,253 18 5,253 5,184 09/30/2018 65535VMW5....... 156 156 -- 156 156 09/30/2018 36228FZA7....... 1,077 1,071 6 1,071 1,077 09/30/2018 059511AQ8....... 70,956 62,300 8,656 62,300 63,781 09/30/2018 94974SAF0....... 1,202 1,197 5 1,197 1,185 09/30/2018 92922FEC8....... 667 664 3 664 655 09/30/2018 949802AC6....... 408 407 1 407 388 09/30/2018 94981DAP2....... 746 743 3 743 666 09/30/2018 43739EBD8....... 868 864 4 864 771 09/30/2018 466247GH0....... 1,141 1,139 2 1,139 999 09/30/2018 -------- -------- ------- -------- -------- Quarterly Total $346,895 $327,977 $18,918 $327,977 $326,570 ======== ======== ======= ======== ======== 88522NAA1....... $ 8,588 $ 8,448 $ 140 $ 8,448 $ 8,323 12/31/2018 125439AA7....... 11,318 11,252 66 11,252 11,047 12/31/2018 07401EAE9....... 56,776 56,568 208 56,568 54,818 12/31/2018 94986QAA1....... 61,577 61,099 478 61,099 59,211 12/31/2018 17308FAA7....... 8,512 8,447 65 8,447 8,440 12/31/2018 45670BAL3....... 31,586 31,353 233 31,353 30,293 12/31/2018 02148BAA2....... 30,980 30,868 112 30,868 30,489 12/31/2018 -------- -------- ------- -------- --------
69 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued)
(in thousands) Amortized Cost Date of Before Financial Current Present Value of Amortized Fair Value Statement Period Projected Cash Recognized Cost After at Time of Where CUSIP OTTI Flows OTTI OTTI OTTI Reported ----- --------- ---------------- ---------- ---------- ---------- ---------- 92926UAF8....... $ 50,362 $ 49,329 $ 1,033 $ 49,329 $ 49,459 12/31/2018 61748HLA7....... 20,943 20,289 654 20,289 19,045 12/31/2018 02660LAF7....... 249,880 248,330 1,550 248,330 245,826 12/31/2018 61745M4M2....... 31,210 30,827 383 30,827 30,029 12/31/2018 12628LAE0....... 16,163 15,997 166 15,997 15,030 12/31/2018 362290AM0....... 1,102 1,030 72 1,030 1,086 12/31/2018 12668BKA0....... 15,547 15,485 62 15,485 15,490 12/31/2018 65539CAW6....... 47,629 47,485 144 47,485 47,115 12/31/2018 61748HJY8....... 4,532 4,386 146 4,386 4,452 12/31/2018 94984GAD9....... 4,915 4,878 37 4,878 4,822 12/31/2018 07384YPN0....... 2,675 2,543 132 2,543 2,269 12/31/2018 17025TAR2....... 2,382 2,341 41 2,341 2,336 12/31/2018 59020UAY1....... 1,061 1,059 2 1,059 909 12/31/2018 94986DAA0....... 4,058 4,032 26 4,032 3,972 12/31/2018 949808BD0....... 4,133 4,111 22 4,111 3,875 12/31/2018 466247BE2....... 1,533 1,525 8 1,525 1,423 12/31/2018 5899296T0....... 438 436 2 436 366 12/31/2018 466247EC3....... 2,316 2,289 27 2,289 1,992 12/31/2018 12669DPR3....... 877 819 58 819 786 12/31/2018 45254NEJ2....... 1,403 1,397 6 1,397 1,384 12/31/2018 466247CP6....... 4,236 4,176 60 4,176 4,102 12/31/2018 92977TAE2....... 2,530 2,526 4 2,526 2,477 12/31/2018 05952GAE1....... 13,321 12,793 528 12,793 13,296 12/31/2018 36185NG87....... 230 228 2 228 209 12/31/2018 040104SN2....... 3,216 3,206 10 3,206 3,122 12/31/2018 07386HJT9....... 3,750 3,738 12 3,738 3,736 12/31/2018 93934FGB2....... 5,015 5,014 1 5,014 5,013 12/31/2018 65535VPY8....... 10,380 7,952 2,428 7,952 10,373 12/31/2018 362348AS3....... 4,836 4,478 358 4,478 4,834 12/31/2018 88156EAD8....... 6,809 6,539 270 6,539 6,713 12/31/2018 655378AH0....... 12,173 11,700 473 11,700 11,996 12/31/2018 073879BB3....... 1,945 1,559 386 1,559 1,595 12/31/2018 466247WT6....... 8,393 8,375 18 8,375 8,349 12/31/2018 94983JAG7....... 7,771 7,582 189 7,582 7,674 12/31/2018 12559QAG7....... 78,613 77,943 670 77,943 75,565 12/31/2018 46630GBD6....... 11,258 11,219 39 11,219 10,978 12/31/2018 94983TAE0....... 6,089 6,033 56 6,033 5,979 12/31/2018 94979UAM5....... 896 742 154 742 518 12/31/2018 74160MGT3....... 1,446 798 648 798 1,338 12/31/2018 94983YAK5....... 2,233 2,204 29 2,204 2,227 12/31/2018 073852AB1....... 9,012 6,054 2,958 6,054 8,882 12/31/2018 126694JS8....... 2,700 2,685 15 2,685 2,698 12/31/2018 12667FM77....... 7,980 7,939 41 7,939 7,853 12/31/2018 12667FUZ6....... 4,010 3,975 35 3,975 3,997 12/31/2018 693680BG4....... 1,865 1,851 14 1,851 1,749 12/31/2018 07384YPN0....... 1,824 1,733 91 1,733 1,543 12/31/2018 466247GJ6....... 2,702 2,528 174 2,528 2,084 12/31/2018 25702@AA4....... 3,540 898 2,642 898 898 12/31/2018 25702@AB2....... 3,540 898 2,642 898 898 12/31/2018 -------- --------------- ------- -------- -------- Quarterly Total $894,809 $ 873,989 $20,820 $873,989 $864,983 ======== =============== ======= ======== ======== Year-end total $46,637 =======
70 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued) Structured Notes The following table presents the structured notes held by the Company at December 31, 2018:
(in thousands) Book/Adjusted CUSIP Actual Cost Fair Value Carrying Value ----- ----------- ---------- -------------- 03350FAA4.... $ 2,601 $ 2,303 $ 2,600 039483BC5.... 24,278 26,529 24,007 054536AC1.... 400 394 400 05565AAB9.... 15,941 16,320 15,943 05954TAJ0.... 10,430 10,154 10,031 05968DAA8.... 18,500 19,425 18,500 06051GGG8.... 19,082 18,260 19,080 06051GGM5.... 3,632 3,510 3,634 06051GGR4.... 12,178 11,854 12,195 06051GHA0.... 98,682 93,525 98,723 06051GHD4.... 3,133 2,946 3,134 064058AB6.... 20,000 17,219 20,000 06738CAG4.... 53,546 87,098 54,528 06738EBD6.... 13,962 13,498 13,964 111021AE1.... 42,445 50,042 40,630 13643EAA3.... 5,344 5,576 5,165 172967LJ8.... 12,184 10,910 12,176 172967LS8.... 43,000 40,101 43,000 172967LU3.... 20,000 17,865 20,000 21987DAB0.... 1,498 1,496 1,498 225401AF5.... 16,005 15,118 16,013 23311PAA8.... 6,892 6,227 6,894 25156PAC7.... 77,328 86,455 75,639 35177PAL1.... 66,489 70,209 62,371 38141GWV2.... 7,000 6,535 7,000 38148YAA6.... 12,847 12,320 12,868 404280BK4.... 7,174 7,128 7,170 404280BT5.... 5,069 4,956 5,066 46625HRY8.... 1,423 1,427 1,423 46647PAF3.... 1,983 1,993 1,985 46647PAJ5.... 4,000 3,633 4,000 46647PAK2.... 29,000 25,954 29,000 46647PAL0.... 63,570 57,978 63,586 46647PAN6.... 17,805 17,541 17,817 539439AQ2.... 25,000 22,238 25,000 59156RAP3.... 443 451 443 59156RBF4.... 17,031 17,742 17,536 60687YAT6.... 22,758 23,229 22,760 61744YAK4.... 1,901 1,891 1,905 61744YAP3.... 23,058 22,833 23,092 636792AB9.... 10,500 10,430 10,500 693475AK1.... 6,399 6,503 6,399 726503AE5.... 5,521 4,791 5,523 744320AM4.... 13,299 13,025 13,301 780097AH4.... 20,289 50,982 22,798 780097BG5.... 24,000 22,909 24,000 80281LAG0.... 1,800 1,627 1,800 80928HAA1.... 11,280 11,196 11,280 82669GAS3.... 27,600 28,177 27,600 ------- ------- -------
71 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO STATUTORY FINANCIAL STATEMENTS (Continued)
(in thousands) Book/Adjusted CUSIP Actual Cost Fair Value Carrying Value ----- ----------- ---------- -------------- 853254BM1.... $ 2,765 $ 2,737 $ 2,765 912810FH6.... 1,013 1,409 1,206 984121CQ4.... 3,132 3,166 3,134 98417EAR1.... 22,025 19,338 21,978 98417EAT7.... 3,396 3,489 3,449 G2214RAE1.... 2,214 2,153 2,180 M88269TJ0.... 3,052 1,069 1,306 -------- ---------- -------- Total $985,897 $1,037,884 $979,995 ======== ========== ========
None of the structured notes held by the Company are defined as a Mortgage-Referenced Security by the IAO. 72 Supplemental Information AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
December 31, (in millions) 2018 ------------- ------------ Investment income earned: Government bonds......................................................... $ 55 Bonds exempt from U.S. tax............................................... -- Other bonds (unaffiliated)............................................... 4,843 Bonds of affiliates...................................................... (2) Preferred stocks (unaffiliated).......................................... 13 Common stocks (unaffiliated)............................................. 5 Common stocks of affiliates.............................................. -- Cash and short-term investments.......................................... 29 Mortgage loans........................................................... 801 Real estate.............................................................. 50 Contract loans........................................................... 82 Other invested assets.................................................... 395 Derivative instruments................................................... 210 Miscellaneous income..................................................... 7 ------- Gross investment income..................................................... $ 6,488 ======= Real estate owned - book value less encumbrances............................ $ 197 ======= Mortgage loans - book value: Commercial mortgages..................................................... $17,325 Residential mortgages.................................................... 1,661 Mezzanine loans.......................................................... 114 ------- Total mortgage loans........................................................ $19,100 ======= Mortgage loans by standing - book value: Good standing............................................................ $18,930 Good standing with restructured terms.................................... 169 Interest overdue more than 90 days, not in foreclosure................... 1 ------- Total mortgage loans........................................................ $19,100 ======= Partnerships - statement value.............................................. $ 4,224 ======= Bonds and stocks of parents, subsidiaries and affiliates - statement value: Bonds.................................................................... $ -- Common stocks............................................................ 123 ======= Bonds and short-term investments by class and maturity: Bonds and short-term investments by maturity - statement value: Due within one year or less.......................................... $ 6,685 Over 1 year through 5 years.......................................... 24,267 Over 5 years through 10 years........................................ 22,732 Over 10 years through 20 years....................................... 14,716 Over 20 years........................................................ 26,613 ------- Total maturity........................................................... $95,013 ======= Bonds and short-term investments by class - statement value: Class 1.............................................................. $54,946 Class 2.............................................................. 34,005 Class 3.............................................................. 3,043 Class 4.............................................................. 2,153 Class 5.............................................................. 711 Class 6.............................................................. 155 ------- Total by class........................................................... $95,013 ======= Total bonds and short-term investments publicly traded................... $59,010 Total bonds and short-term investments privately placed.................. 36,003 ======= Preferred stocks - statement value....................................... $ 303 Common stocks - market value............................................. 326 Short-term investments - book value...................................... 319 Options, caps and floors owned - statement value......................... 478 Collar, swap and forward agreements open - statement value............... 959 Futures contracts open - current value................................... (12) Cash on deposit.......................................................... 1,102 =======
74 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES (Continued)
December 31, (in millions) 2018 ------------- ------------ Life insurance in-force: Industrial................................................ $ 808 Ordinary.................................................. 74,696 Group..................................................... 4,317 Amount of accidental death insurance in-force under ordinary policies................................................... 5,342,532 Life insurance policies with disability provisions in-force: Industrial................................................ 217 Ordinary.................................................. 35,918 Group life................................................ 41 Supplementary contracts in-force: Ordinary - not involving life contingencies: Amount on deposit..................................... 798 Income payable........................................ 97 Ordinary - involving life contingencies: Amount on deposit..................................... 229 Income payable........................................ 77 Group - not involving life contingencies: Amount on deposit..................................... 2 ========== Annuities: Ordinary: Immediate - amount of income payable.................. $ 1,366 Deferred, fully paid - account balance................ 47,341 Deferred, not fully paid - account balance............ 29,333 Group: Amount of income payable.............................. 394 Fully paid - account balance.......................... 636 Not fully paid - account balance...................... 20,347 ========== Accident and health insurance - premiums in-force: Other..................................................... $ 105 Group..................................................... 2 Credit.................................................... -- ========== Deposit funds and dividend accumulations: Deposit funds - account balance........................... $ 6,514 Dividend accumulations - account balance.................. 591 ========== Claim payments in 2018: Group accident & health: 2018.................................................. $ 146 2017.................................................. 3,611 2016.................................................. 2,896 2015.................................................. 1,669 2014.................................................. 558 Prior................................................. 7,157 Other accident & health: 2018.................................................. (22,664) 2017.................................................. (12,607) 2016.................................................. (7,122) 2015.................................................. (2,914) 2014.................................................. (2,047) Prior................................................. (4,627) ==========
75 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES DECEMBER 31, 2018 (in millions) 1. The Company's total admitted assets as of December 31, 2018 are $176.8 billion. The Company's total admitted assets, excluding separate accounts, as of December 31, 2018 are $127.2 billion. 2. Following are the 10 largest exposures to a single issuer/borrower/investment, by investment category, excluding: (i) U.S. Government, U.S. Government agency securities and those U.S. Government money market funds listed in the Appendix to the IAO Practices and Procedures Manual as exempt, (ii) property occupied by the Company, and (iii) policy loans:
Percentage of Total Admitted Issuer Description of Exposure Amount Assets - ---------------------- ---------------------------- ------ ---------- a. Ambrose 2013-5 BONDS $1,230 1.00% b. Ambrose 2013-3 BONDS 1,122 0.90 c. L Street II LLC BONDS 958 0.80 d. JPMORGAN BONDS 866 0.70 e. Ambrose 2013-2 BONDS 816 0.60 f. SUNAMERICA INVESTMENT INC. OIA PSA 683 0.50 g. MORGAN STANLEY BONDS 638 0.50 h. WELLS FARGO BONDS 601 0.50 i. CITIGROUP BONDS 598 0.50 j. Varagon BONDS/OTHER INVESTED ASSETS 598 0.50
3. The Company's total admitted assets held in bonds and preferred stocks, by NAIC rating, are:
Bonds and Short-Term Investments Preferred Stocks -------------------------------- ------------------------- Percentage Percentage of Total of Total Admitted NAIC Admitted NAIC Rating Amount Assets Rating Amount Assets ----------- ------- ---------- -------- ------ ---------- NAIC - 1.... $54,946 43.20% P/RP - 1 $107 0.10% NAIC - 2.... 34,005 26.70 P/RP - 2 113 0.10 NAIC - 3.... 3,043 2.40 P/RP - 3 -- -- NAIC - 4.... 2,153 1.70 P/RP - 4 -- -- NAIC - 5.... 711 0.60 P/RP - 5 83 0.10 NAIC - 6.... 155 0.10 P/RP - 6 -- --
4. Assets held in foreign investments:
Percentage of Total Admitted Amount Assets -------- ---------- a. Total admitted assets held in foreign investments............... $26,697 21.00% b. Foreign currency denominated investments........................ 7,038 5.50 c. Insurance liabilities denominated in that same foreign currency. -- --
5. Aggregate foreign investment exposure categorized by NAIC sovereign rating:
Percentage of Total Admitted Amount Assets -------- ---------- a. Countries rated NAIC - 1.......... $23,446 18.40% b. Countries rated NAIC - 2.......... 2,130 1.70 c. Countries rated NAIC - 3 or below. 1,120 0.90
76 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (CONTINUED) DECEMBER 31, 2018 (in millions) 6. Two largest foreign investment exposures to a single country, categorized by the country's NAIC sovereign rating:
Percentage of Total Admitted Amount Assets ------ ---------- a. Countries rated NAIC - 1 Country 1: United Kingdom $7,799 6.10% Country 2: Australia 2,014 1.60 b. Countries rated NAIC - 2 Country 1: Mexico 483 0.40 Country 2: Colombia 276 0.20 c. Countries rated NAIC - 3 or below Country 1: Brazil 456 0.40 Country 2: Guernsey, States of 153 0.10
7. Aggregate unhedged foreign currency exposure:
Percentage of Total Admitted Amount Assets ------ ---------- Aggregate unhedged foreign currency exposure. $7,038 5.50%
8. Aggregate unhedged foreign currency exposure categorized by NAIC sovereign rating:
Percentage of Total Admitted Amount Assets ------- ---------- a. Countries rated NAIC - 1 $6,971 5.50% b. Countries rated NAIC - 2 5 -- c. Countries rated NAIC - 3 or below 61 --
9. Two largest unhedged foreign currency exposures to a single country, categorized by the country's NAIC sovereign rating:
Percentage of Total Admitted Amount Assets ------ ---------- a. Countries rated NAIC - 1 Country 1: United Kingdom $3,890 3.10% Country 2: Ireland 979 0.80 b. Countries rated NAIC - 2 Country 1: Peru 3 -- Country 2: Mexico 2 -- c. Countries rated NAIC - 3 or below Country 1: Guernsey, States of 51 -- Country 2: Turkey 5 --
77 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (CONTINUED) DECEMBER 31, 2018 (in millions) 10. Ten largest non-sovereign (i.e. non-governmental) foreign issues:
Percentage of Total Admitted NAIC Rating Amount Assets ----------- ------ ---------- COMMERCIAL MORTGAGE a. BAILEY ACQUISITIONS LIMITED.................................. LOAN $373 0.30% b. Intrepid Mines Limited....................................... NAIC 1 340 0.30 COMMERCIAL MORTGAGE c. DK Resi Holdco I ApS......................................... LOAN 307 0.20 COMMERCIAL MORTGAGE d. Downing Students (Exeter) Limited Partnership Incorporated... LOAN 282 0.20 COMMERCIAL MORTGAGE e. GS LONDON PORTFOLIO II UNIT TRUST............................ LOAN 264 0.20 f. AstraZeneca PLC.............................................. NAIC 1 253 0.20 COMMERCIAL MORTGAGE g. Atlantic Estates Limited..................................... LOAN 253 0.20 h. Anheuser-Busch InBev Worldwide Inc........................... NAIC 1 249 0.20 COMMERCIAL MORTGAGE i. The Blanchardstown Fund, a sub fund of BRE Ireland Retail Fu. LOAN 245 0.20 COMMERCIAL MORTGAGE j. Divanyx Investments Limited.................................. LOAN 243 0.20
11. Assets held in Canadian investments are less than 2.5% of the reporting entity's total admitted assets. 12. Assets held in investments with contractual sales restrictions are less than 2.5 percent of the Company's total admitted assets. 13. The Company's admitted assets held in the ten largest equity interests (including investments in the shares of mutual funds, preferred stocks, publicly traded equity securities, and other equity securities and excluding money market and bond mutual funds listed in the Appendix to the SVO Practices and Procedures Manual as exempt or Class 1) are:
Percentage of Total Admitted Amount Assets ------ ---------- a. SUNAMERICA AFFORDABLE HOUSING LLC....... $683 0.50% b. AIGGRE U.S. Real Estate Fund II LP...... 445 0.30 c. FEDERAL HOME LOAN BANK OF DALLAS........ 138 0.10 d. Metropark Investor LLC.................. 133 0.10 e. Marina.................................. 128 0.10 f. AIGGRE U.S. Real Estate Fund I LP....... 113 0.10 g. Think Investments Fund LP............... 103 0.10 h. CENTAUR FUNDING CORPORATION............. 102 0.10 i. CADIAN FUND LP.......................... 93 0.10 j. AIGGRE Europe Real Estate Fund I S.C.SP. 90 0.10
78 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES DECEMBER 31, 2018 (in millions) 14. Assets held in nonaffiliated, privately placed equities:
Percentage of Total Admitted Amount Assets ------ ---------- Aggregate statement value of investment held in nonaffiliated, privately placed equities:..................................................................... $2,398 1.90% Largest three investments held in nonaffiliated, privately placed equities: a. Marina..................................................................... $ 128 0.10 b. Think Investments Fund LP.................................................. 103 0.10 c. CADIAN FUND LP............................................................. 93 0.10
15. Assets held in general partnership interests are less than 2.5 percent of the Company's total admitted assets. 16. Mortgage loans reported in Schedule B, include the following ten largest aggregate mortgage interests. The aggregate mortgage interest represents the combined value of all mortgages secured by the same property or same group of properties:
Percentage of Total Admitted Amount Assets ------ ---------- a. COMMERCIAL MORTGAGE LOAN, Loan No. 8002341, NY $366 0.30% b. COMMERCIAL MORTGAGE LOAN, Loan No. 5555094, GBR 328 0.30 c. COMMERCIAL MORTGAGE LOAN, Loan No. 5555147, DK 294 0.20 d. COMMERCIAL MORTGAGE LOAN, Loan No. 5555143, GBR 266 0.20 e. COMMERCIAL MORTGAGE LOAN, Loan No. 8002507, NY 258 0.20 f. COMMERCIAL MORTGAGE LOAN, Loan No. 5555161, GBR 255 0.20 g. COMMERCIAL MORTGAGE LOAN, Loan No. 5555093, IR 247 0.20 h. COMMERCIAL MORTGAGE LOAN, Loan No. 8002372, NY 221 0.20 i. COMMERCIAL MORTGAGE LOAN, Loan No. 5555138, GBR 219 0.20 j. COMMERCIAL MORTGAGE LOAN, Loan No. 8002457, NY 214 0.20
Amount and percentage of the reporting entity's total admitted assets held in the following categories of mortgage loans:
Percentage of Total Admitted Amount Assets ------ ---------- a. Construction loans $235 0.20% b. Mortgage loans over 90 days past due -- -- c. Mortgage loans in the process of foreclosure -- -- d. Mortgage loans foreclosed -- -- e. Restructured mortgage loans 169 0.10
79 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (CONTINUED) DECEMBER 31, 2018 (in millions) 17. Aggregate mortgage loans having the following loan-to-value ratios as determined from the most current appraisal as of the annual statement date:
Residential Commercial Agricultural ---------------- ----------------- ---------------- Percentage Percentage Percentage of Total of Total of Total Admitted Admitted Admitted Loan-to-Value Amount Assets Amount Assets Amount Assets ------------- ------ ---------- ------- ---------- ------ ---------- a. above 95%.. $ -- --% $ 6 --% $-- --% b. 91% to 95%. 11 -- -- -- -- -- c. 81% to 90%. 512 0.40 84 0.10 -- -- d. 71% to 80%. 694 0.50 513 0.40 -- -- e. below 70%.. 443 0.30 16,665 13.10 -- --
18. Assets held in each of the five largest investments in one parcel or group of contiguous parcels of real estate reported in Schedule A are less than 2.5 percent of the Company's total admitted assets. 19. Assets held in mezzanine real estate loans are less than 2.5 percent of the Company's total admitted assets. 20. The Company's total admitted assets subject to the following types of agreements as of the following dates:
Unaudited At End of Each Quarter -------------------------------- 1st 2nd 3rd At Year-End Quarter Quarter Quarter ---------------- ------- ------- ------- Percentage of Total Admitted Amount Assets Amount Amount Amount ------ ---------- ------- ------- ------- a. Securities lending (do not include assets. held as collateral for such transactions). $447 0.40% $2,245 $1,254 $717 b. Repurchase agreements..................... 129 0.10 128 110 242 c. Reverse repurchase agreements............. -- -- -- -- -- d. Dollar repurchase agreements.............. -- -- -- -- -- e. Dollar reverse repurchase agreements...... -- -- -- -- --
21. The Company's potential exposure to warrants not attached to other financial instruments, options, caps, and floors:
Owned Written ---------------- ---------------- Percentage Percentage of Total of Total Admitted Admitted Amount Assets Amount Assets ------ ---------- ------ ---------- a. Hedging........... $-- --% $-- --% b. Income generation. -- -- -- -- c. Other............. -- -- -- --
80 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (CONTINUED) DECEMBER 31, 2018 (in millions) 22. The Company's potential exposure (defined as the amount determined in accordance with the NAIC Annual Statement Instructions) for collars, swaps, and forwards as of the following dates:
Unaudited At End of Each Quarter -------------------------------- 1st 2nd 3rd At Year-End Quarter Quarter Quarter ---------------- ------- ------- ------- Percentage of Total Admitted Amount Assets Amount Amount Amount ------ ---------- ------- ------- ------- a. Hedging........... $461 0.40% $447 $425 $415 b. Income generation. -- -- -- -- -- c. Replications...... -- -- -- -- -- d. Other............. -- -- -- -- --
23. The Company's potential exposure (defined as the amount determined in accordance with the NAIC Annual Statement Instructions) for futures contracts as of the following dates:
Unaudited At End of Each Quarter -------------------------------- 1st 2nd 3rd At Year-End Quarter Quarter Quarter ---------------- ------- ------- ------- Percentage of Total Admitted Amount Assets Amount Amount Amount ------ ---------- ------- ------- ------- a. Hedging........... $-- --% $167 $146 $-- b. Income generation. -- -- -- -- -- c. Replications...... -- -- -- -- -- d. Other............. -- -- -- -- --
81 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL SUMMARY INVESTMENT SCHEDULE DECEMBER 31, 2018
Gross Investment Admitted Assets as Reported in the Annual Holdings Statement (in millions) ----------------- ---------------------------------------- Securities Lending Reinvested Collateral Total Investment Categories Amount Percentage Amount Amount Amount Percentage --------------------- ------- ---------- ------- ---------- ------- ---------- Bonds: U.S. treasury securities.......................................... $ 729 0.6% $ 729 $-- $ 729 0.6% U.S. government agency obligations (excluding mortgage- backed securities): Issued by U.S. government agencies............................ -- -- -- -- -- -- Issued by U.S. government sponsored agencies.................. 219 0.2 219 -- 219 0.2 Non-U.S. government (including Canada, excluding mortgage- backed securities).................................... 3,025 2.4 3,025 -- 3,025 2.4 Securities issued by states, territories and possessions and political subdivisions in the U.S.: States, territories and possessions general obligations....... 304 0.2 304 -- 304 0.2 Political subdivisions of states, territories and possessions and political subdivisions general obligations................................................. 331 0.3 331 -- 331 0.3 Revenue and assessment obligations............................ 2,634 2.1 2,634 -- 2,634 2.1 Industrial development and similar obligations................ 77 0.1 77 -- 77 0.1 Mortgage-backed securities (includes residential and commercial MBS): Pass-through securities: Issued or guaranteed by GNMA............................... 43 -- 43 -- 43 -- Issued or guaranteed by FNMA and FHLMC..................... 2,357 1.9 2,357 -- 2,357 1.9 All other.............................................. 3,468 2.8 3,468 -- 3,468 2.8 CMOs and REMICs: Issued or guaranteed by GNMA, FNMA, FHLMC or VA.................................................... 4,407 3.6 4,407 -- 4,407 3.6 Issued by non-U.S. Government issuers and collateralized by mortgage-based securities issued or guaranteed by agencies shown in Line 1.521.................................................... -- -- -- -- -- -- All other.............................................. 7,722 6.2 7,722 -- 7,722 6.2 Other debt and other fixed income securities (excluding short- term): Unaffiliated domestic securities (includes credit tenant loans and hybrid securities)................................ 48,119 38.9 48,119 -- 48,119 38.9 Unaffiliated non-U.S. securities (including Canada)........... 21,258 17.2 21,258 -- 21,258 17.2 Affiliated securities......................................... -- -- -- -- -- --
82 AMERICAN GENERAL LIFE INSURANCE COMPANY SUPPLEMENTAL SUMMARY INVESTMENT SCHEDULE (Continued) DECEMBER 31, 2018
Gross Investment Admitted Assets as Reported in the Annual Holdings Statement (in millions) ------------------ -------------------------------------- Securities Lending Reinvested Collateral Total Investment Categories Amount Percentage Amount Amount Amount Percentage --------------------- -------- ---------- -------- ---------- -------- ---------- Equity interests: Investments in mutual funds.................................. $ 41 --% $ 41 $ -- $ 41 --% Preferred stocks: Affiliated............................................... -- -- -- -- -- -- Unaffiliated............................................. 303 0.2 303 -- 303 0.2 Publicly traded equity securities (excluding preferred stocks): Affiliated............................................... 109 0.1 109 -- 109 0.1 Unaffiliated............................................. 159 0.1 159 -- 159 0.1 Other equity securities: Affiliated............................................... -- -- -- -- -- -- Unaffiliated............................................. 3 -- 3 -- 3 -- Other equity interests including tangible personal property under lease: Affiliated............................................... -- -- -- -- -- -- Unaffiliated............................................. -- -- -- -- -- -- Mortgage loans: Construction and land development............................ 1,224 1.0 1,224 -- 1,224 1.0 Agricultural................................................. -- -- -- -- -- -- Single family residential properties......................... 1,661 1.3 1,661 -- 1,661 1.3 Multifamily residential properties........................... 4,786 4.0 4,786 -- 4,786 4.0 Commercial loans............................................. 11,143 9.0 11,143 -- 11,143 9.0 Mezzanine real estate loans.................................. 114 0.1 114 -- 114 0.1 Real estate investments: Property occupied by company................................. 53 -- 53 -- 53 -- Property held for production of income (includes $2 million of property acquired in satisfaction of debt)...................................................... 111 0.1 111 -- 111 0.1 Property held for sale (includes $34 million of property acquired in satisfaction of debt).......................... 33 -- 33 -- 33 -- Contract loans.................................................. 1,307 1.1 1,307 -- 1,307 1.1 Derivatives..................................................... 1,635 1.3 1,635 -- 1,635 1.3 Receivables for securities...................................... 138 0.1 138 -- 138 0.1 Securities lending reinvested collateral assets................. 352 0.3 352 XXX XXX XXX Cash, cash equivalents and short-term investments............... 1,547 1.3 1,547 352 1,899 1.5 Other invested assets........................................... 4,246 3.4 4,246 -- 4,246 3.4 -------- --- -------- ---- -------- --- Total invested assets........................................... $123,658 100% $123,658 $352 $123,658 100% ======== === ======== ==== ======== ===
83 American Home Assurance Company An AIG Company NAIC Code: 19380 Statutory Basis Financial Statements As of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 [LOGO OF AIG] American Home Assurance Company Statutory Basis Financial Statements As of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 Table of Contents Report of Independent Auditors 3 Statements of Admitted Assets 5 Statements of Liabilities, Capital and Surplus 6 Statements of Operations and Changes in Capital and Surplus 7 Statements of Cash Flows 8 Note 1 Organization and Summary of Significant Statutory Basis Accounting Policies 9 Note 2 Accounting Adjustments to Statutory Basis Financial Statements 22 Note 3 Investments 25 Note 4 Fair Value of Financial Instruments 29 Note 5 Reserves for Losses and Loss Adjustment Expenses 31 Note 6 Related Party Transactions 36 Note 7 Reinsurance 40 Note 8 Income Taxes 43 Note 9 Capital and Surplus and Dividend Restrictions 52 Note 10 Contingencies 52 Note 11 Other Significant Matters 55 Note 12 Subsequent Events 57
Report of Independent Auditors To the Board of Directors of American Home Assurance Company: We have audited the accompanying statutory financial statements of American Home Assurance Company (the "Company"), which comprise the statutory statements of admitted assets and liabilities, capital and surplus as of December 31, 2018 and 2017, and the related statutory statements of operations and changes in capital and surplus, and of cash flows for each of the three years in the period ended December 31, 2018. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting practices prescribed or permitted by the New York State Department of Financial Services. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles As described in Note 1B to the financial statements, the financial statements are prepared by the Company on the basis of the accounting practices prescribed or permitted by the New York State Department of Financial Services, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the statutory basis of accounting described in Notes 1B and 1D and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. Adverse Opinion on U.S. Generally Accepted Accounting Principles In our opinion, because of the significance of the matter discussed in the "Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles" paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2018 and 2017, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 2018. Opinion on Statutory Basis of Accounting In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, capital and surplus of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in accordance with the accounting practices prescribed or permitted by the New York State Department of Financial Services described in Note 1B. Emphasis of Matter As discussed in Notes 1, 5, 6 and 7 to the financial statements, the Company has entered into significant transactions with certain affiliated entities. Our opinion is not modified with respect to this matter. /s/ PricewaterhouseCoopers LLP New York, NY April 22, 2019 American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Statements of Admitted Assets
