0000950123-12-014467.txt : 20130102 0000950123-12-014467.hdr.sgml : 20130101 20121231185743 ACCESSION NUMBER: 0000950123-12-014467 CONFORMED SUBMISSION TYPE: N-4 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20130102 DATE AS OF CHANGE: 20121231 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE ANNUITY ACCOUNT ONE CENTRAL INDEX KEY: 0000885135 IRS NUMBER: 000000000 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-185802 FILM NUMBER: 121294223 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: FLOOR 37 CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 BUSINESS PHONE: 3107726000 MAIL ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: FLOOR 37 CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 FORMER COMPANY: FORMER CONFORMED NAME: VARIABLE ANNUITY ACCOUNT ONE OF ANCHOR NATIONAL LIFE INS CO DATE OF NAME CHANGE: 19920929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE ANNUITY ACCOUNT ONE CENTRAL INDEX KEY: 0000885135 IRS NUMBER: 000000000 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-4 SEC ACT: 1940 Act SEC FILE NUMBER: 811-04296 FILM NUMBER: 121294224 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: FLOOR 37 CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 BUSINESS PHONE: 3107726000 MAIL ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: FLOOR 37 CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 FORMER COMPANY: FORMER CONFORMED NAME: VARIABLE ANNUITY ACCOUNT ONE OF ANCHOR NATIONAL LIFE INS CO DATE OF NAME CHANGE: 19920929 0000885135 S000010599 VARIABLE ANNUITY ACCOUNT ONE C000124674 ICAP II 333- N-4 1 w20035nv4.txt FORM N-4 AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 2012. FILE NOS. 033- 811-04296 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. [ ]
and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. [ ]
(Check Appropriate Box or Boxes) ------------ VARIABLE ANNUITY ACCOUNT ONE (Exact Name of Registrant) AMERICAN GENERAL LIFE INSURANCE COMPANY (Name of Depositor) 2727-A ALLEN PARKWAY, HOUSTON, TEXAS 77019 (Address of Depositor's Principal Offices) (Zip Code) Depositor's Telephone Number, including Area Code: (800) 871-2000 AMERICAN HOME ASSURANCE COMPANY (Name of Guarantor) 175 WATER STREET NEW YORK, NY 10038 (Address of Guarantor's Principal Offices) (Zip Code) Guarantor's Telephone Number, including Area Code: (212) 770-7000 MANDA GHAFERI, ESQ. AIG LIFE AND RETIREMENT 1999 AVENUE OF THE STARS LOS ANGELES, CALIFORNIA 90067-6121 (Name and Address of Agent for Service for Depositor, Registrant and Guarantor) Approximate Date of Proposed Public Offering: As soon after the effective date of this registration statement as is practicable. Title of Securities Being Registered: (i) Units of interest in Variable Annuity Account One of American General Life Insurance Company under variable annuity contracts and (ii) guarantee related to insurance obligations under the variable annuity contracts. The 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), shall determine. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT ONE CROSS REFERENCE SHEET PART A -- PROSPECTUS
ITEM NUMBER IN FORM N-4 CAPTION ----------- ------- 1. Cover Page.............................. Cover Page 2. Definitions............................. Glossary 3. Synopsis................................ Highlights; Fee Tables; Portfolio Expenses; Examples 4. Condensed Financial Information......... Appendix - Condensed Financial Information 5. General Description of Registrant, Depositor and Portfolio Companies....... The ICAP II Variable Annuity; Other Information 6. Deductions.............................. Expenses 7. General Description of Variable Annuity Contracts............................... The ICAP II Variable Annuity; Purchasing a ICAP II Variable Annuity; Investment Options 8. Annuity Period.......................... Annuity Income Options 9. Death Benefit........................... Death Benefits 10. Purchases and Contract Value............ Purchasing a Variable Annuity Contract 11. Redemptions............................. Access To Your Money 12. Taxes................................... Taxes 13. Legal Proceedings....................... Legal Proceedings 14. Table of Contents of Statement of Additional Information.................. Table of Contents of Statement of Additional Information
PART B -- STATEMENT OF ADDITIONAL INFORMATION Certain information required in Part B of the Registration Statement has been included within the Prospectus forming part of this Registration Statement; the following cross-references suffixed with a "P" are made by reference to the captions in the Prospectus.
ITEM NUMBER IN FORM N-4 CAPTION ----------- ------- 15. Cover Page.............................. Cover Page 16. Table of Contents....................... Table of Contents 17. General Information and History......... The ICAP II Variable Annuity (P); Separate Account; General Account (P); Investment Options (P); Other Information (P) 18. Services................................ Other Information (P) 19. Purchase of Securities Being Offered.... Purchasing a ICAP II Variable Annuity (P) 20. Underwriters............................ Distribution of Contracts 21. Calculation of Performance Data......... Performance Data 22. Annuity Payments........................ Annuity Income Options (P); Income Payments; Annuity Unit Values 23. Financial Statements.................... Depositor: Other Information (P); Financial Statements; Registrant: Financial Statements
PART C Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. ICAP II PROSPECTUS JANUARY 2, 2013 FLEXIBLE PAYMENT GROUP DEFERRED ANNUITY CONTRACT ISSUED BY AMERICAN GENERAL LIFE INSURANCE COMPANY IN CONNECTION WITH VARIABLE ANNUITY ACCOUNT ONE This variable annuity has several investment choices -- Variable Portfolios listed below and available fixed account options. The Variable Portfolios invest solely in the Underlying Funds of the Anchor Series Trust ("AST"). - Capital Appreciation - Strategic Multi-Asset - Growth - Multi-Asset - Natural Resources - Government and Quality Bond - Growth and Income
This contract is no longer available for purchase by new contract owners. Please read this prospectus carefully before investing and keep it for future reference. It contains important information about the variable annuity. To learn more about the annuity offered by this prospectus, you can obtain a copy of the Statement of Additional Information ("SAI") dated January 2, 2013. The SAI has been filed with the United States Securities and Exchange Commission ("SEC") and is incorporated by reference into this prospectus. The Table of Contents of the SAI appears at the end of this prospectus. For a free copy of the SAI, call us at (800)445-7862 or write to us at our Annuity Service Center, P.O. Box 54299, Los Angeles, California 90054-0299. In addition, the SEC maintains a website (http://www.sec.gov) that contains the SAI, materials incorporated by reference and other information filed electronically with the SEC by the Company. VARIABLE ANNUITIES INVOLVE RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL, AND ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THEY ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, NOR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS CRIMINAL OFFENSE. TABLE OF CONTENTS
ITEM PAGE ---- ---- GLOSSARY..................................................................... 4 HIGHLIGHTS................................................................... 5 FEE TABLE.................................................................... 6 MAXIMUM AND MINIMUM EXPENSE EXAMPLES......................................... 7 THE ICAP II VARIABLE ANNUITY................................................. 8 INVESTMENT OPTIONS........................................................... 9 Variable Portfolios..................................................... 9 Anchor Series Trust..................................................... 9 Voting Rights........................................................... 9 Substitution, Addition or Deletion of Variable Portfolios............... 10 Fixed Accounts.......................................................... 10 EXPENSES..................................................................... 11 Separate Account Charges................................................ 11 Withdrawal Charges...................................................... 11 Underlying Fund Expenses................................................ 11 Contract Maintenance Fee................................................ 12 Transfer Fee............................................................ 12 Annuity Charge.......................................................... 12 Premium Tax............................................................. 12 Income Taxes............................................................ 12 Reduction or Elimination of Fees, Expenses and Additional Amounts Credited.............................................................. 12 PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACT..................... 13 Payments We Make........................................................ 13 Payments We Receive..................................................... 14 DESCRIPTION OF THE CONTRACTS................................................. 14 Annuitant............................................................... 14 Modification of the Contract............................................ 14 Assignment.............................................................. 15 Termination of the Contract Misstatement and/or Fraud................... 15 Access to Your Money.................................................... 15 Free Withdrawal Amount.................................................. 16 Systematic Withdrawal Program........................................... 16 Minimum Contract Value.................................................. 16 Qualified Contract Owners............................................... 16 Death Benefit........................................................... 16 PURCHASES, WITHDRAWALS AND CONTRACT VALUE.................................... 17 Purchase Payments....................................................... 17 Allocation of Purchase Payments......................................... 18 Accumulation Units...................................................... 18 Free Look............................................................... 19 Exchange Offers......................................................... 19 Transfers During the Accumulation Phase................................. 19 Short-Term Trading Policies............................................. 20 Underlying Funds' Short-Term Trading Policies........................... 21 Transfers During the Income Phase....................................... 22 INCOME OPTIONS............................................................... 22 The Income Phase........................................................ 22 Income Options.......................................................... 23 Allocation of Annuity Payments.......................................... 24 Fixed or Variable Income Payments....................................... 24 Transfers During the Income Phase....................................... 24 Deferment of Payments................................................... 25 ADMINISTRATION............................................................... 25 TAXES........................................................................ 25 Annuity Contracts in General............................................ 25
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ITEM PAGE ---- ---- Aggregation of Contracts................................................ 26 Tax Treatment of Distributions -- Non-Qualified Contracts............... 26 Tax Treatment of Distributions -- Qualified Contracts................... 27 Required Minimum Distributions.......................................... 28 Tax Treatment of Death Benefits......................................... 28 Contracts Owned by a Trust or Corporation............................... 29 Gifts, Pledges and/or Assignments of a Contract......................... 29 Diversification and Investor Control.................................... 29 OTHER INFORMATION............................................................ 30 The Distributor......................................................... 30 The Company............................................................. 30 Ownership Structure of the Company...................................... 30 Operation of the Company................................................ 31 Separate Account........................................................ 31 The General Account..................................................... 32 Guarantee of Insurance Obligations...................................... 32 Legal Proceedings....................................................... 32 Financial Statements.................................................... 33 The Company, the Separate Account and the Guarantor..................... 33 Instructions to Obtain Financial Statements............................. 33 Registration Statements................................................. 34 CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.............................. 34 APPENDIX A -- CONDENSED FINANCIAL INFORMATION................................ A-1 APPENDIX B -- STATE CONTRACT AVAILABILITY AND/OR VARIABILITY................. B-1
3 -------------------------------------------------------------------------------- GLOSSARY -------------------------------------------------------------------------------- We have capitalized some of the technical terms used in this prospectus. To help you understand these terms, we have defined them in this glossary. ACCUMULATION PHASE - The period during which you invest money in your contract. ACCUMULATION UNITS - A measurement we use to calculate the value of the variable portion of your contract during the Accumulation Phase. ANNUITANT - The person on whose life we base annuity income payments after you begin the Income Phase. ANNUITY DATE - The date you select on which annuity income payments begin. ANNUITY UNITS - A measurement we use to calculate the amount of annuity income payments you receive from the variable portion of your contract during the Income Phase. BENEFICIARY - The person you designate to receive any benefits under the contract if you or in the case of a non-natural Owner, the Annuitant dies. If your contract is jointly owned, you and the joint Owner are each other's primary Beneficiary. COMPANY - Refers to American General Life Insurance Company ("AGL"), the insurer that issues this contract. The term "we," "us" and "our" are also used to identify the issuing Company. CONTINUING SPOUSE - Spouse of original contract owner at the time of death who elects to continue the contract after the death of the original contract owner. FIXED ACCOUNT - An account, if available, in which you may invest money and earn a fixed rate of return. Fixed Accounts are obligations of the General Account. GOOD ORDER - Fully and accurately completed forms, including any necessary supplementary documentation, applicable to any given transaction or request received by us. INCOME PHASE - The period upon annuitization during which we make annuity income payments to you. INSURABLE INTEREST - Evidence that the Owner(s), Annuitant(s) or Beneficiary(ies) will suffer a financial loss at the death of the life that triggers the death benefit. Generally, we consider an interest insurable if a familial relationship and/or an economic interest exists. A familial relationship generally includes those persons related by blood or by law. An economic interest exists when the Owner has a lawful and substantial economic interest in having the life, health or bodily safety of the insured life preserved. LATEST ANNUITY DATE - The first business day of the month following your 85th birthday. MARKET CLOSE - The close of the New York Stock Exchange, usually at 1:00 p.m. Pacific Time. NON-QUALIFIED (CONTRACT) - A contract purchased with after-tax dollars. In general, these contracts are not under any pension plan, specially sponsored program or individual retirement account ("IRA"). NYSE - New York Stock Exchange OWNER - The person or entity (if a non-natural owner) with an interest or title to this contract. The term "you" or "your" are also used to identify the Owner. PURCHASE PAYMENTS - The money you give us to buy and invest in the contract. QUALIFIED (CONTRACT) - A contract purchased with pretax dollars. These contracts are generally purchased under a pension plan, specially sponsored program or IRA. SEPARATE ACCOUNT - A segregated asset account maintained by the Company separately from the Company's general account. The Separate Account consists of Variable Portfolios or subaccounts, each investing in shares of the Underlying Funds. TRUST - Refers to the Anchor Series Trust. UNDERLYING FUNDS - The underlying investment portfolios of the Trusts in which the Variable Portfolios invest. VARIABLE PORTFOLIO(S) - The variable investment options available under the contract. Each Variable Portfolio, which is a subaccount of the Separate Account, invests in shares of one of the Underlying Funds. Each Underlying Fund has its own investment objective. 4 -------------------------------------------------------------------------------- HIGHLIGHTS -------------------------------------------------------------------------------- The ICAP II Variable Annuity is a contract between you and the Company. It is designed to help you invest on a tax-deferred basis and meet long-term financial goals. There are minimum Purchase Payment amounts required to purchase a contract. Purchase Payments may be invested in a variety of variable and fixed account options. Like all deferred annuities, the contract has an Accumulation Phase and an Income Phase. During the Accumulation Phase, you invest money in your contract. The Income Phase begins when you start receiving income payments from your annuity to provide for your retirement. FREE LOOK: You may cancel your contract within 10 days after receiving it (or whatever longer period is required in your state). You will receive whatever your contract is worth on the day that we receive your request. The amount refunded may be more or less than your original Purchase Payment. We will return your original Purchase Payment if required by law. Please see FREE LOOK in the prospectus. EXPENSES: There are fees and charges associated with the contract. Each year, we deduct a $30 contract maintenance fee from your contract. We also deduct insurance charges, which equal 1.40% annually of the average daily value of your contract allocated to the Variable Portfolios. There are investment charges on amounts invested in the Variable Portfolios. A separate withdrawal charge schedule applies to each Purchase Payment. The amount of the withdrawal charge declines over time. After a Purchase Payment has been in the contract for five complete years, withdrawal charges no longer apply to that portion of the Purchase Payment. Please see FEE TABLE and CONTRACT CHARGES in the prospectus. ACCESS TO YOUR MONEY: You may withdraw money from your contract during the Accumulation Phase. If you do so, earnings are deemed to be withdrawn first. You will pay income taxes on earnings and untaxed contributions when you withdraw them. Payments received during the Income Phase are considered partly a return of your original investment. A federal tax penalty may apply if you make withdrawals before age 59 1/2. As noted above, a withdrawal charge may apply. Please see WITHDRAWALS and TAXES in the prospectus. DEATH BENEFIT: A death benefit feature is available under the contract to protect your Beneficiaries in the event of your death during the Accumulation Phase. Please see DEATH BENEFITS in the prospectus. ANNUITY INCOME OPTIONS: When you are ready to begin taking annuity income payments, you can choose to receive annuity income payments on a variable basis, fixed basis or a combination of both. You may also chose from three different annuity income options, including an option for income that you cannot outlive. Please see ANNUITY INCOME OPTIONS in the prospectus. INQUIRIES: If you have questions about your contract, call your financial representative or contact us at Annuity Service Center, P.O. Box 54299, Los Angeles, California 90054-0299. Telephone Number: (800) 445-7862. PLEASE SEE ALLOCATION OF PURCHASE PAYMENTS IN THE PROSPECTUS FOR THE ADDRESS TO WHICH YOU MUST SEND PURCHASE PAYMENTS. THE COMPANY OFFERS SEVERAL DIFFERENT VARIABLE ANNUITY CONTRACTS TO MEET THE DIVERSE NEEDS OF OUR INVESTORS. OUR CONTRACTS MAY PROVIDE DIFFERENT FEATURES, BENEFITS, PROGRAMS AND INVESTMENT OPTIONS OFFERED AT DIFFERENT FEES AND EXPENSES. WHEN WORKING WITH YOUR FINANCIAL REPRESENTATIVE TO DETERMINE THE BEST PRODUCT TO MEET YOUR NEEDS, YOU SHOULD CONSIDER AMONG OTHER THINGS, WHETHER THE FEATURES OF THIS CONTRACT AND THE RELATED FEES PROVIDE THE MOST APPROPRIATE PACKAGE TO HELP YOU MEET YOUR RETIREMENT SAVINGS GOALS. IF YOU WOULD LIKE MORE INFORMATION REGARDING HOW MONEY IS SHARED AMONGST OUR BUSINESS PARTNERS, INCLUDING BROKER-DEALERS AND FROM CERTAIN INVESTMENT ADVISERS OF THE UNDERLYING FUNDS, SEE THE PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACT SECTION. PLEASE READ THE PROSPECTUS CAREFULLY FOR MORE DETAILED INFORMATION REGARDING THESE AND OTHER FEATURES AND BENEFITS OF THE CONTRACT, AS WELL AS THE RISKS OF INVESTING. 5 -------------------------------------------------------------------------------- FEE TABLE -------------------------------------------------------------------------------- THE FOLLOWING DESCRIBES THE FEES AND EXPENSES THAT ARE APPLICABLE TO THE CONTRACT AND WHEN YOU TRANSFER CONTRACT VALUE BETWEEN INVESTMENT OPTIONS OR SURRENDER THE CONTRACT. IF APPLICABLE, YOU MAY ALSO BE SUBJECT TO STATE PREMIUM TAXES.(1) MAXIMUM OWNER TRANSACTION EXPENSES MAXIMUM WITHDRAWAL CHARGES (AS A PERCENTAGE OF EACH PURCHASE PAYMENT)(2)..... 5%
TRANSFER FEE.......................... $25 per transfer after the first 15 transfers in any contract year.
THE FOLLOWING DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT, NOT INCLUDING UNDERLYING FUND EXPENSES WHICH ARE OUTLINED IN THE NEXT SECTION. CONTRACT MAINTENANCE FEE..................................................... $30
SEPARATE ACCOUNT ANNUAL EXPENSES (deducted from the average daily ending net asset value allocated to the Variable Portfolios) Mortality and Expense Risk Charge.......................................... 1.25% Distribution Expense Charge................................................ 0.15% ----- TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES.............................. 1.40% =====
UNDERLYING FUND EXPENSES (AS OF DECEMBER 31, 2011) THE FOLLOWING SHOWS THE MINIMUM AND MAXIMUM TOTAL OPERATING EXPENSES CHARGED BY THE UNDERLYING FUNDS OF THE TRUSTS, BEFORE ANY WAIVERS OR REIMBURSEMENTS THAT YOU MAY PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT. MORE DETAIL CONCERNING THE UNDERLYING FUNDS' EXPENSES IS CONTAINED IN THE PROSPECTUS FOR EACH OF THE TRUSTS. PLEASE READ THEM CAREFULLY BEFORE INVESTING.
TOTAL ANNUAL UNDERLYING PORTFOLIO EXPENSES MINIMUM MAXIMUM ------------------------------------------ ------- ------- (expenses that are deducted from underlying portfolios of the Trust, including management fees and other expenses)....................... 0.62% 1.82%
FOOTNOTES TO THE FEE TABLES: -------- (1) State premium taxes of up to 3.5% of your Purchase Payments may be deducted when you make a Purchase Payment or when you fully surrender your contract or begin the Income Phase. PLEASE SEE PREMIUM TAX AND STATE CONTRACT AVAILABILITY AND/OR VARIABILITY APPENDIX BELOW. (2) Withdrawal Charge Schedule (as a percentage of each Purchase Payment) declines over 5 years as follows: YEARS SINCE RECEIPT:..................................... 1 2 3 4 5 6+ 5% 4% 3% 2% 1% 0%
6 -------------------------------------------------------------------------------- MAXIMUM AND MINIMUM EXPENSE EXAMPLES -------------------------------------------------------------------------------- These examples are intended to help you compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include owner transaction expenses, the contract maintenance fee if any, separate account annual expenses, available optional feature fees and Underlying Fund expenses. The examples assume that you invest $10,000 in the contract for the time periods indicated; that your investment has a 5% return each year; and you incur the maximum or minimum fees and expenses of the Underlying Fund as indicated in the examples. Although your actual costs may be higher or lower, based on these assumptions, your costs at the end of the stated period would be: MAXIMUM EXPENSE EXAMPLES (ASSUMING MAXIMUM SEPARATE ACCOUNT ANNUAL EXPENSES OF 1.40% AND INVESTMENT IN AN UNDERLYING FUND WITH TOTAL EXPENSES OF 1.82%) (1) If you surrender your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------- ---------------------------------------- $830 $1,307 $1,807 $3,567 ---------------------------------------- ----------------------------------------
(2) If you do not surrender or annuitize your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------- ---------------------------------------- $330 $1,007 $1,707 $3,567 ---------------------------------------- ----------------------------------------
MINIMUM EXPENSE EXAMPLES (ASSUMING MINIMUM SEPARATE ACCOUNT ANNUAL EXPENSES OF 1.40% AND INVESTMENT IN AN UNDERLYING FUND WITH TOTAL EXPENSES OF 0.62%) (1) If you surrender your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------- ---------------------------------------- $710 $949 $1,214 $2,400 ---------------------------------------- ----------------------------------------
(2) If you do not surrender or annuitize your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------- ---------------------------------------- $210 $649 $1,114 $2,400 ---------------------------------------- ----------------------------------------
EXPLANATION OF EXPENSE EXAMPLES 1. The purpose of the Expense Examples is to show you the various fees and expenses you would incur directly and indirectly by investing in this variable annuity contract. The Expense Examples represent both fees at the separate account as well as the maximum and minimum total annual Underlying Fund operating expenses. We converted the contract maintenance fee to a percentage (0.05%). The actual impact of the administration fee may differ from this percentage. Additional information on the Underlying Fund fees can be found in the accompanying Trust prospectus. 2. In addition to the stated assumptions, the Expense Examples also assume that no transfer fees were imposed. Although premium taxes may apply in certain states, they are not reflected in the Expense Examples. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. CONDENSED FINANCIAL INFORMATION APPEARS IN THE CONDENSED FINANCIAL INFORMATION APPENDIX OF THIS PROSPECTUS. 7 -------------------------------------------------------------------------------- THE ICAP II VARIABLE ANNUITY -------------------------------------------------------------------------------- When you purchase a variable annuity, a contract exists between you and the Company. You are the Owner of the contract. The contract provides several main benefits: - Death Benefit: If you die during the Accumulation Phase, the Company pays a death benefit to your Beneficiary. - Guaranteed Income: Once you begin the Income Phase, you receive a stream of annuity income payments for your lifetime, or another available period you select. - Tax Deferral: This means that you do not pay taxes on your earnings from the contract until you withdraw them. Tax-qualified retirement plans (e.g., IRAs, 401(k) or 403(b) plans) defer payment of taxes on earnings until withdrawal. If you are considering funding a tax-qualified retirement plan with an annuity, you should know that an annuity does not provide any additional tax deferral treatment of earnings beyond the treatment provided by the tax-qualified retirement plan itself. However, annuities do provide other features and benefits, which may be valuable to you. You should fully discuss this decision with your financial representative. This variable annuity was developed to help you plan for your retirement. In the Accumulation phase, it can help you build assets on a tax-deferred basis. In the Income Phase, it can provide you with guaranteed income through annuity income payments. The contract is called a "variable" annuity because it allows you to invest in Variable Portfolios which, like mutual funds, have different investment objectives and performance. You can gain or lose money if you invest in these Variable Portfolios. The amount of money you accumulate in your contract depends on the performance of the Variable Portfolios in which you invest. Fixed Accounts, if available, earn interest at a rate set and guaranteed by the Company. If you allocate money to an available Fixed Account, the amount of money that accumulates in the contract depends on the total interest credited to the particular Fixed Account in which you invest. For more information on investment options available under this contract, PLEASE SEE INVESTMENT OPTIONS BELOW. As a function of the Internal Revenue Code ("IRC"), you may be assessed a 10% federal tax penalty on any withdrawal made prior to your reaching age 59 1/2. PLEASE SEE TAXES BELOW. Additionally, you will be charged a withdrawal charge on each Purchase Payment withdrawn prior to the end of the applicable withdrawal charge period, PLEASE SEE FEE TABLE ABOVE. Because of these potential penalties, you should fully discuss all of the benefits and risks of this contract with your financial representative prior to purchase. 8 -------------------------------------------------------------------------------- INVESTMENT OPTIONS -------------------------------------------------------------------------------- VARIABLE PORTFOLIOS The Variable Portfolios invest in the Underlying Funds of the Trust. Additional Variable Portfolios may be available in the future. The Variable Portfolios are only available through the purchase of certain insurance contracts. The Trust serves as the underlying investment vehicle for other variable annuity contracts issued by the Company and other affiliated and unaffiliated insurance companies. Neither the Company nor the Trust believe that offering shares of the Trust in this manner disadvantages you. The Trust is monitored for potential conflicts. The Trust may have other Underlying Funds in addition to those listed here that are not available for investment under this contract. The Variable Portfolios offered through this contract are selected by us and we may consider various factors in the selection process, including but not limited to: asset class coverage, the strength of the investment adviser's or subadviser's reputation and tenure, brand recognition, performance and the capability and qualification of each investment firm. Another factor we may consider is whether the Underlying Fund or its service providers (i.e., the investment adviser and/or subadviser(s)) or their affiliates will make payments to us or our affiliates in connection with certain administrative, marketing and support services, or whether the Underlying Fund's service providers have affiliates that can provide marketing and distribution support for sales of the contract. PLEASE SEE PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACT BELOW. We review the Variable Portfolios periodically and may make changes if we determine that a Variable Portfolio no longer satisfies one or more of the selection criteria and/or if the Variable Portfolio has not attracted significant allocations from contract owners. We have included the Anchor Series Trust at least in part because they are managed by SunAmerica Asset Management Corp. ("SAAMCo"), which is wholly-owned by the Company. You are responsible for allocating Purchase Payments to the Variable Portfolios as is appropriate for your own individual circumstances, investment goals, financial situation and risk tolerance. You should periodically review your allocations and values to ensure they continue to suit your needs. You bear the risk of any decline in contract value resulting from the performance of the Variable Portfolios you have selected. In making your investment selections, you should investigate all information available to you including the Underlying Fund's prospectus, statement of additional information and annual and semi- annual reports. We do not provide investment advice, nor do we recommend or endorse any particular Variable Portfolio. The Variable Portfolios along with their respective advisers are listed below: ANCHOR SERIES TRUST -- CLASS 1 SAAMCo is the investment adviser and Wellington Management Company, LLP is the subadviser to Anchor Series Trust ("AST"). EQUITY PORTFOLIOS FIXED INCOME PORTFOLIOS - CAPITAL APPRECIATION - GOVERNMENT AND QUALITY BOND - GROWTH - NATURAL RESOURCES - GROWTH AND INCOME ASSET ALLOCATION PORTFOLIOS - STRATEGIC MULTI-ASSET - MULTI-ASSET