December 31, December 31, 2018 2017 ------------ ------------ Cash and invested assets: Bonds, primarily at amortized cost (fair value: 2018 - $14,935; 2017 - $15,831) $14,534 $15,153 Common stocks, at carrying value (cost: 2018 - $321; 2017 - $584) 356 576 Preferred stocks, at carrying value (cost: 2018 - $49; 2017 - $49) 49 49 Other invested assets (cost: 2018 - $2,982 ; 2017 - $3,504) 3,003 3,901 Mortgage loans 2,679 2,067 Derivative instruments 5 -- Short-term investments, at amortized cost (approximates fair value) 46 -- Cash and cash equivalents 230 238 Receivable for securities sold 104 82 ------- ------- Total cash and invested assets $21,006 $22,066 ------- ------- Investment income due and accrued $ 166 $ 169 Agents' balances or uncollected premiums: Premiums in course of collection 941 940 Premiums and installments booked but deferred and not yet due 241 367 Accrued retrospective premiums 511 567 High deductible policy receivables 63 43 Reinsurance recoverable on paid losses 365 325 Funds held by or deposited with reinsurers 212 217 Net deferred tax assets 772 814 Receivables from parent, subsidiaries and affiliates 284 5 Other assets 159 197 Allowance for uncollectible accounts (53) (72) ------- ------- Total admitted assets $24,667 $25,638 ======= =======
See Notes to Statutory Basis Financial Statements ------------------------------------------------------------------------------- 5 STATEMENTS OF ADMITTED ASSETS - As of December 31, 2018 and 2017 American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions, Except Share Information) -------------------------------------------------------------------------------- Statements of Liabilities, Capital and Surplus
December 31, December 31, 2018 2017 ------------ ------------ Liabilities Reserves for losses and loss adjustment expenses $10,935 $12,115 Unearned premium reserves 3,234 3,301 Commissions, premium taxes, and other expenses payable 140 140 Reinsurance payable on paid loss and loss adjustment expenses 249 244 Current federal taxes payable to parent 9 12 Funds held by company under reinsurance treaties 2,288 1,695 Provision for reinsurance 30 20 Ceded reinsurance premiums payable, net of ceding commissions 337 324 Collateral deposit liability 369 393 Payable for securities purchased 112 38 Payable to parent, subsidiaries and affiliates 565 674 Other liabilities 476 444 ------- ------- Total liabilities $18,744 $19,400 ------- ------- Capital and Surplus Common capital stock, $17 par value, 1,758,158 shares authorized, 1,695,054 shares issued and outstanding $ 29 $ 29 Capital in excess of par value 6,989 6,839 Unassigned surplus (2,021) (1,324) Special surplus funds from reinsurance 926 694 ------- ------- Total capital and surplus $ 5,923 $ 6,238 ------- ------- Total liabilities, capital and surplus $24,667 $25,638 ======= =======
See Notes to Statutory Basis Financial Statements ------------------------------------------------------------------------------- 6 STATEMENTS OF LIABILITIES, CAPITAL and SURPLUS - As of December 31, 2018 and 2017 American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Statements of Operations and Changes in Capital and Surplus
For the Years Ended December 31, ------------------------------- 2018 2017 2016 -------- -------- -------- Statements of Operations Underwriting income: Premiums earned $ 5,009 $ 5,170 $ 6,052 -------- -------- -------- Underwriting deductions: Losses incurred 3,945 4,400 5,212 Loss adjustment expenses 315 577 267 Other underwriting expenses 1,858 1,624 1,875 -------- -------- -------- Total underwriting deductions 6,118 6,601 7,354 -------- -------- -------- Net underwriting loss (1,109) (1,431) (1,302) -------- -------- -------- Investment gain: Net investment income earned 1,027 1,058 1,187 Net realized capital losses (net of capital gains tax expense: 2018 - $69; 2017 - $82; 2016 - $61) (111) (110) (106) -------- -------- -------- Net investment gain 916 948 1,081 -------- -------- -------- Net loss from agents' or premium balances charged-off (3) (19) (36) Other (expense) income (136) 39 (20) -------- -------- -------- Net loss after capital gains taxes and before federal income taxes (332) (463) (277) Federal and foreign income tax benefit (54) (69) (34) -------- -------- -------- Net loss $ (278) $ (394) $ (243) ======== ======== ======== Change in Capital and Surplus Capital and surplus, as of December 31, previous year $ 6,238 $ 6,448 $ 6,641 Adjustment to beginning surplus (Note 2) 71 38 66 -------- -------- -------- Capital and surplus, as of January 1, 6,309 6,486 6,707 Other changes in capital and surplus: Net loss (278) (394) (243) Change in net unrealized capital gain (loss) (net of capital gain (loss) tax expense (benefit): 2018 - ($50) $; 2017 - $2; 2016 - ($16) (137) 204 (48) Change in net deferred income tax 31 (394) 118 Change in nonadmitted assets (91) 410 (157) Change in provision for reinsurance (10) 17 (3) Capital contribution 150 -- 700 Dividends to stockholder -- -- (600) Foreign exchange translation (20) (54) 22 Change in statutory contingency reserve (31) (39) (44) Other surplus adjustments -- 2 (4) -------- -------- -------- Total changes in capital and surplus (386) (248) (259) -------- -------- -------- Capital and Surplus, as of December 31, $ 5,923 $ 6,238 $ 6,448 ======== ======== ========
See Notes to Statutory Basis Financial Statements ------------------------------------------------------------------------------- 7 STATEMENTS OF OPERATIONS and CHANGES IN CAPITAL AND SURPLUS - for the years ending December 31, 2018, 2017 and 2016 American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Statements of Cash Flows
For the Years Ended December 31, ------------------------------- 2018 2017 2016 -------- -------- -------- Cash from Operations: Premiums collected, net of reinsurance $ 5,292 $ 5,395 $ 6,477 Net investment income 839 920 974 Miscellaneous income (expense) 4 (17) 17 -------- -------- -------- Sub-total 6,135 6,298 7,468 -------- -------- -------- Benefit and loss related payments 4,832 7,209 2,750 Commission and other expense paid 2,599 3,407 2,236 Federal and foreign income taxes recovered (1) (98) 9 -------- -------- -------- Net cash (used in) provided from operations (1,295) (4,220) 2,473 -------- -------- -------- Cash from Investments: Proceeds from investments sold, matured, or repaid Bonds 3,990 7,709 5,646 Stocks 339 324 35 Mortgage loans 111 615 118 Other investments 1,790 1,591 1,026 -------- -------- -------- Total proceeds from investments sold, matured, or repaid 6,230 10,239 6,825 -------- -------- -------- Cost of investments acquired Bonds 3,766 4,278 7,584 Stocks 56 454 59 Mortgage loans 748 763 871 Other investments 870 853 1,035 -------- -------- -------- Total cost of investments acquired 5,440 6,348 9,549 -------- -------- -------- Net cash provided from investing activities 790 3,891 (2,724) -------- -------- -------- Cash from Financing and Miscellaneous Sources: Borrowed funds repaid (65) (180) 216 Intercompany receipts 599 577 (61) Net deposit activity on deposit-type contracts and other insurance (27) (13) (24) Collateral deposit liability (payments) receipts (24) 8 50 Other receipts 60 30 84 -------- -------- -------- Net cash provided from financing and miscellaneous activities 543 422 265 -------- -------- -------- Net change in cash, cash equivalents, and short-term investments 38 93 14 Cash, cash equivalents, and short-term investments -------- -------- -------- Beginning of year 238 145 131 -------- -------- -------- End of year $ 276 $ 238 $ 145 ======== ======== ========
Refer to Note 11D for description of non-cash items. See Notes to Statutory Basis Financial Statements ------------------------------------------------------------------------------- 8 STATEMENT OF CASH FLOW - for the years ended December 31, 2018, 2017 and 2016 American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- 1. Organization and Summary of Significant Statutory Basis Accounting Policies -------------------------------------------------------------------------------- A. Basis of Organization and Presentation -------------------------------------------------------------------------------- Organization -------------------------------------------------------------------------------- American Home Assurance Company ("the Company" or "American Home") is a direct wholly-owned subsidiary of AIG Property Casualty U.S., Inc. ("AIG PC US"), a Delaware corporation, which is in turn owned by AIG Property Casualty Inc. ("AIG PC"), a Delaware corporation. The Company's ultimate parent is American International Group, Inc. (the "Ultimate Parent" or "AIG"). AIG conducts its property and casualty operations through multiple line companies writing substantially all commercial (casualty, property, specialty and financial liability) and consumer (accident & health and personal lines) insurance both domestically and abroad. The Company is party to an inter-company pooling agreement (the "Combined Pooling Agreement"), among the twelve companies listed below, collectively named the Combined Pool. Effective January 1, 2017, the Combined Pooling Agreement was amended and restated among the twelve member companies. The member companies of the Combined Pool, their National Association of Insurance Commissioners ("NAIC") company codes, inter-company pooling participation percentages under the Combined Pooling Agreement and states of domicile are as follows:
Pool NAIC Participation State of Company Company Percentage Domicile ------- ------- ------------- ------------ National Union Fire Insurance Company of Pittsburgh, Pa. (National Union)* 19445 35% Pennsylvania American Home Assurance Company (American Home) 19380 35% New York Lexington Insurance Company (Lexington) 19437 30% Delaware AIG Property Casualty Company (APCC) 19402 0% Pennsylvania Commerce and Industry Insurance Company (C&I) 19410 0% New York The Insurance Company of the State of Pennsylvania (ISOP) 19429 0% Illinois New Hampshire Insurance Company (New Hampshire) 23841 0% Illinois AIG Specialty Insurance Company (Specialty) 26883 0% Illinois AIG Assurance Company (Assurance) 40258 0% Illinois Granite State Insurance Company (Granite) 23809 0% Illinois Illinois National Insurance Co. (Illinois National) 23817 0% Illinois AIU Insurance Company (AIU) 19399 0% New York
* Lead Company of the Combined Pool Refer to Note 6 for additional information on the Combined Pool and the effects of the changes in the intercompany pooling arrangements (the "2017 Pooling Restructure Transaction"). The Company accepts commercial business primarily through a network of independent retail and wholesale brokers and through an independent agency networks. In addition, the Company accepts consumer business primarily through agents and brokers, as well as through direct marketing and partner organizations. There were no Managing Agents or Third Party Administrators who placed direct written premium with the Company in an amount exceeding more than 5.0 percent of surplus of the Company for the years ending December 31, 2018, 2017, and 2016. The Company is diversified in terms of classes of its business, distribution network and geographic locations. The Company has direct written premium concentrations of 5.0 percent or more in the following locations: ------------------------------------------------------------------------------- 9 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
State / Location 2018 2017 2016 ---------------- ---- ---- ---- California $103 $124 $70 Florida 68 86 78 United Arab Emirates 66 71 88 New York 36 65 97 Texas 26 48 48
Basis of Presentation -------------------------------------------------------------------------------- The accompanying financial statements of the Company have been prepared in conformity with accounting practices prescribed or permitted by the New York State Department of Financial Services ("NY SAP"). Certain balances relating to prior periods have been reclassified to conform to the current year's presentation. Additionally, the financial statements include the Company's U.S. operations, its Dubai, Caribbean, Jamaica and Argentina branch operations and its participation in the American International Overseas Association (the "Association"). The Company's financial information as of and for the years ended December 31, 2018, 2017 and 2016 have been presented in accordance with the terms of the Combined Pooling Agreement. Refer to Note 6 for additional information regarding the changes in the pooling percentages. B. Permitted and Prescribed Practices -------------------------------------------------------------------------------- NY SAP recognizes only statutory accounting practices prescribed or permitted by the New York State Department of Financial Services ("NY DFS") for determining and reporting the financial position and results of operations of an insurance company and for the purpose of determining its solvency under the New York Insurance Code. The NAIC Statutory Accounting Principles included within the Accounting Practices and Procedures Manual ("NAIC SAP") have been adopted as a component of prescribed practices by the NY DFS. The Superintendent of the NY DFS (the "Superintendent") has the right to permit other specific practices that differ from prescribed practices. NY SAP has prescribed the practice of discounting workers' compensation known case loss reserves on a non-tabular basis. This practice is not prescribed under NAIC SAP. For the affiliated loss portfolio transfer ("LPT") agreement entered into during 2018, the Company received permitted practices to present the consideration paid in relation to statutory reserves ceded to Fortitude Reinsurance Company Limited ("Fortitude Re") and Eaglestone Reinsurance Company ("Eaglestone") within paid losses rather than as premium written and earned. The classification change has no effect on net income or surplus. Refer to Note 5 for further details. In 2016, the Company applied a permitted practice to present the consideration received in relation to loss reserves transferred other than via commutation as part of the updated and amended Combined Pooling Agreement transaction within paid losses rather than as premiums written and earned. The classification change had no effect on net income or surplus. Insurance Department of the Commonwealth of Pennsylvania ("PA SAP") has prescribed the availability of certain offsets in the calculation of the Provision for reinsurance, which offsets are not prescribed under NAIC SAP. The Company has received approval to reflect the transfer of collection risk on certain of the Company's asbestos related reinsurance recoverable balances, to an authorized third party reinsurer, as another form of collateral acceptable to the Commissioner with respect to the reinsurance recoverable balance from the original reinsurers. In 2016, the Company applied a permitted practice to recognize the effects of a retroactive aggregate excess of loss reinsurance agreement (the "ADC" or "Adverse Development Cover") entered into in January 2017 with National Indemnity Company ("NICO"), a subsidiary of Berkshire Hathaway, Inc. In addition, the Company applied a permitted practice to record the impact of the ADC as prospective reinsurance. The permitted practice also allowed the Company to reflect the consideration as paid losses rather than a reduction in premiums earned. The surplus gain associated with the ADC has been reported in a segregated surplus account and does not form part of the Company's Unassigned surplus, subject to the applicable dividend restrictions; such amounts must be restricted in surplus until such time as payments received by NICO exceed premiums paid for the retrocession. The use of the aforementioned permitted and prescribed practices has not affected the Company's ability to comply with the NY DFS's risk based capital ("RBC") and surplus requirements for the 2018, 2017 or 2016 reporting periods. ------------------------------------------------------------------------------- 10 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- A reconciliation of the net income (loss) and capital and surplus between NAIC SAP and practices prescribed or permitted by NY SAP is shown below:
SSAP # FS Ref 2018 2017 2016 ------ ------ ------ ------ ------ Net loss, NY SAP $ (278) $ (394) $ (243) State prescribed or permitted practices - addition (charge): Change in non-tabular discounting 65 (a) 13 73 147 Adverse Development Cover 62R (a) -- -- (514) Present the consideration received/paid in relation to the loss reserves within paid losses 62R (b) -- -- -- --- -- ------ ------ ------ Net loss, NAIC SAP $ (265) $ (321) $ (610) --- -- ------ ------ ------ Statutory surplus, NY SAP $5,923 $6,238 $6,448 State prescribed or permitted practices - addition (charge): Non-tabular discounting 65 (a) (73) (86) (159) Credits for collection risk on certain asbestos reinsurance recoveries 62R (c) (61) (43) (58) Adverse Development Cover 62R (d) (920) (689) (514) Present the consideration received/paid in relation to the loss reserves within paid losses 62R (b) -- -- -- --- -- ------ ------ ------ Statutory surplus, NAIC SAP $4,869 $5,420 $5,717 === == ====== ====== ======
(a)Impacts Reserves for losses and loss adjustment expenses within the Statements of Liabilities, Capital and Surplus and Losses incurred within the Statements of Operations and Changes in Capital and Surplus. (b)Impacts Losses incurred and Premiums earned within the Statements of Operations and Changes in Capital and Surplus. (c)Impacts Provision for reinsurance within the Statements of Liabilities, Capital and Surplus and the change in Provision for reinsurance within the Statements of Operations and Changes in Capital and Surplus. (d)Impacts Special surplus funds from reinsurance within the Statements of Liabilities, Capital and Surplus. Although the application of prospective reinsurance treatment to the ADC results in no overall change to surplus, the permitted practice applied results in any gain being restricted and reported in segregated surplus and does not form part of the Company's Unassigned surplus. C. Use of Estimates in the Preparation of the Financial Statements -------------------------------------------------------------------------------- The preparation of statutory financial statements in accordance with NY SAP requires the application of accounting policies that often involve a significant degree of judgment. The Company's accounting policies that are most dependent on the application of estimates and assumptions are considered critical accounting estimates and are related to the determination of: . Reserves for losses and loss adjustment expenses ("LAE") including estimates and recoverability of the related reinsurance assets; . Legal contingencies; . Other than temporary impairment ("OTTI") losses on investments; . Fair value of certain financial assets, impacting those investments measured at fair value in the Statements of Admitted Assets and Liabilities, Capital and Surplus, as well as unrealized gains (losses) included in Capital and Surplus; and . Income tax assets and liabilities, including the recoverability and admissibility of net deferred tax assets and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset. These accounting estimates require the use of assumptions, including some that are highly uncertain at the time of estimation. It is reasonably possible that actual experience may materially differ from the assumptions used and therefore the Company's statutory financial condition, results of operations and cash flows could be materially affected. On December 22, 2017, the United States enacted Public Law 115-97, known as the Tax Cuts and Jobs Act ("the Tax Act"). The Tax Act reduces the statutory rate of U.S. federal corporate income tax to 21 percent and enacts numerous other changes generally impacting the Company in tax years beginning January 1, 2018. As of December 31, 2018, the Company has fully completed the accounting for the tax effects of the Tax Act. Although the prescribed measurement period has ended, there are aspects of the Tax Act that remain unclear and additional guidance from the U.S. tax authority is pending. As further guidance is issued by the U.S. tax authority, any resulting changes in the Company's estimates will be treated in accordance with the relevant accounting guidance. The Company does not believe such revisions would have a material impact on surplus. ------------------------------------------------------------------------------- 11 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- D. Accounting Policy Differences -------------------------------------------------------------------------------- NAIC SAP is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America ("US GAAP"). NAIC SAP varies from US GAAP in certain significant respects, including:
Transactions NAIC SAP Treatment US GAAP Treatment ------------ ---------------------------------- ----------------------------------- Policy Acquisition Costs Costs are immediately expensed and Costs directly related to the Principally brokerage commissions are included in Other Underwriting successful acquisition of new or and premium taxes arising from the Expenses, except for reinsurance renewal insurance contracts are issuance of insurance contracts. ceding commissions received in deferred and amortized over the excess of the cost to acquire term of the related insurance business which are recognized as a coverage. deferred liability and amortized over the period of the reinsurance agreement. Unearned Premiums, Unpaid Losses Presented net of reinsurance Presented gross of reinsurance and Loss Expense Liabilities recoverable. with corresponding reinsurance recoverable assets for ceded unearned premiums and reinsurance recoverable on unpaid losses, respectively. Retroactive reinsurance contracts Gains and losses are recognized in Gains are deferred and amortized earnings immediately and surplus over the settlement period of the is segregated to the extent pretax ceded claim recoveries. Losses are gains are recognized. Certain immediately recognized in the retroactive affiliate or related Statements of Operations. party reinsurance contracts are accounted for as prospective reinsurance if there is no gain in surplus as a result of the transaction. Investments in Bonds held as: Investment grade securities (rated All available for sale investments 1) available for sale by NAIC as class 1 or 2) are are carried at fair value with 2) fair value option carried at amortized cost. Non- changes in fair value, net of investment grade securities (NAIC applicable taxes, reported in rated 3 to 6) are carried at the accumulated other comprehensive lower of amortized cost and fair income within shareholder's equity. value. Fair value option investments are carried at fair value with changes in fair value, net of applicable projected income taxes, reported in net investment income. Investments in Equity Securities Carried at fair value with All equity securities that do not unrealized gains and losses follow the equity method of reported, net of applicable taxes, accounting, are measured at fair in the Statements of Changes in value with changes in fair value Capital and Surplus. recognized in earnings. Investments in Limited Carried at the underlying US GAAP If aggregate interests allow the Partnerships, Hedge Funds and equity with results from the holding entity to exercise more Private Equity Interests investment's operations recorded, than minor influence (typically net of applicable taxes, as more than 3%), the investment is unrealized gains (losses) directly carried at Net Asset Value ("NAV") in the Statements of Changes in with changes in value recorded to Capital and Surplus. net investment income. Where the aggregate interests allow the entity to exercise only minor influence (typically less than 3%), the investment is recorded at NAV with changes in value recorded, net of tax, as a component of accumulated other comprehensive income in shareholder's equity.
------------------------------------------------------------------------------- 12 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
Transactions NAIC SAP Treatment US GAAP Treatment ------------ ---------------------------------- ---------------------------------- Investments in Subsidiary, Subsidiaries are not consolidated. Consolidation is required when Controlled and Affiliated Entities there is a determination that the (SCAs) affiliated entity is a variable interest entity ("VIE") and the entity has a variable interest and the power to direct the activities of the VIE. The VIE assessment would consider various factors including limited partnership (LP) The equity investment in SCAs are status and inherent rights of accounted for under the equity equity investors. method and recorded as Common stock investments. Dividends are Investments in SCAs that are recorded within Net Investment voting interest entities (VOE) Income. with majority voting rights are generally consolidated. Investments in SCAs where the holding entity exercises significant influence (generally ownership of>3% voting interests for LPs and similar entities and between 20 percent and 50 percent for other entities) are recorded at equity value. The change in equity is included within operating income. Statement of Cash Flows Statutory Statements of Cash Flows The Statements of Cash Flows can must be presented using the direct be presented using the direct or method. Changes in cash, cash indirect methods, however are equivalents, and short-term typically presented using the investments and certain sources of indirect method. Presentation is cash are excluded from operational limited to changes in cash and cash flows. Non-cash items are cash equivalents (short-term required to be excluded in the investments are excluded). All Statements of Cash Flows and non-cash items are excluded from should be disclosed accordingly. the presentation of cash flows. Deferred Federal Income Taxes Deferred income taxes are The provision for deferred income established for the temporary taxes is recorded as a component differences between tax and book of income tax expense, as a assets and liabilities, subject to component of the Statements of limitations on admissibility of Operations, except for changes tax assets. associated with items that are included within other Changes in deferred income taxes comprehensive income where such are recorded within capital and items are recorded net of surplus and have no impact on the applicable income taxes. Statements of Operations. Statutory Adjustments Certain asset balances designated All assets and liabilities are (applied to certain assets as nonadmitted, such as intangible included in the financial including goodwill, furniture and assets and certain investments in statements. Provisions for equipment, deferred taxes in affiliated entities are excluded uncollectible receivables are excess of limitations, prepaid from the Statements of Admitted established as valuation expenses, overdue receivable Assets and are reflected as allowances and are recognized as balances and unsecured reinsurance deductions from capital and expense within the Statements of amounts) surplus. Operations. A Provision for reinsurance is established for unsecured reinsurance amounts recoverable from unauthorized and certain authorized reinsurers with a corresponding reduction to Unassigned surplus.
The effects on the financial statements of the variances between NAIC SAP and US GAAP, although not reasonably determinable, are presumed to be material. ------------------------------------------------------------------------------- 13 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- E. Significant Statutory Accounting Policies -------------------------------------------------------------------------------- Premiums -------------------------------------------------------------------------------- Premiums for insurance and reinsurance contracts are recorded as gross premiums written as of the effective date of the policy. Premiums are earned primarily on a pro-rata basis over the term of the related insurance coverage. Premiums collected prior to the effective date of the policy are recorded as advance premiums, reported as a liability and not considered income until due. Extended reporting endorsements are reflected as premiums written and are earned on a pro-rata basis over the stated term of the endorsement unless the term of the endorsement is indefinite in which case premiums are fully earned at inception of the endorsement along with the recognition of associated loss and LAE. Unearned premium reserves are established on an individual policy basis, reflecting the terms and conditions of the coverage being provided. Unearned premium reserves represent the portion of premiums written relating to the unexpired terms of coverage as of the date of the financial statements. For policies with coverage periods equal to or greater than thirteen months and generally not subject to cancellation or modification by the Company, premiums are earned using a prescribed percentage of completion method. Additional unearned premium reserves for policies exceeding thirteen months are established as greater of three prescribed tests. Reinsurance premiums are typically earned over the same period as the underlying policies, or risks, covered by the contracts. As a result, the earnings pattern of a reinsurance contract generally written for a 12-month term may extend up to 24 months, reflecting the inception dates of the underlying attaching policies throughout the 12-month period of the reinsurance contract. Reinsurance premiums ceded are recognized as a reduction in revenues over the period reinsurance coverage is provided. Insurance premiums billed and outstanding for 90 days or more are nonadmitted and charged against Unassigned surplus. Premiums for retrospectively rated contracts are initially recorded based on the expected loss experience and are earned on a pro-rata basis over the term of the related insurance coverage. Additional or returned premium is recorded if the estimated loss experience differs from the initial estimate and is immediately recognized in earned premium. The Company records accrued retrospectively rated premiums as written premiums. Adjustments to premiums for changes in the level of exposure to insurance risk are generally determined based upon audits conducted after the policy expiration date. Gross written premiums net of ceded written premiums ("Net written premiums") that were subject to retrospective rating features as of December 31, 2018, 2017 and 2016 were as follows:
Years ended December 31, 2018 2017 2016 ------------------------ ---- ---- ---- Net written premiums subject to retrospectively rated contracts $ 93 $105 $ 72 Percentage of total net written premiums 1.9% 2.1% 1.1%
As of December 31, 2018 and 2017, the admitted portion of accrued premiums related to the Company's retrospectively rated contracts were $511 and $567, respectively, which will be billed in future periods based primarily on the payment of the underlying expected losses and LAE. Unsecured amounts associated with these accrued retrospective premiums were $60 and $58 as of December 31, 2018 and 2017, respectively. Ten percent of the amount of accrued retrospective premiums receivable not offset by retrospective return premiums or other liabilities to the same party, other than loss and LAE reserves, or collateral (collectively referred to as the unsecured amount) have been nonadmitted in the amount of $10 and $13 as of December 31, 2018 and 2017, respectively. High Deductible -------------------------------------------------------------------------------- The Company establishes loss reserves for high deductible policies net of the insured's contractual deductible (such deductibles are referred to as "reserve credits"). The Company establishes a nonadmitted asset for ten percent of paid losses recoverable in excess of collateral held on an individual insured basis, or for one hundred percent of paid losses recoverable where no collateral is held and amounts are outstanding for more than ninety days. Additionally, the Company establishes an allowance for doubtful accounts for such paid losses recoverable in excess of collateral and after nonadmitted assets. Similarly, the Company does not recognize reserve credit offsets to its estimate of loss reserves where such credits are deemed uncollectible, as the Company ultimately bears credit risk on the underlying policies' insurance obligations. ------------------------------------------------------------------------------- 14 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The following table shows the counterparty exposure on unpaid claims and billed recoverable on paid claims for high deductibles by line of business as of December 31, 2018 and 2017:
Reserve Credits on Recoverable on Paid December 31, 2018 Gross Loss Reserves Unpaid Claims Claims Total ----------------- ------------------- ------------------ ------------------- ---------- Allied Lines $ 390 $ 390 $ 10 $ 400 General Liabilities 464 464 9 473 Workers Compensation 3,419 3,419 51 3,470 ---------- ---------- --------- ---------- Total $ 4,273 $ 4,273 $ 70 $ 4,343 ---------- ---------- --------- ----------
As of December 31, 2018, both on-balance sheet and off-balance sheet collateral pledged to the Company related to deductible and paid recoverables was $206 and $3,068, respectively. Unsecured high deductible amounts related to unpaid claims and for paid recoverables for 2018 were $1,069, or 25% of the total high deductible. Additionally, as of December 31, 2018, the Company had recoverables on paid claims greater than 90 days overdue of $72, of which $7 have been nonadmitted.