YOU SHOULD READ THE PROSPECTUS FOR THE ACCOMPANYING TRUST CAREFULLY. THE PROSPECTUS CONTAINS DETAILED INFORMATION ABOUT THE PORTFOLIOS, INCLUDING EACH VARIABLE PORTFOLIO'S INVESTMENT OBJECTIVE AND RISK FACTORS. VOTING RIGHTS The Company is the legal owner of the Trusts' shares. However, when an Underlying Fund solicits proxies in conjunction with a shareholder vote, we must obtain your instructions on how to vote those shares. We vote all of 9 the shares we own in proportion to your instructions. This includes any shares we own on our own behalf. Should we determine that we are no longer required to vote in the manner described above, we will vote the shares in our own right. SUBSTITUTION, ADDITION OR DELETION OF VARIABLE PORTFOLIOS We may, subject to any applicable law, make certain changes to the Variable Portfolios offered in your contract. We may offer new Variable Portfolios or stop offering existing Variable Portfolios. New Variable Portfolios may be made available to existing contract owners and Variable Portfolios may be closed to new or subsequent Purchase Payments, transfers or allocations. In addition, we may also liquidate the shares of any Variable Portfolio, substitute the shares of one Underlying Fund held by a Variable Portfolio for another and/or merge Variable Portfolios or cooperate in a merger of Underlying Funds. To the extent required by the Investment Company Act of 1940, as amended, we may be required to obtain SEC approval or your approval. FIXED ACCOUNTS Your contract may offer Fixed Accounts for varying guarantee periods. A Fixed Account may be available for differing lengths of time (such as 1, 3, or 5 years). Each guarantee period may have different guaranteed interest rates. We guarantee that the interest rate credited to amounts allocated to any Fixed Account guarantee periods will never be less than the guaranteed minimum interest rate specified in your contract. Once the rate is established, it will not change for the duration of the guarantee period. We determine which, if any, guarantee periods will be offered at any time in our sole discretion, unless state law requires us to do otherwise. Please check with your financial representative regarding the availability of Fixed Accounts. There are three categories of interest rates for money allocated to the Fixed Accounts. The applicable rate is guaranteed until the corresponding guarantee period expires. With each category of interest rate, your money may be credited a different rate as follows: - Initial Rate: The rate credited to any portion of the initial Purchase Payment allocated to a Fixed Account. - Current Rate: The rate credited to any portion of a subsequent Purchase Payment allocated to a Fixed Account. - Renewal Rate: The rate credited to money transferred from a Fixed Account or a Variable Portfolio into a Fixed Account and to money remaining in a Fixed Account after expiration of a guarantee period. When a guarantee period ends, you may leave your money in the same Fixed Account or you may reallocate your money to another Fixed Account or to the Variable Portfolios. If you do not want to leave your money in the same Fixed Account, you must contact us within 30 days after the end of the guarantee period and provide us with new allocation instructions. WE DO NOT CONTACT YOU. IF YOU DO NOT CONTACT US, YOUR MONEY WILL REMAIN IN THE SAME FIXED ACCOUNT WHERE IT WILL EARN INTEREST AT THE RENEWAL RATE THEN IN EFFECT FOR THAT FIXED ACCOUNT. If available, you may systematically transfer interest earned in available Fixed Accounts into any of the Variable Portfolios on certain periodic schedules offered by us. Systematic transfers may be started, changed or terminated at any time by contacting our Annuity Service Center. Check with your financial representative about the current availability of this service. At any time we are crediting the minimum guaranteed interest rate specified in your contract, we reserve the right to restrict your ability to invest into the Fixed Accounts. All Fixed Accounts may not be available in your state. Please check with your financial representative regarding the availability of Fixed Accounts. 10 -------------------------------------------------------------------------------- EXPENSES -------------------------------------------------------------------------------- There are charges and expenses associated with your contract. These charges and expenses reduce your investment return. We will not increase the contract maintenance fee and withdrawal charges under your contract. However, the investment charges under your contract may increase or decrease. Some states may require that we charge less than the amounts described below. We intend to profit from the sale of the contracts. Our profit may be derived as a result of a variety of pricing factors including but not limited to the fees and charges assessed under the Contract and/or amounts we may receive from an Underlying Fund, its investment adviser and/or subadvisers (or affiliates thereof). Please see PAYMENTS IN CONNECTION WITH THE DISTRIBUTION OF THE CONTRACT below. The fees, charges, amounts received from the Underlying Funds (or affiliates thereof) and any resulting profit may be used for any corporate purpose including supporting marketing, distribution and/or administration of the Contract and, in its role as an intermediary, the Underlying Funds. SEPARATE ACCOUNT CHARGES The Company deducts a mortality and expense risk charge in the amount of 1.40% annually of the value of your contract invested in the Variable Portfolios. We deduct the charge daily. This charge compensates the Company for the mortality and expense risk and the costs of contract distribution assumed by the Company. Generally, the mortality risks assumed by the Company arise from its contractual obligations to make income payments after the Annuity Date and to provide a death benefit. The expense risk assumed by the Company is that the costs of administering the contracts and the Separate Account will exceed the amount received from the administrative fees and charges assessed under the contract. If these charges do not cover all of our expenses, we will pay the difference. Likewise, if these charges exceed our expenses, we will keep the difference. The Insurance Charge is expected to result in a profit. Profit may be used for any legitimate cost/expense including distribution, depending upon market conditions. WITHDRAWAL CHARGES The contract provides a free withdrawal amount every year. (SEE FREE WITHDRAWAL AMOUNT BELOW.) If you take money out in excess of the free withdrawal amount, you may incur a withdrawal charge. We apply a withdrawal charge against each Purchase Payment you put into the contract. After a Purchase Payment has been in the contract for five complete years, no withdrawal charge applies. The withdrawal charge equals a percentage of Purchase Payments you take out of the contract which are still subject to the withdrawal charge and not previously withdrawn. The withdrawal charge percentage declines each year a Purchase Payment is in the contract, as follows:
-------------------------------------------------------------------------------- YEAR 1 2 3 4 5 6 -------------------------------------------------------------------------------- WITHDRAWAL CHARGE 5% 4% 3% 2% 1% 0% --------------------------------------------------------------------------------
When calculating the withdrawal charge, we treat withdrawals as coming first from the Purchase Payments that have been in your contract the longest. However, for tax purposes, your withdrawals are considered earnings first, then Purchase Payments. Whenever possible, we deduct the withdrawal charge from the money remaining in your contract. If you withdraw all of your contract value, applicable withdrawal charges are deducted from the amount withdrawn. We do not assess a withdrawal charge for money withdrawn to pay a death benefit. Withdrawals made prior to age 59 1/2 may result in a 10% IRS penalty tax. SEE TAXES, BELOW. UNDERLYING FUND EXPENSES The Separate Account purchases shares of the Variable Portfolios. The Accumulation Unit value for each Variable Portfolio reflects the investment management fees and other expenses of the Underlying Funds. These fees may 11 vary. They are not fixed or specified in your annuity contract, rather the Variable Portfolios are governed by their own boards of trustees. CONTRACT MAINTENANCE FEE During the Accumulation Phase, we subtract a $30 contract maintenance fee from your account, on a pro-rata basis, once per contract year. This charge compensates us for the cost of contract administration. If your contract was issued prior to September 1, 1987, we deduct this fee from your contract on December 31 of each year. In addition, we will waive the fee during the year in which you fully surrender your contract. If your contract was issued on or after September 1, 1987, we deduct the fee on your contract anniversary. If you withdraw your entire contract value, the fee is deducted from that withdrawal. TRANSFER FEE Generally, we permit 15 free transfers between investment options each contract year. We charge you $25 for each additional transfer that contract year. SEE TRANSFERS DURING THE ACCUMULATION PHASE, BELOW. ANNUITY CHARGE If you elect to have your income payments made under income option 1, Life Annuity with 10 or 20 Years Guaranteed, or income option 2, Joint and Survivor Life Annuity, we do not assess an annuity charge. If you elect income option 3, Income for a Specified Period, and if your Purchase Payments were made in the contract year in which income payments begin or in any of the four preceding contract years, we may assess an annuity charge. This annuity charge equals the withdrawal charge that would apply if your contract was being surrendered. If income option 3 is elected by your Beneficiary under the death benefit, we will not assess an annuity charge. PREMIUM TAX Certain states charge us a tax on the premiums you pay into the contract ranging from 0% to 3.5%. We deduct from your contract these premium tax charges where applicable. Currently we deduct the charge for premium taxes when you take a full withdrawal or begin the Income Phase of the contract. In the future, we may assess this deduction at the time you put Purchase Payment(s) into the contract or upon payment of a death benefit. INCOME TAXES We do not currently deduct income taxes from your contract. We reserve the right to do so in the future. REDUCTION OR ELIMINATION OF FEES, EXPENSES AND ADDITIONAL AMOUNTS CREDITED Sometimes sales of the contracts to groups of similarly situated individuals may lower our administrative and/or sales expenses. We reserve the right to reduce or waive certain charges and expenses when this type of sale occurs. In addition, we may also credit additional interest to policies sold to such groups. We determine which groups are eligible for such treatment. Some of the criteria used to make a determination are: size of the group; amount of expected Purchase Payments; relationship existing between us and prospective purchaser; nature of the purchase; length of time a group of contracts is expected to remain active; purpose of the purchase and whether that purpose increases the likelihood that our expenses will be reduced; and/or any other factors that we believe indicate that administrative and/or sales expenses may be reduced. We may make such a determination regarding sales to our employees, our affiliates' employees and employees of currently contracted broker-dealers, our registered representatives and immediate family members of all of those described. We reserve the right to change or modify any such determination or the treatment applied to a particular group, at any time. 12 -------------------------------------------------------------------------------- PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACT -------------------------------------------------------------------------------- PAYMENTS WE MAKE We make payments in connection with the distribution of the contracts that generally fall into the three categories below. COMMISSIONS. Registered representatives of broker-dealers ("selling firms") licensed under federal securities laws and state insurance laws sell the contract to the public. The selling firms have entered into written selling agreements with the Company and SunAmerica Capital Services, Inc. ("SACS"), the distributor of the contracts. We pay commissions to the selling firms for the sale of your contract. The selling firms are paid commissions for the promotion and sale of the contracts according to one or more schedules. The amount and timing of commissions will vary depending on the selling firm and its selling agreement with us. For example, as one option, we may pay upfront commission only, up to a maximum 5% of each Purchase Payment you invest (which may include promotional amounts we may pay periodically as commission specials). Another option may be a lower upfront commission on each Purchase Payment, with a trail commission of up to a maximum 1.50% of contract value annually. The registered representative who sells you the contract typically receives a portion of the compensation we pay to his/her selling firm, depending on the agreement between the selling firms and its registered representative and their internal compensation program. We are not involved in determining your registered representatives' compensation. ADDITIONAL CASH COMPENSATION. We may enter into agreements to pay selling firms support fees in the form of additional cash compensation ("revenue sharing"). These revenue sharing payments may be intended to reimburse the selling firms for specific expenses incurred or may be based on sales, certain assets under management, longevity of assets invested with us and/or a flat fee. Asset-based payments primarily create incentives to service and maintain previously sold contracts. Sales-based payments primarily create incentives to make new sales of contracts. These revenue sharing payments may be consideration for, among other things, product placement/preference and visibility, greater access to train and educate the selling firm's registered representatives about our contracts, our participation in sales conferences and educational seminars and for selling firms to perform due diligence on our contracts. The amount of these fees may be tied to the anticipated level of our access in that selling firm. We enter into such revenue sharing arrangements in our discretion and we may negotiate customized arrangements with selling firms, including affiliated and non-affiliated selling firms based on various factors. These special compensation arrangements are not offered to all selling firms and the terms of such arrangements may vary between selling firms depending on, among other things, the level and type of marketing and distribution support provided, assets under management and the volume and size of the sales of our contracts. If allowed by his or her selling firm, a registered representative or other eligible person may purchase a contract on a basis in which an additional amount is credited to the contract. PLEASE SEE REDUCTION OR ELIMINATION OF FEES, EXPENSES AND ADDITIONAL AMOUNTS CREDITED ABOVE. We provide a list of firms to whom we paid annual amounts greater than $5,000 under these revenue sharing arrangements in 2011 in the Statement of Additional Information which is available upon request. We do not assess a specific charge directly to you or your separate account assets in order to cover commissions and other sales expenses and incentives we pay. However, we anticipate recovering these amounts from our profits which are derived from the fees and charges collected under the contract. We hope to benefit from these revenue sharing arrangements through increased sales of our contracts and greater customer service support. Revenue sharing arrangements may provide selling firms and/or their registered representatives with an incentive to favor sales of our contracts over other variable annuity contracts (or other investments) with respect to which a selling firm does not receive the same level of additional compensation. You should discuss with your selling firm and/or registered representative how they are compensated for sales of a contract and/or any resulting real or 13 perceived conflicts of interest. You may wish to take such revenue sharing arrangements into account when considering or evaluating any recommendation relating to this contract. NON-CASH COMPENSATION. Some registered representatives may receive various types of non-cash compensation such as gifts, promotional items and entertainment in connection with our marketing efforts. We may also pay for registered representatives to attend educational and/or business seminars. Any such compensation is paid in accordance with SEC and FINRA rules. PAYMENTS WE RECEIVE We may directly or indirectly receive revenue sharing payments from the Trusts, their investment advisers, sub-advisers and/or distributors (or affiliates thereof), in connection with certain administrative, marketing and other services we provide and related expenses we incur. The availability of these revenue sharing arrangements creates an incentive for us to seek and offer Underlying Funds (and classes of shares of such Underlying Funds) that make such payments to us. Other Underlying Funds (or available classes of shares) may have lower fees and better overall investment performance. Not all Trusts pay the same amount of revenue sharing. Therefore, the amount of fees we collect may be greater or smaller based on the Underlying Funds you select. We generally receive two kinds of payments described below. ADMINISTRATIVE, MARKETING AND SUPPORT SERVICE FEES. We receive compensation of up to 0.50% annually based on assets under management from certain Trusts' investment advisers, subadvisers and/or distributors (or affiliates thereof). These payments may be derived, in whole or in part, from the investment management fees deducted from assets of the Underlying Funds or wholly from the assets of the Underlying Funds. Contract Owners, through their indirect investment in the Trusts, bear the costs of these investment management fees, which in turn will reduce the return on your investment. These amounts are generally based on assets under management from certain Trusts' investment advisers or their affiliates and vary by Trust. Some investment advisers, subadvisers and/or distributors (or affiliates thereof) pay us more than others. Such amounts received from SAAMCo, a wholly-owned subsidiary of AGL, are not expected to exceed 0.50% annually based on assets under management. OTHER PAYMENTS. Certain investment advisers, subadvisers and/or distributors (or affiliates thereof) may help offset the costs we incur for marketing activities and training to support sales of the Underlying Funds in the contract. These amounts are paid voluntarily and may provide such advisers, subadvisers and/or distributors access to national and regional sales conferences attended by our employees and registered representatives. The amounts paid depend on the nature of the meetings, the number of meetings attended, the costs expected to be incurred and the level of the adviser's, subadviser's or distributor's participation. In addition, we (and our affiliates) may receive occasional gifts, entertainment or other compensation as an incentive to market the Underlying Funds and to cooperate with their marketing efforts. As a result of these payments, the investment advisers, subadvisers and/or distributors (or affiliates thereof) may benefit from increased access to our wholesalers and to our affiliates involved in the distribution of the contract. -------------------------------------------------------------------------------- DESCRIPTION OF THE CONTRACTS -------------------------------------------------------------------------------- ANNUITANT The annuitant is the person on whose life we base income payments. You may not change the Annuitant at any time before the Annuity Date. You may also designate a second person on whose life, together with the annuitant, income payments depend. If the annuitant dies before the Annuity Date, you must notify us and select a new annuitant. MODIFICATION OF THE CONTRACT Only the Company's President, a Vice President or Secretary may approve a change or waive a provision of the contract. Any change or waiver must be in writing. We reserve the right to modify the terms of the contract as necessary to comply with changes in applicable law. 14 ASSIGNMENT You may assign this contract before beginning the Income Phase by sending a written request to us at the Annuity Service Center. Your rights and those of any other person with rights under this contract will be subject to the assignment. WE RESERVE THE RIGHT TO NOT RECOGNIZE ASSIGNMENTS IF IT CHANGES THE RISK PROFILE OF THE OWNER OF THE CONTRACT, AS DETERMINED IN OUR SOLE DISCRETION. Please see the Statement of Additional Information for details on the tax consequences of an assignment. If the contract is issued pursuant to a Qualified plan (or a Non-qualified plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or otherwise transferred except under such conditions as may be allowed under applicable law. BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, YOU SHOULD CONSULT A COMPETENT TAX ADVISER SHOULD YOU WISH TO ASSIGN YOUR CONTRACT. TERMINATION OF THE CONTRACT FOR MISSTATEMENT AND/OR FRAUD The Company reserves the right to terminate the contract at any time if it discovers a misstatement or fraudulent representation of any information provided in connection with the issuance or ongoing administration of the contract. ACCESS TO YOUR MONEY You can access money in your contract by making a partial withdrawal and/or by receiving income payments during the Income Phase. See INCOME OPTIONS below. Any request for withdrawal will be priced as of the day it is received by us in good order if the request is received before Market Close. If the request for withdrawal is received after Market Close, the request will be priced as of the next business day. Generally, we deduct a withdrawal charge applicable to any partial or total withdrawal before the end of the withdrawal charge period. If you made a total withdrawal, we also deduct premium taxes if applicable and a contract maintenance fee. Your contract provides for a free withdrawal amount each year. A free withdrawal amount is the portion of your contract that we allow you to take out each year without being charged a withdrawal charge. HOWEVER, UPON A FUTURE TOTAL WITHDRAWAL OF YOUR CONTRACT, IF WITHDRAWAL CHARGES ARE STILL APPLICABLE, ANY PREVIOUS FREE WITHDRAWALS WOULD BE SUBJECT TO A WITHDRAWAL CHARGE. Purchase Payments in excess of your free withdrawal amount, that are withdrawn prior to the end of the withdrawal schedule, will result in payment of a withdrawal charge. The amount of the withdrawal charge and how it applies are discussed more fully in EXPENSES above. You should consider, before purchasing this contract, the effect this withdrawal charge will have on your investment if you need to withdraw more money than the free withdrawal amount. You should fully discuss this decision with your financial representative. To determine your free withdrawal amount and your withdrawal charge, we refer to two special terms: "penalty free earnings" and the "total invested amount." The penalty-free earnings amount is your contract value less your total invested amount. The total invested amount is the total of all Purchase Payments less portions of prior withdrawals that reduce your total invested amount as follows: - Free withdrawals in any year that were in excess of your penalty-free earnings and were based on the portion of the total invested amount that was no longer subject to withdrawal charges at the time of the withdrawal; and - Any prior withdrawals (including withdrawal charges applicable to those withdrawals) of the total invested amount on which you already paid a withdrawal charge. When you make a withdrawal, we deduct it from penalty-free earnings first, then from the total invested amount on a first-in, first-out basis. This means that you can also access your Purchase Payments, which are no longer subject to a withdrawal charge before those Purchase Payments, which are still subject to the withdrawal charge. 15 FREE WITHDRAWAL AMOUNT There is a Free Withdrawal Amount which applies to the first withdrawal during a Contract Year after the first Contract Year. The Free Withdrawal Amount is equal to the greater of 10% of the aggregate Purchase Payments less prior withdrawals or Purchase Payments in the contract for longer than five years minus prior withdrawals. Alternatively, certain Owners of Non-Qualified Contracts and Contracts issued in connection with IRAs may choose to withdraw via the Systematic Withdrawal Program amounts which in the aggregate add up to 10% of their initial Purchase Payments annually, without charge. The Systematic Withdrawal Program is available under such Contracts which were issued on and after April 1, 1989. To participate in the Systematic Withdrawal Program, Owners must complete an enrollment form (which describes the program) and send it to us at our Annuity Service Center. (Please see "Systematic Withdrawal Program" below). SYSTEMATIC WITHDRAWAL PROGRAM During the Accumulation Phase, you may elect to receive periodic income payments under the systematic withdrawal program. Under the program, you may choose to take monthly, quarterly, semiannual or annual payments from your contract. Electronic transfer of these funds to your bank account is available. The minimum amount of each withdrawal is $250. You may systematically withdraw up to 10% of your total Purchase Payments each contract year. There must be at least $500 remaining in each Variable Portfolio after a withdrawal from your contract at all times. Withdrawals may be subject to a withdrawal charge and taxation, and a 10% IRS penalty tax may apply if you are under age 59 1/2. There is no additional charge for participating in this program. The program is not available to everyone. Please check with our Annuity Service Center, which can provide the necessary enrollment forms. The Company reserves the right to modify, suspend or terminate this program at any time. MINIMUM CONTRACT VALUE Where permitted by state law, we may terminate your contract if both of the following occur: (1) your contract is less than $500 as a result of withdrawals; and (2) you have not made any Purchase Payments during the past three years. We will provide you with sixty days written notice. At the end of the notice period, we will distribute the contract value to you. QUALIFIED CONTRACT OWNERS Certain Qualified plans restrict and/or prohibit your ability to withdraw money from your contract. PLEASE SEE TAXES BELOW for a more detailed explanation. DEATH BENEFIT If you die during the Accumulation Phase of your contract, we pay a death benefit to your Beneficiary. The death benefit is equal to the greater of: 1. the value of your contract at the time we receive all satisfactory proof of death documentation; or 2. total Purchase Payments less any withdrawals and partial annuitizations (and any fees or charges applicable to such distributions), compounded at a 5% annual growth rate; or 3. after your fifth contract year, your contract value on the last contract anniversary plus any Purchase Payments and less any withdrawals and partial annuitizations (and any fees or charges applicable to such distributions) since that contract anniversary. We do not pay the death benefit if you die after you switch to the Income Phase. However, if you die during the Income Phase, your Beneficiary receives any remaining guaranteed income payments in accordance with the income option you selected. (SEE INCOME OPTIONS BELOW.) You name your Beneficiary. You may change the Beneficiary at any time, unless you previously made an irrevocable Beneficiary designation. 16 We calculate and pay the death benefit when we receive all required paperwork and satisfactory proof of death. We consider the following satisfactory proof of death: 1. a certified copy of the death certificate; or 2. a certified copy of a decree of a court of competent jurisdiction as to the finding of death; or 3. a written statement by a medical doctor who attended the deceased at the time of death; or 4. any other proof satisfactory to us. If the Beneficiary is the spouse of a deceased owner, he or she can elect to continue the contract. If a Beneficiary does not elect a specific form of pay out within 60 days of our receipt of proof of death, we pay a lump sum death benefit to the Beneficiary. If a Beneficiary does not elect a settlement option, within 60 days of our receipt of all required paperwork and satisfactory proof of death received by us in Good Order, we pay a lump sum death benefit by check to the Beneficiary's address of record. The death benefit must be paid within 5 years of the date of death unless the Beneficiary elects to have it payable in the form of an annuity income option. If the Beneficiary elects an annuity income option, it must be paid over the Beneficiary's lifetime or for a period not extending beyond the Beneficiary's life expectancy. Payments must begin within one year of your death. If the Beneficiary is the spouse of a deceased owner, he or she can elect to continue the contract at the then current value. PLEASE SEE SPOUSAL CONTINUATION BELOW. Payments must begin under the selected annuity income option no later than the first anniversary of death for Non-Qualified contracts or December 31st of the year following the year of death for IRAs. Beneficiaries who do not begin taking payments within these specified time periods will not be eligible to elect an annuity income option. -------------------------------------------------------------------------------- PURCHASES, WITHDRAWALS AND CONTRACT VALUE -------------------------------------------------------------------------------- PURCHASE PAYMENTS An initial Purchase Payment is the money you give us to buy a contract. Any additional money you give us to invest in the contract after purchase is a subsequent Purchase Payment. The following chart shows the minimum initial and subsequent Purchase Payments permitted under your contract. These amounts depend upon whether your contract is Qualified or Non-qualified for tax purposes. SEE TAXES, BELOW. ------------------------------------------- MINIMUM MINIMUM INITIAL SUBSEQUENT PURCHASE PURCHASE PAYMENT PAYMENT ------------------------------------------- Qualified $100 $100 ------------------------------------------- Non- Quali- fied $1,000 $500 -------------------------------------------
We reserve the right to refuse any Purchase Payment. Furthermore, we reserve the right to require company approval prior to accepting Purchase Payments greater than $1,000,000. Subsequent Purchase Payments that would cause total Purchase Payments in all contracts issued by the Company or its affiliate, the United States Life Insurance Company in the City of New York, to the same owner to exceed these limits may also be subject to company pre-approval. Once you have contributed at least the minimum initial Purchase Payment, you can establish an automatic payment plan that allows you to make subsequent Purchase Payment of as little as $25.00. In addition, we may not issue a contract to anyone over age 80. In general, we will not issue a Qualified contract to anyone who is age 70 1/2 or older, unless it is shown that the minimum distribution required by the IRS is being made. 17 We allow spouses to jointly own this contract. However, the age of the older spouse is used to determine the availability of any age driven benefits. The addition of a joint owner after the contract has been issued is contingent upon prior review and approval by the Company. If we learn of a misstatement of age, we reserve the right to fully pursue our remedies including termination of the contract and/or revocation of any age-driven benefit. ALLOCATION OF PURCHASE PAYMENTS In order to issue your contract, we must receive your initial Purchase Payment and all required paperwork in "good order," including Purchase Payment allocation instructions at our Annuity Service Center. We will accept initial and subsequent Purchase Payments by electronic transmission from certain broker- dealer firms. In connection with arrangements we have to transact business electronically, we may have agreements in place whereby your broker-dealer may be deemed our agent for receipt of your Purchase Payments. Provided we have received your Purchase Payment and all required paperwork by Market Close, we allocate your initial Purchase Payment within two days of receiving it. If we do not have complete information necessary to issue your contract, we will contact you. If we do not have the information necessary to issue your contract within 5 business days, we will send your money back to you, or ask your permission to keep your money until we get the information necessary to issue the contract. Any subsequent Purchase Payment will be priced as of the day it is received by us in good order if the request is received before Market Close. If the subsequent Purchase Payment is received after Market Close, it will be priced as of the next business day. We invest your subsequent Purchase Payments in the Variable Portfolios and Fixed Accounts according to any allocation instructions that accompany the subsequent Purchase Payment. If we receive a Purchase Payment without allocation instructions, we will invest the money according to you allocation instructions on file. SEE INVESTMENT OPTIONS, BELOW. Purchase Payments submitted by check can only be accepted by the Company at the following address: American General Life Insurance Company P.O. Box 100330 Pasadena, CA 91189-0330 Purchase Payments sent to the Annuity Service Center will be forwarded to the address above. Overnight deliveries of Purchase Payments can only be accepted at the following address: American General Life Insurance Company Building #6, Suite 120 2710 Media Center Drive Los Angeles, CA 90065-0330 Delivery of Purchase Payments to any other address will result in a delay in crediting your contract until the Purchase Payment is received at the appropriate address. ACCUMULATION UNITS When you allocate a Purchase Payment to the Variable Portfolios, we credit your contract with Accumulation Units of the Separate Account. We base the number of Accumulation Units you receive on the unit value of the Variable Portfolio as of the day we process your Purchase Payment, as described under ALLOCATION OF PURCHASE PAYMENTS above, if before that day's Market Close, or on the next business day's unit value if we process your Purchase Payment after that day's Market Close. The value of an Accumulation Unit goes up and down based on the performance of the Variable Portfolios. We calculate the value of an Accumulation Unit each day that the NYSE is open as follows: 1. We determine the total value of money invested in a particular Variable Portfolio; 2. We subtract from that amount all applicable daily asset based charges; and 3. We divide this amount by the number of outstanding Accumulation Units. We determine the number of Accumulation Units credited to your contract by dividing the Purchase Payment by the Accumulation Unit value for the specific Variable Portfolio. 