Reserve Credits on Recoverable on Paid December 31, 2017 Gross Loss Reserves Unpaid Claims Claims Total ----------------- ------------------- ------------------ ------------------- ---------- Allied Lines $ 394 $ 394 $ 8 $ 402 General Liabilities 445 445 6 451 Workers Compensation 3,550 3,550 39 3,589 ---------- ---------- --------- ---------- Total $ 4,389 $ 4,389 $ 53 $ 4,442 ---------- ---------- --------- ----------
As of December 31, 2017, both on-balance sheet and off-balance sheet collateral pledged to the Company related to deductible and paid recoverables was $230 and $3,142, respectively. Unsecured high deductible amounts related to unpaid claims and for paid recoverables for 2017 were $1,202, or 27% of the total high deductible. Additionally, as of December 31, 2017, the Company had recoverables on paid claims greater than 90 days overdue of $51, of which $9 have been nonadmitted. The following table shows the deductible amounts for the highest ten unsecured high deductible policies as of December 31, 2018 and 2017:
Counterparty* Unsecured High Deductible Amounts ------------- --------------------------------- December 31, 2018 2017 ------------ ---------------- ---------------- Counterparty 1 $ 129 $ 188 Counterparty 2 103 107 Counterparty 3 75 90 Counterparty 4 55 64 Counterparty 5 54 50 Counterparty 6 54 49 Counterparty 7 48 47 Counterparty 8 48 39 Counterparty 9 21 26 Counterparty 10 20 20
* Actual counterparty is not named and may vary year over year. Additionally, a group of entities under common control is regarded as a single counterparty. Deposit Accounting -------------------------------------------------------------------------------- Direct insurance transactions where management determines there is insufficient insurance risk transfer are recorded as deposits unless the policy was issued (i) in respect of the insured's requirement for evidence of coverage pursuant to applicable statutes (insurance statutes or otherwise), contractual terms or normal business practices, (ii) in respect of an excess insurer's requirement for an underlying primary insurance policy in lieu of self-insurance, or (iii) in compliance with filed forms, rates and/or rating plans. ------------------------------------------------------------------------------- 15 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Assumed and ceded reinsurance contracts which do not transfer a sufficient amount of insurance risk are recorded as deposits with the net consideration paid or received recognized as a deposit asset or liability, respectively. Deposit assets are admitted if (i) the assuming company is licensed, accredited or qualified by the PA DOI, or (ii) the collateral (i.e., funds withheld, letters of credit or trusts) provided by the reinsurer meets all the requirements of the NY SAP, as applicable. The deposit asset or liability is adjusted by calculating the effective yield on the deposit to reflect the actual payments made or received to date and expected future payments with a corresponding credit or charge to Other income (expense) in the Statements of Operations. Deposit assets are recorded to Other assets within the Statements of Admitted Assets, refer to Note 11A. Deposit liabilities are recorded to Other liabilities within the Statements of Liabilities, Capital and Surplus, refer to Note 11B. Premium Deficiency -------------------------------------------------------------------------------- The Company periodically reviews its expected ultimate losses with respect to its unearned premium reserves. A premium deficiency loss and related liability is established if the unearned premium reserves and related future investment income are collectively not sufficient to cover the expected ultimate loss projection. For purposes of premium deficiency tests, contracts are grouped in a manner consistent with how policies are marketed, serviced, and measured for the profitability of such contracts. As of December 31, 2018 and 2017, the Company did not incur any premium deficiency losses. Retroactive Reinsurance -------------------------------------------------------------------------------- Transactions involving the transfer of loss and LAE reserves associated with loss events that occurred prior to the effective date of the transfer are recorded as retroactive reinsurance and reported separately from Reserves for losses and loss adjustment expenses in the Statements of Liabilities, Capital and Surplus. Initial pre-tax gains or losses are recorded in Retroactive reinsurance gain within the Statements of Operations and Changes in Capital and Surplus with surplus gains recorded as Special surplus funds from reinsurance which is a component of Capital and Surplus that is restricted from dividend payment. Amounts recorded in Special surplus funds from reinsurance are considered to be earned surplus (i.e., transferred to Unassigned surplus) only when, and to the extent that, cash recoveries from the assuming entity exceed the consideration paid by the ceding entity. Special surplus funds from retroactive reinsurance are maintained separately for each respective retroactive reinsurance agreement; Special surplus funds from retroactive reinsurance account write-in entry on the balance sheet is adjusted, upward or downward, to reflect any subsequent increase or reduction in reserves ceded. The reduction in the special surplus funds is limited to the lesser of amounts recovered by the Company in excess of consideration paid or the surplus gain in relation to such agreement. To the extent that the transfer of loss and LAE reserves associated with loss events that occurred prior to the effective date of the transfer is between affiliated entities and neither entity records a gain or loss in surplus, the transaction qualifies as an exception in the NAIC SAP accounting guidance and is accounted for as prospective reinsurance. Insurance Related Acquisition Costs -------------------------------------------------------------------------------- Commissions, premium taxes, and certain underwriting costs are expensed as incurred and are included in Other underwriting expenses. The Company records an unearned ceding commission accrual equal to the excess of the ceding commissions received from reinsurers compared to the anticipated acquisition cost of the business ceded. This amount is amortized as an increase to income over the effective period of the reinsurance agreement in proportion to the amount of insurance coverage provided. Provisions for Allowances and Unauthorized or Overdue Reinsurance -------------------------------------------------------------------------------- The recoverability of certain assets, including insurance receivables with counterparties, is reviewed periodically by management. A minimum reserve, as required under the NAIC Annual Statement Instructions for Property and Casualty Companies for Schedule F-Provision for Overdue Reinsurance for uncollectible reinsurance is recorded with an additional reserve required if an entity's experience indicates that a higher amount should be provided. The minimum reserve is recorded as a liability and the change between years is recorded as a gain or loss directly to Unassigned fund (surplus) in the Statement of Liabilities, Capital and Surplus. Any reserve over the minimum amount is recorded on the statement of operations by reversing the accounts previously utilized to establish the reinsurance recoverable. Various factors are taken into consideration when assessing the recoverability of these asset balances including: the age of the related amounts due and the nature of the unpaid balance; disputed balances, historical recovery rates and any significant decline in the credit standing of the counterparty. PA SAP is applied in the determination of the Company's Provision for reinsurance. ------------------------------------------------------------------------------- 16 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Reserves for Losses and Loss Adjustment Expenses -------------------------------------------------------------------------------- Reserves for case incurred but not reported ("IBNR") and LAE losses are determined on the basis of actuarial specialists' evaluations and other estimates, including historical loss experience. The methods of making such estimates and for establishing the resulting reserves are reviewed and updated based on available information, and any resulting adjustments are recorded in the current period. Accordingly, newly established reserves for losses and LAE, or subsequent changes, are charged to income as incurred. In the event of loss recoveries through reinsurance agreements, loss and LAE reserves are reported net of reinsurance amounts recoverable for unpaid losses and LAE. Losses and LAE ceded through reinsurance are netted against losses and LAE incurred. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsurance policy based upon the terms of the underlying contract. See Note 5 for further discussion of policies and methodologies for estimating the liabilities and losses. Workers' compensation reserves are discounted in accordance with NY DFS statutes; see Note 5 for further details. Salvage and subrogation recoverables are estimated using past experience adjusted for current trends, and any other factors that would modify past experience. Estimated salvage and subrogation recoveries (net of associated expenses) are deducted from the liability for unpaid claims or losses. Structured Settlements -------------------------------------------------------------------------------- In the ordinary course of business, the Company enters into structured settlements to settle certain claims. Structured settlements involve the purchase of an annuity by the Company, generally from life insurers, to fund future claim obligations. In the event the life insurers providing the annuity do not meet their obligations, the Company would, in certain cases, become liable for the payments of benefits. As of December 31, 2018 there were no incurred losses, there has been no default by any of the participating life insurers and the Company has not reduced its loss reserves for any annuities purchased where it is both the owner and the payee. Management believes that based on the financial strength of the life insurers involved (mostly affiliates) the likelihood of the Company becoming liable, or incurring an incremental loss, is remote. The estimated loss reserves eliminated by such structured settlement annuities and the unrecorded loss contingencies as of December 31, 2018 and 2017 were $1,328 and $1,321, respectively. As of December 31, 2018, the Company had annuities with aggregate statement values in excess of one percent of its policyholders' surplus with life insurer affiliates as follows:
Licensed in Life Insurance Company State of Domicile New York Statement Value ---------------------- ----------------- ----------- --------------- American General Life Insurance Company of Texas Texas No $166 American General Life Insurance Company of Delaware Delaware No 270 The United State Life Insurance Company in the City of New New York York Yes 837
Fair Value of Financial Instruments -------------------------------------------------------------------------------- The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions. Assets and liabilities recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of three 'levels' based upon the observability of inputs available in the marketplace as discussed below: . Level 1: Fair value measurements that are based upon quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. The quoted price for such instruments is not subject to adjustment. ------------------------------------------------------------------------------- 17 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- . Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. . Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's policy is to recognize transfers in and out at the end of the reporting period, consistent with the date of the determination of fair value (See Note 4 for the balance and activity of financial instruments). The valuation methods and assumptions used in estimating the fair values of financial instruments are as follows: . The fair values of bonds, mortgage loans, unaffiliated common stocks and preferred stocks are based on fair values that reflect the price at which a security would sell in an arm's length transaction between a willing buyer and seller. As such, sources of valuation include third party pricing sources, stock exchanges, brokers or custodians or the NAIC Capital Markets and Investment Analysis Office ("NAIC IAO"). . The fair value of derivatives is determined using quoted prices in active markets and other market evidence whenever possible, including market-based updates, broker or dealer quotations or alternative pricing sources. . The carrying value of all other financial instruments approximates fair value due to the short term nature. Cash Equivalents and Short Term Investments -------------------------------------------------------------------------------- Cash equivalents are short-term, highly liquid investments, with original maturities of three months or less, that are both; (a) readily convertible to known amounts of cash; and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Highly liquid debt securities with maturities of greater than three months but less than twelve months from the date of purchase are classified as short-term investments. Short-term investments are carried at amortized cost which approximates fair value. Bonds (including Loan Backed and Structured Securities) -------------------------------------------------------------------------------- Bonds include any securities representing a creditor relationship, whereby there is a fixed schedule for one or more future payments such as US government agency securities, municipal securities, corporate and convertible bonds, and fixed income instruments. Loan-backed and structured securities ("LBaSS") include residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS"), and asset-backed securities ("ABS"), pass-through securities, lease-backed securities, equipment trust certificates, loan-backed securities issued by special purpose corporations or trusts, and securities where there is not direct recourse to the issuer. Bonds and LBaSS with an NAIC IAO designation of "1" or "2" (considered to be investment grade) are carried at amortized cost. Bonds and LBaSS with an NAIC designation of "3", "4", "5", "5*", "6" or "6*" (considered to be non-investment grade) are carried at the lower of amortized cost or fair value. LBaSS fair values are primarily determined using independent pricing services and broker quotes. Bonds and LBaSS that have not been filed and have not received a designation in over a year, from the NAIC IAO, are assigned a 6* designation and carried at zero, with unrealized losses charged to surplus. Bond and LBaSS securities that have been filed and received a 6* designation can carry a value greater than zero. Bond and LBaSS securities are assigned a 5* designation when the following conditions are met: a) the documentation required for a full credit analysis did not exist, b) the issuer/obligor has made all contractual interest and principal payments, and c) an expectation of repayment of interest and principal exists. Amortization of premium or discount on bonds and LBaSS is calculated using the effective yield method. Additionally, mortgage-backed securities ("MBS") and ABS prepayment assumptions are obtained from an outside vendor or internal estimates. The retrospective adjustment method is used to account for the effect of unscheduled payments affecting high credit quality securities, while securities with less than high credit quality and securities for which the collection of all contractual cash flows is not probable are both accounted for using the prospective adjustment method. ------------------------------------------------------------------------------- 18 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Mortgage Loans -------------------------------------------------------------------------------- Mortgage loans on real estate are carried at unpaid principal balances, net of unamortized premiums, discounts and impairments. Pre-payments of principal are recorded as a reduction in the mortgage loan balance. If a mortgage loan provides for a prepayment penalty or acceleration fee in the event the loan is liquidated prior to its scheduled termination date, such fees is reported as investment income when received. Interest income includes interest collected, the change in interest income due and accrued, the change in unearned interest income as well as amortization of premiums, discounts, and deferred fees and recorded as earned in investment income in the statement of operations. Impaired loans are identified by management as loans in which it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The Company accrues income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Non-performing loan interest income that is delinquent more than 90 days is generally recognized on a cash basis. Mortgage loans are considered impaired when collection of all amounts due under contractual terms is not probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan's effective interest rate, ii) the loan's observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on statistical models primarily driven by past due status, debt service coverage, loan-to-value ratio, property occupancy, profile of the borrower and of the major property tenants, and economic trends in the market where the property is located. When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount of the loan is charged off against the allowance. Internal credit risk ratings are assigned based on the consideration of risk factors including past due status, debt service coverage, loan-to-value ratio or the ratio of the loan balance to the estimated value of the property, property occupancy, profile of the borrower and of the major property tenants, economic trends in the market where the property is located, and condition of the property. Preferred Stocks -------------------------------------------------------------------------------- Perpetual preferred stocks with an NAIC rating of "P1" or "P2", having characteristics of equity securities are carried at fair value. Redeemable preferred stocks with an NAIC rating of "RP1" or "RP2", which have characteristics of debt securities, are carried at book value. All preferred stocks with an NAIC rating of "3" through "6" are carried at the lower of book or fair value. Unaffiliated Common Stock Securities -------------------------------------------------------------------------------- Unaffiliated common stock investments are carried at fair value with changes in fair value recorded as unrealized gains (losses) in Unassigned surplus, or as realized losses in the event a decline in value is determined to be other than temporary. For FHLB capital stock, which is only redeemable at par, the fair value shall be presumed to be par, unless considered other-than-temporarily impaired. Investments in subsidiaries and affiliated companies -------------------------------------------------------------------------------- Investments in non-publicly traded affiliates are recorded based on the underlying equity of the respective entity's financial statements as presented on a basis consistent with the nature of the affiliates operations (including any nonadmitted amounts). The Company's share of undistributed earnings and losses of affiliates is recorded as unrealized gains (losses) in Unassigned surplus. Investments in joint ventures, partnerships and limited liability companies -------------------------------------------------------------------------------- Other invested assets include joint ventures and partnerships and are accounted for under the equity method, based on the most recent financial statements of the entity. Changes in carrying value are recorded as unrealized gains (losses) in Unassigned surplus. Additionally, other invested assets include investments in collateralized loans that are recorded at the lower of amortized cost and the fair value of the underlying collateral. Changes in carrying value resulting from adjustments where the fair value is less than amortized cost are recorded as unrealized gains (losses) in Unassigned surplus, while changes resulting from amortization are recorded as Net investment income. Derivatives -------------------------------------------------------------------------------- Derivative financial instruments are accounted for at fair value using quoted prices in active markets and other market evidence whenever possible, including market-based inputs to valuation models, broker or dealer quotations or alternative pricing sources, reduced by the amount of collateral held or posted by the Company with respect to the derivative position. Changes in carrying value are recorded as unrealized gains (losses) in Unassigned surplus. ------------------------------------------------------------------------------- 19 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Net investment income and gain/loss -------------------------------------------------------------------------------- Investment income is recorded as earned and includes interest, dividends and earnings from subsidiaries, loans and joint ventures. Realized gains or losses on the disposition or impairment of investments are determined on the basis of specific identification. Investment income due and accrued is assessed for collectability. The Company records a valuation allowance on investment income receivable when it is probable that an amount is uncollectible by recording a charge against investment income in the period such determination is made. Any amounts receivable over 90 days past due, or 180 days past due for mortgage loans, that do not have a valuation allowance are nonadmitted by the Company. Evaluating Investments for Other-Than-Temporary Impairment -------------------------------------------------------------------------------- If a bond is determined to have an OTTI in value the cost basis is written down to fair value as its new cost basis, with the corresponding charge to Net realized capital gains (losses) as a realized loss. For bonds, other than loan-backed and structured securities, an OTTI shall be considered to have occurred if it is probable that the Company will not be able to collect all amounts due under the original contractual terms.. For loan-backed and structured securities, an OTTI shall be considered to have occurred if the fair value of a security is below its amortized cost and management intends to sell or does not have the ability and intent to retain the security until recovery of the amortized cost (i.e., intent based impairment). When assessing the intent to sell a security, management evaluates relevant facts and circumstances including, but not limited to, decisions to rebalance the investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing. In general, a security is considered a candidate for OTTI evaluation if it meets any of the following criteria: . The Company may not realize a full recovery on their investment based on lack of ability or intent to hold a security to recovery; . Fundamental credit risk of the issuer exists; and/or . Other qualitative/quantitative factors exist indicating an OTTI has occurred. When a credit-related OTTI is present, the amount of OTTI recognized as a realized capital loss is equal to the difference between the investment's amortized cost basis and the present value of cash flows expected to be collected regardless of management's ability or intent to hold the security. Common and preferred stock investments whose fair value is less than their carrying value or is at a significant discount to acquisition value are considered to be potentially impaired. For securities with unrealized losses, an analysis is performed. Factors include: . If management intends to sell a security that is in an unrealized loss position then an OTTI loss is considered to have occurred; . If the investments are trading at a significant (25 percent or more) discount to par, amortized cost (if lower) or cost for an extended period of time based on facts and circumstances of the investment; or . If a discrete credit event occurs resulting in: (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking protection from creditors under bankruptcy law or any similar laws intended for court supervised reorganization of insolvent enterprises; or, (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims; or . If there are other factors precluding a full recovery of the investment. Limited partnership investments whose fair value is less than its book value with a significant unrealized loss are considered candidates for OTTI. OTTI factors that are periodically considered include: . If an order of liquidation or other fundamental credit issues with the partnership exists; . If there is a significant reduction in scheduled cash flow activities between the Company and the partnership or fund during the year; . If there is an intent to sell, or the Company may be required to sell, the investment prior to the recovery of cost of the investment; or . If other qualitative/quantitative factors indicating an OTTI exist based on facts and circumstances of the investment. ------------------------------------------------------------------------------- 20 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Equities in Pools & Associations -------------------------------------------------------------------------------- The Company accounts for its participation in the business pooled via the Association (see Note 6) and its deposit in the Association by recording the Company's share of: . direct and assumed premium as gross premium, . underwriting and net investment income results in the Statements of Operations and Changes in Capital and Surplus, . insurance and reinsurance balances in the Statements of Admitted Assets, . all other non-insurance assets and liabilities held by the Association, all of which are on its members' behalf, as Equities in Underwriting Pools and Associations in the Statements of Admitted Assets, and . cashflows in the Statements of Cash Flows. Foreign Currency Translation -------------------------------------------------------------------------------- Foreign currency denominated assets and liabilities are translated into U.S. dollars using rates of exchange prevailing at the period end date. Revenues, expenses, gains, losses and surplus adjustments, of non-U.S. operations are translated into U.S. dollars based on weighted average exchange rate for the period. All gains or losses due to translation adjustments recorded as unrealized gains (losses) within Unassigned surplus in the Statements of Liabilities, Capital and Surplus. All realized gains and losses due to exchange differences between settlement date and transaction date resulting from foreign currency transactions, not in support of foreign insurance operations, are included in Net realized capital gains (losses) in the Statements of Operations and Changes in Capital and Surplus. Retirement Plans, Deferred Compensation, Postemployment Benefits and Compensated Absences and Other Postretirement Benefit Plans -------------------------------------------------------------------------------- The Company's employees participate in various AIG-sponsored defined benefit pension and postretirement plans. AIG, as sponsor, is ultimately responsible for the maintenance of these plans in compliance with applicable laws. The Company is not directly liable for obligations under these plans. AIG charges the Company and its insurance company affiliates pursuant to intercompany expense sharing agreements; the expenses are then shared by the pool participants in accordance with the pooling agreement. In August 2015, AIG amended the defined benefit pension plans, to freeze benefit accruals effective January 1, 2016. Consequently, these plans were closed to new participants and current participants ceased earning additional benefits as of December 31, 2015. However, interest credits continue to accrue on the existing cash balance accounts and participants are continuing to accrue years of service for purposes of vesting and early retirement eligibility and subsidies as they continue to be employed by AIG and its subsidiaries. AIG sponsors various defined contribution plans that provide for pre-tax salary reduction contributions by its U.S. employees. The most significant plan is the AIG Incentive Savings Plan, to which the Company makes matching contributions of 100 percent of the first six percent of employee contributions, subject to Internal Revenue Service imposed limitations. Effective January 1, 2016, participants began receiving an additional fully vested, non-elective, non-discretionary employer contribution equal to three percent of the participant's annual base compensation for the plan year, paid each pay period regardless of whether the participant currently contributes to the plan, and subject to the Internal Revenue Service ("IRS")-imposed limitations. The Company incurred employee related costs related to defined benefit and defined contribution plans during 2018, 2017 and 2016 of $5, $10 and $10, respectively. Depreciation -------------------------------------------------------------------------------- Certain assets, principally electronic data processing ("EDP") equipment, software and leasehold improvements are designated as nonadmitted assets and their net book value is deducted from surplus. EDP equipment primarily consists of non-operating software and is depreciated over its useful life, generally not exceeding five years. Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the leasehold improvement. Income Taxes -------------------------------------------------------------------------------- The Company files a consolidated U.S. federal income tax return with AIG. AIG has more than 300 subsidiaries which form part of this tax return. A complete listing of the participating subsidiaries is included in Note 8. The Company is allocated U.S. federal income taxes based upon a tax sharing agreement (the "Tax Sharing Agreement") with AIG, effective January 1, 2018, and approved by the Company's Board of Directors. This agreement provides that the Company shall incur tax results that would have been paid or received by such company if it had filed a separate federal income tax return, with limited exceptions. ------------------------------------------------------------------------------- 21 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Additionally, while the agreement described above governs the current and deferred income tax recorded in the income tax provision, the amount of cash that will be paid or received for U.S. federal income taxes may at times be different. The terms of this agreement are based on principles consistent with the allocation of income tax expense or benefit on a separate company basis, except that: . The sections of the Internal Revenue Code relating to the Base Erosion Anti-abuse Tax ("BEAT") are applied, but only if the AIG consolidated group is subject to BEAT in the Consolidated Tax Liability, and; . The impact of Deferred Intercompany Transactions (as defined in Treas. Reg. (S)1.1502-13(b)(1), if the "intercompany items" from such transaction, as defined in Treas. Reg. (S)1.1502-13(b)(2), have not been taken into account pursuant to the "matching rule" of Treas. Reg. (S)1.1502-13(c)), are excluded from current taxation, provided however, that the Company records the appropriate deferred tax asset and/or deferred tax liability related to the gain or loss and includes such gain or loss in its separate return tax liability in the subsequent tax year when the deferred tax liability or deferred tax asset becomes current. The Company has an enforceable right to recoup federal income taxes in the event of future net losses that it may incur or to recoup its net losses carried forward as an offset to future net income subject to federal income taxes. Under the Tax Sharing Agreement, income tax liabilities related to uncertain tax positions and tax authority audit adjustments ("TAAAs") shall remain with the Company for which the income tax liabilities relate. Furthermore, if and when such income tax liabilities are realized or determined to no longer be necessary, the responsibility for any additional income tax liabilities, benefits or rights to any refunds due, remains with the Company. In accordance with Circular Letter 1979-33 issued by the NY DFS, AIG shall establish and maintain an escrow account for amounts where the Company's separate return liability exceeds the AIG consolidated tax liability. As of December 31, 2018, the Company's separate return liability did not exceed the AIG consolidated tax liability and therefore no amounts were maintained in escrow. Deferred Taxes -------------------------------------------------------------------------------- The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance, if necessary, to reduce the deferred tax asset to an amount that is more likely than not to be realized ("adjusted gross deferred tax asset"). The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires management to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it would be to support a conclusion that a valuation allowance is not needed. The Company's framework for assessing the recoverability of deferred tax assets requires it to consider all available evidence, including: . the nature, frequency, and amount of cumulative financial reporting income and losses in recent years; . the sustainability of recent operating profitability of the Company's subsidiaries; . the predictability of future operating profitability of the character necessary to realize the net deferred tax asset; . the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and . prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset. The adjusted gross deferred tax asset is then assessed for statutory admissibility. The reversing amount eligible for loss carryback or the amount expected to be realized in three years is admissible, subject to the defined surplus limitation. The remaining adjusted gross deferred tax asset can be admitted to the extent of offsetting deferred tax liabilities. 2. Accounting Adjustments to Statutory Basis Financial Statements -------------------------------------------------------------------------------- A. Change in Accounting Principles -------------------------------------------------------------------------------- 2018 and 2017 Changes -------------------------------------------------------------------------------- The Company did not adopt any material change in accounting principles in 2018 or 2017. ------------------------------------------------------------------------------- 22 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- 2016 Changes -------------------------------------------------------------------------------- In 2016, the Company adopted the following change in the SSAP: Going Concern: In June 2015, the Statutory Accounting Principles Working Group adopted changes to SSAP No.1, , Disclosures of Accounting Policies, Risks & Uncertainties, and Other Disclosures ("SSAP 1"), with a December 31, 2016 effective date, requiring management to evaluate whether there are conditions that give rise to substantial doubt over the Company's ability to continue as a going concern within one year from the financial statement issuance date. Conditions that would give rise to substantial doubt ordinarily relate to the Company's ability to meet its obligations as they become due. If substantial doubt arises over the Company's ability to continue as a going concern, the Company shall provide disclosure detailing management's evaluation and the consideration of management's plans to alleviate any substantial doubt. The adoption of this change did not have an effect on the Company's financial condition, results of operations or cash flows. B. Adjustments to Surplus -------------------------------------------------------------------------------- During 2018, 2017 and 2016 the Company identified corrections that resulted in after-tax statutory adjustments to beginning capital and surplus of $72, $38 and $66, respectively. In accordance with SSAP No. 3, Accounting Changes and Corrections of Errors ("SSAP 3"), the corrections of errors have been reported in the 2018, 2017 and 2016 statutory financial statements as adjustments to Unassigned surplus. The impact of these corrections would have decreased the 2017 pre-tax income by $10 and decreased the 2016 pre-tax income by $20. Management has concluded that the effects of these errors on the previously issued financial statements were immaterial based on a quantitative and qualitative analysis. The impact to surplus, assets and liabilities as of January 1, 2018, 2017 and 2016 is presented in the following tables:
Policyholders' Total Admitted 2018 Adjustments Surplus Assets Total Liabilities ---------------- -------------- -------------- ----------------- Balance at December 31, 2017 $6,238 $25,638 $19,400 Adjustments to beginning Capital and Surplus: Asset corrections 56 56 -- Liability corrections 6 -- (6) Income tax corrections 10 10 -- ------ ------- ------- Total adjustments to beginning Capital and Surplus 72 66 (6) ------ ------- ------- Balance at January 1, 2018 as adjusted $6,310 $25,704 $19,394 ====== ======= =======
An explanation for each of the adjustments for prior period corrections is described below: Asset corrections - The increase in net admitted assets is primarily the result of a) an understatement in the carrying value of an investment impacting 2017 financials; b) deposit accounting not recorded within contract terms. Liability corrections - The decrease in total liabilities is primarily the result of a) a net decrease in unearned premium reserves on multi-year direct policies; partially offset by b) an increase due to an over-cession of premiums and losses on a specific program. Income tax corrections - The increase in the tax assets is primarily the result of a) corrections to prior period balances for adjustments to the current and deferred tax assets and liabilities and b) the tax effect of the corresponding change in asset realization and liability corrections. ------------------------------------------------------------------------------- 23 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
Policyholders' Total Admitted 2017 Adjustments Surplus Assets Total Liabilities ---------------- -------------- -------------- ----------------- Balance at December 31, 2016 $6,448 $29,684 $23,236 Adjustments to beginning Capital and Surplus: Asset corrections 27 27 -- Liability corrections 3 -- (3) Income tax corrections 8 8 -- ------ ------- ------- Total adjustments to beginning Capital and Surplus 38 35 (3) ------ ------- ------- Balance at January 1, 2017 as adjusted $6,486 $29,719 $23,233 ====== ======= =======
An explanation for each of the adjustments for prior period corrections is described below: Asset corrections - The increase in net admitted assets is primarily the result of the recording of real estate step up gains. Liability corrections - The decrease in total liabilities is primarily the result of a) a decrease due to an over-accrual of insurance taxes, licenses and fees; partially offset by b) an increase resulting from the understatement of losses; c) an increase due to understatement of interest expense on environmental funds held and d) an increase for direct business which was being accounted for as Deposit Accounting in error. Income tax corrections - The increase in the tax assets is primarily the result of a) corrections to prior period balances for adjustments to the current and deferred tax assets and liabilities and b) the tax effect of the corresponding change in asset realization and liability corrections.