18 We receive a $25,000 Purchase Payment from you on Wednesday. You allocate the money to Variable Portfolio A. We determine that the value of an Accumulation Unit for Variable Portfolio A is $11.10 at Market Close on Wednesday. We then divide $25,000 by $11.10 and credit your contract on Wednesday night with 2,252.2523 Accumulation Units for Variable Portfolio A. Performance of the Variable Portfolios and the insurance charges under your contract affect Accumulation Unit values. These factors cause the value of your contract to go up and down. FREE LOOK You may cancel your contract within ten days after receiving it. We call this a "free look." Your state may require a longer free look period. Please check with your financial representative. To cancel, you must mail the contract along with your free look request to our Annuity Service Center at P.O. Box 54299, Los Angeles, California 90054-0299. If you decide to cancel your contract during the free look period, generally we will refund to you the value of your contract on the day we receive your request. Certain states require us to return your Purchase Payments upon a free look request. Additionally, all contracts issued as an IRA require the full return of Purchase Payments upon a free look. If your contract was issued in a state requiring return of Purchase Payments or as an IRA, and you cancel your contract during the free look period, we return the greater of (1) your Purchase Payments; or (2) the value of your contract. With respect to those contracts, we reserve the right to put your money in the Cash Management Variable Portfolio during the free look period. If we place your money in the Cash Management Variable Portfolio during the free look period, we will allocate your money according to your instructions at the end of the applicable free look period. EXCHANGE OFFERS From time to time, we may offer to allow you to exchange an older variable annuity issued by the Company or one of its affiliates, for a newer product with more current features and benefits also issued by the Company or one of its affiliates. Such an exchange offer will be made in accordance with applicable state and federal securities and insurance rules and regulations. We will provide the specific terms and conditions of any such exchange offer at the time the offer is made. TRANSFERS DURING THE ACCUMULATION PHASE Subject to our rules, restrictions and policies described below, during the Accumulation Phase you may transfer funds between the Variable Portfolios and/or any available Fixed Accounts by telephone (800) 445-7862, through the Company's website (www.sunamerica.com), by U.S. Mail addressed to our Annuity Service Center, P.O. Box 54299, Los Angeles, California 90054-0299 or by facsimile. All transfer instructions submitted via facsimile must be sent to (818) 615-1543; otherwise they will not be considered received by us. We may accept transfers by telephone or the Internet unless you tell us not to on your contract application. If your contract was issued in the state of New York, we may accept transfers by telephone if you complete and send the Telephone Transfer Agreement form to our Annuity Service Center. When receiving instructions over the telephone or the Internet, we have procedures to provide reasonable assurance that the transactions executed are genuine. Thus, we are not responsible for any claim, loss or expense from any error resulting from instructions received over the telephone or the Internet. If we fail to follow our procedures, we may be liable for any losses due to unauthorized or fraudulent instructions. We cannot guarantee that we will be able to accept telephone, fax and/or internet transfer instructions at all times. Any telephone, fax or computer system, whether it is yours, your broker-dealer's, or ours, can experience outages or delays for a variety of reasons and may prevent our processing of your transfer request. We reserve the right to modify, suspend or terminate telephone, fax and/or internet transfer privileges at any time. If telephone, fax and/or internet access is unavailable, you should make your transfer request in writing by U.S. Mail to our Annuity Service Center. Any transfer request will be priced as of the day it is received by us in Good Order if the request is received before Market Close. If the transfer request is received after Market Close, the request will be priced as of the next business day. Funds already in your contract cannot be transferred into the DCA Fixed Accounts. 19 You must transfer at least $100 per transfer. If less than $100 remains in any Variable Portfolio or Fixed Account after a transfer, that amount must be transferred as well. There is no charge for your first 15 transfers. We charge for transfers in excess of 15 in any contract year. The fee is $25 for each transfer exceeding this limit. SHORT-TERM TRADING POLICIES We do not want to issue this variable annuity contract to contract owners engaged in trading strategies that seek to benefit from short-term price fluctuations or price inefficiencies in the Variable Portfolios of this product ("Short-Term Trading") and we discourage Short-Term Trading as more fully described below. However, we cannot always anticipate if a potential contract owner intends to engage in Short-Term Trading. Short-Term Trading may create risks that may result in adverse effects on investment return of the Underlying Fund in which a Variable Portfolio invests. Such risks may include, but are not limited to: (1) interference with the management and planned investment strategies of an Underlying Fund; (2) dilution of the interests in the Underlying Fund due to practices such as "arbitrage"; and/or (3) increased brokerage and administrative costs due to forced and unplanned fund turnover. These circumstances may reduce the value of the Variable Portfolio. In addition to negatively impacting the Owner, a reduction in contract value may also be harmful to Annuitants and/or Beneficiaries. We have adopted the following administrative procedures to discourage Short-Term Trading which are summarized below. The first 5 transfers in a rolling 6-month look-back period ("6-Month Rolling Period") can be made by telephone, through the Company's website, or in writing by mail or by facsimile. The 5th transfer in a 6-Month Rolling Period triggers the U.S. Mail method of transfer. Therefore, once you make the 5th transfer in a 6-Month Rolling Period, all transfers must be submitted by United States Postal Service first-class mail ("U.S. Mail") for twelve months from the date of your 5th transfer request ("Standard U.S. Mail Policy"). For example, if you made a transfer on August 16, 2011 and within the previous six months (from February 17, 2011 forward) you made 5 transfers including the August 16th transfer, then all transfers made for twelve months after August 16, 2011 must be submitted by U.S. Mail (from August 17, 2011 through August 16, 2012). U.S. Mail includes any postal service delivery method that offers delivery no sooner than United States Postal Service first-class mail, as determined in the Company's sole discretion. We will not accept transfer requests sent by any other medium except U.S. Mail during this 12-month period. Transfer requests required to be submitted by U.S. Mail can only be cancelled by a written request sent by U.S. Mail with the appropriate paperwork received prior to the execution of the transfer. All transfers made on the same day prior to Market Close are considered one transfer request for purposes of applying the Short-Term Trading policy and calculating the number of free transfers. Transfers resulting from your participation in the DCA or Automatic Asset Rebalancing programs are not included for the purposes of determining the number of transfers before applying the Standard U.S. Mail Policy. We apply the Standard U.S. Mail Policy uniformly and consistently to all contract owners except for omnibus group contracts as described below. We believe that the Standard U.S. Mail Policy is a sufficient deterrent to Short-Term Trading. However, we may become aware of transfer patterns among the Variable Portfolios and/or Fixed Accounts which appear to be Short-Term Trading or otherwise detrimental to the Variable Portfolios but have not yet triggered the limitations of the Standard U.S. Mail Policy described above. If such transfer activity comes to our attention, we may require you to adhere to our Standard U.S. Mail Policy prior to reaching the specified number of transfers ("Accelerated U.S. Mail Policy"). To the extent we become aware of Short-Term Trading activities which cannot be reasonably controlled solely by the Standard U.S. Mail Policy or the Accelerated U.S. Mail Policy, we reserve the right to evaluate, in our sole discretion, whether to: (1) impose further limits on the size, manner, number and/or frequency of transfers you can make; (2) impose minimum holding periods; (3) reject any Purchase Payment or transfer request; (4) terminate your transfer privileges; and/or (5) request that you surrender your contract. We will notify you in writing if your transfer privileges are terminated. In addition, we reserve the right not to accept or otherwise restrict transfers from a third party acting for you and not to accept pre- authorized transfer forms. 20 Some of the factors we may consider when determining whether to accelerate the Standard U.S. Mail Policy, reject transfers or impose other conditions on transfer privileges include: (1) the number of transfers made in a defined period; (2) the dollar amount of the transfer; (3) the total assets of the Variable Portfolio involved in the transfer and/or transfer requests that represent a significant portion of the total assets of the Variable Portfolio; (4) the investment objectives and/or asset classes of the particular Variable Portfolio involved in your transfers; (5) whether the transfer appears to be part of a pattern of transfers to take advantage of short-term market fluctuations or market inefficiencies; (6) the history of transfer activity in the contract or in other contracts we may offer; and/or (7) other activity, as determined by us, that creates an appearance, real or perceived, of Short-Term Trading or the possibility of Short-Term Trading. Notwithstanding the administrative procedures above, there are limitations on the effectiveness of these procedures. Our ability to detect and/or deter Short- Term Trading is limited by operational systems and technological limitations, as well as our ability to predict strategies employed by contract owners (or those acting on their behalf) to avoid detection. We cannot guarantee that we will detect and/or deter all Short-Term Trading and it is likely that some level of Short-Term Trading will occur before it is detected and steps are taken to deter it. To the extent that we are unable to detect and/or deter Short-Term Trading, the Variable Portfolios may be negatively impacted as described above. Additionally, the Variable Portfolios may be harmed by transfer activity related to other insurance companies and/or retirement plans or other investors that invest in shares of the Underlying Fund. Moreover, our ability to deter Short- Term Trading may be limited by decisions by state regulatory bodies and court orders which we cannot predict. You should be aware that the design of our administrative procedures involves inherently subjective decisions which we attempt to make in a fair and reasonable manner consistent with the interests of all Owners of this contract. We do not enter into agreements with contract owners whereby we permit or intentionally disregard Short-Term Trading. The Standard and Accelerated U.S. Mail Policies are applied uniformly and consistently to contract owners utilizing third party trading services/strategies performing asset allocation services for a number of contract owners at the same time. You should be aware that such third party trading services may engage in transfer activities that can also be detrimental to the Variable Portfolios, including trading relatively large groups of contracts simultaneously. These transfer activities may not be intended to take advantage of short-term price fluctuations or price inefficiencies. However, such activities can create the same or similar risks as Short-Term Trading and negatively impact the Variable Portfolios as described above. Omnibus group contracts may invest in the same Underlying Funds available in your contract but on an aggregate, not individual basis. Thus, we have limited ability to detect Short-Term Trading in omnibus group contracts and the Standard U.S. Mail Policy does not apply to these contracts. Our inability to detect Short-Term Trading may negatively impact the Variable Portfolios as described above. WE RESERVE THE RIGHT TO MODIFY THE POLICIES AND PROCEDURES DESCRIBED IN THIS SECTION AT ANY TIME. To the extent that we exercise this reservation of rights, we will do so uniformly and consistently unless we disclose otherwise. UNDERLYING FUNDS' SHORT-TERM TRADING POLICIES Please note that the Underlying Funds have their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. We reserve the right to enforce these Underlying Fund policies and procedures, including, but not limited to, the right to collect a redemption fee on shares of the Underlying Fund if imposed by such Fund's Board of Trustees/Directors. As of the date of this prospectus, none of the Underlying Funds impose a redemption fee. We also reserve the right to reject, with or without prior notice, any purchase, transfer or allocation into a Variable Portfolio if the corresponding Underlying Fund will not accept such purchase, 21 transfer or allocation for any reason. The prospectuses for the Underlying Funds describe these procedures, which may be different among Underlying Funds and may be more or less restrictive than our policies and procedures. Under rules adopted by the Securities and Exchange Commission, we also have written agreements with the Underlying Funds that obligate us to, among other things, provide the Underlying Funds promptly upon request certain information about you (e.g., your social security number) and your trading activity. In addition, we are obligated to execute instructions from the Underlying Funds to restrict or prohibit further purchases or transfers in an Underlying Fund under certain circumstances. Many investments in the Underlying Funds outside of these contracts are omnibus orders from intermediaries such as other separate accounts or retirement plans. If an Underlying Fund's policies and procedures fail to successfully detect and