Policyholders' Total Admitted 2016 Adjustments Surplus Assets Total Liabilities ---------------- -------------- -------------- ----------------- Balance at December 31, 2015 $6,641 $26,103 $19,462 Adjustments to beginning Capital and Surplus: Asset corrections 42 42 -- Liability corrections (3) -- 3 Income tax corrections 27 27 -- ------ ------- ------- Total adjustments to beginning Capital and Surplus 66 69 3 ------ ------- ------- Balance at January 1, 2016 as adjusted $6,707 $26,172 $19,465 ====== ======= =======
An explanation for each of the adjustments for prior period corrections is described below: Asset corrections - The increase in net admitted assets is primarily the result of a) an increase due to an overcharge of claims service fees related to an internally developed system; partially offset by b) a decrease due to understatement of the prior year expense allocation; and c) a decrease related to unsupported ceded premiums. Liability corrections - The increase in total liabilities is primarily the result of a) an increase due to ceded losses reversed without consideration of contract limits; b) an increase due to recording of unsupported ceded reserves; and c) an increase resulting from losses understated on certain client accounts; partially offset by d) a decrease related to an overstatement of profit share between AIG PC Pool companies and AIG Warranty Guard Agency. Income tax corrections - The increase in the tax assets is primarily the result of a) corrections to prior period balances for adjustments to the current and deferred tax assets and liabilities and b) the tax effect of the corresponding change in asset realization and liability corrections. ------------------------------------------------------------------------------- 24 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- 3. Investments -------------------------------------------------------------------------------- A. Bond Investments -------------------------------------------------------------------------------- The reconciliations from carrying value to fair value of the Company's bond investments as of December 31, 2018 and 2017 are outlined in the tables below:
Gross Gross Carrying Unrealized Unrealized Fair December 31, 2018 Value Gains Losses Value ----------------- --------- ---------- ---------- --------- U.S. governments $ 57 $ 1 $ -- $ 58 All other governments 258 1 (4) 255 States, territories and possessions 432 20 (3) 449 Political subdivisions of states, territories and possessions 382 13 (1) 394 Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 2,636 53 (27) 2,662 Industrial and miscellaneous 10,769 461 (113) 11,117 --------- -------- ----- --------- Total $ 14,534 $ 549 $(148) $ 14,935 ========= ======== ===== =========
Gross Gross Carrying Unrealized Unrealized Fair December 31, 2017 Value Gains Losses Value ----------------- --------- ---------- ---------- --------- U.S. governments $ 109 $ 2 $ -- $ 111 All other governments 207 1 (1) 207 States, territories and possessions 664 41 (1) 704 Political subdivisions of states, territories and possessions 752 36 (1) 787 Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 2,944 101 (13) 3,032 Industrial and miscellaneous 10,477 565 (52) 10,990 --------- -------- ---- --------- Total $ 15,153 $ 746 $(68) $ 15,831 ========= ======== ==== =========
The carrying values and fair values of bonds at December 31, 2018, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
Carrying Fair December 31, 2018 Value Value ----------------- ---------- ---------- Due in one year or less $ 487 $ 487 Due after one year through five years 2,557 2,567 Due after five years through ten years 1,882 1,873 Due after ten years 1,959 1,986 Structured securities 7,693 8,065 ---------- ---------- Total $ 14,578 $ 14,978 ========== ==========
------------------------------------------------------------------------------- 25 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- B. Mortgage Loan Investments -------------------------------------------------------------------------------- The minimum and maximum lending rates for mortgage loans during 2018 were:
Minimum Maximum Category Lending Rate % Lending Rate % -------- -------------- -------------- Office 4.3% 5.0% Industrial 3.0% 4.5% Multi-Family 2.1% 4.3% Residential 2.9% 5.2%
The maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages was 95 percent. The Company's mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of nonperforming mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented. The Company did not have any advanced amounts for taxes or assessments. The following table details an analysis of mortgage loans as of December 31, 2018 and 2017:
Residential Commercial ----------------- --------------------------- Farm Insured All Other Insured All Other Mezzanine Total ---- ------- --------- ------- --------- --------- ------ 2018 Recorded Investment Current $-- $-- $486 $-- $2,191 $-- $2,677 30 - 59 days past due -- -- 2 -- -- -- 2 --- --- ---- --- ------ --- ------ Total $-- $-- $488 $-- $2,191 $-- $2,679 --- --- ---- --- ------ --- ------ 2017 Recorded Investment Current $-- $-- $339 $-- $1,727 $-- $2,066 30 - 59 days past due -- -- 1 -- -- -- 1 --- --- ---- --- ------ --- ------ Total $-- $-- $340 $-- $1,727 $-- $2,067 === === ==== === ====== === ======
C. Loan-Backed and Structured Securities -------------------------------------------------------------------------------- The Company did not record any non-credit OTTI losses during 2018 and 2017 for LBaSS. As of December 31, 2018 and 2017, the Company held LBaSS for which it recognized $43 and $19 respectively of credit-related OTTI based on the present value of projected cash flows being less than the amortized cost of the securities. The following table shows the aggregate unrealized losses and related fair value relating to those securities for which an OTTI has not been recognized as of the reporting date and the length of time that the securities have been in a continuous unrealized loss position:
Years Ended December 31, 2018 2017 ------------------------ -------- -------- Aggregate unrealized losses: Less than 12 Months $ 36 $ 28 12 Months or longer $ 41 $ 5 Aggregate related fair value of securities with unrealized losses: Less than 12 Months $ 1,723 $ 2,178 12 Months or longer $ 1,376 $ 215
The Company held structured notes as of December 31, 2018 and 2017 with a total carrying value of $140 and $128, respectively. There were no structured notes held as of December 31, 2018 and 2017 which were considered mortgage-referenced securities. ------------------------------------------------------------------------------- 26 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- D. Unrealized losses -------------------------------------------------------------------------------- The fair value of the Company's bonds and stocks that had gross unrealized losses (where fair value is less than amortized cost) as of December 31, 2018 and 2017 are set forth in the tables below:
December 31, 2018 Less than 12 Months 12 Months or Longer Total ----------------- -------------------- -------------------- -------------------- Unrealized Unrealized Unrealized Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- U.S. governments $ 13 $ -- $ 22 $ -- $ 35 $ -- All other governments 67 (3) 124 (4) 191 (7) States, territories and possessions 51 (3) 44 (1) 95 (4) Political subdivisions of states, territories and possessions 49 (1) 52 (1) 101 (2) Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 264 (3) 723 (24) 987 (27) Industrial and miscellaneous 3,360 (99) 1,825 (67) 5,185 (166) ------ ----- ------ ----- ------ ----- Total bonds $3,804 $(109) $2,790 $ (97) $6,594 $(206) ------ ----- ------ ----- ------ ----- Affiliated -- -- 10 (5) 10 (5) Non-affiliated 9 (1) -- -- 9 (1) ------ ----- ------ ----- ------ ----- Total common stocks $ 9 $ (1) $ 10 $ (5) $ 19 $ (6) ------ ----- ------ ----- ------ ----- Total bonds and stocks $3,813 $(110) $2,800 $(102) $6,613 $(212) ====== ===== ====== ===== ====== =====
December 31, 2017 Less than 12 Months 12 Months or Longer Total ----------------- -------------------- -------------------- -------------------- Unrealized Unrealized Unrealized Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- U.S. governments $ 8 $ -- $ -- $ -- $ 8 $ -- All other governments 138 (3) 23 (1) 161 (4) States, territories and possessions 49 (1) 6 -- 55 (1) Political subdivisions of states, territories and possessions 35 -- 35 (1) 70 (1) Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 541 (12) 100 (1) 641 (13) Industrial and miscellaneous 2,674 (46) 625 (16) 3,299 (62) ------ ---- ---- ---- ------ ----- Total bonds $3,445 $(62) $789 $(19) $4,234 $ (81) ------ ---- ---- ---- ------ ----- Affiliated -- -- 128 (49) 128 (49) Non-affiliated 5 -- -- -- 5 -- ------ ---- ---- ---- ------ ----- Total common stocks $ 5 $ -- $128 $(49) $ 133 $ (49) ------ ---- ---- ---- ------ ----- Total bonds and stocks $3,450 $(62) $917 $(68) $4,367 $(130) ====== ==== ==== ==== ====== =====
E. Realized Gains Losses -------------------------------------------------------------------------------- Proceeds from sales and associated gross realized gains (losses) for the years ended December 31, 2018, 2017 and 2016 were as follows:
Years ended December 31 2018 2017 2016 ----------------------- ------------------ ------------------ ------------------ Equity Equity Equity Bonds Securities Bonds Securities Bonds Securities ------ ---------- ------ ---------- ------ ---------- Proceeds from sales $1,924 $339 $5,648 $59 $3,895 $34 Gross realized gains 14 21 79 5 83 12 Gross realized losses (27) -- (69) -- (48) --
------------------------------------------------------------------------------- 27 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- F. Derivative Financial Instruments -------------------------------------------------------------------------------- The Company holds currency as well as interest rate derivative financial instruments in the form of currency swaps, interest rate swaps, and currency forwards and futures to manage risk from currency exchange rate fluctuations, and the impact of such fluctuations to surplus and cash flows on investments or loss reserves. While not accounted for under hedge accounting, the currency derivatives are economic hedges of the Company's exposure to fluctuations in the value of receipts on certain investments held by the Company denominated in foreign currencies (primarily GBP and EUR), or of the Company's exposure to fluctuations in recorded amounts of loss reserves denominated in foreign currencies (primarily JPY). Additionally, interest rate derivatives were entered into to manage risk from fluctuating interest rates in the market, and the impact of such fluctuations to surplus and cash flows on investments or loss reserves. The interest rate derivatives are cash flow hedges of the Company's exposure to fluctuations in LIBOR/EURIBOR rates on investments in collateralized loan obligations. Market Risk The Company is exposed under these types of contracts to fluctuations in value of the swaps and forwards and variability of cash flows due to changes in interest rates and exchange rates. Credit Risk The current credit exposure of the Company's derivative contracts is limited to the fair value of such contracts. Credit risk is managed by entering into transactions with creditworthy counterparties and obtaining collateral. Cash Requirements The Company is subject to collateral requirements on its currency and interest rate derivative contracts. Additionally, the Company is required to make currency exchanges on fixed dates and fixed amounts or fixed exchange rates, or make a payment in the amount of foreign currency physically received on certain foreign denominated investments. For interest rate swaps, the Company is required to make payments based on a floating rate (LIBOR/EURIBOR) on a fixed payment date. The currency and interest rate derivatives do not qualify for hedge accounting. As a result, the Company's currency and interest rate contracts are accounted for at fair value and the changes in fair value are recorded as unrealized gains (losses) in Unassigned surplus within the Statements of Operations and Changes in Capital and Surplus until the contract expires, paid down or is redeemed early. In the event a contract is fully redeemed before its expiration, the related unrealized amounts will be recognized in the Net realized capital gains (losses). Furthermore, if the contract has periodic payments or fully matures, any related unrealized amounts are recognized in net investment income. The Company did not apply hedge accounting to any of its derivatives for any period in these financial statements. The following tables summarize the outstanding notional amounts, the fair values and the realized and unrealized gains or losses of the derivative financial instruments held by the Company for the years ended December 31, 2018 and 2017.
December 31, 2018 Year ended December 31, 2018 -------------------------- ---------------------------------- Derivative Financial Outstanding Realized capital Unrealized capital Instrument Notional Amount Fair Value gains/ (losses) gains / (losses) -------------------- --------------- ---------- ---------------- ------------------ Swaps $1,334 $ 5 $(2) $25 Forwards -- -- -- (1) ------ --- --- --- Total $1,334 $ 5 $(2) $24 ====== === === ===
December 31, 2017 Year ended December 31, 2017 ------------------------- ---------------------------------- Derivative Financial Outstanding Realized Capital Unrealized capital Instrument Notional Amount Fair Value gains/(losses) gains / losses -------------------- --------------- ---------- ---------------- ------------------ Swaps $583 $(15) $(9) $(44) Forwards 250 1 1 4 ---- ---- --- ---- Total $833 $(14) $(8) $(40) ==== ==== === ====
------------------------------------------------------------------------------- 28 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- G. Other Invested Assets -------------------------------------------------------------------------------- During 2018, 2017 and 2016, the Company recorded OTTI losses on investments in joint ventures and partnerships of $91, $81, and $66, respectively. H. Investment Income -------------------------------------------------------------------------------- The Company had $0 and $1 accrued investment income receivables over 90 days past due as of December 31, 2018 and 2017, respectively. Investment expenses of $36, $42 and $33 were included in Net investment income earned for the years ended December 31, 2018, 2017 and 2016, respectively. I. Restricted Assets -------------------------------------------------------------------------------- The Company had securities deposited with regulatory authorities, as required by law, with a carrying value of $1,676 and $1,645 as of December 31, 2018 and 2017, respectively. 4. Fair Value of Financial Instruments -------------------------------------------------------------------------------- The following tables present information about financial instruments carried at fair value on a recurring basis and indicates the level of the fair value measurement as of December 31, 2018 and 2017:
December 31, 2018 Level 1 Level 2 Level 3 Total ----------------- ------- ------- ------- ------- Bonds $ -- $ 578 $ 96 $ 674 Common stocks 111 -- 25 136 Mutual funds 2 -- -- 2 Derivative assets -- 22 -- 22 Derivative liabilities -- (17) -- (17) ------ ------ ------ ------- Total $ 113 $ 583 $ 121 $ 817 ====== ====== ====== =======
December 31, 2017 Level 1 Level 2 Level 3 Total ----------------- ------- ------- ------- ------- Bonds $ -- $ 245 $ 65 $ 310 Common stocks 136 276 22 434 Mutual funds 1 2 -- 3 Derivative assets -- 6 -- 6 Derivative liabilities -- (20) -- (20) ------ ------- ------ ------- Total $ 137 $ 509 $ 87 $ 733 ====== ======= ====== =======
There were no assets carried at fair value that were transferred between Level 1 and Level 2 during 2018. During the year ended December 31, 2017, $2 of common stocks transferred from Level 1 to Level 2 as an alternative method was utilized to determine fair value as active market price was not readily accessible. ------------------------------------------------------------------------------- 29 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- A. Fair Value Measurements in Level 3 of the Fair Value Hierarchy -------------------------------------------------------------------------------- The following tables show the balance and activity of financial instruments classified as level 3 in the fair value hierarchy for the years ended December 31, 2018 and 2017.
Total Realized Gains (Losses) Purchases, Beginning included in Unrealized Sales, Balance at Net Gains (Losses) Issuances, Balance at January 1, Transfers into Transfers out Investment Included in Settlements, December 31, 2018 Level 3 of Level 3 Income Surplus Net 2018 ---------- -------------- ------------- -------------- -------------- ------------ ------------ Bonds $65 $98 $(141) $(13) $(2) $ 89 $ 96 Common stocks 22 1 (26) 15 (2) 15 25 --- --- ----- ---- --- ---- ---- Total $87 $99 $(167) $ 2 $(4) $104 $121 === === ===== ==== === ==== ====
Total Realized Gains (Losses) Purchases, Beginning included in Unrealized Sales, Balance at Net Gains (Losses) Issuances, Balance at January 1, Transfers into Transfers out Investment Included in Settlements, December 31, 2017 Level 3 of Level 3 Income Surplus Net 2017 ---------- -------------- ------------- -------------- -------------- ------------ ------------ Bonds $66 $16 $(85) $(1) $-- $69 $65 Common Stocks 21 -- -- 5 -- (4) 22 --- --- ---- --- --- --- --- Total $87 $16 $(85) $ 4 $-- $65 $87 === === ==== === === === ===
Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data or when the asset is no longer carried at fair value. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant inputs becoming observable or when a long-term interest rate significant to a valuation becomes short-term and thus observable. Transfers out of Level 3 can also occur due to favorable credit migration resulting in a higher NAIC designation. Securities are generally transferred into Level 3 due to a decrease in market transparency, downward credit migration and an overall increase in price disparity for certain individual security types. The Company's policy is to recognize transfers in and out at the end of the reporting period, consistent with the date of the determination of fair value. The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to the Company, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments may not be reasonably available to the Company, balances shown below may not equal total amounts reported for such Level 3 assets.
Fair Value at December 31, 2018 Valuation Technique Unobservable Input Range (Weighted Average) ------------------------------- -------------------- ------------------ ------------------------ Assets: Bonds $31 Discounted cash flow Yield 3.94% - 5.75% (4.85%)
------------------------------------------------------------------------------- 30 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- B. Fair Value of all Financial Instruments -------------------------------------------------------------------------------- The table below details the fair value of all financial instruments except for those accounted for under the equity method as of December 31, 2018 and 2017:
Not Aggregate Admitted Practicable December 31, 2018 Fair Value Assets Level 1 Level 2 Level 3 (Carry Value) ----------------- ---------- -------- ------- ------- ------- ------------- Bonds $14,935 $14,534 $ -- $10,809 $4,126 $-- Cash equivalents and short term investments 191 191 134 57 -- -- Common stock 145 145 111 9 25 -- Derivative assets 22 22 -- 22 -- -- Derivative liabilities (17) (17) -- (17) -- -- Mortgage loans 2,673 2,679 -- -- 2,673 -- Mutual funds 2 2 2 -- -- -- Preferred stock 50 49 -- 50 -- -- ------- ------- ---- ------- ------ --- Total $18,001 $17,605 $247 $10,930 $6,824 $-- ======= ======= ==== ======= ====== ===
Not Aggregate Admitted Practicable December 31, 2017 Fair Value Assets Level 1 Level 2 Level 3 (Carry Value) ----------------- ---------- -------- ------- ------- ------- ------------- Bonds $15,831 $15,153 $ -- $11,434 $4,397 $-- Cash equivalents and short term investments 138 138 138 -- -- -- Common stock 445 445 136 288 21 -- Derivative assets 6 6 -- 6 -- -- Derivative liabilities (20) (20) -- (20) -- -- Mortgage loans 2,079 2,067 -- -- 2,079 -- Mutual funds 3 3 1 2 -- -- Preferred stock 50 49 -- 50 -- -- ------- ------- ---- ------- ------ --- Total $18,532 $17,841 $275 $11,760 $6,497 $-- ======= ======= ==== ======= ====== ===
5. Reserves for Losses and Loss Adjustment Expenses -------------------------------------------------------------------------------- A roll forward of the Company's net reserves for losses and LAE as of December 31, 2018, 2017 and 2016, is set forth in the table below:
December 31, 2018 2017 2016 ------------ ------- ------- ------- Reserves for losses and LAE, end of prior year $12,115 $12,210 $13,171 ------- ------- ------- Incurred losses and LAE related to: Current accident year 4,000 4,700 4,377 Prior accident year 260 277 1,102 ------- ------- ------- Total incurred losses and LAE $ 4,260 $ 4,977 $ 5,479 ------- ------- ------- Paid losses and LAE related to: Current accident year (1,182) (1,140) (1,123) Prior accident year (4,258) (3,932) (5,317) ------- ------- ------- Total paid losses and LAE (5,440) (5,072) (6,440) ------- ------- ------- Reserves for losses and LAE, end of current year $10,935 $12,115 $12,210 ======= ======= =======
During 2018, after applying the impact of the ADC, the Company reported net unfavorable prior year development on loss and LAE reserves of approximately $260, which includes a decrease in loss reserve discount on prior accident years of $24. Under the ADC, 80 percent of the reserve risk on substantially all of the Company's commercial long-tail exposures for accident years 2015 and prior is ceded to NICO. Excluding the impact of the ADC, the Company recognized unfavorable prior year loss reserve development of $491. ------------------------------------------------------------------------------- 31 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The 2018 unfavorable prior year development is generally a result of the following: . Unfavorable prior year development in excess casualty, driven by the combination of construction defect and construction wrap claims from accident years 2015 and prior where the Company reacted to significant increases in severity and longer claim reporting patterns, as well as higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident years; . Unfavorable prior year development in financial lines, primarily from directors & officers (D&O) and employment practices liability (EPLI) policies covering corporate and national insureds as well as private and not-for-profit insureds. This development was predominantly in accident years 2014-2017 and resulted largely from increases in severity as the frequency of class action lawsuits increased in those years; and . Unfavorable prior year development in personal lines reflecting an increase in estimates in respect of the California Wildfires and Hurricane Irma. During 2017, after applying the impact of the ADC, the Company reported net unfavorable prior year development on loss and LAE reserves of approximately $277, which includes a decrease in loss reserve discount on prior accident years of $45. Under the ADC, 80 percent of the reserve risk on substantially all of the Company's commercial long-tail exposures for accident years 2015 and prior is ceded to NICO. Excluding the impact of the ADC, the Company recognized unfavorable prior loss reserve development of $452. The 2017 unfavorable prior year development is generally a result of the following: . Unfavorable prior year development in excess casualty and primarily general liability products within Other Liability - Occurrence line of business, driven primarily by increases in underlying severity and greater than expected loss experience in accident year 2016 as well as increased development from claims related to construction defects and construction wrap business (largely from accident years 2006 and prior); . Unfavorable prior year development in excess casualty and directors and officers ("D&O") within Other Liability - Claims-Made line of business, covering privately owned and not-for-profit insureds. The D&O development was predominantly in accident year 2016 and resulted largely from increases in bankruptcy-related claims and fiduciary liability claims for large educational institutions; and . Unfavorable prior year development primarily driven by commercial auto business in the program business unit. A significant portion of this development came from accident year 2016 with much of it related to programs that have been terminated over the past year. During 2016, the Company reported adverse loss and LAE net reserve development of $1,102 which includes a loss reserve discount of $152 due to accretion. The adverse development is comprised mainly of development on the Primary Workers Compensation class of business of $669, the Primary General Liability class of business of $270, the Excess Casualty class of business of $268, the Medical Malpractice class of business of $152, the Primary Commercial Auto class of business of $123, and the Programs class of business of $131. In addition, favorable prior year loss development on retrospectively rated policies was $12 as of December 31, 2016, which was offset by additional return premiums. Original estimates are adjusted as additional information becomes known regarding individual claims. As a result of the ADC, there was $514 of prior year development (net of discount) ceded to NICO. Refer to Note 1 for further details regarding this transaction. The Company's reserves for losses and LAE have been reduced for anticipated salvage and subrogation of $249, $252 and $242 for the years ended December 31, 2018, 2017 and 2016, respectively. The Company paid $9, $32 and $36 in the reporting period to settle 204, 233 and 54 claims related to extra contractual obligations or bad faith claims stemming from lawsuits for the years ended December 31, 2018, 2017 and 2016, respectively. A. Asbestos/Environmental Reserves -------------------------------------------------------------------------------- The Company has indemnity claims asserting injuries from toxic waste, hazardous substances, asbestos and other environmental pollutants and alleged damages to cover the clean-up costs of hazardous waste dump sites (environmental claims). Estimation of environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1986 and prior years, cannot be estimated by conventional reserving techniques. Environmental claims development is affected by factors such as inconsistent court resolutions, the broadening of the intent of policies and scope of coverage and increasing number of new claims. The Company and other industry members have and will continue to litigate the broadening judicial interpretation of policy coverage and the liability issues. If the courts continue in the future to expand the intent of the policies and the scope of the coverage, as they have in the past, additional liabilities would emerge for amounts in excess of reserves held. This emergence cannot now be reasonably estimated, but could have a material impact on the Company's future operating results or financial position. ------------------------------------------------------------------------------- 32 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The Company has exposure to asbestos and/or environmental losses and LAE costs arising from pre-1986 general liability, product liability, commercial multi-peril and excess liability insurance or reinsurance policies as noted below:
Asbestos Losses Environmental Losses ------------------------- ------------------------- December 31, 2018 2017 2016 2018 2017 2016 ------------ ------- ------- ------- ------- ------- ------- Direct Loss and LAE reserves, beginning of year $ 797 $ 838 $ 819 $ 215 $ 255 $ 149 Impact of pooling restructure transaction -- -- 137 -- -- 25 Incurred losses and LAE (17) 2 37 97 1 91 Calendar year paid losses and LAE (53) (43) (155) (27) (41) (10) ------- ------- ------- ------- ------- ------- Loss and LAE Reserves, end of year $ 727 $ 797 $ 838 $ 285 $ 215 $ 255 ------- ------- ------- ------- ------- ------- Assumed reinsurance Loss and LAE reserves, beginning of year $ 258 $ 249 $ 264 $ 19 $ 15 $ 14 Impact of pooling restructure transaction -- -- 43 -- -- 2 Incurred losses and LAE 76 27 1 (1) 6 (1) Calendar year paid losses and LAE (18) (18) (59) (1) (2) -- ------- ------- ------- ------- ------- ------- Loss and LAE Reserves, end of year $ 316 $ 258 $ 249 $ 17 $ 19 $ 15 ------- ------- ------- ------- ------- ------- Net of reinsurance Loss and LAE reserves, beginning of year $ 1 $ 1 $ 9 $ -- $ -- $ -- Impact of pooling restructure transaction -- -- 2 -- -- -- Incurred losses and LAE -- -- -- -- -- -- Calendar year paid losses and LAE -- -- (10) -- -- -- ------- ------- ------- ------- ------- ------- Loss and LAE Reserves, end of year $ 1 $ 1 $ 1 $ -- $ -- $ -- ======= ======= ======= ======= ======= =======
The Company estimates the full impact of the asbestos and environmental exposure by establishing case basis reserves on all known losses and establishes bulk reserves for IBNR losses and LAE based on management's judgment after reviewing all the available loss, exposure, and other information. Included in the above table are loss and LAE - IBNR and bulk reserves arising from pre-1986 general liability, product liability, commercial multi-peril and excess liability insurance or reinsurance policies as noted below:
Asbestos Loss Reserves LAE Reserves December 31, 2018 2017 2018 2017 ------------ ------ ------ ------ ------ Direct basis: $ 350 $ 406 $ 39 $ 45 Assumed reinsurance basis: 125 78 14 9 Net of ceded reinsurance basis: -- -- -- --
Environmental Loss Reserves LAE Reserves December 31, 2018 2017 2018 2017 ------------ ------ ------ ------ ------ Direct basis: $ 112 $ 68 $ 48 $ 29 Assumed reinsurance basis: 5 3 2 1 Net of ceded reinsurance basis: -- -- -- --
B. Loss Portfolio Transfer -------------------------------------------------------------------------------- On February 12, 2018, the Company and certain AIG affiliated insurers (collectively, the "Reinsureds" (as cedants), each of which is a member of the Combined Pool) commuted certain loss portfolio reinsurance agreements with Eaglestone (as reinsurer). The commuted reinsurance agreements with Eaglestone related to environmental impairment liability and related exposures, pre-1986 environmental, public entity, occupational accident exposures, miscellaneous run-off general liability and workers' compensation exposures, and selected physicians and surgeons professional liability policies. The commutation settlement was equal to the statutory balances as of the January 1, 2017 effective date. ------------------------------------------------------------------------------- 33 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- On the same date, the Reinsureds (as cedants), Eaglestone (as original reinsurer), and Fortitude Re (as replacement reinsurer), a wholly owned AIG subsidiary and registered Class 4 and Class E reinsurer in Bermuda, entered into a novation agreement whereby obligations of excess workers' compensation business previously ceded by the Reinsureds to Eaglestone were transferred to Fortitude Re. The novation consideration was equal to the total statutory reserves ceded to Eaglestone as of the January 1, 2017 effective date. Further, and also on the same date, a book of assumed reinsurance business of the Reinsureds, which was previously embedded in one of the LPTs that was commuted, was ceded back to Eaglestone as a separate LPT ("Re-ceded Portfolio") on a fund transferred basis with settlement equal to the statutory balances as of the January 1, 2017 effective date, resulting in no gain in surplus to the Reinsureds. Finally, the Reinsureds (as cedants) ceded substantially all commuted business as detailed above through various LPT reinsurance agreements to Fortitude Re (as replacement reinsurer). Additionally, at the same time, the Reinsureds also ceded to Fortitude Re additional business related to certain excess workers' compensation (accident years 2011 and 2012), certain pollution legal liability, buffer trucking, some healthcare primary and excess product coverages businesses. The consideration for the above reinsurance agreements is equal to the statutory book value of the ceded liabilities as of the January 1, 2017 effective date, resulting in no gain in surplus to the Reinsureds. The consideration was settled on a funds withheld basis. Interest on the funds withheld is determined by the total return of a certain earmarked portfolio of assets owned by the Reinsureds. The recording of these transactions by the Reinsureds in the first quarter of 2018 required the reversal of interest expense on funds held due to Eaglestone on the commuted portfolios and the recognition of interest expense due to Fortitude Re on the commuted portfolios and the new cessions, in order to record the effect of the transaction as of the stated effective date of January 1, 2017. A reconciliation of change in reserves and corresponding consideration (paid) received for the above transactions between Eaglestone, Fortitude Re and the Reinsureds for the effective date of January 1, 2017 are shown below:
LPTs (Previously commuted business and 2016 Exit Re-ceded Company Novation Commutation Portfolio) Portfolio Total ------- -------- ----------- ------------ --------- ------- Reserves -------- Eaglestone Reinsurance Company $(1,577) $(2,895) $ -- $ 41 $(4,431) Fortitude Reinsurance Company 1,577 -- 4,013 -- 5,590 Combined Pool Companies: National Union Fire Ins. Co. of Pittsburgh, Pa. -- 1,013 (1,405) (14) (406) American Home Assurance Company -- 1,013 (1,405) (14) (406) Lexington Insurance Company -- 869 (1,203) (13) (347) Total Combined Pool -- 2,895 (4,013) (41) (1,159) Consideration (Paid) Received as Funds Held, Cash and Securities -------------------------------------- Eaglestone Reinsurance Company (1,734) (2,895) -- 41 (4,588) Fortitude Reinsurance Company 1,734 -- 4,013 -- 5,747 Combined Pool Companies: National Union Fire Ins. Co. of Pittsburgh, Pa. -- 1,013 (1,405) (14) (406) American Home Assurance Company -- 1,013 (1,405) (14) (406) Lexington Insurance Company -- 869 (1,203) (13) (347) Total Combined Pool -- 2,895 (4,013) (41) (1,159)
------------------------------------------------------------------------------- 34 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The below table presents the reserves as of December 31, 2017 that were transferred during 2018 between Eaglestone, Fortitude Re and the Reinsureds for the above transactions:
LPTs (Previously commuted business and 2016 Exit Re-ceded Total Change in Company Novation Commutation Portfolio) Portfolio Reserves ------- -------- ----------- ------------ --------- --------------- Eaglestone Reinsurance Company $(1,477) $(2,567) $ -- $ 32 $(4,012) Fortitude Reinsurance Company 1,477 -- 3,442 -- 4,919 Combined Pool Companies: National Union Fire Ins. Co. of Pittsburgh, Pa. -- 898 (1,205) (11) (318) American Home Assurance Company -- 898 (1,205) (11) (318) Lexington Insurance Company -- 771 (1,032) (10) (271) Total Combined Pool -- 2,567 (3,442) (32) (907)
C. Discounting of Liabilities for Unpaid Losses or Unpaid Loss Adjustment Expenses -------------------------------------------------------------------------------- The Company discounts its workers' compensation (both tabular and non-tabular) reserves. The calculation of the Company's tabular discount is based upon the mortality table used in the 2007 US Decennial Life Table, and applying a 3.5 percent interest rate. Only case basis reserves are subject to tabular discounting. The December 31, 2018 and 2017 liabilities include $569 and $781 of such discounted reserves, respectively. Tabular Reserve Discount -------------------------------------------------------------------------------- The table below presents the amount of tabular discount applied to the Company's reserves as of December 31, 2018, 2017 and 2016.