discourage Short-Term trading, there may be a negative impact to the owners of the Underlying Fund. If an Underlying Fund believes that an omnibus order we submit may reflect transfer requests from owners engaged in Short-Term Trading, the Underlying Fund may reject the entire omnibus order and delay or prevent us from implementing your transfer request. TRANSFERS DURING THE INCOME PHASE During the Income Phase, only one transfer per month is permitted between the Variable Portfolios. No other transfers are allowed during the Income Phase. Transfers will be effected for the last NYSE business day of the month in which we receive your request for the transfer. -------------------------------------------------------------------------------- INCOME OPTIONS -------------------------------------------------------------------------------- THE INCOME PHASE WHAT IS THE INCOME PHASE? During the Income Phase, we use the money accumulated in your contract to make regular payments to you. This is known as "annuitizing" your contract. At this point, the Accumulation Phase ends. You will no longer be able to take withdrawals of contract value and all other features and benefits of your contract will terminate, including your ability to surrender your contract. BEGINNING THE INCOME PHASE IS AN IMPORTANT EVENT. YOU HAVE DIFFERENT OPTIONS AVAILABLE TO YOU. YOU SHOULD DISCUSS YOUR OPTIONS WITH YOUR FINANCIAL REPRESENTATIVE AND/OR TAX ADVISOR SO THAT TOGETHER YOU MAY MAKE THE BEST DECISION FOR YOUR PARTICULAR CIRCUMSTANCES. WHEN DOES THE INCOME PHASE BEGIN? Generally, you can annuitize your contract any time after your second contract anniversary ("Annuity Date") and on or before the Latest Annuity Date, defined below, by completing and mailing the Annuity Option Selection Form to our Annuity Service Center. If you do not request to annuitize your contract on the Annuity Date of your choice, your contract will be annuitized on the Latest Annuity Date, except as specified below. Your Latest Annuity Date is defined as the first business day of the month following your 85th birthday. If your contract is jointly owned, the Latest Annuity Date is based on the older Annuitant's date of birth. HOW DO I ELECT TO BEGIN THE INCOME PHASE? First, you must select one of the income payment options, listed below, that best meets your needs by mailing a completed Annuity Option Selection Form to our Annuity Service Center. If you do not select an income payment option, your contract will be annuitized in accordance with the default income payment option specified under Income Payment Options below. WHAT IS THE IMPACT ON MY DEATH BENEFIT WHEN MY CONTRACT IS ANNUITIZED? Upon annuitizing the contract, the death benefit will terminate. PLEASE SEE DEATH BENEFITS ABOVE. 22 CAN I EXTEND THE ACCUMULATION PHASE PAST THE LATEST ANNUITY DATE? If you do not begin the Income Phase earlier, income payments must begin on your Latest Annuity Date. We may offer you the opportunity to extend your Accumulation Phase up to age 95 at our sole discretion. Currently, we allow extensions of the Accumulation Phase, in one-year increments ("Extension Periods"), provided your contract is eligible for an Extension Period as described below. If you enter an Extension Period, your contract remains in the Accumulation Phase, you retain all current benefits, and can choose to surrender or annuitize in the future. If you do not wish to enter or continue an Extension Period, you can elect to annuitize by mailing a completed Annuity Option Selection Form to our Annuity Service Center. Accepting our offer to extend the Accumulation Phase does not preclude you from requesting to annuitize your contract prior to the end of the Extension Period. EXTENSION PERIODS WILL NOT BE OFFERED BEYOND THE FIRST BUSINESS DAY OF THE MONTH FOLLOWING YOUR 95TH BIRTHDAY. If your Accumulation Phase is extended to the first business day of the month following your 95th birthday but you have not selected an Annuity Payout Option by that date, we will automatically annuitize your contract using the default option specified below. We will contact you prior to your Latest Annuity Date to inform you of Extension Periods, if available. Currently, you may be eligible for an Extension Period provided you do not have a Leveraged Death Benefit. A Leveraged Death Benefit is determined as follows: (1) a withdrawal is taken after April 30, 2012 (unless taken as a systematic withdrawal of the RMD for this contract); and (2) the death benefit to contract value ratio is 300% or more, on the date we determine eligibility for an Extension Period. If we determine you are not eligible for an Extension Period due to having a Leveraged Death Benefit, as defined above, we will not allow any extensions of your Accumulation Phase, and your contract will be annuitized on the Latest Annuity Date. Subsequently, if we determine you are no longer eligible for an Extension Period, we will then annuitize your contract on the first business day of the month following the end of the current Extension Period in accordance with the default income payment option specified below and in your contract. You may select another income payment option so long as you notify us in writing at least 30 days prior to that date. We reserve the right, at our sole discretion, to refuse to offer Extension Periods, regardless of whether we may have granted Extension Periods in the past to you or other similarly situated contract owners. INCOME OPTIONS Currently, this contract offers three income options. Other payout options may be available. Contact the Annuity Service Center for more information. If you elect to receive income payments but do not select an option, your income payments will be made monthly and in accordance with Option 1 for a period of 10 years. We base our calculation of income payments on the life of the Annuitant and the annuity rates set forth in your contract. As the contract owner, you may change the Annuitant at any time prior to the Annuity Date. You must notify us if the Annuitant dies before the Annuity Date and designate a new Annuitant. OPTION 1 -- LIFE ANNUITY WITH 10 OR 20 YEARS GUARANTEED This option provides income payments for the longer of (1) the life of the Annuitant or (2) 10 or 20 years, depending on the number of years you select. Under this option, we guarantee that income payments will be made for at least 10 or 20 years. If the Annuitant dies before all guaranteed income payments are made, the remaining income payments go to the Beneficiary under your contract. OPTION 2 -- JOINT AND SURVIVOR LIFE ANNUITY This option provides income payments for the life of the Annuitant and for the life of another designated person. Upon the death of either person, we will continue to make income payments during the lifetime of the survivor. Income payments stop whenever the survivor dies. 23 OPTION 3 -- INCOME FOR A SPECIFIED PERIOD This option provides income payments for a guaranteed period ranging from 5 to 30 years. If the Annuitant dies before all of the guaranteed income payments are made, the remaining income payments will be made to the Beneficiary under your contract. Additionally, if variable income payments are elected under this option, you (or the Beneficiary under the contract if the Annuitant dies prior to all guaranteed payments being made) may redeem the contract value after the Annuity Date. The amount available upon such redemption will be the discounted present value of any remaining guaranteed payments. Under this option, if your Purchase Payments were made in the contract year in which income payments begin or in any of the four preceding contract years, we may assess an annuity charge. This annuity charge equals the withdrawal charge that would apply to those purchase payments if your contract was being surrendered. If this option is elected by your Beneficiary under the death benefit, we will not assess an annuity charge. The value of an Annuity Unit, regardless of the option chosen, takes into account the Mortality and Expense Risk Charge. Since Option 3 does not contain an element of mortality risk, no benefit is derived from this charge. Please read the Statement of Additional Information for a more detailed discussion of the income options. ALLOCATION OF ANNUITY PAYMENTS You can choose income payments that are fixed, variable or both. If payments are fixed, the Company guarantees the amounts of each payment. If the payments are variable, the amounts are not guaranteed. They will go up and/or down based upon the performance of the Variable Portfolio(s) in which you invest. FIXED OR VARIABLE INCOME PAYMENTS Unless otherwise elected, if at the date when income payments begin you are invested in the Variable Portfolio(s) only, your income payments will be variable and if your money is only in the fixed account at that time, your income payments will be fixed in amount. If you are invested in both fixed and variable options at the time you begin the Income Phase, a portion of your income payments will be fixed and a portion will be variable unless otherwise elected. You may send us a written request to convert variable income payments to fixed income payments. However, you may not convert fixed income payments to variable income payments. We make income payments on a monthly basis. You instruct us to send you a check or to have the payments directly deposited into your bank account. If state law allows, we distribute annuities with a contract value of $5,000 or less in a lump sum. Also, if the selected income option results in income payments of less than $50 per payment, the frequency of your payments may be decreased, state law allowing. Your income payments will vary if you are invested in the Variable Portfolio(s) after the Annuity Date depending on four factors: - for life options, your age when payments begin, and; - the value of your contract in the Variable Portfolios on the Annuity Date, and; - the 5% assumed investment rate used in the annuity table for the contract, and; - the performance of the Variable Portfolios in which you are invested during the time you receive income payments. If you are invested in both the fixed account options and the Variable Portfolios after the Annuity Date, the allocation of funds between the fixed and variable options also impacts the amount of your income payments. TRANSFERS DURING THE INCOME PHASE During the Income Phase, you may transfer funds to the fixed account and/or among the Variable Portfolios. Transfers during the Income Phase are subject to the following limitations: (1) You may not transfer funds to a Variable Portfolio during the first year your contract is in the Income Phase. After the first year, you may only make one transfer per Variable Portfolio during each contract year. (2) When you make a transfer, you must transfer the entire value of a Variable Portfolio. 24 (3) Your transfer request must be in writing. We must receive your transfer request during the 45 days preceding your contract anniversary. Amounts are transferred at the next Annuity Unit value calculation date. (4) You may not transfer funds from the fixed account option. However, amounts may be transferred from the Variable Portfolios to the fixed account option. (5) We reserve the right to modify, suspend or terminate this transfer privilege at any time. DEFERMENT OF PAYMENTS We may defer making fixed income payments for up to six months, or less if required by law. Interest is credited to you during the deferral period. -------------------------------------------------------------------------------- ADMINISTRATION -------------------------------------------------------------------------------- ADMINISTRATION We are responsible for the administrative servicing of your contract. Please contact our Annuity Service Center at (800) 445-7862, if you have any comments, questions or service requests. We send out transaction confirmations and quarterly statements. During the Accumulation Phase, you will receive confirmation of transactions for your contract. Transactions made pursuant to contractual or systematic agreements, such as dollar cost averaging, may be confirmed quarterly. Purchase Payments received through the automatic payment plan or a salary reduction arrangement, may also be confirmed quarterly. For all other transactions, we send confirmations. It is your responsibility to review these documents carefully and notify our Annuity Service Center of any inaccuracies immediately. We investigate all inquiries. Depending on the facts and circumstances, we may retroactively adjust your contract, provided you notify us of your concern within 30 days of receiving the transaction confirmation or quarterly statement. Any other adjustments we deem warranted are made as of the time we receive notice of the error. If you fail to notify our Annuity Service Center of any mistakes or inaccuracy within 30 days of receiving the transaction confirmation or quarterly statement, we will deem you to have ratified the transaction. -------------------------------------------------------------------------------- TAXES -------------------------------------------------------------------------------- THE BASIC SUMMARY BELOW ADDRESSES BROAD FEDERAL TAXATION MATTERS BASED ON THE INTERNAL REVENUE CODE ("IRC"), TREASURY REGULATIONS AND INTERPRETATIONS EXISTING AS OF THE DATE OF THIS PROSPECTUS AND GENERALLY DOES NOT ADDRESS STATE OR LOCAL TAXATION ISSUES OR QUESTIONS. IT IS NOT TAX ADVICE, NOR DOES IT INCLUDE ALL THE FEDERAL TAX RULES THAT MAY AFFECT YOU AND YOUR CONTRACT. WE CAUTION YOU TO SEEK COMPETENT TAX ADVICE ABOUT YOUR OWN CIRCUMSTANCES FROM A QUALIFIED TAX ADVISOR. WE DO NOT GUARANTEE THE TAX STATUS OR TREATMENT OF YOUR ANNUITY. TAX LAWS CONSTANTLY CHANGE; THEREFORE, WE CANNOT GUARANTEE THAT INFORMATION CONTAINED HEREIN IS COMPLETE AND/OR ACCURATE. FEDERAL INCOME TAX TREATMENT OF THE CONTRACT IS SOMETIMES UNCERTAIN AND CONGRESS, THE INTERNAL REVENUE SERVICE ("IRS") AND/OR THE COURTS MAY MODIFY TAX LAWS AND TREATMENT RETROACTIVELY. WE HAVE INCLUDED AN ADDITIONAL DISCUSSION REGARDING TAXES IN THE STATEMENT OF ADDITIONAL INFORMATION. ANNUITY CONTRACTS IN GENERAL The IRC provides for special rules regarding the tax treatment of annuity contracts. Generally, taxes on the earnings in your annuity contract are deferred until you take the money out. Qualified retirement investment arrangements that satisfy specific tax and ERISA requirements automatically provide tax deferral regardless of whether the underlying contract is an annuity, a trust, or a custodial account. Different rules and tax treatment apply depending on how you take the money out and whether your contract is Qualified or Non-Qualified. If you do not purchase your contract under an employer-sponsored retirement plan, or an Individual Retirement Account or Annuity ("IRA"), your contract is referred to as a Non-Qualified contract. In general, your cost basis in 25 a Non-Qualified contract is equal to the Purchase Payments you put into the contract. You have already been taxed on the cost basis in your Non-Qualified contract. If you purchase your contract under a qualified employer-sponsored retirement plan or an IRA, your contract is referred to as a Qualified contract. Examples of qualified plans or arrangements are: traditional (pre-tax) IRAs, Tax-Sheltered Annuities (also referred to as 403(b) annuities or 403(b) contracts), plans of self-employed individuals (often referred to as H.R. 10 Plans or Keogh Plans), pension and profit sharing plans including 401(k) plans, and governmental 457(b) deferred compensation plans. Typically, for employer plans and tax deductible IRA contributions, you have not paid any tax on the Purchase Payments used to buy your contract and therefore, you have no cost basis in your contract. AGGREGATION OF CONTRACTS Federal tax rules generally require that all Non-Qualified contracts issued after October 21, 1988 by the same company to the same policyholder during the same calendar year will be treated as one annuity contract for purposes of determining the taxable amount upon distribution. TAX TREATMENT OF DISTRIBUTIONS - NON-QUALIFIED CONTRACTS If you make partial or total withdrawals from a Non-Qualified contract, the IRC generally treats such withdrawals as coming first from taxable earnings and then coming from your Purchase Payments. Purchase Payments made prior to August 14, 1982, however, are an important exception to this general rule, and for tax purposes generally are treated as being distributed first, before either the earnings on those contributions, or other Purchase Payments and earnings in the contract. If you annuitize your contract, a portion of each annuity income payment will be considered, for tax purposes, to be a return of a portion of your Purchase Payment, generally until you have received all of your Purchase Payment. Any portion of each annuity income payment that is considered a return of your Purchase Payment will not be taxed. Additionally, the taxable portion of any withdrawals, whether annuitized or other withdrawals, generally is subject to applicable state and/or local income taxes, and may be subject to an additional 10% penalty tax unless withdrawn in conjunction with the following circumstances: - after attaining age 59 1/2; - when paid to your Beneficiary after you die; - after you become disabled (as defined in the IRC); - when paid as a part of a series of substantially equal periodic payments (not less frequently than annually) made for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary for a period of 5 years or attainment of age 59 1/2, whichever is later; - under an immediate annuity contract; - when attributable to Purchase Payments made prior to August 14, 1982. On March 30, 2010, the Health Care and Education Reconciliation Act ("Reconciliation Act") was signed into law. Among other provisions, the Reconciliation Act imposes a new tax on net investment income. This tax, which goes into effect in 2013, is at the rate of 3.8% of applicable thresholds for Modified Adjusted Gross Income ("MAGI") ($250,000 for joint filers; $125,000 for married individuals filing separately; and, $200,000 for individual filers). An individual with MAGI in excess of the threshold will be required to pay this new tax on net investment income in excess of the applicable MAGI threshold. For this purpose, net investment income generally will include taxable withdrawals from a Non-Qualified contract, as well as other taxable amounts including amounts taxed annually to an owner that is not a natural person (see Contracts Owned by a Trust or Corporation). This new tax generally does not apply to Qualified contracts, however taxable distributions from such contracts may be taken into account in determining the applicability of the MAGI thresholds. A transfer of contract value to another annuity contract generally will be tax reported as a distribution unless we have sufficient information to confirm that the transfer qualifies as an exchange under IRC Section 1035 (a "1035 exchange"). 