Lines of Business 2018 2017 2016 ----------------- -------- -------- -------- Workers' Compensation Case Reserves $ 135 $ 134 $ 96
As of December 31, 2018 and 2017, the tabular case reserve discount is presented net of the ceded discount related to the ADC of $184 and $162, respectively. Non-Tabular Discount -------------------------------------------------------------------------------- The Company's non-tabular workers' compensation case reserves are discounted using the Company's own payout pattern and a 5 percent interest rate, as prescribed by NY SAP. The table below presents the amount of non-tabular discount applied to the Company's reserves as of December 31, 2018, 2017 and 2016.
Lines of Business 2018 2017 2016 ----------------- -------- -------- -------- Workers' Compensation Case Reserves $ 73 $ 86 $ 159
As of December 31, 2018 and 2017, the non-tabular case reserve discount is presented net of the ceded discount related to the ADC of $193 and $187, respectively. ------------------------------------------------------------------------------- 35 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- 6. Related Party Transactions -------------------------------------------------------------------------------- A. Combined Pooling Agreement -------------------------------------------------------------------------------- 2017 Pooling Restructure Transaction In 2017, the Combined Pooling Agreement was amended and restated among the twelve member companies. In order to rebalance the capital accounts of the companies in the Combined Pool, certain participants of the Combined Pool made distributions or received contributions of capital during March 2017. The change in the Combined Pooling Agreement had no effect on the Company's reported assets, liabilities, surplus, operations or cash flow, as the Company's participation in the pool remained the same. 2016 Pooling Restructure Transaction In 2016, the Combined Pooling Agreement was amended and restated among the twelve member companies. In order to rebalance the capital accounts of the companies in the Combined Pool, certain participants of the Combined Pool made distributions or received contributions of capital during February 2016. C&I distributed to AIG PC US, its parent, an amount of $700, of which $158 was an extraordinary dividend and $542 was a return of capital. Subsequently, AIG PC US made a contribution to American Home in the amount of $700. The following table shows the changes in assets, liabilities and surplus as a result of the 2016 Pooling Restructure Transaction:
Amount ------ Assets: Agents' balances or uncollected premiums $ 286 Amounts recoverable from reinsurers 51 Funds held by or deposited with reinsured companies 31 Other insurance assets 37 ------ Total Assets 405 ------ Liabilities Unearned premium reserves (net) 521 Reinsurance payable on paid losses and loss adjustment expenses 34 Reserves for losses and loss adjustment expenses (net) 2,265 Funds held by company under reinsurance treaties 227 Ceded reinsurance premiums payable 47 Other insurance liabilities 140 ------ Total Liabilities $3,234 ------ Statements of Operations and Changes in Surplus Net premiums written $ 521 Change in unearned premium reserves (521) ------ Premiums earned -- ------ Other underwriting expenses incurred 82 ------ Net loss (82) ------ Total change in Surplus (82) ------ Net Impact $2,747 ------ Consideration received Securities received $ 18 Cash received 2,729 ------ Consideration Received $2,747 ======
Other underwriting expenses incurred represent the net expense allowance impact to the Company pursuant to the Combined Pooling Agreement. ------------------------------------------------------------------------------- 36 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The Company received a permitted practice from the domiciliary state that resulted in the reporting of consideration for the transfer of undiscounted loss reserves as paid (or negative paid) losses within losses incurred, rather than presenting such amounts within premiums written and earned. This permitted practice only relates to the inception of the pooling arrangement. As a result, the consideration paid relating to unearned premium is reflected as negative premiums written, as offset by the change in unearned premium, and the consideration relating to the transfer of undiscounted loss reserves and loss adjustment expenses was recorded as negative paid losses, as offset by the change in net losses incurred. This permitted practice had no effect upon net income or surplus for the period. Statutory accounting principles allow for prospective accounting treatment for modifications to existing intercompany pooling agreements that do not result in a gain in surplus to the insurance group or to impacted companies. Transfer of both assets and the liabilities valued at statutory book value ensures that there is no impact to surplus as a result of implementing a modification to an existing pooling arrangement. Under the terms of the Combined Pooling agreement, which was approved by the individual company's Insurance Department state of domicile, all assets and liabilities were transferred at statutory book value, gross of admissibility, recoverability allowances, provisions and discount amounts. Due to the adjustment for these amounts, there were impacts to the individual companies' net income and surplus amounts, mainly due to the prescribed or permitted practices of the individual company's Insurance Department state of domicile in comparison to other states of domicile. Specifically, changes in discount resulting from the net reduction in workers' compensation reserves retained following the reduction in the Company's pooling participation were reflected as a charge to income based on the state prescribed discount rates. In addition, the Companies were compensated for any previous acquisition costs associated with unearned premium reserves that were subject to transfer, as well as certain expense reallocations that had no effect to the Combined Pool. As a result of the transaction, the Company recorded an increase/(decrease) in its Assets, Liabilities, Surplus and Net Income subsequent to the changes associated with the net consideration received (described above), yet inclusive of the change in discount, acquisition costs and expense reallocation adjustments as follows:
Net Admitted Net Line Description Assets Liabilities Surplus Income ---------------- ------------ ----------- ------- ------ Change in nonadmitted assets $-- $-- $(21) $ -- Workers' compensation discount -- -- 83 83 Other allocations -- -- (20) (14) --- --- ---- ---- Total $-- $-- $ 42 $ 69 === === ==== ====
B. American International Overseas Association -------------------------------------------------------------------------------- AIG formed the Association, a Bermuda exempted limited partnership, in 1976, as the pooling mechanism for AIG's international general insurance operations. At the time of forming the Association, the member companies entered into a reinsurance agreement to govern the business pooled in the Association. The current participation percentages for the Association Pool member companies are set forth in the table below.
NAIC Co. Participation Member Company Code Percent -------------- -------- ------------- Combined Pool Member companies, as follows: National Union 19445 78% New Hampshire 23841 12% American Home 19380 10%
The Company's participation in the Association is pooled among all Pool members in proportion to their participation in the Combined Pool. ------------------------------------------------------------------------------- 37 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- C. Significant Transactions -------------------------------------------------------------------------------- The following table summarizes transactions (excluding reinsurance and cost allocation transactions) that occurred during 2018, 2017 and 2016 between the Company and affiliated companies in which the value exceeded one-half of one percent of the Company's admitted assets as of December 31, 2018, 2017 and 2016:
2018 ------------------------------------------------- Assets Received by Assets Transferred by the Company the Company --------------------- --------------------------- Date of Statement Transaction Explanation of Transaction Name of Affiliate Value Description Statement Value Description ----------- -------------------------- ----------------- --------- ----------- --------------- ----------- 12/31/18 Capital Contribution (a)AIG PC US $150 Receivables -- -- ---- ----------- -- -- (a) Refer to Note 11 and 12 for more details.
2017 ------------------------------------------------- Assets Received by the Assets Transferred by the Company Company --------------------- --------------------------- Date of Statement Transaction Explanation of Transaction Name of Affiliate Value Description Statement Value Description ----------- ---------------------------------- ----------------- --------- ----------- --------------- ----------- 01/19/17 Purchase of securities AIG, Inc. $264 Securities $264 Cash 10/31/17 Purchase and sale of securities Lexington 343 Securities 359 Securities 10/31/17 Purchase of securities Lexington 16 Cash -- -- 10/31/17 Purchase and sale of securities National 499 Securities 507 Securities Union 10/31/17 Purchase of securities National 9 Cash -- -- Union
2016 ----------------------------------------------------- Assets Received by Assets Transferred by the Company the Company ------------------------- --------------------------- Date of Statement Transaction Explanation of Transaction Name of Affiliate Value Description Statement Value Description ----------- ----------------------------------- ----------------- --------- --------------- --------------- ----------- 01/25/16 Receivable for Capital Contribution (a)AIG PC US $650 Securities $ -- -- 02/29/16 Capital Contribution AIG PC US 700 Securities -- -- 06/30/16 Dividend AIG PC US -- -- 300 Securities 09/30/16 Dividend AIG PC US -- -- 300 Securities Various Sale of Securities The Variable 310 -- 310 Cash Annuity Life Insurance Company Various Purchase of Securities American 187 Securities/Cash 187 Securities General Life Insurance Company
(a)Refer to Note 11 for more details. AIG Global Real Estate Investment Corp. ("AIGGRE") Restructure In 2018, the Company and several of its U.S. insurance company affiliates restructured their respective ownership interests in certain real estate equity investments previously originated by an affiliate, AIGGRE (including its investment management affiliates), by contributing such interests to three separate real estate investment funds managed by AIGGRE - AIGGRE U.S. Real Estate Fund I, LP ("U.S. Fund I"), AIGGRE U.S. Real Estate Fund II, LP ("U.S. Fund II" and, together with U.S. Fund I, the "U.S. Funds"), and AIGGRE Europe Real Estate Fund I S.C.SP ("Europe Fund I"). The U.S. Funds each closed on November 1, 2018. In connection with the closing of U.S. Fund I, the Company made a capital commitment to the fund of up to $276 (representing an approximately 23% equity interest therein), and contributed the Company's interests in certain real estate equity investments (with an aggregate fair value of approximately $209) and received a cash payment from the fund of approximately $24. ------------------------------------------------------------------------------- 38 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- In connection with the closing of U.S. Fund II, the Company made a capital commitment to the fund of up to $621 (representing approximately 23% equity interest therein), and contributed to the fund the Company's interests in certain real estate equity investments (with an aggregate fair value of approximately $702) and received a cash payment from the fund of approximately $224. Further, Europe Fund I closed on November 2, 2018. In connection with the closing of Europe Fund I, the Company made a capital commitment to the fund of up to $52 (representing an approximately 8% equity interest therein), and contributed cash to the fund (approximately $34). As a result of this transaction, the Company received equity in the Funds equaling the fair value of the assets transferred. The transfer is accounted for at fair value with any gain deferred until permanence of transfer of risk and rewards can be established. Any loss is recognized immediately, if any. The difference between the carrying value of the assets transferred and consideration received is recorded as a basis difference, which will be admitted subject to applicable limits and amortized over the duration of the Funds. At December 31, 2018, the Company's unfunded capital commitment to U.S. Fund I, U.S. Fund II and Europe Fund I, after certain additional capital was called, was approximately $91, $134, and $24, respectively. As of December 31, 2018 the Company's balance in the U.S. Fund I, U.S. Fund II and Europe Fund I was $101, $342, and $27, respectively. D. Amounts Due to or from Related Parties -------------------------------------------------------------------------------- At December 31, 2018 and 2017, the Company reported the following receivables/payables balances from/to its Ultimate Parent, subsidiaries and affiliates (excluding reinsurance transactions). Intercompany agreements have defined settlement terms and related receivables are reported as nonadmitted if balances due remain outstanding more than ninety days past the due date as specified in the agreement.
As of December 31, 2018 2017 ------------------ ------- ------- Balances with AIG PC US $ 150 $ -- Balances with other member pool companies -- 1 Balances with other affiliates 134 4 ------- ------- Receivable from parent, subsidiaries and affiliates $ 284 $ 5 ------- ------- Balances with National Union $ 524 $ 658 Balances with other member pool companies 25 -- Balances with other affiliates 16 16 ------- ------- Payable to parent, subsidiaries and affiliates $ 565 $ 674 ======= =======
Current federal and foreign income taxes (payable) recoverable under the Tax Sharing Agreement at December 31, 2018 and 2017 were $(9) and $(12), respectively. The Company did not change its methods of establishing terms regarding any transactions with its affiliates during the years ended December 31, 2018 or 2017. E. Guarantees or Contingencies for Related Parties -------------------------------------------------------------------------------- The Company has issued guarantees whereby it unconditionally and irrevocably guarantees all present and future obligations and liabilities arising from the policies of insurance issued by certain insurers who, as of the guarantee issue date, were members of the AIG holding company group. The guarantees were provided in order to secure or maintain the guaranteed companies' rating status issued by certain rating agencies, as disclosed in Note 10. F. Management, Service Contract and Cost Sharing Arrangements -------------------------------------------------------------------------------- As an affiliated company of AIG, the Company utilizes centralized services from AIG and its affiliates. The Company is allocated a charge for these services, based on the amount of incremental expense associated with operating the Company as a separate legal entity. The amount of expense allocated to the Company each period was determined based on an analysis of services provided to the Company. ------------------------------------------------------------------------------- 39 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The following table summarizes fees incurred related to affiliates that exceeded one-half of one percent of the Company's admitted assets during 2018, 2017 and 2016:
Affiliates 2018 2017 2016 ---------- -------- -------- -------- AIG Claims Inc. $ 192 $ 201 $ 173 -------- -------- -------- Total $ 192 $ 201 $ 173 ======== ======== ========
In 2018, 2017 and 2016 management service costs included severance expenses pertaining to an AIG-wide initiative to centralize work streams into lower cost locations and create a more streamlined organization. G. Borrowed Money -------------------------------------------------------------------------------- The Company (among other affiliates) is a borrower under a Loan Agreement, with AIG, as lender, pursuant to which the Company may borrow funds from AIG from time to time (the "Loan Facility"). The aggregate amount of all loans that may be outstanding under the Loan Facility at a given time is $500. As of December 31, 2018 and 2017, the Company had no outstanding liability pursuant to this Loan Facility. Significant debt terms and covenants include the following: . The Company must preserve and maintain its legal existence while maintaining all rights, privileges and franchises necessary to the normal conduct of its business; . The Company must take, or cause to be taken, all other actions reasonably necessary or desirable to preserve and defend the rights of the Lender to payment hereunder, and to assure to the Lender the benefits hereof, and; . The Company must not merge with or into or consolidate with any other person, sell, transfer or dispose of all or substantially all of its assets or undergo any change in the control of its voting stock unless (a) such merger or consolidation is with or into a wholly-owned subsidiary of Lender, (b) such sale or transfer is to a wholly-owned subsidiary of the Lender or (c) the Company receives the prior written authorization from the Lender. There have been no violations of the terms and covenants associated with the debt issuance. Refer to Note 11E regarding funds borrowed from FHLB. 7. Reinsurance -------------------------------------------------------------------------------- In the ordinary course of business, the Company may use both treaty and facultative reinsurance to minimize its net loss exposure to a) any single catastrophic loss event; b) an accumulation of losses from a number of smaller events; or c) provide greater risk diversification. Based on the terms of the reinsurance contracts, a portion of expected IBNR losses will be recoverable in accordance with terms of the reinsurance protection purchased. This determination is necessarily based on the estimate of IBNR and accordingly, is subject to the same uncertainties as the estimate of IBNR. Ceded amounts related to paid and unpaid losses and loss expenses with respect to these reinsurance agreements are generally substantially collateralized. The Company remains liable to the extent that the reinsurers do not meet their obligation under the reinsurance contracts after any collateral is exhausted, and as such, the financial condition of the reinsurers is regularly evaluated and monitored for concentration of credit risk. In addition, the Company assumes reinsurance from other insurance companies. ------------------------------------------------------------------------------- 40 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The following table presents direct, assumed reinsurance and ceded reinsurance written and earned premiums for the years ended December 31, 2018, 2017 and 2016:
2018 2017 2016 Years Ended December 31, ----------------- ----------------- ----------------- Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- Direct premiums $ 482 $ 672 $ 682 $ 592 $ 715 $ 481 Reinsurance premiums assumed: Affiliates 7,221 7,322 7,243 7,527 8,658 8,182 Non-affiliates 147 192 298 276 311 217 -------- -------- -------- -------- -------- -------- Gross premiums 7,850 8,186 8,223 8,395 9,684 8,880 -------- -------- -------- -------- -------- -------- Reinsurance premiums ceded: Affiliates 1,063 1,268 1,264 1,205 1,513 1,169 Non-affiliates 1,803 1,909 1,928 2,020 1,903 1,659 -------- -------- -------- -------- -------- -------- Net premiums $ 4,984 $ 5,009 $ 5,031 $ 5,170 $ 6,268 $ 6,052 ======== ======== ======== ======== ======== ========
As of December 31, 2018 and 2017, and for the years then ended, the Company's unearned premium reserves, paid losses and LAE, and reserves for losses and LAE (including IBNR), have been reduced for reinsurance ceded as follows:
Unearned Premium Paid Losses and Reserves for Losses Reserves LAE and LAE ---------------- --------------- ------------------- December 31, 2018: Affiliates $ 759 $ 51 $ 9,034 Non-affiliates 501 314 8,567 -------- -------- --------- Total $ 1,260 $ 365 $ 17,601 ======== ======== ========= December 31, 2017: Affiliates $ 1,068 $ 59 $ 9,829 Non-affiliates 608 266 7,747 -------- -------- --------- Total $ 1,676 $ 325 $ 17,576 ======== ======== =========
A. Reinsurance Return Commission -------------------------------------------------------------------------------- The maximum amount of return commission which would have been due to reinsurers if all of the Company's reinsurance had been cancelled as of December 31, 2018 and 2017 with the return of the unearned premium reserve is as follows:
Assumed Reinsurance Ceded Reinsurance Net --------------------------------- --------------------------------- -------------------------------- Premium Reserve Commission Equity Premium Reserve Commission Equity Premium Reserve Commission Equity --------------- ----------------- --------------- ----------------- --------------- ----------------- December 31, 2018 Affiliates $4,007 $825 $ 759 $123 $3,248 $702 All Other 117 24 501 81 (384) (57) ------ ---- ------ ---- ------ ---- Total $4,124 $849 $1,260 $204 $2,864 $645 ------ ---- ------ ---- ------ ---- December 31, 2017 Affiliates $4,150 $745 $1,068 $179 $3,082 $566 All Other 161 29 608 102 (447) (73) ------ ---- ------ ---- ------ ---- Total $4,311 $774 $1,676 $281 $2,635 $493 ====== ==== ====== ==== ====== ====
------------------------------------------------------------------------------- 41 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- B. Unsecured Reinsurance Recoverable The aggregate unsecured reinsurance balances (comprising recoverables for paid and unpaid losses and LAE and unearned premium reserves) in excess of three percent of policyholders' surplus at December 31, 2018 and 2017 with respect to an individual reinsurer, and each of such reinsurer's related group members having an unsecured aggregate reinsurance balance with the company, are as follows:
Reinsurer 2018 2017 --------- ------ ------- Affiliates: Combined Pool* $7,321 $ 8,648 Eaglestone 645 1,019 Other affiliates 16 3 ------ ------- Total affiliates $7,982 $ 9,670 ------ ------- Berkshire Hathaway Group 1,062 4,733 Swiss Reinsurance Group 439 536 ------ ------- Total Non-affiliates 1,501 5,269 ------ ------- Total affiliates and non-affiliates $9,483 $14,939 ------ -------
* Includes intercompany pooling impact of $577 related to Unearned Premium Reserve, $6,486 related to Reserves for Losses and LAE and $13 related to Paid losses and LAE as of and for the year ended December 31, 2018, and $887, $7,505, and $17, respectively, as of and for the year ended December 31, 2017. C. Reinsurance Recoverable in Dispute -------------------------------------------------------------------------------- At December 31, 2018 and 2017, the aggregate of all disputed items did not exceed ten percent of capital and surplus and there were no amounts in dispute for any single reinsurer that exceeded five percent of capital and surplus. The total reinsurance recoverable balances in dispute are $46 and $58 as of December 31, 2018 and 2017, respectively. D. Retroactive Reinsurance -------------------------------------------------------------------------------- On January 20, 2017, the Combined Pool entered into an adverse development reinsurance agreement with NICO under which the Combined Pool ceded to NICO eighty percent of its reserve risk above an attachment point on substantially all of its U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, the Combined Pool ceded to NICO eighty percent of net paid losses on subject business on or after January 1, 2016 in excess of $25,000 of net paid losses, up to an aggregate limit of $25,000. At NICO's 80 percent share, NICO's limit of liability under the contract is $20,000. The Combined Pool paid consideration of approximately $10,188 in February 2017, including interest at 4 percent per annum from January 1, 2016 through date of payment. American Home's share of the consideration paid was $3,566. NICO placed the consideration received into a collateral trust account as security for NICO's claim payment obligations, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO's obligations under the agreement. American Home accounted for this transaction as prospective reinsurance, except that the surplus gain associated with the ADC has been reported in a segregated surplus account and does not form a part of the Company's Unassigned funds. The total surplus gain recognized by the Combined Pool as of December 31, 2018 and 2017 was $1,984 and $1,426, respectively. American Home's share of this gain as of December 31, 2018 and 2017 was $920 and $689, respectively. The surplus gain is presented as segregated surplus and subject to the applicable dividend restrictions. This amount must be restricted in surplus until such time as the actual retroactive reinsurance recovered from NICO exceeds the consideration paid for the cession. ------------------------------------------------------------------------------- 42 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- E. Reinsurance Agreements Qualifying for Reinsurer Aggregation -------------------------------------------------------------------------------- In 2011, the Combined Pool companies entered into a loss portfolio transfer reinsurance agreement with Eaglestone, an affiliate, which provides coverage up to a limit of $5,000 for the Pool's net asbestos exposures. Effective the same date, Eaglestone retroceded the majority of this exposure to NICO, an unaffiliated company. NICO provides coverage up to a limit of $3,500 for subject business covered under the agreement. NICO administers claims and pursues amounts recoverable from the Combined Pool companies' reinsurers with respect to paid losses and loss adjustment expenses. To the extent that the prior reinsurers pay, the amounts are collected and retained by NICO. NICO maintains funds in trust for the benefit of Eaglestone under the contract; as of December 31, 2018 and 2017 the amount in trust was $3,291 and $3,703, respectively. The amount of the unexhausted limit under the NICO agreement as of December 31, 2018 and 2017 was $1,198 and $1,295, respectively. The Company has accounted for its cession to Eaglestone as prospective reinsurance. 8. Income Taxes -------------------------------------------------------------------------------- U.S. TAX REFORM OVERVIEW On December 22, 2017, the United States enacted Public Law 115-97, known as the Tax Cuts and Jobs Act ("the Tax Act"). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting the Company. Consistent with Staff Accounting Bulletin No. 118 released by the Securities and Exchange Commission, the NAIC issued INT 18-01: Updated Tax Estimates under the Tax Cuts and Jobs Act ("INT 18-01"), which provided guidance on statutory accounting for the tax effects of the Tax Act. INT 18-01 addressed situations where accounting for certain income tax effects of the Tax Act under SSAP 101, Income Taxes, ("SSAP 101") may be incomplete upon issuance of an entity's financial statements and provides a one-year measurement period from enactment date to complete the accounting under SSAP 101. In accordance with INT 18-01, a company was required to reflect the following: . Income tax effects of those aspects of the Tax Act for which accounting under SSAP 101 is complete . Provisional estimate of income tax effects of the Tax Act to the extent accounting is incomplete but a reasonable estimate is determinable . If a provisional estimate cannot be determined, SSAP 101 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the Tax Act. At December 31, 2017, the Company originally recorded a provisional estimate of income tax effects of the Tax Act of $588 attributable to the reduction in the U.S. corporate income tax rate. The Company's provisional estimate was based in part on a reasonable estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. AIG filed the 2017 consolidated U.S. income tax return and the review of the primary impact of the Tax Act provisions on the Company's deferred taxes has been completed. As a result, the Company considers the accounting for the effects of the rate change on deferred tax balances to be complete and no material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any resulting changes in the Company's estimates will be treated in accordance with the relevant accounting guidance. The Tax Act includes provisions for Global Intangible Low-Taxed Income ("GILTI"), under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of foreign corporations and for Base Erosion and Anti-Abuse Tax ("BEAT"), under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and while certain formal guidance was issued by the U.S. tax authority, there are still aspects of the Tax Act that remain unclear and additional guidance is expected in 2019. Such guidance may result in changes to the interpretations and assumptions the Company made and actions the Company may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, the Company treats BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner. No provision for income tax related to GILTI or BEAT was recorded as of December 31, 2018. Tax effects for which a reasonable estimate can be determined Provisions Impacting Property and Casualty Insurance Companies The Tax Act modified computations of insurance reserves for property and casualty insurance companies. Specifically, the Act extends the discount period for certain long-tail lines of business from 10 years to 24 years and increases the discount rate, replacing the applicable federal rate for a higher-yield corporate bond rate, and eliminates the election allowing companies to use their historical loss payment patterns for loss reserve discounting. Adjustments related to the differences in insurance reserves balances computed historically versus the Tax Act have to be taken into income over eight years. Accordingly, these changes give rise to a new deferred tax liability. At December 31, 2017, the Company recorded a provisional estimate of $74 with respect to this deferred tax liability. This increase in deferred tax liability was offset by an increase in the deferred tax asset related to insurance reserves as a result of applying the new provisions of the Tax Act. ------------------------------------------------------------------------------- 43 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- As of December 31, 2018, the Company has completed the review and accounting of the tax reserve computation and recorded offsetting decreases of $21 to both the deferred tax liability and deferred tax asset. Provisions Impacting Projections of Taxable Income and Admissibility of Deferred Tax Assets Certain provisions of the Tax Act impact the Company's projections of future taxable income used in analyzing realizability of the Company's deferred tax assets. In certain instances, provisional estimates have been included in the Company's future taxable income projections for these specific provisions to reflect application of the new tax law. The Company does not currently anticipate that its reliance on provisional estimates would have a material impact on the Company's determination of realizability of its deferred tax assets. Tax effects for which no estimate can be determined The Tax Act may affect the results in certain investments and partnerships in which the Company is a non-controlling interest owner. At December 31, 2017, the information needed to determine a provisional estimate was not available (such as for interest deduction limitations in those entities and the changed definition of a U.S. Shareholder), and accordingly, no provisional estimates were recorded. The Company has since completed the review of these investments and partnerships. The Company considers the accounting for this item to be complete and no measurement period change was recorded. U.S. Tax Reform - INT 18-01 Measurement Period Completion As of December 31, 2018, the Company has fully completed accounting for the tax effects of the Tax Act. Although the prescribed measurement period has ended, there are aspects of the Tax Act that remain unclear and additional guidance from the U.S. tax authority is pending. As further guidance is issued by the U.S. tax authority, any resulting changes in the Company's estimates will be treated in accordance with the relevant accounting guidance. The components of the Company's net deferred tax assets/liabilities ("DTA"/"DTL") as of December 31, 2018 and 2017 are as follows:
12/31/2018 12/31/2017 Change ----------------------- ----------------------- --------------------- Ordinary Capital Total Ordinary Capital Total Ordinary Capital Total -------- ------- ------ -------- ------- ------ -------- ------- ----- Gross DTA $1,028 $227 $1,255 $1,000 $167 $1,167 $ 28 $60 $ 88 Statutory Valuation Allowance -- 57 57 -- 20 20 -- 37 37 ------ ---- ------ ------ ---- ------ ---- --- ---- Adjusted Gross DTA 1,028 170 1,198 1,000 147 1,147 28 23 51 Nonadmitted DTA 127 -- 127 13 -- 13 114 -- 114 ------ ---- ------ ------ ---- ------ ---- --- ---- Subtotal Admitted DTA 901 170 1,071 987 147 1,134 (86) 23 (63) DTL 129 170 299 173 147 320 (44) 23 (21) ------ ---- ------ ------ ---- ------ ---- --- ---- Net Admitted DTA/(DTL) $ 772 $ -- $ 772 $ 814 $ -- $ 814 $(42) $-- $(42) ====== ==== ====== ====== ==== ====== ==== === ====
At December 31, 2018, the Company recorded gross deferred tax assets ("DTA") of $1,255. A valuation allowance was established on net capital deferred tax assets of $57 as it is management's belief that certain assets will not be realized in the foreseeable future. Tax planning strategies had no impact on the determination of the net admitted DTA. The following table shows the summary of the calculation for the net admitted DTA as of December 31, 2018 and 2017:
12/31/2018 12/31/2017 Change ---------------------- ----------------------- --------------------- Ordinary Capital Total Ordinary Capital Total Ordinary Capital Total -------- ------- ----- -------- ------- ------ -------- ------- ----- Adjusted gross DTAs realizable within 36 months or 15 percent of statutory surplus (the lesser of 1 and 2 below) 772 -- 772 814 -- 814 (42) -- (42) 1. Adjusted gross DTAs realizable within 36 months 774 -- 774 816 -- 816 (42) -- (42) 2. 15 percent of statutory surplus NA NA 772 NA NA 814 NA NA (42) Adjusted gross DTAs that can be offset against DTLs 129 170 299 173 147 320 (44) 23 (21) ---- --- ----- ---- ---- ------ ---- --- ---- Total DTA admitted as the result of application of SSAP 101 $901 170 1,071 $987 $147 $1,134 $(86) $23 $(63) ==== === ===== ==== ==== ====== ==== === ====
------------------------------------------------------------------------------- 44 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
2018 2017 -------- -------- Ratio percentage used to determine recovery period and threshold limitation amount 388% 369% Amount of adjusted capital and surplus used to determine recovery period and threshold limitation in (2) above. $ 5,151 $ 5,424
The following table shows the components of the current income tax expense (benefit) for the periods listed:
For the years ended December 31, 2018 2017 Change -------------------------------- -------- -------- -------- Federal income tax $ (63) $ (79) $ 16 Foreign income tax 9 10 (1) -------- -------- -------- Subtotal (54) (69) 15 -------- -------- -------- Federal income tax on net capital gains 69 82 (13) -------- -------- -------- Federal and foreign income taxes incurred $ 15 $ 13 $ 2 ======== ======== ========
The following table shows the components of the DTA split between ordinary and capital DTA as of December 31, 2018 and 2017:
2018 2017 Change -------- -------- -------- Ordinary Discounting of unpaid losses $ 151 $ 192 $ (41) Nonadmitted assets 19 25 (6) Unearned premium reserve 158 173 (15) Bad debt expense 11 15 (4) Net operating loss carry forward 501 423 78 Foreign tax credit carry forward 79 62 17 Investments 26 32 (6) Mortgage Contingency Reserve 29 22 7 Intangible Assets 14 15 (1) Other temporary differences 40 41 (1) -------- -------- -------- Subtotal 1,028 1,000 28 Nonadmitted 127 13 114 -------- -------- -------- Admitted ordinary deferred tax assets $ 901 $ 987 $ (86) -------- -------- -------- Capital Investments $ 211 $ 162 $ 49 Net capital loss carry forward 1 -- 1 Unrealized capital losses 15 5 10 -------- -------- -------- Subtotal 227 167 60 -------- -------- -------- Statutory valuation allowance 57 20 37 -------- -------- -------- Admitted capital deferred tax assets 170 147 23 -------- -------- -------- Admitted deferred tax assets $ 1,071 $ 1,134 $ (63) ======== ======== ========
------------------------------------------------------------------------------- 45 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The following table shows the components of the DTL split between ordinary and capital DTL as of December 31, 2018 and 2017:
2018 2017 Change ------- ------- ------ Ordinary Investments $ 72 $ 86 $ (14) Tax Act adjustment to discounting of unpaid losses 47 74 (27) Section 481(a) adjustment 3 6 (3) Other temporary differences 7 7 -- ------- ------- ------ Subtotal 129 173 (44) ------- ------- ------ Capital Investments $ 108 $ 45 $ 63 Unrealized capital gains (losses) 61 101 (40) Other temporary differences 1 1 -- ------- ------- ------ Subtotal 170 147 23 ------- ------- ------ Deferred tax liabilities 299 320 (21) ------- ------- ------ Net deferred tax assets/liabilities $ 772 $ 814 $ (42) ======= ======= ======
The change in net deferred tax assets is comprised of the following:
2018 2017 Change ------- ------- ------- Adjusted gross deferred tax assets $ 1,198 $ 1,147 $ 51 Total deferred tax liabilities (299) (320) 21 ------- ------- ------- Net deferred tax assets/ (liabilities) 899 827 72 Tax effect of unrealized gains (losses) 50 ------- Total change in net deferred tax $ 22 ======= Change in deferred tax - current year 39 ------- Change in deferred tax - current year - other surplus items (8) ------- Change in deferred tax - current year - total 31 ------- Change in deferred tax - prior period correction (9) ------- Total change in deferred tax - current year $ 22 -------
The following table shows the components of opening surplus adjustments on current and deferred taxes for the year ended December 31, 2018:
Current Deferred Total ------- -------- ------ SSAP 3 impact: SSAP 3 - general items $ 13 $ (10) $ 3 SSAP 3 - statutory valuation allowance -- 4 4 ------- ------ ------ Subtotal SSAP 3 13 (6) 7 SSAP 3 - unrealized gain/loss -- (3) (3) ------- ------ ------ SSAP 3 - adjusted tax assets and liabilities 13 (9) 4 SSAP 3 - nonadmitted impact -- 6 6 ------- ------ ------ Total SSAP 3 impact $ 13 $ (3) $ 10 ======= ====== ======
------------------------------------------------------------------------------- 46 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- The provision for federal and foreign income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The following table presents a reconciliation of such differences in arriving at total taxes related to the Company for the years ended December 31, 2018, 2017 and 2016:
2018 2017 2016 ------------ ------------ ------------ Tax Tax Tax Description Amount Effect Amount Effect Amount Effect ----------- ------ ------ ------ ------ ------ ------ Net Income (Loss) Before Federal Income Taxes and Capital Gains Taxes $(263) $(55) $(380) $(133) $(216) $ (76) Book to Tax Adjustments: Tax Exempt Income, net of proration (34) (7) (71) (25) (118) (41) Transfer Pricing -- -- -- -- (5) (2) Change in Nonadmitted Assets 28 6 46 16 19 7 Change in Tax Position -- -- -- 2 -- 17 Statutory Valuation Allowance -- 40 -- (5) -- 32 Return to Provision -- (1) -- (3) -- (7) Change in contingency reserve (31) (7) (39) (14) (44) (15) Impact of Tax Act -- -- 588 -- -- Real Estate Redemption -- -- (72) (25) -- -- Other 36 8 6 6 2 -- ----- ---- ----- ----- ----- ----- Total Book to Tax Adjustments (1) 39 (130) 540 (146) (9) ----- ---- ----- ----- ----- ----- Total Income Tax $(264) $(16) $(510) $ 407 $(362) $ (85) ===== ==== ===== ===== ===== ===== Federal and Foreign Income Taxes Incurred -- (54) -- (69) -- (34) Federal Income Tax on Net Capital Gains -- 69 -- 82 -- 61 Change in Net Deferred Income Taxes -- (31) -- 394 -- (118) Less: Change in Deferred Tax - Other Surplus Items -- -- -- -- -- 6 ----- ---- ----- ----- ----- ----- Total Income Tax $ -- $(16) $ -- $ 407 $ -- $ (85) ===== ==== ===== ===== ===== =====
Operating loss and tax credit carry-forwards At December 31, 2018 the Company had net operating loss carry forwards expiring through the year 2038 of: $2,386 At December 31, 2018 the Company had net capital loss carry forwards expiring through the year 2023 of: $ 4 At December 31, 2018, the Company had no AMT credit carry forwards. $ -- At December 31, 2018 the Company had foreign tax credits expiring through the year 2028 of: $ 79
There were no deposits reported as admitted assets under Section 6603 of the Internal Revenue Service (IRS) Code as of December 31, 2018. The Company does not believe that the liability related to any federal or foreign tax loss contingencies will significantly change within the next 12 months. A reasonable estimate of such change cannot be made at this time. As of December 31, 2018, there was a $18 liability related to uncertain tax positions. The U.S is the only major tax jurisdiction of the Company. The statute of limitations for all tax years prior to 2000 has expired for the consolidated federal income tax return. The Company is currently under examination for the tax years 2000 through 2013 and open to examination through 2017. The following table lists those companies that form part of the 2018 AIG consolidated federal income tax return: ------------------------------------------------------------------------------- 47 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
Company Company Company Company Company ------------------------- ------------------------- ------------------------- ------------------------- ------------------------ 245 LGC Hotel Owner LLC A.I. Credit Consumer A.I. Credit Corp. ABI Holdings LLC AGC Life Insurance Discount Company Company AGLIC GRE Harrison AH Land 1470 Palmetto, AH SubGP 1000 Woodwind AH SubGP 1007 Highland AH SubGP 1008 Castle Investor, LLC LLC Lakes, LLC Meadow, LLC Highlands, LLC AH SubGP 1020 AH SubGP 1045 AH SubGP 1098 Green AH SubGP 1120 Camp AH SubGP 1122 English Collingham, LLC Montgomery, LLC Pines, LLC Verde, LLC Oaks, LLC AH SubGP 1158 Flat Iron, AH SubGP 1167 AH SubGP 1199 Rancho Del AH SubGP 1207 Park AH SubGP 1209 LLC Steeplechase, LLC Sol, LLC Place, LLC Honeycreek, LLC AH SubGP 1210 Geronimo, AH SubGP 1211 Mision Del AH SubGP 1212 Painted AH SubGP 1248 North AH SubGP 1263 West LLC Valle, LLC Desert, LLC Vista, LLC Virginia, LLC AH SubGP 1324 Crossings AH SubGP 1371 University AH SubGP 1384 Woodglen, AH SubGP 1422 Gardens at AH SubGP 1433 Magnolia, at Heritage, LLC Square, LLC LLC Stafford, LLC LLC AH SubGP 1470 Palmetto, AH SubGP 1535 Hunter's AH SubGP 1548 Walnut, LLC AH SubGP 1551 Spanish AH SubGP 1597 Broadmoor, LLC Run, LLC Creek, LLC LLC AH SubGP 1600 Rainer, LLC AH SubGP 1631 Broadway, AH SubGP 1661 Woodchase, AH SubGP 1694 Sonoma, LLC AH SubGP 206 West Park, LLC LLC LLC AH SubGP 245 Garland, LLC AH SubGP 306 Piedmont, AH SubGP 348 River Run, AH SubGP 39 Wellington AH SubGP 472 Carolina LLC LLC Place, LLC Spring, LLC AH SubGP 474 Arrowhead AH SubGP 479 Sunrise, LLC AH SubGP 503 Southgate AH SubGP 516 AH SubGP 585 St. Clair, Ridge, LLC II, LLC Merrilltown, LLC LLC AH SubGP 586 Charlotte AH SubGP 592 Waterford AH SubGP 603 Casa AH SubGP 672 Kings AH SubGP 675 Greenbrier, Spring, LLC at Summit View, LLC Grande, LLC Crest, LLC LLC AH SubGP 706 River Run AH SubGP 716 Villas of AH SubGP 757 Argyle AH SubGP 785 Mayfield, AH SubGP 787 North II, LLC Mission Bend, LLC Avenue, LLC LLC Knoll, LLC AH SubGP 821 San Luis AH SubGP 835 Whispering, AH SubGP 911 Mainland, AH SubGP 914 Grand AH SubGP 919 MS Bay, LLC LLC LLC Pointe II, LLC Loveland, LLC AH SubGP 929 Collinwood, AH SubGP 935 Dunlop AH SubGP 936 Emmaus, LLC AH SubGP 940 Crescent AH SubGP 943 Southcreek, LLC farms, LLC Pointe, LLC LLC AH SubGP 997 Maxey, LLC AH SubGP GAG Gandolf, LLC AH SubGP MDL, LLC AHAC GRE Harrison AICCO, Inc. [Delaware] Investor, LLC AIG Aerospace Adjustment AIG Aerospace Insurance AIG Asset Management AIG Assurance Company AIG BG Holdings LLC Services, Inc. Services, Inc. (U.S.), LLC AIG Capital Corporation AIG Capital Services, AIG Castle Holdings II AIG Castle Holdings LLC AIG Central Europe & CIS Inc. LLC Insurance Holdings Corporation AIG Century AIG Claims, Inc. AIG Commercial Equipment AIG Commercial Equipment AIG Consumer Finance Verwaltungsgesellschaft Finance Company, Canada Finance, Inc. Group, Inc. mbH AIG Credit (Europe) AIG Credit Corp. AIG Direct Insurance AIG Employee Services, AIG Equipment Finance Corporation Services, Inc. Inc. Holdings, Inc. AIG Europe Holdings AIG FCOE, Inc. AIG Federal Savings Bank AIG Financial Advisor AIG Financial Products Limited Services, Inc. Corp. AIG Fund Services, Inc. AIG G5, Inc. AIG Global Asset AIG Global Capital AIG Global Real Estate Management Holdings Corp. Markets Securities, LLC Investment (Europe) Limited AIG Global Real Estate AIG Global Real Estate AIG Global Real Estate AIG Home Loan 1, LLC AIG Home Loan 2, LLC Investment Corp. Investment Corp. [Russia] Investment de Mexico, S. de R.L. de C.V. AIG Home Loan 3, LLC AIG Home Loan 4, LLC AIG Home Loan 5, LLC AIG Insurance Management AIG International Inc. Services, Inc. AIG Kirkwood, Inc. AIG Korean Real Estate AIG Life Holdings, Inc. AIG Life of Bermuda, Ltd. AIG Lodging Development YH Opportunities, Inc.
------------------------------------------------------------------------------- 48 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
Company Company Company Company Company ------------------------- ------------------------- ------------------------ ------------------------ ------------------------- AIG Markets, Inc. AIG Matched Funding Corp. AIG MEA Investments and AIG MEA Investments and AIG Mortgage Capital, LLC Services, Inc. [Dubai Services, LLC Airport Free Zone] AIG North America, Inc. AIG Offshore Systems AIG PC European AIG PC Global Services, AIG PC Global Services, Services, Inc. Insurance Investments Inc. Inc. United Kingdom Inc. branch AIG Portfolio Solutions AIG Procurement AIG Property Casualty AIG Property Casualty AIG Property Casualty LLC Services, Inc. Company Europe Financing Limited Inc. AIG Property Casualty AIG Property Casualty AIG Realty, Inc. AIG Relocation, Inc. AIG S1, Inc. International, LLC U.S., Inc. AIG Securities Lending AIG Shared Services AIG Shared Services AIG Shared Services AIG Specialty Insurance Corp. Corporation Corporation - Management Corporation Company Services (Philippnines Branch) AIG Spring Ridge I, Inc. AIG Technologies, Inc. AIG Trading Group Inc. AIG Travel Assist, Inc. AIG Travel EMEA Limited AIG Travel Europe Limited AIG Travel, Inc. AIG United Guaranty AIG United Guaranty, AIG Warranty Services of Agenzia Di Assicurazione Sociedad Limitada Florida, Inc. S.R.L. AIG Warranty Services, AIG WarrantyGuard, Inc. AIG.COM, Inc. AIG-FP Capital AIG-FP Matched Funding Inc. Preservation Corp. Corp. AIG-FP Pinestead AIG-FP Private Funding AIG-FP Structured AIGGRE 19 Chapin AIGGRE 251 West 30th Holdings Corp. (Cayman) Limited Finance (Cayman) Limited Investor LLC Street Investor LLC AIGGRE 401 Hennepin AIGGRE 520 Eola Investor AIGGRE 5th and Summit AIGGRE 6037 Investor LLC AIGGRE 950 Second Investor LLC LLC Investor LLC Investor, LLC AIGGRE Bartlett Investor AIGGRE Bartlett Investor AIGGRE Beachwalk AIGGRE Bellevue II AIGGRE Bellevue I LLC II LLC Investor LLC Investor LLC Investor, LLC AIGGRE Bonita Springs AIGGRE Bridges/Angeline AIGGRE Carrollton AIGGRE Cherry Creek AIGGRE City Center Investor LLC Investor, LLC Investor LLC Investor, LLC Investor LLC AIGGRE Clarity Pointe AIGGRE Clarity Pointe AIGGRE Clarity Pointe AIGGRE Clarity Pointe AIGGRE Clarity Pointe Coconut Creek Investor Investor LLC Platform LLC Stuart Investor LLC Tallahassee Investor LLC LLC AIGGRE Columbia Hotel AIGGRE Columbia Pike, LLC AIGGRE Consolidated AIGGRE Corte Madera, LLC AIGGRE Crescent Bellevue Investor LLC Retail Holdco LLC Investor LLC AIGGRE Crest Ridge AIGGRE D36 Investor LLC AIGGRE Dakota Springs AIGGRE DC Ballpark AIGGRE Dunwoody Senior Housing Investor Investor LLC Investor, LLC Investor, LLC LLC AIGGRE Edgewater AIGGRE Emerald Bay Club AIGGRE EOLA, LLC AIGGRE Fairfax, LLC AIGGRE Fairways Investor Investor LLC Investor LLC LLC AIGGRE Forest City West AIGGRE Foundry Investor AIGGRE Gainesville West AIGGRE Gardens Investor, AIGGRE GT Assisted Village Investor, LLC LLC 38 Investor LLC LLC Living Investor, LLC AIGGRE Hazel Dell AIGGRE Hill7 Investor LLC AIGGRE Hyde Park, LLC AIGGRE Island Club AIGGRE King's Crossing Investor LLC Investor LLC Investor LLC AIGGRE Lake Norman AIGGRE Lane Field AIGGRE Laurel Towne AIGGRE Lexington Hotel AIGGRE Livermore Investor LLC Investor LLC Centre Investor LLC Investor LLC Longfellow Investor LLC AIGGRE LSU Baton Rouge, AIGGRE Maple, LLC AIGGRE Market Street II AIGGRE Market Street LLC AIGGRE Metro Place, LLC LLC LLC AIGGRE Mills Investor LLC AIGGRE MXIP-OD l LLC AIGGRE MXIP-OD ll LLC AIGGRE Mystic, LLC AIGGRE Naples Investor LLC AIGGRE Nashville Hotel AIGGRE North Central AIGGRE North Getty AIGGRE Oakland Investor AIGGRE Papermill Investor LLC Investor LLC Investor LLC LLC Investor I LLC AIGGRE Papermill AIGGRE Park Central II AIGGRE Park Central, LLC AIGGRE Paterson Investor AIGGRE Peachtree, LLC Investor II LLC Investor LLC LLC
------------------------------------------------------------------------------- 49 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
Company Company Company Company Company ------------------------- ------------------------ ------------------------- ------------------------- ------------------------- AIGGRE Pearl Block 136 AIGGRE Rancho Dominguez AIGGRE Redmond Investor, AIGGRE Retail Investor AIGGRE Retail Investor Investor LLC Investor LLC LLC I, LLC II, LLC AIGGRE Ritz Block AIGGRE Riverfront, LLC AIGGRE Riverhouse AIGGRE San Pedro AIGGRE Solana Olde Town Investor LLC Investor LLC Industrial Owner LLC Investor LLC AIGGRE St. Charles AIGGRE St. Simons AIGGRE ST. Tropez AIGGRE SWII Investor LLC AIGGRE Tampa Parkland Investor LLC Investor LLC Investor LLC GP, LLC AIGGRE Tampa Parkland, AIGGRE Toringdon AIGGRE Torrance II LLC AIGGRE Torrance, LLC AIGGRE UMN Hotel LLC Investor LLC Investor LLC AIGGRE Uptown Village AIGGRE Vantage Point AIGGRE Vista, LLC AIGGRE Williamsburg LLC AIGGRE Windy Ridge Investor LLC Investor LLC Investor LLC AIU Insurance Company AIUH LLC Akita, Inc. Alabaster Capital LLC AM Holdings LLC Ambler Holding Corp. American Athletic Club, American General Annuity American General American General Inc. Service Corporation Assignment Corporation Assignment Corporation of New York American General American General Life American General Life American General Life American General Realty Insurance Agency, Inc. Insurance Co. Insurance Company Services Company, LLC Investment Corporation American Home Assurance American International American International American International American International Company Facilities Management, Group, Inc. Realty Corporation Reinsurance Company, Ltd. LLC Applewood Funding Corp. Barnegat Funding Corp. Barnegat Funding Trust Blackbird Investments LLC Blackcap Investments LLC 2016-1 Bluewood Investments LLC Branch Retail Partners C&I UK Investments Ltd. CAP Investor 1, LLC CAP Investor 10, LLC Consolidated, L.P. CAP Investor 2, LLC CAP Investor 4, LLC CAP Investor 5, LLC CAP Investor 8, LLC Castle 2003-2 Trust Castle US Inc. CEF Lease Holding, LLC Charleston Bay SAHP Corp. Chartis Excess Limited Cherrywood Investments LLC Commerce and Industry Connective Mortgage Crossings SAHP Corp. Curzon Funding Limited Curzon Funding LLC Insurance Company Advisory Company Curzon Street Funding Deerfield Gillete, LLC Design Professionals DIL/SAHP Corp. Eaglestone Reinsurance Designated Activity Association Risk Company Company Purchasing Group, Inc. Eastcheap Investments Eastgreen, Inc. F 2000, Inc. Falls Church Corporate First Principles Capital (Cayman) Limited Center LLC Management, LLC Fischbach L.L.C. Flamebright Investment Forest SAHP Corp. FQA Master Tenant MM, LLC French Quarter Limited Apartments Manager, LLC Global Loss Prevention, Global Loss Prevention, Grand Savannah SAHP Corp. Granite State Insurance Graphite Management LLC Inc. Inc. [Canada] Company Hamilton Customer Care Hamilton Insurance Hamilton Services, LLC Hamilton Specialty Hamilton U.S. Holdings, Insurance Services, LLC Company Insurance Company Inc. Health Direct, Inc. HPIS Limited HPSC Hotel Owner LLC HUMAN CONDITION SAFETY, Illinois National INC. Insurance Co. Knickerbocker Corporation Lavastone Capital LLC Lexington Insurance Livetravel, Inc. Lower Makefield Investor Company LLC LSTREET I, LLC LSTREET II, LLC MG Reinsurance Limited MIP Mezzanine, LLC MIP PE Holdings, LLC Morefar Marketing, Inc. Mt. Mansfield Company, National Union Fire National Union Fire New Hampshire Insurance Inc. Insurance Company Of Insurance Company Of Company Pittsburgh Vermont Nightingale Finance Nightingale Finance LLC NSM Holdings, Inc. NSM Investments, Inc. OHCAP Investor 12, LLC Limited Orangewood Investments Peachwood, LLC Pearce & Pearce, Inc. Persimmon LLC Pine Street Real Estate LLC Holdings Corp. Plumwood, LLC Prairie SAHP Corp. Quartz Holdings LLC Raptor Funding Corp. Rialto Melbourne Investor LLC
------------------------------------------------------------------------------- 50 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
Company Company Company Company Company ------------------------ ------------------------ ------------------------- ------------------------- ------------------------- Risk Specialists Rokland Limited SA Affordable Housing, SA Investment Group, Inc. SAAHP GP Corp. Companies Insurance LLC Agency, Inc. SAFG Retirement SAHP GA III - SC LLC SAHP NCCAP 18, LLC SAHP NCCAP 19, LLC SAI Deferred Services, Inc. Compensation Holdings, Inc. Sandstone (2017) Ltd. SCSP Corp. Service Net Solutions of Service Net Warranty, LLC Seventh Street Funding Florida, LLC LLC Slate Capital LLC SLP Housing GPDNAC, LLC SNW Insurance Agency, LLC SPIA I LLC Spicer Energy LLC Spicer Holding Corp. Spruce Peak Realty, LLC Stoneland Limited Stowe Country Club LLC Stowe Mountain Holdings, Inc. SubGen NT, Inc. SunAmerica Affordable SunAmerica Asset SunAmerica Fund Assets SunAmerica Fund Assets Housing Partners, Inc. Management, LLC 101, LLC 107, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 115, LLC 123, LLC 125, LLC 127, LLC 130, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 133, LLC 134, LLC 138, LLC 155, LLC 167, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 46, LLC 47, LLC 48, LLC 51, LLC 52, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 53, LLC 54, LLC 56, LLC 57, LLC 58, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 59, LLC 60, LLC 62, LLC 63, LLC 64, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 65, LLC 67, LLC 68, LLC 69, LLC 70, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 71, LLC 72, LLC 73, LLC 74, LLC 75, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 76, LLC 77, LLC 78, LLC 79, LLC 80, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 82, LLC 85, LLC 86, LLC 88, LLC 90, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets 92, LLC 95, LLC 96, LLC II, LLC VII, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets VIII, LLC XI, LLC XIII, LLC XIX, LLC XL, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets XLI, LLC XLII, LLC XLIII, LLC XVII, LLC XVIII, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets XXIV, LLC XXIX, LLC XXV, LLC XXVI, LLC XXVII, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets XXVIII, LLC XXX, LLC XXXI, LLC XXXII, LLC XXXIII, LLC SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets SunAmerica Fund Assets XXXIV, LLC XXXIX, LLC XXXVI, LLC XXXVII, LLC XXXVIII, LLC SunAmerica Fund Assets, SunAmerica Georgia SunAmerica Life SunAmerica Retirement The Insurance Company of LLC Investors III, LLC Reinsurance Company Markets, Inc. the State of Pennsylvania The United States Life The United States Life The Variable Annuity The Variable Annuity Travel Guard Americas LLC Insurance Company in the Insurance Company in the Life Ins. S/A Life Insurance Company City of New York City of NY Travel Guard Group, Inc. U G Corporation United Guaranty Corp. VALIC Financial VALIC Retirement Advisors, Inc. Services Company Webatuck Corp. Yellowwood Investments LLC
------------------------------------------------------------------------------- 51 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- 9. Capital and Surplus and Dividend Restrictions -------------------------------------------------------------------------------- A. Dividend Restrictions -------------------------------------------------------------------------------- Under New York law, the Company may pay cash dividends only from Unassigned surplus determined on a statutory basis. New York domiciled companies are restricted (on the basis of the lower of 10 percent of statutory earned surplus as defined in NY Insurance Law section 4105, adjusted for special surplus items, as of the last statement on file with the Superintendent, or 100 percent of adjusted net investment income for the preceding thirty-six month period ended as of the last statement on file with the Superintendent) as to the amount of ordinary dividends they may declare or pay in any twelve-month period without the prior approval of the NY DFS. The maximum dividend amount the Company can pay in 2019, as of December 31, 2018 is $0. Other than the limitations above, there are no restrictions placed on the portion of Company profits that may be paid as ordinary dividends to the stockholders. The Company did not pay any dividends in 2018 and 2017. B. Capital & Surplus -------------------------------------------------------------------------------- Changes in balances of special surplus funds are due to adjustments in the amounts of reserves transferred under retroactive reinsurance agreements and when cash recoveries exceed the consideration paid. The portion of Unassigned surplus at December 31, 2018 and 2017 represented or reduced by each item below is as follows:
As Adjusted* Years Ended December 31, 2018 2017 2017 ------------------------ -------- ------------ -------- Unrealized gains and losses (net of taxes) $ 148 $ 290 $ 244 Nonadmitted asset values (216) (125) (130) Provision for reinsurance (30) (20) (20)
* As Adjusted includes SSAP 3 prior year adjustments The Company exceeded minimum RBC requirements at both December 31, 2018 and 2017. 10.Contingencies -------------------------------------------------------------------------------- A. Legal Proceedings -------------------------------------------------------------------------------- In the normal course of business, AIG and its subsidiaries are, like others in the insurance and financial services industries in general, subject to regulatory and government investigations and actions, and litigation and other forms of dispute resolution in a large number of proceedings pending in various domestic and foreign jurisdictions. Certain of these matters involve potentially significant risk of loss due to potential for significant jury awards and settlements, punitive damages or other penalties. Many of these matters are also highly complex and seek recovery on behalf of a class or similarly large number of plaintiffs. It is therefore inherently difficult to predict the size or scope of potential future losses arising from these matters. In AIG's insurance and reinsurance operations, litigation and arbitration concerning the scope of coverage under insurance and reinsurance contracts, and litigation and arbitration in which its subsidiaries defend or indemnify their insureds under insurance contracts, are generally considered in the establishment of loss reserves. Separate and apart from the foregoing matters involving insurance and reinsurance coverage, AIG, its subsidiaries and their respective officers and directors are subject to a variety of additional types of legal proceedings brought by holders of AIG securities, customers, employees and others, alleging, among other things, breach of contractual or fiduciary duties, bad faith and violations of federal and state statutes and regulations. With respect to these other categories of matters not arising out of claims for insurance or reinsurance coverage, the Company establishes reserves for loss contingencies when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. In many instances, the Company is unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from legal proceedings may exceed the amount of liabilities that has been recorded in its financial statements covering these matters. While such potential future charges could be material, based on information currently known to management, management does not believe, other than may be discussed below, that any such charges are likely to have a material adverse effect on the Company's financial position or results of operation. ------------------------------------------------------------------------------- 52 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- Additionally, from time to time, various regulatory and governmental agencies review the transactions and practices of AIG and its subsidiaries in connection with industry-wide and other inquiries into, among other matters, the business practices of current and former operating insurance subsidiaries. The Company has cooperated, and will continue to cooperate, in producing documents and other information in response to such requests. B. Leases -------------------------------------------------------------------------------- Lease expenses are allocated to the Company based upon the percentage of space occupied with the final share of cost based upon its percentage participation in the Combined Pool. C. Other Commitments -------------------------------------------------------------------------------- As part of its hedge fund, private equity and real estate equity portfolio investments, as of December 31, 2018, the Company may be called upon for additional capital investments of up to $780. At December 31, 2018 the Company had $273 of outstanding commitments related to various funding obligations associated with investments in commercial and residential mortgage loans. D. Guarantees -------------------------------------------------------------------------------- The Company has issued guarantees whereby it unconditionally and irrevocably guaranteed all present and future obligations and liabilities arising from the policies of insurance issued by certain insurers who, as of the guarantee issue date, were members of the AIG holding company group. The guarantees were provided in order to secure or maintain the guaranteed companies' rating status issued by certain rating agencies. The Company would be required to perform under the guarantee in the event that a guaranteed entity failed to make payments due under policies of insurance issued during the period of the guarantee. The Company has not been required to perform under any of the guarantees. The Company remains contingently liable for all policyholder obligations associated with insurance policies issued by the guaranteed entity during the period in which the guarantee was in force. Each guaranteed entity has reported total assets in excess of its liabilities and the majority have invested assets in excess of their direct (prior to reinsurance) policyholder liabilities. Additionally, the Company is party to an agreement with AIG whereby AIG has agreed to make any payments due under the guarantees in the Company's place and stead. Furthermore, for any former affiliate that has been sold, the purchaser has provided the Company with hold harmless agreements relative to the guarantee of the divested affiliate. Accordingly, management believes that the likelihood of payment under any of the guarantees is remote. The following schedule sets forth the effective and termination dates (agreements with guarantees in run off), of each guarantee, the amount of direct policyholder obligations guaranteed, the invested assets and policyholder surplus for each guaranteed entity as of December 31, 2018: ------------------------------------------------------------------------------- 53 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) --------------------------------------------------------------------------------