26 TAX TREATMENT OF DISTRIBUTIONS - QUALIFIED CONTRACTS Generally, you have not paid any taxes on the Purchase Payments used to buy a Qualified contract. As a result, most amounts withdrawn from the contract or received as annuity income payments will be taxable income. Exceptions to this general rule include withdrawals attributable to after-tax amounts permitted under the employer's plan. The taxable portion of any withdrawal or income payment from a Qualified contract will be subject to an additional 10% penalty tax, under the IRC, except in the following circumstances: - after attainment of age 59 1/2; - when paid to your Beneficiary after you die; - after you become disabled (as defined in the IRC); - as a part of a series of substantially equal periodic payments (not less frequently than annually) made for your life (or life expectancy) or the joint lives (or joint expectancies) of you and your designated Beneficiary for a period of 5 years or attainment of age 59 1/2, whichever is later; - payments to employees after separation from service after attainment of age 55 (does not apply to IRAs); - dividends paid with respect to stock of a corporation described in IRC Section 404(k); - for payment of medical expenses to the extent such withdrawals do not exceed limitations set by the IRC for deductible amounts paid during the taxable year for medical care; - payments to alternate payees pursuant to a qualified domestic relations order (does not apply to IRAs); - for payment of health insurance if you are unemployed and meet certain requirements; - distributions from IRAs for qualifying higher education expenses or first home purchases; - amounts distributed from a Code Section 457(b) plan other than to the extent such amounts in a governmental Code Section 457(b) plan represent rollovers from an IRA or employer-sponsored plan to which the 10% penalty would otherwise apply and which are treated as distributed from a Qualified plan for purposes of the premature distribution penalty. - The Pension Protection Act of 2006 created other distribution events and exemptions from the 10% early withdrawal penalty tax. These include payments to certain reservists called up for active duty after September 11, 2001 and payments up to $3,000 per year for health, life and accident insurance by certain retired public safety officers, which are federal income tax-free. The IRC limits the withdrawal of an employee's voluntary Purchase Payments from a Tax-Sheltered Annuity (TSA) contract. Generally, withdrawals can only be made when an Owner: (1) reaches age 59 1/2; (2) severs employment with the employer; (3) dies; (4) becomes disabled (as defined in the IRC); or (5) experiences a financial hardship (as defined in the IRC). In the case of hardship, the owner can only withdraw Purchase Payments. Additional plan limitations may also apply. Amounts held in a TSA contract as of December 31, 1988 are not subject to these restrictions except as otherwise imposed by the plan. Qualifying transfers (including intra-plan exchanges) of amounts from one TSA contract or account to another TSA contract or account, and qualifying transfers to a state defined benefit plan to purchase service credits, where permitted under the employer's plan, generally are not considered distributions, and thus are not subject to these withdrawal limitations. If amounts are transferred to a contract with lesser IRC withdrawal limitations than the account from which it is transferred, the more restrictive withdrawal limitations will continue to apply. Transfers among 403(b) annuities and/or 403(b)(7) custodial accounts generally are subject to rules set out in the plan, the Code, regulations, IRS pronouncements, and other applicable legal authorities. On July 26, 2007, the Department of the Treasury published final 403(b) regulations that were largely effective on January 1, 2009. These comprehensive regulations include several new rules and requirements, such as a requirement that employers maintain their 403(b) plans pursuant to a written plan. Subsequent IRS guidance and/or the terms of the written plan may impose new restrictions on both new and existing contracts, including restrictions on the availability of loans, distributions, transfers and exchanges, regardless of when a contract was purchased. Effective January 1, 2009, the Company no longer accepts new premiums (including contributions, 27 transfers and exchanges) into new or existing 403(b) contracts. You may wish to discuss the new regulations and/or the general information above with your tax adviser. Withdrawals from other Qualified contracts are often limited by the IRC and by the employer's plan. If you are purchasing the contract as an investment vehicle for a trust under a Qualified Plan, you should consider that the contract does not provide any additional tax-deferral benefits beyond the treatment provided by the trust itself. In addition, if the contract itself is a qualifying arrangement (as with a 403(b) annuity or Individual Retirement Annuity), the contract generally does not provide tax deferral benefits beyond the treatment provided to alternative qualifying arrangements such as trusts or custodial accounts. However, in both cases the contract offers features and benefits that other investments may not offer. You and your financial representative should carefully consider whether the features and benefits, including the investment options, lifetime annuity income options, and protection through living benefits, death benefits and other benefits provided under an annuity contract issued in connection with a Qualified contract are suitable for your needs and objectives and are appropriate in light of the expense. REQUIRED MINIMUM DISTRIBUTIONS Generally, the IRC requires that you begin taking annual distributions from Qualified annuity contracts by April 1 of the calendar year following the later of (1) the calendar year in which you attain age 70 1/2 or (2) the calendar year in which you separate from service from the employer sponsoring the plan. If you own a traditional IRA, you must begin receiving minimum distributions by April 1 of the calendar year following the calendar year in which you reach age 70 1/2. If you choose to delay your first distribution until the year after the year in which you reach 70 1/2 or separate from service, as applicable, then you will be required to withdraw your second required minimum distribution on or before December 31 in that same year. For each year thereafter, you must withdraw your required minimum distribution by December 31. If you own more than one IRA, you may be permitted to take your annual distributions in any combination from your IRAs. A similar rule applies if you own more than one TSA. However, you cannot satisfy this distribution requirement for your IRA contract by taking a distribution from a TSA, and you cannot satisfy the requirement for your TSA by taking a distribution from an IRA. You may be subject to a surrender charge on withdrawals taken to meet minimum distribution requirements, if the withdrawals exceed the contract's maximum penalty free amount. Failure to satisfy the minimum distribution requirements may result in a tax penalty. You should consult your tax adviser for more information. You may elect to have the required minimum distribution amount on your contract calculated and withdrawn each year under the automatic withdrawal option. You may select monthly, quarterly, semiannual, or annual withdrawals for this purpose. This service is provided as a courtesy and we do not guarantee the accuracy of our calculations. Accordingly, we recommend you consult your tax adviser concerning your required minimum distribution. You may terminate your election for automated minimum distribution at any time by sending a written request to our Annuity Service Center. We reserve the right to change or discontinue this service at any time. IRS regulations require that the annuity contract value used to determine required minimum distributions include the actuarial value of other benefits under the contract, such as optional death benefits and/or living benefits. As a result, if you request a minimum distribution calculation, or if one is otherwise required to be provided, in those specific circumstances where this requirement applies, the calculation may be based upon a value that is greater than your contract value, resulting in a larger required minimum distribution. This regulation does not apply to required minimum distributions made under an irrevocable annuity income option. You should discuss the effect of these new regulations with your tax adviser. TAX TREATMENT OF DEATH BENEFITS The taxable amount of any death benefits paid under the contract are taxable to the Beneficiary. The rules governing the taxation of payments from an annuity contract, as discussed above, generally apply whether the death benefit is paid as lump sum or annuity income payments. Estate taxes may also apply. 28 Enhanced death benefits are used as investment protection and are not expected to rise to any adverse tax effects. However, the IRS could take the position that some or all of the charges for these death benefits should be treated as a partial withdrawal from the contract. In that case, the amount of the partial withdrawal may be includible in taxable income and subject to the 10% penalty if the owner is under 59 1/2, unless another exception applies. If you own a Qualified contract and purchase these enhanced death benefits, the IRS may consider these benefits "incidental death benefits" or "life insurance." The IRC imposes limits on the amount of the incidental benefits and/or life insurance allowable for Qualified contracts and the employer-sponsored plans under which they are purchased. If the death benefit(s) selected by you are considered to exceed these limits, the benefit(s) could result in taxable income to the owner of the Qualified contract, and in some cases could adversely impact the qualified status of the Qualified contract or the plan. You should consult your tax adviser regarding these features and benefits prior to purchasing a contract. CONTRACTS OWNED BY A TRUST OR CORPORATION A Trust or Corporation or other owner that is not a natural person ("Non-Natural Owner") that is considering purchasing this contract should consult a tax adviser. Generally, the IRC does not confer tax-deferred status upon a Non-Qualified contract owned by a Non-Natural Owner for federal income tax purposes. Instead in such cases, the Non-Natural Owner pays tax each year on the contract's value in excess of the owner's cost basis, and the contract's cost basis is then increased by a like amount. However, this treatment is not applied to a contract held by a trust or other entity as an agent for a natural person nor to contracts held by Qualified Plans. Please see the Statement of Additional Information for a more detailed discussion of the potential adverse tax consequences associated with non-natural ownership of a Non-Qualified annuity contract. GIFTS, PLEDGES AND/OR ASSIGNMENTS OF A CONTRACT If you transfer ownership of your Non-Qualified contract to a person other than your spouse (or former spouse incident to divorce) as a gift you will pay federal income tax on the contract's cash value to the extent it exceeds your cost basis. The recipient's cost basis will be increased by the amount on which you will pay federal taxes. In addition, the IRC treats any assignment or pledge (or agreement to assign or pledge) of any portion of a Non-Qualified contract as a withdrawal. Please see the Statement of Additional Information for a more detailed discussion regarding potential tax consequences of gifting, assigning, or pledging a Non-Qualified contract. The IRC prohibits Qualified annuity contracts including IRAs from being transferred, assigned or pledged as security for a loan. This prohibition, however, generally does not apply to loans under an employer-sponsored plan (including loans from the annuity contract) that satisfy certain requirements, provided that: (a) the plan is not an unfunded deferred compensation plan; and (b) the plan funding vehicle is not an IRA. DIVERSIFICATION AND INVESTOR CONTROL The IRC imposes certain diversification requirements on the underlying investments for a variable annuity. We believe that the manager of the Underlying Funds monitors the Funds so as to comply with these requirements. To be treated as a variable annuity for tax purposes, the Underlying Funds must meet these requirements. The diversification regulations do not provide guidance as to the circumstances under which you, and not the Company, would be considered the owner of the shares of the Variable Portfolios under your Non-Qualified contract, because of the degree of control you exercise over the underlying investments. This diversification requirement is sometimes referred to as "investor control." The determination of whether you possess sufficient incidents of ownership over Variable Portfolio assets to be deemed the owner of the Underlying Funds depends on all of the relevant facts and circumstances. However, IRS Revenue Ruling 2003-91 provides that an annuity owner's ability to choose among general investment strategies either at the time of the initial purchase or thereafter, does not constitute control sufficient to cause the contract holder to be treated as the owner of the Variable Portfolios. The Revenue Ruling provides that if, based on all the facts and circumstances, you do not have direct or indirect control over the Separate Account or any Variable Portfolio asset, then you do not possess sufficient incidents of ownership over the assets supporting the annuity to be deemed the owner of the assets for federal income tax purposes. If any guidance is provided which is considered a new position, then the guidance should generally be applied prospectively. 