Policyholder Invested Estimated Policyholders' Date Obligations @ Assets @ Loss @ Surplus Guaranteed Company Date Issued Terminated 12/31/2018 12/31/2018 12/31/2018 12/31/2018 ------------------ ----------- ---------- ------------- ------------ ---------- -------------- 21st Century Advantage Insurance Company (f/ k/a AIG Advantage Insurance Company ) 12/15/1997 8/31/2009 $ 61 $ 28,171 $-- $ 29,997 21st Century North America Insurance Company (f/k/a American International Insurance Company ) 11/5/1997 8/31/2009 14,310 579,237 -- 582,160 21st Century Pinnacle Insurance Company (f/k/a American International Insurance Company of New Jersey) 12/15/1997 8/31/2009 1,863 42,599 -- 43,351 21st Century Superior Insurance Company (f/k/a American International Insurance Company of California, Inc.) 12/15/1997 8/31/2009 -- 29,756 -- 31,378 AIG Edison Life Insurance Company (f/k/a GE Edison Life Insurance Company) 8/29/2003 3/31/2011 6,171,405 90,562,013 -- 2,096,371 American General Life and Accident Insurance Company * 3/3/2003 9/30/2010 1,455,005 171,697,141 -- 6,350,255 American General Life Insurance Company * 3/3/2003 12/29/2006 7,848,780 171,697,141 -- 6,350,255 American International Assurance Company (Australia) Limited ** 11/1/2002 10/31/2010 443,000 1,799,000 -- 574,000 Chartis Europe, S.A. (f/k/a AIG Europe, S.A.) * 9/15/1998 12/31/2012 4,874,370 12,971,749 -- 4,024,837 AIG Seguros Mexico, S.A. de C.V. (f/k/a AIG Mexico Seguros Interamericana, S.A. de C.V.) * 12/15/1997 3/31/2015 113,503 148,770 -- 132,764 Chartis UK (f/k/a Landmark Insurance Company, Limited (UK)) * 3/2/1998 11/30/2007 227,494 12,971,749 -- 4,024,837 Farmers Insurance Hawaii (f/k/a AIG Hawaii Insurance Company, Inc.) 11/5/1997 8/31/2009 587 98,707 -- 96,108 Lloyd's Syndicate (1414) Ascot (Ascot Underwriting Holdings Ltd.) 1/20/2005 10/31/2007 7,445 687,603 -- 3,332 SunAmerica Annuity and Life Assurance Company (Anchor National Life Insurance Company) * 1/4/1999 12/29/2006 767,160 171,697,141 -- 6,350,255 SunAmerica Life Insurance Company * 1/4/1999 12/29/2006 2,165,907 171,697,141 -- 6,350,255 The United States Life Insurance Company in the City of New York 3/3/2003 4/30/2010 3,481,072 27,590,498 -- 1,278,050 The Variable Annuity Life Insurance Company 3/3/2003 12/29/2006 1,750,022 77,115,094 -- 2,689,564 ---------- ---------- ----------- ------------ --- ----------- Total $29,321,984 $911,413,510 $-- $41,007,769 ========== ========== =========== ============ === ===========
* Current affiliates ** AIA was formerly as subsidiary of AIG, Inc. In previous years AIA provided the direct policyholder obligations as of each year end. However, starting in 2014 AIA declined to provide financial information related to these guarantees. The financial information reflects amounts as of December 31, 2012, at which time the guaranteed entities had invested assets in excess of direct policyholder obligations and were in a positive surplus position. Such amounts continue to remain the Company's best estimate given available financial information. The guaranteed policyholder obligations will decline as the policies expire. E. Joint and Several Liabilities -------------------------------------------------------------------------------- AIU and American Home are jointly and severally obligated to policyholders of their Japan branches, in connection with transfers of the business of those Japan branches to Japan-domiciled affiliates in 2013 and 2014, respectively. Under the terms of the transfer agreement, the Japan affiliates have agreed to be responsible for 100% of the obligations associated with such policies, and management expects such companies to satisfy their obligation. The Company carries no reserves with respect to such liabilities. The Japanese affiliates carried $20 and $26 of loss reserves in respect of such policies, as of December 31, 2018 and 2017, respectively. As of December 31, 2018, if the Japan affiliates were to fail to satisfy their obligations, the Company's share of the aggregate exposure under the pooling agreement is $12. Each Pool member is also jointly and severally obligated to the other Pool members, in proportion to their pool share, in the event any other Pool member fails. ------------------------------------------------------------------------------- 54 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- 11.Other Significant Matters -------------------------------------------------------------------------------- A. Other Assets -------------------------------------------------------------------------------- As of December 31, 2018 and 2017, other admitted assets as reported in the accompanying Statements of Admitted Assets were comprised of the following balances:
Other admitted assets 2018 2017 --------------------- ------- -------- Collateral on derivative liabilities $ -- $ 9 Deposit accounting assets 11 13 Equities in underwriting pools and associations (11) 8 Guaranty funds receivable on deposit 9 9 Loss funds on deposit 72 54 Other assets 78 104 ------- -------- Total other admitted assets $ 159 $ 197 ======= ========
B. Other Liabilities -------------------------------------------------------------------------------- As of December 31, 2018 and 2017, other liabilities as reported in the accompanying Statements of Liabilities, Capital and Surplus were comprised of the following balances:
Other liabilities 2018 2017 ----------------- ------- ------- Accrued retrospective premiums $ 24 $ 25 Borrowed money -- 65 Collateral on derivative assets 6 -- Deferred commission earnings 44 61 Deposit accounting liabilities 4 32 Derivative instruments -- 14 Paid loss clearing contra liability (loss reserve offset for paid claims) (36) (77) Other accrued liabilities 306 226 Remittances and items not allocated 12 10 Retroactive reinsurance reserves - ceded (29) (26) Servicing carrier liability 8 9 Statutory contingency reserve 137 105 ------- ------- Total other liabilities $ 476 $ 444 ======= =======
C. Other (Expense) Income -------------------------------------------------------------------------------- For the years ended December 31, 2018, 2017 and 2016, other (expense) income as reported in the accompanying Statements of Operations and Changes in Capital and Surplus were comprised of the following balances:
Other income (expense) 2018 2017 2016 ---------------------- ------- ------- ------- Fee income on deposit programs $ 1 $ 4 $ 7 Gain on sale of medical stop-loss business -- 91 -- Interest expense on reinsurance program (148) (54) (47) Other (expense) income 11 (2) 20 ------- ------- ------- Total other income (expense) $ (136) $ 39 $ (20) ======= ======= =======
------------------------------------------------------------------------------- 55 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- D. Non- Cash items -------------------------------------------------------------------------------- For the years ended December 31, 2018, 2017 and 2016, the amounts reported in the Statements of Cash Flow are net of the following non-cash items:
Non-cash transactions 2018 2017 2016 --------------------- ------- ------- ------- Capital contribution from parent: Pooling Restructure Transaction $ -- $ -- $ 700 Receivable 150 -- -- Dividends to parent: -- Securities -- -- (600) Funds Held: -- Premiums collected (62) (313) (441) Benefit and loss related payments (15) 229 244 Interest (146) (60) (46) Commissions 23 114 129 Funds Held 200 30 114 Securities received/transferred: Securities received 1,244 972 986 Securities transferred (1,662) (1,337) (824) Miscellaneous expense (income) -- -- -- Intercompany -- -- 55 Other: -- Securities* -- -- 650
* 2015 Capital Contribution recorded as a receivable was settled in 2016 in the form of cash and securities. E. Federal Home Loan Bank ("FHLB") Agreements -------------------------------------------------------------------------------- The Company is a member of the FHLB of New York. Such membership requires ownership of stock in the FHLB. The Company owned an aggregate of $9 and $12 of stock in the FHLB at December 31, 2018 and 2017, respectively. Through its membership, the Company has conducted business activity (borrowings) with the FHLB. The Company utilizes the FHLB facility to supplement liquidity or for other uses deemed appropriate by management. The outstanding borrowings are being used primarily for interest rate risk management purposes in connection with certain reinsurance arrangements, and the balances are expected to decline as underlying premiums are collected. The Company is required to pledge certain mortgage-backed securities, government and agency securities and other qualifying assets to secure advances obtained from the FHLB. The FHLB applies a haircut to collateral pledged to determine the amount of borrowing capacity it will provide to its member. As of December 31, 2018, the Company had an actual borrowing capacity of $1,107 based on qualified pledged collateral. At December 31, 2018, the Company had borrowings of $0 from the FHLB. F. Insurance-Linked Securities -------------------------------------------------------------------------------- As of December 31, 2018, the Company was not a ceding insurer in catastrophe bond reinsurance transactions in force. As of December 31, 2017, the Company was a ceding insurer in three catastrophe bond reinsurance transactions in force covering the Company's direct and assumed property exposures. As of December 31, 2017, the aggregate amount the Company may have received under these arrangements in the event of catastrophic events that exceeded the related attachment points for each applicable bond was $184. G. Sale of Medical Stop-loss and Organ Transplant Business -------------------------------------------------------------------------------- On October 15, 2017, the Pool sold its medical stop-loss and organ transplant business and renewal rights to Tokio Marine HCC Life Insurance Company. The sale of the renewal rights resulted in a gain of $91 for the Company. In addition to the sale of the renewal rights, the Pool entered into a 100 percent quota share reinsurance agreement to cede the in-force liabilities of these businesses as of the transaction date, which resulted in a gain of $6.5 for the Company. ------------------------------------------------------------------------------- 56 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. American Home Assurance Company Statutory Basis Financial Statements (Dollars in Millions) -------------------------------------------------------------------------------- 12.Subsequent Events -------------------------------------------------------------------------------- Subsequent events have been considered through April 22, 2019 for these Financial Statements issued on April 22, 2019. Type I - Recognized Subsequent Events: In February 2019, the NY DFS approved the Company's request to record a $150 contribution from AIG PC US, settled in the form of cash, in its 2018 Financial Statement. The contribution was reflected as a receivable as of December 31, 2018 and as gross paid in and contributed surplus pursuant to SSAP No. 9, Subsequent Events, and SSAP No. 72, Surplus and Quasi-Reorganizations. Type II - Nonrecognized Subsequent Events: Share Repurchase On January 23, 2019, the NY DFS approved the Company's plan to distribute an amount of up to approximately $504 to its immediate parent, an increase in the par value of its common stock from $17 per share to $20 per share and a decrease in the minimum number of directors from 13 to 7. The distribution would be accomplished via a share repurchase agreement with the per share repurchase price equal to the Company's statutory book value per share, calculated as of September 30, 2018. On February 14, 2019, the Company repurchased 139,000 shares of its issued and outstanding common stock, resulting in a distribution to its immediate parent of $502 and a reduction in its common capital stock and gross paid in and contributed surplus of $2 and $500, respectively. On that same date, the Company filed an amendment to its charter with NY DFS to increase the par value of the Company's common stock from $17 to $20 per share. The increase to the par value resulted in an increase of $5 to the Company's common capital stock and a reduction to its gross paid in and contributed surplus of the same amount, post share repurchase. AIGGRE Restructure In 2019, the Company and several of its U.S. insurance company affiliates established AIGGRE US Real Estate Fund III LP (US Fund III), a real estate investment fund managed AIGGRE. At the closing of US FUND III, on January 2, 2019, the Company made a capital commitment to the fund of up to $146 (representing an approximately 9.73% equity interest therein). In connection with the closing of US Fund III, the Company contributed cash (approximately $23) to the fund. The Company's unfunded capital commitment to U.S. Fund III, after certain additional capital was called, was approximately $116. ------------------------------------------------------------------------------- 57 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2018 and 2017 and for years ended December 31, 2018, 2017 and 2016. PART C: OTHER INFORMATION Item 26. Exhibits (a) Board of Directors Resolution. ----------------------------- (1) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of Separate Account VL-R. (24) (2) Resolution of the Board of Directors of American General Life Insurance Company authorizing the consolidation of the Separate Account. (Filed herewith) (b) Custodian Agreements. Inapplicable. -------------------- (c) Underwriting Contracts. ---------------------- (1) Distribution Agreement between American General Life Insurance Company and American General Equity Services Corporation, effective October 1, 2002. (9) (2) Form of Selling Group Agreement. (10) (3) Schedule of Commissions (Incorporated by reference from the text included under the heading "Distribution of the Policies" in the Statement of Additional Information that is filed as part of this Registration Statement). (4) Distribution Agreement between American General Life Insurance Company and AIG Capital Services, Inc., entered into as of December 31, 2018. (23) (d) Contracts. --------- (1) Specimen form of EquiBuilder/TM/ III Flexible Premium Life Insurance Policy (Policy Form No. T1735) (1) (2) Specimen form of Accidental Death Benefit Rider. (1) (3) Specimen form of Term Insurance Rider. (1) (4) Specimen form of Children's Term Insurance Rider. (1) (5) Specimen form of Disability Rider - Waiver of Monthly Deductions. (1) (6) Specimen form of Accelerated Benefit Settlement Option Rider. (2) (7) Specimen form of Endorsement to EquiBuilder III Flexible Premium Life Insurance Policy when issued to a Policy Owner in the State of Texas. (1) C-1 (8) Assumption Certificate. (10) (e) Applications. ------------ (1) Specimen form of Application for EquiBuilder III Policy. (2) (2) Specimen form of Supplemental Application. (3) (3) Specimen form of Individual Life Insurance Application Single Insured - Part A, Form No. ICC15-108087 rev0218. (23) (4) Specimen form of amended Life Insurance Application - Part B (Medical History), Form No. ICC15-108088 rev0516. (20) (5) Specimen form of Request for Investment Division/Series Transfer Form, Form No. AGLC 100553 Rev0815. (23) (6) Specimen form of Absolute Assignment, Form No. AGLC0010-2011 Rev0315. (19) (7) Specimen form of Collateral Assignment, Form No. AGLC0205 Rev0617. (21) (8) Specimen form of Name and Address Change, Form No. AGLC0222 Rev0617. (21) (9) Specimen form of Change of Ownership, Form No. AGLC0013 Rev0617. (23) (10) Specimen form of Change of Beneficiary, Form No. AGLC0108 Rev0617. (23) (11) Specimen form of New Business Supplemental Application for Individual Life Insurance, Form No. ICC17-111268. (23) (12) Specimen form of Reinstatement Application for Individual Life Insurance, Form No. ICC15-108250 rev0617. (23) (13) Specimen form of In-Force Change Application for Individual Life Insurance, Form No. ICC15-108251 Rev0617. (23) (14) Specimen form of Service Request, Form No. AGLC0107 Rev0418. (23) (f) Depositor's Certificate of Incorporation and By-Laws. ---------------------------------------------------- (1) Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective December 31, 1991. (4) C-2 (2) Amendment to the Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective July 13, 1995. (5) (3) By-Laws of American General Life Insurance Company, restated as of June 8, 2005. (13) (g) Reinsurance Contracts. --------------------- (1) Form of Reinsurance Agreement between American General Life Insurance Company and General & Cologne Life Re of America. (16) (2) Form of Reinsurance Agreement between American General Life Insurance Company and Munich American Reassurance Company. (16) (3) Form of Reinsurance Agreement between American General Life Insurance Company and RGA Reinsurance Company. (16) (4) Form of Reinsurance Agreement between American General Life Insurance Company and Swiss Re Life & Health America, Inc. (16) (5) Automatic and Facultative Reinsurance Agreement between American General Life Insurance Company and Generali USA Life Reinsurance Company. (18) (h) Participation Agreements. ------------------------ (1)(a) Amended and Restated Participation Agreement among Variable Insurance Products Funds, Fidelity Distributors Corporation and American General Life Insurance Company of Delaware dated April 27, 2012. (17) (1)(b) Form of Amended and Restated Service Contract among Fidelity Variable Insurance Products Funds, American General Life Insurance Company, American General Life Insurance Company of Delaware and The United States Life Insurance Company in the City of New York effective May 1, 2012. (17) (1)(c) Form of Service Agreement by and between Fidelity Investments Institutional Operations Company, Inc. and American General Life Insurance Company. (6) (1)(d) Form of First Amendment to Service Agreement by and between Fidelity Investments Institutional Operations Company, Inc. and American General Life Insurance Company. (16) (2)(a) Form of Participation Agreement among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (7) C-3 (2)(b) Form of Amendment No. 5 to Participation Agreement by and among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (6) (2)(c) Form of Amendment No. 8 to Participation Agreement by and among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (10) (2)(d) Form of Letter Agreement between Massachusetts Financial Services, MFS Variable Insurance Trust and American General Life Insurance Company, dated December 19, 2005. (16) (3)(a) Form of SEC Rule 22c-2 Information Sharing Agreement between Fidelity and American General Life Insurance Company. (16) (4)(a) Form of SEC Rule 22c-2 Information Sharing Agreement between MFS and American General Life Insurance Company. (16) (5)(a) Form of Consent to Assignment of Fund Participation and other Agreements with regard to the change in distributor for the products to AIG Capital Services, Inc. (18) (i) Administrative Contracts. ------------------------ (1)(a) Form of Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including American General Life Insurance Company. (11) (1)(b) Form of Addendum No. 1 to Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including American General Life Insurance Company, dated May 21, 1975. (11) (1)(c) Form of Addendum No. 2 to Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including American General Life Insurance Company, dated September 23, 1975. (11) (1)(d) Form of Addendum No. 24 to Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including American General Life Insurance Company, dated December 30, 1998. (11) (1)(e) Form of Addendum No. 28 to Service and Expense Agreement dated February 1, 1974, among American International Group, Inc. and various affiliate C-4 subsidiaries, including American General Life Insurance Company and American General Life Companies, effective January 1, 2002. (11) (1)(f) Form of Addendum No. 30 to Service and Expense Agreement dated February 1, 1974, among American International Group, Inc. and various affiliate subsidiaries, including American General Life Insurance Company and American General Life Companies, LLC, effective January 1, 2002. (11) (1)(g) Form of Addendum No. 32 to Service and Expense Agreement dated February 1, 1974, among American International Group, Inc. and various affiliate subsidiaries, including American General Life Insurance Company, American General Life Companies, LLC and American General Equity Services Corporation, effective May 1, 2004. (12) (1)(h) Specimen form of Addendum No. 45 to Service and Expense Agreement dated February 1, 1974, among American International Group, Inc. and various affiliate subsidiaries, including American General Life Insurance Company and AIG Capital Services, Inc. (successor to American General Equity Services Corporation), dated October 1, 2017. (21) (j) Other Material Contracts. ------------------------ (1) General Guarantee Agreement from American Home Assurance Company on behalf of American General Life Insurance Company. (13) (2) Notice of Termination of Guarantee as Published in the Wall Street Journal on November 24, 2006. (15) (3) Amended and Restated Unconditional Capital Maintenance Agreement between American International Group, Inc. and American General Life Insurance Company. (18) (4) Termination Agreement of the Amended and Restated Unconditional Capital Maintenance Agreement between Americ4an International Group, Inc. and American General Life Insurance Company. (19) (k) Legal Opinions. -------------- (1) Opinion and Consent of Sullivan & Cromwell LLP, Counsel to American Home Assurance Company. (14) (2) Opinion of Counsel and Consent of Depositor. (Filed herewith) (l) Actuarial Opinions. ------------------ (1) Opinion of Robert M. Beuerlein Senior Vice President - Actuarial/Financial. (8) C-5 (2) Opinion and Consent of American General Life Insurance Company's actuary. (10) (m) Calculation. None ----------- (n) Other Opinions. -------------- (1) Consent. (Filed herewith) (o) Omitted Financial Statements. None ---------------------------- (p) Initial Capital Agreements. None -------------------------- (q) Redeemability Exemption. ----------------------- (1) Description of American General Life Insurance Company's Issuance, Transfer and Redemption Procedures for EquiBuilder II and III Policies Pursuant to Rule 6e-3(T)(b)(12)(iii) under the Investment Company Act of 1940 as of May 1, 2018. (36) (r) Powers of Attorney. ------------------ (1) Power of Attorney - American General Life Insurance Company Directors. (Filed herewith) (2) Power of Attorney - American Home Assurance Company Directors. (Filed herewith) -------- (1) Incorporated by reference to Post-Effective Amendment No. 8 to Form S-6 Registration Statement (File No. 033-77470) of The American Franklin Life Insurance Company Separate Account VUL-2 filed April 30, 1999. (2) Incorporated by reference to Post-Effective Amendment No. 5 to Form S-6 Registration Statement (File No. 033-77470) of The American Franklin Life Insurance Company Separate Account VUL-2 filed on February 27, 1998. (3) Incorporated by reference to Post-Effective Amendment No. 15 to Form S-6 Registration Statement (File No. 033-41838) of The American Franklin Life Insurance Company Separate Account VUL-2 filed on April 18, 2002. (4) Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 033-43390) of American General Life Insurance Company Separate Account D filed on October 16, 1991. C-6 (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 Post-Effective Amendment No. 2 to Form S-6 Registration Statement (File No. 333-80191) of American General Life Insurance Company Separate Account VL-R filed on September 20, 2000. (7) 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. (8) Incorporated by reference to Post-Effective Amendment No. 9 to Form S-6 Registration Statement (File No. 033-77470) of The American Franklin Life Insurance Company Separate Account VUL-2 filed April 27, 2000. (9) Incorporated by reference to Post-Effective Amendment No. 7 to Form N-4 Registration Statement (File No. 333-40637) of American General Life Insurance Company Separate Account D filed on November 8, 2002. (10) Incorporated by reference to initial filing of Form N-6 Registration Statement (File No. 333-102299) of American General Life Insurance Company Separate Account VUL-2 filed on December 31, 2002. (11) Incorporated by reference to Post-Effective Amendment No. 8 to Form N-6 Registration Statement (File No. 333-43264) of American General Life Insurance Company Separate Account VL-R filed on May 3, 2004. (12) Incorporated by reference to Post-Effective Amendment No. 1 to Form N-6 Registration Statement (File No. 333-118318) of American General Life Insurance Company Separate Account VL-R filed on May 2, 2005. (13) Incorporated by reference to Post-Effective Amendment No. 11 to Form N-6 (File No. 333-43264) of American General Life Insurance Company Separate Account VL-R filed on August 12, 2005. (14) Incorporated by reference to Post-Effective Amendment No. 5 to Form N-6 (File No. 333-102299) of American General Life Insurance Company Separate Account VUL-2 filed on October 24, 2005. (15) Incorporated by reference to Post-Effective Amendment No. 6 to Form N-6 Registration Statement (File No. 333-118318) of American General Life Insurance Company Separate Account AGL VL-R filed on December 12, 2006. C-7 (16) Incorporated by reference to Post-Effective Amendment No. 7 to Form N-6 Registration Statement (File No. 333-118318) of American General Life Insurance Company Separate Account VL-R filed on May 1, 2007. (17) Incorporated by reference to Post-Effective Amendment No. 5 to Form N-6 Registration Statement (File No. 333-151576) of American General Life Insurance Company Separate Account VL-R filed on April 30, 2013. (18) Incorporated by reference to Post-Effective Amendment No. 6 to Form N-6 Registration Statement (File No. 333-151576) of American General Life Insurance Company Separate Account VL-R filed on April 30, 2014. (19) Incorporated by reference to Post-Effective Amendment No. 2 to Form N-6 Registration Statement (File No. 333-196172) of American General Life Insurance Company Separate Account VL-R filed on April 29, 2016. (20) Incorporated by reference to Post-Effective Amendment No. 3 to Form N-6 Registration Statement (File No. 333-196172) of American General Life Insurance Company Separate Account VL-R filed on April 28, 2017. (21) Incorporated by reference to Post-Effective Amendment No. 4 to Form N-6 Registration Statement (File No. 333-196172) of American General Life Insurance Company Separate Account VL-R filed on April 30, 2018. (22) Incorporated by reference to Post-Effective Amendment No. 19 to Form N-6 Registration Statement (File No. 333-102299) of American General Life Insurance Company Separate Account VUL-2 filed on April 30, 2018. (23) Incorporated by reference to Post-Effective Amendment No. 5 to Form N-6 Registration Statement (File No. 333-196172) of American General Life Insurance Company Separate Account VL-R filed on April 30, 2019. (24) 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. Item 27. Directors and Officers of the Depositor The directors and principal officers of the Company are set forth below. The business address of each officer and director is 2919 Allen Parkway, Houston, Texas 77019, unless otherwise noted. NAMES, POSITIONS AND OFFICES HELD WITH DEPOSITOR ------------------------------------------------ Kevin T. Hogan (3) Director, Chairman of the Board, Chief Executive Officer, and President Jonathan J. Novak (5) Director and Chief Executive Officer, Institutional Markets
C-8 Todd P. Solash (1) Director and Chief Executive Officer, Individual Retirement Adam C. Winslow (3) Director and Chief Executive Officer, Life Insurance Katherine A. Anderson Director, Senior Vice President and Chief Risk Officer Thomas J. Diemer Director, Executive Vice President and Chief Financial Officer Terri N. Fiedler Director, Senior Vice President and Chief Distribution Officer Michael P. Harwood Director, Senior Vice President, Chief Actuary and Corporate Illustration Actuary Craig A. Sabal (6) Director, Senior Vice President and Chief Investment Officer James Bracken (3) Executive Vice President, Head of Legacy Portfolio Evelyn Curran Executive Vice President Craig A. Anderson Senior Vice President and Life Controller Axel P. Andre (5) Senior Vice President, Market Risk Management Timothy M. Heslin (2) Senior Vice President, Chief Life Product and Underwriting Officer Kyle L. Jennings Senior Vice President and Chief Compliance Officer William C. Kolbert (4) Senior Vice President and Business Information Officer Gabriel A. Lopez (1) Senior Vice President, Individual Retirement Operations Christopher V. Muchmore (1) Senior Vice President, Market Risk Management Christine A. Nixon (1) Senior Vice President Bryan A. Pinsky (1) Senior Vice President, Individual Retirement Products Sai P. Raman (4) Senior Vice President, Institutional Markets Sabyasachi Ray (3) Senior Vice President and Chief Operating Officer Justin J.W. Caulfield (3) Vice President and Treasurer Lisa K. Gerhart Vice President and Assistant Life Controller Julie Cotton Hearne Vice President and Secretary Mallary L. Reznik (1) Vice President, General Counsel and Assistant Secretary Mark A. Peterson (2) Vice President, Distribution Michael E. Treske (1) Vice President, Distribution Leo W. Grace Vice President, Product Filing Christina M. Haley (1) Vice President, Product Filing Tracey E. Harris Vice President, Product Filing Mary M. Newitt (1) Vice President, Product Filing Daniel R. Cricks Vice President and Tax Officer Stephen G. Lunanuova (6) Vice President and Tax Officer Barbara J. Moore Vice President and Tax Officer T. Clay Spires Vice President and Tax Officer Frank Kophamel Vice President and Appointed Actuary Michelle D. Campion (5) Vice President Jeffrey S. Flinn Vice President Manda Ghaferi (1) Vice President William L. Mask Vice President Jennifer N. Miller (5) Vice President Thomas A. Musante (5) Vice President
C-9 Stewart R. Polakov (1) Vice President Jennifer A. Roth (1) Vice President, 38a-1 Compliance Officer Edward P. Voit (7) Vice President Amanda K. Ouslander Anti-Money Laundering and Economic Sanctions Compliance Officer Rosemary Foster Assistant Secretary David J. Kumatz (2) Assistant Secretary Virginia N. Puzon (1) Assistant Secretary Grace D. Harvey (2) Illustration Actuary Laszlo Kulin (6) Investment Tax Officer Alireza Vaseghi (3) Managing Director and Chief Operating Officer, Institutional Markets Melissa H. Cozart Privacy Officer
(1) 21650 Oxnard Street, Woodland Hills, CA 91367 (2) 340 Seven Springs Way, Brentwood, TN 37027 (3) 175 Water Street, New York, NY 10038 (4) 50 Danbury Road, Wilton, CT 06897 (5) 777 S. Figueroa Street, Los Angeles, CA 90017 (6) 80 Pine Street, New York, NY 10005 (7) 301 Grant Street, Pittsburgh, PA 15219 Item 28. Persons Controlled by or Under Common Control with the Depositor or the Registrant The Depositor is an indirect wholly-owned subsidiary of American International Group, Inc. An organizational chart for American International Group, Inc. can be found as Exhibit 21 in American International Group, Inc.'s Form 10-K, SEC file Number 001-08787, accession number 0000005272-19-000023, filed February 15, 2019. Exhibit 21 is incorporated herein by reference. The Registrant is a separate account of American General Life Insurance Company (Depositor). Item 29. Indemnification Insofar as indemnification for liability arising under the Securities Act of 1933 ("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 C-10 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. AMERICAN GENERAL LIFE INSURANCE COMPANY To the full extent authorized by law, the corporation shall indemnify any person made, or threatened to be made, a party to an action or proceeding, whether criminal or civil, by reason of the fact that he, his testator or intestate is or was a director or officer of the corporation or serves or served in any capacity in any other corporation at the request of the corporation. Nothing contained herein shall affect any rights to indemnification to which corporate personnel other than directors and officers may be entitled by contract or otherwise under law. Item 30. Principal Underwriters (a) Other Activity. Registrant's principal underwriter, AIG Capital Services, -------------- Inc., also acts as principal underwriter for the following investment companies: American General Life Insurance Company Variable Separate Account Variable Annuity Account Five Variable Annuity Account Seven Variable Annuity Account Nine Separate Account D Separate Account I Separate Account VL-R The United States Life Insurance Company in the City of New York FS Variable Separate Account FS Variable Annuity Account Five Separate Account USL VL-R Separate Account USL A The Variable Annuity Life Insurance Company Separate Account A (b) Management. ---------- The following information is provided for each director and officer of the principal underwriter.
Name and Principal Positions and Offices with Underwriter Business Address* AIG Capital Services, Inc. ------------------ -------------------------------------- Terri N. Fiedler (2) Director James T. Nichols (1) Director, President and Chief Executive Officer Michael E. Treske Chief Distribution Officer, Mutual Funds and Variable Annuities
C-11
Name and Principal Positions and Offices with Underwriter Business Address* AIG Capital Services, Inc. ------------------ -------------------------------------- Michael Fortey (2) Chief Compliance Officer Frank Curran (1) Vice President, Chief Financial Officer, Chief Operating Officer, Controller and Treasurer John T. Genoy (1) Vice President Mallary L. Reznik Vice President Julie Cotton Hearne (2) Vice President and Secretary Daniel R. Cricks (2) Vice President, Tax Officer T. Clay Spires (2) Vice President, Tax Officer Virginia Puzon Assistant Secretary Rosemary Foster (2) Assistant Secretary
* Unless otherwise indicated, the principal business address of AIG Capital Services, Inc. and of each of the above individuals is 21650 Oxnard Street, Suite 750, Woodland Hills, CA 91367-4997. (1) Principal business address is Harborside 5, 185 Hudson Street, Jersey City, NJ 07311. (2) Principal business address is 2919 Allen Parkway, Houston, TX 77019. (c) Compensation From the Registrant. AIG Capital Services, Inc. retains no -------------------------------- compensation or commissions from the Registrant. Item 31. Location of Accounts and Records All records referenced under Section 31(a) of the 1940 Act, and Rules 31a-1 through 31a-3 thereunder, are maintained and in the custody of American General Life Insurance Company at its principal executive office located at 2727-A Allen Parkway, Houston, Texas 77019-2191 or at American General Life Insurance Company's Administrative Office located at 340 Seven Springs Way, MC430, Brentwood, Tennessee 37027-5098. Item 32. Management Services. Not applicable. Item 33. Fee Representation 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. C-12 Undertakings of the Depositor During any time there are insurance obligations outstanding and covered by the guarantee issued by American Home Assurance Company ("American Home Guarantee Period"), filed as an exhibit to this Registration Statement (the "American Home Guarantee"), the Depositor hereby undertakes to provide notice to policy owners covered by the American Home Guarantee promptly after the happening of significant events related to the American Home Guarantee. These significant events include: (i) termination of the American Home Guarantee that has a material adverse effect on the policy owner's rights under the American Home Guarantee; (ii) a default under the American Home Guarantee that has a material adverse effect on the policy owner's rights under the American Home Guarantee; or (iii) the insolvency of American Home Assurance Company ("American Home"). Depositor hereby undertakes during the American Home Guarantee Period to cause Registrant to file post-effective amendments to this Registration Statement as frequently as is necessary to ensure that the current annual audited statutory financial statements of American Home in the Registration Statement are updated to be as of a date not more than 16 months prior to the effective date of this Registration Statement, and to cause Registrant to include as an exhibit to this Registration Statement the consent of the independent registered public accounting firm of American Home regarding such financial statements. During the American Home Guarantee Period, the Depositor hereby undertakes to include in the prospectuses to policy owners, an offer to supply the annual audited statutory financial statements of American Home, free of charge upon a policy owner's request. As of December 29, 2006 at 4:00 p.m. Eastern Time (the "Point of Termination"), the American Home Guarantee was terminated for prospectively issued Policies. The American Home Guarantee will not cover any Policies with a date of issue later than the Point of Termination. The American Home Guarantee will continue to cover Policies with a date of issue earlier than the Point of Termination until all insurance obligations under such Policies are satisfied in full. C-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, American General Life Insurance Company Separate Account VL-R has duly caused this Registration Statement to be signed on its behalf, by the undersigned, duly authorized, in the City of Houston, and State of Texas on this 29th day of November, 2019. 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/ CRAIG A. ANDERSON ------------------------------------------ CRAIG A. ANDERSON SENIOR VICE PRESIDENT AND LIFE CONTROLLER Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities with the Depositor and on the dates indicated. Signature Title Date --------- ----- ---- *KEVIN T. HOGAN Director, Chairman, Chief November 29, 2019 ------------------------ Executive Officer, and President KEVIN T. HOGAN *KATHERINE A. ANDERSON Director, Senior Vice President November 29, 2019 ------------------------ and Chief Risk Officer KATHERINE A. ANDERSON *THOMAS J. DIEMER Director, Executive Vice President November 29, 2019 ------------------------ and Chief Financial Officer THOMAS J. DIEMER *TERRI N. FIEDLER Director, Senior Vice President November 29, 2019 ------------------------ and Chief Distribution Officer TERRI N. FIEDLER *MICHAEL P. HARWOOD Director, Senior Vice President, November 29, 2019 ------------------------ Chief Actuary and Corporate MICHAEL P. HARWOOD Illustration Actuary *JONATHAN J. NOVAK Director, Chief Executive Officer, November 29, 2019 ------------------------ Institutional Markets JONATHAN J. NOVAK *CRAIG A. SABAL Director, Senior Vice President November 29, 2019 ------------------------ and Chief Investment Officer CRAIG A. SABAL *TODD P. SOLASH Director, Chief Executive Officer, November 29, 2019 ------------------------ Individual Retirement TODD P. SOLASH *ADAM C. WINSLOW Director, Chief Executive Officer, November 29, 2019 ------------------------ Life Insurance ADAM C. WINSLOW /s/ CRAIG A. ANDERSON Senior Vice President and Life November 29, 2019 ------------------------ Controller CRAIG A. ANDERSON /s/ MANDA GHAFERI Attorney-in-Fact November 29, 2019 ------------------------ *MANDA GHAFERI SIGNATURES American Home Assurance Company has caused this Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of New York, and State of New York on the 29th day of November, 2019. AMERICAN HOME ASSURANCE COMPANY BY: /s/ BRIAN GREENSPAN ------------------------------------------ BRIAN GREENSPAN STATUTORY CONTROLLER AND SENIOR VICE PRESIDENT This Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ DAVID H. McELROY Director, President, CEO and November 29, 2019 ------------------------ Chairman of the Board of Directors DAVID H. McELROY /s/ ALEXANDER R. BAUGH Director November 29, 2019 ------------------------ ALEXANDER R. BAUGH /s/ THOMAS A. BOLT Director November 29, 2019 ------------------------ THOMAS A. BOLT /s/ ELIAS F. HABAYEB Director and Chief Financial November 29, 2019 ------------------------ Officer ELIAS F. HABAYEB /s/ BARBARA J. LUCK Director November 29, 2019 ------------------------ BARBARA J. LUCK /s/ KENNETH RIEGLER Director November 29, 2019 ------------------------ KENNETH RIEGLER /s/ ANTHONY VIDOVICH Director November 29, 2019 ------------------------ ANTHONY VIDOVICH *BY: /s/ BRIAN GREENSPAN -------------------------- BRIAN GREENSPAN ATTORNEY-IN-FACT AH - 1 EXHIBIT INDEX Item 26. Exhibits (a)(2) Resolution of the Board of Directors of American General Life Insurance Company authorizing the consolidation of the Separate Account. (k)(2) Opinion of Counsel and Consent of Depositor. (n)(1) Consent. (r)(1) Power of Attorney - American General Life Insurance Company. (r)(2) Power of Attorney - American Home Assurance Company.
E-1 EX-99.(A)(2) 2 d792352dex99a2.txt EX-99.(A)(2) AMERICAN GENERAL LIFE INSURANCE COMPANY SECRETARY'S CERTIFICATE I, Julie Cotton Hearne, being the duly elected Vice President and Secretary of AMERICAN GENERAL LIFE INSURANCE COMPANY, a Texas insurance corporation (the "Company"), do hereby certify that by virtue of my office, I have custody of the original records of the Company, and that at a meeting of the Board of Directors of the Company on September 25, 2019, the resolutions attached hereto as Exhibit A, were duly adopted, and have not been amended, modified, superseded or revised as of the date hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name on behalf of said Company this 21/st/ day of October, 2019. /s/ Julie Cotton Hearne ------------------------------ Julie Cotton Hearne Vice President and Secretary American General Life Insurance Company EXHIBIT A Resolutions AMERICAN GENERAL LIFE INSURANCE COMPANY (the "Company") RESOLUTIONS REGARDING APPROVAL OF MERGERS OF SEPARATE ACCOUNTS WHEREAS, from time to time, the Company has established separate accounts in connection with the variable insurance contracts issued by the Company (the "Separate Accounts"), and as a result, there a number of separate accounts on its books of the Company; and WHEREAS, management deems it in the best interest of the Company to merge and/or reorganize certain variable separate accounts, the result of which mergers or reorganizations would, among other things, reduce costs, duplications and inefficiencies associated with maintaining multiple Separate Accounts, each with its own recordkeeping, auditing and reporting requirements; and WHEREAS, management has identified certain Separate Accounts and proposes to merge or reorganize, such accounts as set forth on the attached Exhibit A. NOW, THEREFORE, BE IT RESOLVED THAT, the Board does hereby approve and authorized the merger, combination or reorganization of any and/or all of the Company's Separate Accounts that support variable insurance products issued by the Company, as any officer of the Company shall deem necessary or appropriate for the efficient administration of the Separate Accounts; and be it FURTHER RESOLVED, that the appropriate officers of the Company be and they each hereby are authorized and instructed to take any and all actions necessary to effect the merger and reorganization transactions contemplated by resolutions, including but not limited to, the filing of any registration statement and amendments thereto with the Securities and Exchange Commission, the execution of and filing of any applications for exemption or approval, the execution of any and all required underwriting agreements, state regulatory filings, Blue Sky filings, policy filings, and to execute any and all other documents that may be required by any Federal, state or local regulatory agency in order to operate the separate account. FURTHER RESOLVED, that all prior resolutions and authorizations of the Board of the Company with respect to the surviving separate accounts remain in full force and effect. FURTHER RESOLVED, that all lawful actions heretofore taken by any officer, employee or authorized representative of the Company in connection with the subject matter of these resolutions be, and they hereby are, ratified and approved in all respects. EXHIBIT A Chart of Mergers SEPARATE ACCOUNT MERGERS List of Current Variable Separate Accounts Proposed Surviving Separate Accounts for Merger/Reorganization Post Merger/Reorganization --------------------------------- ------------------------------------- Variable Annuity Account One Variable Separate Account Variable Annuity Account Two Variable Annuity Account Four AG Separate Account A Separate Account D Separate Account A Separate Account VA-1 Separate Account VA-2 Separate Account VUL Variable Separate Account VL-R Separate Account II Separate Account VUL - 2 EX-99.(K)(2) 3 d792352dex99k2.txt EX-99.(K)(2) LOGO AIG October 31, 2019 Life and Retirement 21650 Oxnard Street U.S. Securities and Exchange Commission Suite 750 Division of Investment Management Woodland Hills, CA 91367 100 F. Street, NE www.aig.com Washington, DC 20549 Manda Ghaferi Dear Madam/Sir: Vice President and Referring to this Registration Statement on behalf Deputy General Counsel of American General Life Insurance Company Separate T + 1 310 772 6545 Account VL-R ("Separate Account") and the F + 1 310 772-6569 Registration Statement on Form N-6 filed November 4, mghaferi@aig.com 2019 (the "Registration Statement") on behalf of the Separate Account and having examined and being familiar with the Articles of Incorporation and By-Laws of American General Life Insurance Company ("AGL"), the applicable resolutions relating to the Separate Account and other pertinent records and documents, I am of the opinion that: 1) AGL is a duly organized and existing stock life insurance company under the laws of the State of Texas; 2) The Separate Account is a duly organized and existing separate account of AGL; 3) Assets allocated to the Separate Account are owned by AGL and AGL is not a trustee with respect thereto. The variable universal life insurance policies provide that the portion of the assets of the Separate Account equal to the reserves and other variable universal life insurance policy liabilities with respect to the Separate Account will not be chargeable with the liabilities arising out of any other business AGL may conduct. AGL reserves the right to transfer assets of the Separate Account in excess of such reserves and other liabilities to the general account of AGL. 4) The variable universal life insurance policies being registered by the Registration Statement will, upon sale thereof, be duly authorized and constitute validly issued and binding obligations of AGL in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally. I am admitted to the bar in the State of California, and I do not express any opinion as to the laws of any other jurisprudence. I hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. Very truly yours, /s/ Manda Ghaferi Manda Ghaferi EX-99.(N)(1) 4 d792352dex99n1.txt EX-99.(N)(1) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the use in this Registration Statement on Form N-6 of Separate Account VL-R of American General Life Insurance Company ("Separate Account VL-R") of our report dated April 22, 2019, relating to the financial statements of Separate Account VL-R which appears in such Registration Statement. We also consent to the use in this Registration Statement of our report dated April 22, 2019, relating to the financial statements of Separate Account VUL-2 of American General Life Insurance Company. We also consent to the use in this Registration Statement of our report dated April 22, 2019, relating to the statutory basis financial statements of American General Life Insurance Company. We also consent to the use in this Registration Statement of our report dated April 22, 2019, relating to the statutory basis financial statements of American Home Assurance Company. We also consent to the references to us under the heading "Financial Statements" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Houston, Texas November 1, 2019 EX-99.(R)(1) 5 d792352dex99r1.txt EX-99.(R)(1) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby constitutes and appoints MALLARY REZNIK AND MANDA GHAFERI, or each of them, as his true and lawful attorneys-in fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any all capacities, to sign any and all amendments (including pre-and post-effective amendments) to the Registration Statements listed below, for which AMERICAN GENERAL LIFE INSURANCE COMPANY serves as Depositor, and to file the same, with all exhibits thereto, and other documents in connection therewith, as fully to all intents as he might or could do in person, including specifically, but without limiting the generality of the foregoing, to (i) take any action to comply with any rules, regulations or requirements of the Securities and Exchange Commission under the federal securities laws; (ii) make application for and secure any exemptions from the federal securities laws; (iii) register additional annuity contracts under the federal securities laws, if registration is deemed necessary. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, or their substitutes, shall do or cause to be done by virtue thereof. REGISTRATION STATEMENTS:
Registrant Name File Nos. --------------- ------------------------------------------- Variable Separate Account 333-185778 333-185840 333-185837 811-03859 333-185780 333-185797 333-185831 333-185784 333-185798 333-185818 333-185786 333-185762 333-185799 333-185820 333-185808 333-185787 333-185801 333-185815 333-198223 333-185775 333-185838 333-185816 333-223017 333-185791 333-185800 333-185788 333-213338 Variable Annuity Account One 333-185802 811-04296 Variable Annuity Account Two 333-185821 811-08626 Variable Annuity Account Four 333-185803 811-08874 Variable Annuity Account Five 333-185793 333-185826 333-185814 333-185813 811-07727 333-185804 333-185822 333-185809 333-185829 333-185824 333-185811 333-185825 333-185828 333-185810 Variable Annuity Account Seven 333-185790 333-185795 333-185807 333-185832 811-09003 333-185794 333-185806 Variable Annuity Account Nine 333-185834 333-185835 333-185841 333-185842 811-21096 AGL Separate Account A 033-44745 033-44744 811-01491 AGL Separate Account VL-R 333-151576 333-80191 333-129552 333-137817 811-08561 333-146948 333-53909 333-109613 333-143072 333-43264 333-42567 333-90787 333-144594 333-82982 333-103361 333-65170 333-153093 333-89897 333-118318 333-87307 333-153068 333-196172 AGL Separate Account VUL 333-102301 811-05794 AGL Separate Account VUL-2 333-102300 333-102299 811-06366 AGL Separate Account I 333-185785 333-185839 333-185817 333-185823 811-05301 333-185819 333-185827 333-185836 333-185805 333-185789 333-185843 333-185796 333-185785 AGL Separate Account II 333-185761 333-185812 333-185830 811-04867 333-185833 333-185782 AGL AG Separate Account A 333-185844 333-185792 811-08862 AG Separate Account D 333-25549 002-49805 333-81703 333-40637 811-02441 033-43390 333-109206 333-70667 033-57730 AGL Separate Account VA-1 333-102302 811-07781 AGL Separate Account VA-2 333-102303 811-01990
AGL POA - 1 POWER OF ATTORNEY
Signature Title Date --------- ----- ---- /s/ KEVIN T. HOGAN Director, Chairman, Chief Executive October 21, 2019 --------------------------- Officer, and President KEVIN T. HOGAN /s/ KATHERINE A. ANDERSON Director, Senior Vice October 21, 2019 --------------------------- President and Chief Risk KATHERINE A. ANDERSON Officer /s/ THOMAS J. DIEMER Director, Executive Vice October 17, 2019 --------------------------- President and Chief Financial THOMAS J. DIEMER Officer /s/ TERRI N. FIEDLER Director, Senior Vice October 18, 2019 --------------------------- President and Chief TERRI N. FIEDLER Distribution Officer /s/ MICHAEL P. HARWOOD Director, Senior Vice October 16, 2019 --------------------------- President, Chief Actuary and MICHAEL P. HARWOOD Corporate Illustration Actuary /s/ JONATHAN J. NOVAK --------------------------- Director, Chief Executive October 23, 2019 JONATHAN J. NOVAK Officer, Institutional Markets /s/ CRAIG A. SABAL Director, Senior Vice October 16, 2019 --------------------------- President and Chief CRAIG A. SABAL Investment Officer /s/ TODD P. SOLASH Director, Chief Executive October 15, 2019 --------------------------- Officer, Individual Retirement TODD P. SOLASH /s/ ADAM C. WINSLOW Director, Chief Executive October 21, 2019 --------------------------- Officer, Life Insurance ADAM C. WINSLOW
AGL POA - 2 EX-99.(R)(2) 6 d792352dex99r2.txt EX-99.(R)(2) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby constitutes and appoints BRIAN GREENSPAN as his true and lawful attorney-in fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Registration Statements listed on the attached schedule, for AMERICAN GENERAL LIFE INSURANCE COMPANY COMPANY and THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK which serve as Depositors and AMERICAN HOME ASSURANCE COMPANY which serves as Guarantor, and to file the same, with all exhibits thereto, and other documents in connection therewith, as fully to all intents as he might or could do in person, including specifically, but without limiting the generality of the foregoing, to (i) take any action to comply with any rules, regulations or requirements of the Securities and Exchange Commission under the federal securities laws; (ii) make application for and secure any exemptions from the federal securities laws; (iii) register additional insurance and annuity contracts under the federal securities laws, if registration is deemed necessary. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his substitute, shall do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ DAVID H. McELROY Director, President, CEO and November 1, 2019 ------------------------ Chairman of the Board of Directors DAVID H. McELROY /s/ ALEXANDER R. BAUGH Director November 1, 2019 ------------------------ ALEXANDER R. BAUGH /s/ THOMAS A. BOLT Director November 1, 2019 ------------------------ THOMAS A. BOLT /s/ ELIAS F. HABAYEB Director and Chief Financial November 1, 2019 ------------------------ Officer ELIAS F. HABAYEB /s/ BARBARA J. LUCK Director November 1, 2019 ------------------------ BARBARA J. LUCK /s/ KENNETH RIEGLER Director November 1, 2019 ------------------------ KENNETH RIEGLER /s/ ANTHONY VIDOVICH Director November 1, 2019 ------------------------ ANTHONY VIDOVICH AH - 1 AMERICAN HOME ASSURANCE COMPANY GUARANTOR PRODUCT SCHEDULE - 11/1/19
Registrant Name File Nos. --------------- ----------------------------------------- AGL VARIABLE SEPARATE ACCOUNT 333-185797 American Pathway II 811-03859 333-185798 Polaris 333-185799 Polaris II 333-185831 PolarisAmerica 333-185838 Polaris Platinum II 333-185800 Polaris II Platinum Series 333-185837 Polaris Choice II / Polaris Choice III 333-185818 WM Diversified Strategies 333-185820 WM Diversified Strategies III 333-185815 Polaris Advisor 333-185801 Polaris Protector 333-185816 Polaris Preferred Solution AGL VARIABLE ANNUITY ACCOUNT ONE 333-185802 ICAP II 811-04296 AGL VARIABLE ANNUITY ACCOUNT TWO 333-185821 Vista Capital Advantage 811-08626 AGL VARIABLE ANNUITY ACCOUNT FOUR 333-185803 Anchor Advisor 811-08874 AGL VARIABLE ANNUITY ACCOUNT FIVE 333-185829 Seasons 811-07727 333-185804 Seasons Select II 333-185825 Seasons Select 333-185826 Seasons Triple Elite / Seasons Elite 333-185822 Seasons Advisor 333-185824 Seasons Advisor II 333-185828 Seasons Preferred Solution AGL VARIABLE ANNUITY ACCOUNT SEVEN 333-185806 Polaris Plus 811-09003 333-185807 Polaris II A-Class / Polaris II A-Class Platinum Series 333-185832 Polaris II Asset Manager AGL VARIABLE ANNUITY ACCOUNT NINE 333-185834 Ovation 811-21096 333-185835 Ovation Plus 333-185841 Ovation Advantage 333-185842 Ovation Advisor USL--FS VARIABLE SEPARATE ACCOUNT 333-178854 Polaris NY/ Polaris II NY / 811-08810 Polaris II NY - Jones 333-178859 WM Diversified Strategies III NY 333-178857 FSA Advisor 333-178853 Polaris Choice NY / Polaris Choice III NY 333-178855 Polaris II A-Class Platinum Series NY 333-178850 Polaris Advantage NY USL-FS VARIABLE ANNUITY ACCOUNT ONE 333-178861 ICAP II NY 811-06313 USL-FS VARIABLE ANNUITY ACCOUNT TWO 333-178863 Vista Capital Advantage NY 811-08624 USL-FS VARIABLE ANNUITY ACCOUNT FIVE 333-178860 Seasons Triple Elite NY/ 811-08369 Seasons Elite NY 333-178858 Seasons Select II NY AGL SEPARATE ACCOUNT A 033-44745 Black, VA, Blue VA, Green VA 811-01491 033-44744 Orange VA, Yellow VA AGL SEPARATE ACCOUNT D 033-43390 Generations VA, Variety Plus VA 811-02441 002-49805 Front End Load, Regular Surr. Charge 333-70667 Platinum Investor VA 333-40637 Select Reserve VA 033-57730 WM Advantage VA 333-109206 Platinum Investor IVA 333-25549 WM Strategic Asset Manager VA
AH - 2
Registrant Name File Nos. --------------- -------------------------------------- AGL SEPARATE ACCOUNT VA-1 333-102302 The Chairman VA 811-07781 AGL SEPARATE ACCOUNT VA-2 811-01990 333-102303 Individual VA Contracts 811-01990 AGL SEPARATE ACCOUNT VL-R 333-89897 AG Legacy Plus 811-08561 333-42567 Platinum Investor I VUL 333-90787 Platinum Investor Survivor VUL 333-80191 Corporate America VUL 333-53909 Legacy Plus VUL (Orig.) 333-103361 Platinum Investor II VUL 333-43264 Platinum Investor III VUL 333-188318 Platinum Investor IV VUL 333-129552 Platinum Investor VIP (Orig.) 333-109613 Platinum Investor FlexDirector 333-82983 Platinum Investor PLUS VUL 333-65170 Platinum Investor Survivor VUL 333-87307 Platinum Investor Survivor II VUL 333-87307 The ONE VUL Solution AGL SEPARATE ACCOUNT VUL 333-102301 EquiBuilder VUL 811-05794 AGL SEPARATE ACCOUNT VUL-2 333-102300 EquiBuilder II VUL 811-06366 333-102299 EquiBuilder III VUL USL SEPARATE ACCOUNT USL VL-R 333-151575 Income Advantage Select VUL 811-09359 333-149403 Protection Advantage Select VUL 333-137941 Platinum Investor VIP VUL 333-105246 Platinum Investor PLUS VUL 333-79471 Platinum Investor VUL USL SEPARATE ACCOUNT USL VA-R 333-63673 Generations VA 811-09007 VALIC SEPARATE ACCOUNT A 002-32783 GUP & GTS-VA 811-03240 033-75292 Portfolio Director / Portfolio Director 2/ Portfolio Director Plus 333-49232 Potentia 002-96223 UIT-981 333-124398 Independence Plus VA
AH - 3 CORRESP 7 filename7.txt LOGO AIG VIA EDGAR AND ELECTRONIC MAIL Life and Retirement 21650 Oxnard Street November 29, 2019 Suite 750 Woodland Hills, CA U.S. Securities and Exchange Commission 91367 Division of Investment Management www.aig.com 100 F. Street, NE Washington, DC 20549 Manda Ghaferi Vice President and Re: AMERICAN GENERAL LIFE INSURANCE COMPANY Deputy General Counsel ("DEPOSITOR") T + 1 310 772 6545 AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE F + 1 310 772-6569 ACCOUNT VL-R ("REGISTRANT") mghaferi@aig.com EQUIBUILDER III VARIABLE UNIVERSAL LIFE Dear Madam/Sir: On behalf of the Registrant and Depositor, submitted herewith pursuant to the Securities Act of 1933 ("1933 Act") and the Investment Company Act of 1940 ("1940 Act"), as amended, is a copy of the Pre-Effective N-6 Registration Statement. The purpose of this filing is to register a variable universal life product under the marketing name of Equibuilder III under the new Registrant. The Registrant and its distributor AIG Capital Services, Inc. ("Distributor") respectfully request, consistent with Rule 461(a) under the 1933 Act, that the Commission, pursuant to delegated authority, grant acceleration of the effective date of this filing and that such Registration Statement be declared effective at 9:00a.m., Eastern Time, on December 2, 2019, or as soon as practicable thereafter. Depositor, Registrant and Distributor are aware of their obligations under the 1933 Act. Depositor, Registrant and Distributor acknowledge that: . Should the Commission or the Staff, acting pursuant to delegated authority, declare the filing effective, it does not foreclose the Commission from taking any action with respect to the filings; and . The action of the Commission or the Staff, acting pursuant to delegated authority, in declaring the filing effective, does not relieve Depositor and Registrant from full responsibility for the adequacy and accuracy of the disclosure in the filing; and, . Depositor and Registrant may not assert this action as a defense in any proceeding initiated by the Commission or any other person under the federal securities law of the United States. LOGO Please contact Manda Ghaferi at (310) 772-6545 if you have any questions or need more information. Sincerely, AMERICAN GENERAL LIFE INSURANCE COMPANY, as Depositor and on behalf of the Registrant By: /s/ Manda Ghaferi _____________________________________ Manda Ghaferi, Vice President AIG CAPITAL SERVICES, INC. By: /s/ Mallary L. Reznik _____________________________________ Mallary L. Reznik, Vice President