29 However, if such guidance is considered not to be a new position, it may be applied retroactively. This would mean that you, as the owner of the Non- Qualified contract, could be treated as the owner of the Underlying Fund. Due to the uncertainty in this area, we reserve the right to modify the contract in an attempt to maintain favorable tax treatment. These investor control limitations generally do not apply to Qualified contracts, which are referred to as "Pension Plan Contracts" for purposes of this rule, although the limitations could be applied to Qualified contracts in the future. -------------------------------------------------------------------------------- OTHER INFORMATION -------------------------------------------------------------------------------- THE DISTRIBUTOR SunAmerica Capital Services, Inc. ("SACS"), Harborside Financial Center, 3200 Plaza 5, Jersey City, NJ 07311-4992, distributes the contracts. SACS, an affiliate of the Company, is a registered broker-dealer under the Securities Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority ("FINRA"). No underwriting fees are retained by SACS in connection with the distribution of the contracts. THE COMPANY American General Life Insurance Company ("AGL") is a stock life insurance company organized under the laws of the state of Texas. AGL's home office is 2727-A Allen Parkway, Houston, Texas 77019-2191. AGL is 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. Effective December 31, 2012, SunAmerica Annuity and Life Assurance Company ("SunAmerica Annuity"), an affiliate of AGL, merged with and into AGL ("Merger"). Before the Merger, contracts in all states except New York were issued by SunAmerica Annuity. Upon the Merger, all contractual obligations of SunAmerica Annuity became obligations of AGL. Accordingly, all references in the prospectus to SunAmerica Annuity as the issuer of the Contracts and owner of the separate account assets are amended to refer to AGL. The Merger did not affect the terms of, or the rights and obligations under your contract, other than to reflect the change to the Company that provides your contract benefits from SunAmerica Annuity to AGL. You will receive a contract endorsement from AGL that reflects the change from SunAmerica Annuity to AGL. The Merger also did not result in any adverse tax consequences for any contract Owners. Until we update all the forms to reflect the SunAmerica Annuity merger into AGL, we may provide you with forms, statements or reports that still reflect SunAmerica Annuity as the issuer. You may also contact AGL at its Annuity Service Center, P.O. Box 54299, Los Angeles, California 90054-0299. Telephone Number: (800) 445-7862. OWNERSHIP STRUCTURE OF THE COMPANY AGL is an indirect, wholly owned subsidiary of American International Group, Inc. ("AIG"), a Delaware corporation. 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 contract 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. AIG is a leading international insurance organization serving customers in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. On September 22, 2008, AIG entered into a revolving credit facility ("FRBNY Credit Facility") with the Federal Reserve Bank of New York ("NY Fed"). On January 14, 2011, AIG completed a series of integrated transactions 30 (the "Recapitalization") to recapitalize AIG. In the Recapitalization, AIG repaid the NY Fed approximately $21 billion in cash, representing complete repayment of all amounts owing under the FRBNY Credit Facility, and the facility was terminated. As a result of the Recapitalization, AIG was controlled by the Department of Treasury. As of December 14, 2012, the Department of Treasury sold its remaining shares of AIG Common Stock. The transactions described above do not alter our obligations to you. 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. For information on how to locate these documents, SEE FINANCIAL STATEMENTS, BELOW. OPERATION OF THE COMPANY The operations of the Company are influenced by many factors, including general economic conditions, monetary and fiscal policies of the federal government, and policies of state and other regulatory authorities. The level of sales of the Company's financial and insurance products is influenced by many factors, including general market rates of interest, the strength, weakness and volatility of equity markets, terms and conditions of competing financial and insurance products and the relative value of such brands. The Company is exposed to market risk, interest rate risk, contract owner behavior risk and mortality/longevity risk. Market volatility may result in increased risks related to death and living guaranteed benefits on the Company's financial and insurance products, as well as reduced fee income in the case of assets held in separate accounts, where applicable. These guaranteed benefits are sensitive to equity market and other conditions. The Company primarily uses capital market hedging strategies to help cover the risk of paying guaranteed living benefits in excess of account values as a result of significant downturns in equity markets or as a result of other factors. The Company has treaties to reinsure a portion of the guaranteed minimum income benefits and guaranteed death benefits for equity and mortality risk on some of its older contracts. Such risk mitigation may or may not reduce the volatility of net income and capital and surplus resulting from equity market volatility. The Company is regulated for the benefit of contract owners by the insurance regulator in its state of domicile; and also by all state insurance departments where it is licensed to conduct business. The Company is required by its regulators to hold a specified amount of reserves in order to meet its contractual obligations to contract owners. Insurance regulations also require the Company to maintain additional surplus to protect against a financial impairment the amount of which is based on the risks inherent in the Company's operations. SEPARATE ACCOUNT Before December 31, 2012, Variable Annuity Account One was a separate account of SunAmerica Annuity, originally established under Arizona law on July 18, 1990 when it assumed the Separate Account, originally established under California law on November 30, 1989. On December 31, 2012, and in conjunction with the merger of AGL and SunAmerica Annuity, Variable Annuity Account One was transferred to and became a separate account of AGL under Texas law. It may be used to support the contract and other variable annuity contracts, and used for other permitted purposes. The Separate Account is registered with the SEC as a unit investment trust under the Investment Company Act of 1940, as amended. Purchase Payments you make that are allocated to the Variable Portfolios are invested in the Separate Account. The Company owns the assets in the Separate Account and invests them on your behalf, according to your instructions. Purchase Payments invested in the Separate Account are not guaranteed and will fluctuate with the value of the Variable Portfolios you select. Therefore, you assume all of the investment risk for contract value allocated to the Variable Portfolios. These assets are kept separate from our General Account and may not be charged with liabilities arising from any other business we may conduct. Additionally, income gains and losses (realized and unrealized) resulting from assets in the Separate Account are credited to or charged against the Separate Account without regard to other income gains or losses of the Company. You benefit from dividends received by the Separate Account through an increase in your unit value. The Company expects to benefit from these dividends through tax credits and corporate dividends received deductions; however, these corporate deductions are not passed back to the Separate Account or to contract Owners. 31 THE GENERAL ACCOUNT Obligations that are paid out of the Company's general account ("General Account") include any amounts you have allocated to available Fixed Accounts, including any interest credited thereon, and amounts owed under your contract for death and/or living benefits which are in excess of portions of contract value allocated to the Variable Portfolios. The obligations and guarantees under the contract are the sole responsibility of the Company. Therefore, payments of these obligations are subject to our financial strength and claims paying ability, and our long term ability to make such payments. The General Account assets are invested in accordance with applicable state regulation. These assets are exposed to the typical risks normally associated with a portfolio of fixed income securities, namely interest rate, option, liquidity and credit risk. The Company manages its exposure to these risks by, among other things, closely monitoring and matching the duration and cash flows of its assets and liabilities, monitoring or limiting prepayment and extension risk in its portfolio, maintaining a large percentage of its portfolio in highly liquid securities and engaging in a disciplined process of underwriting, reviewing and monitoring credit risk. With respect to the living benefits available in your contract, we also manage interest rate and certain market risk through a hedging strategy in the portfolio and we may require that those who elect a living benefit allocate their Purchase Payments in accordance with specified investment parameters. GUARANTEE OF INSURANCE OBLIGATIONS The Company's insurance policy obligations for individual and group contracts issued prior to December 29, 2006 at 4:00 p.m. Eastern Time, are guaranteed (the "Guarantee") by American Home Assurance Company ("American Home" or "Guarantor"). As of December 29, 2006 at 4:00 p.m. Eastern Time (the "Point of Termination"), the Guarantee by American Home was terminated for prospectively issued contracts. The Guarantee will not cover any contracts or certificates with a date of issue later than the Point of Termination. The Guarantee will continue to cover individual contracts, individual certificates and group unallocated contracts with a date of issue earlier than the Point of Termination until all insurance obligations under such contracts or certificates are satisfied in full. Insurance obligations include, without limitation, contract value invested in any available Fixed Accounts, death benefits, living benefits and annuity income options. The Guarantee does not guarantee contract value or the investment performance of the Variable Portfolios available under the contracts. The Guarantee provides that individual contract owners, individual certificate holders and group unallocated contract owners with a date of issue earlier than the Point of Termination can enforce the Guarantee directly. Guarantees for contracts and certificates issued prior to the Merger will continue after the Merger. As a result, the Merger of SunAmerica Annuity into AGL will not impact the insurance obligations under the Guarantee. PLEASE SEE THE COMPANY ABOVE FOR MORE DETAILS REGARDING THE MERGER. 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, 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, an affiliate of the Company, is an indirect wholly owned subsidiary of American International Group. LEGAL PROCEEDINGS The Company has received industry-wide regulatory inquiries, including a multi- state audit and market conduct examination covering compliance with unclaimed property laws and a directive from the New York Department of Financial Services regarding claims settlement practices and other related state regulatory inquiries. In the three months ended September 30, 2012, the Company, together with its life insurance company affiliates, worked to resolve multi-state examinations relating to the handling of unclaimed property and the use of the Social Security Administration Death Master File ("SSDMF") to identify death claims that have not been submitted to the Company or its insurance company affiliates, as the case may be, in the normal course of business. The final settlement of these examinations was announced on October 22, 2012. The Company is taking enhanced measures to, among other things, routinely match policyholder records with the SSDMF to determine if its insured parties, annuitants, or retained account holders have died and locate beneficiaries when a claim is payable. 32 Although the Company has reached final settlement on the multi-state examinations, it is possible that the settlement remediation requirements and/or remaining inquiries and other regulatory activity could result in the payment of additional death claims and additional escheatment of funds deemed abandoned under state laws. The Company believes that it has adequately reserved for such claims as of December 31, 2012, but there can be no assurance that the ultimate cost will not vary, perhaps materially, from its estimate. In addition, the state of West Virginia has two lawsuits pending against the Company relating to alleged violations of the West Virginia Uniform Unclaimed Property Act, in connection with policies issued by the Company and by American General Life and Accident Insurance Company (which merged into the Company on December 31, 2012). The State of West Virginia has also filed similar lawsuits against other insurers. In addition, the Company invested a total of $490.7 million in WG Trading Company, L.P. ("WG Trading") in two separate transactions. The Company received back a total amount of $567.2 million from these investments. In August 2010, a court-appointed Receiver filed a lawsuit against the Company and other defendants seeking to recover any funds distributed in excess of the entities' investments. The Receiver asserts that WG Trading and WG Trading Investors, L.P. were operated as a "ponzi" scheme. There are no pending legal proceedings affecting the Separate Account. Various lawsuits against the Company have arisen in the ordinary course of business. In addition, various federal, state and 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, market conduct exams or regulatory inquiries. As of December 31, 2012, 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 described below are important for you to consider. Information about how to obtain these financial statements is also provided below. THE COMPANY, THE SEPARATE ACCOUNT AND THE GUARANTOR The financial statements of the Company and the Separate Account are required to be made available because you must look to those entities directly to satisfy our obligations to you under the Contract. The financial statements of the Guarantor are provided in relation to its ability to meet its obligations under the Guarantee. PLEASE SEE GUARANTEE OF INSURANCE OBLIGATIONS ABOVE. INSTRUCTIONS TO OBTAIN FINANCIAL STATEMENTS The financial statements of the Company, Separate Account and Guarantor are available by requesting a free copy of the Statement of Additional Information by calling (800) 445-7862 or by using the request form on the last page of this prospectus. We encourage both existing and prospective contract Owners to read and understand the financial statements. You can also inspect and copy this information at SEC public facilities at the following locations: WASHINGTON, DISTRICT OF COLUMBIA 100 F. Street, N.E., Room 1580 Washington, DC 20549 CHICAGO, ILLINOIS 175 W. Jackson Boulevard Chicago, IL 60604 NEW YORK, NEW YORK 3 World Financial, Room 4300 New York, NY 10281 To obtain copies by mail, contact the Washington, D.C. location. After you pay the fees as prescribed by the rules and regulations of the SEC, the required documents are mailed. The Company will provide without charge to each 33 person to whom this prospectus is delivered, upon written or oral request, a copy of the above documents. Requests for these documents should be directed to the Company's Annuity Service Center, as follows: By Mail: Annuity Service Center P.O. Box 54299 Los Angeles, California 90054-0299 Telephone Number: (800) 445-7862 REGISTRATION STATEMENTS Registration statements under the Securities Act of 1933, as amended, related to the contracts 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, the Company and its general account, American Home, the Variable Portfolios and the contract, please refer to the registration statements and exhibits. -------------------------------------------------------------------------------- CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION -------------------------------------------------------------------------------- Additional information concerning the operations of the Separate Account is contained in the Statement of Additional Information ("SAI"), which is available without charge upon written request. Please use the request form at the back of this prospectus and send it to our Annuity Service Center at P.O. Box 54299, Los Angeles, California 90054-0299 or by calling (800) 445-7862. The contents of the SAI are listed below. STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
SEPARATE ACCOUNT AND THE COMPANY GENERAL ACCOUNT PERFORMANCE DATA ANNUITY INCOME PAYMENTS ANNUITY UNIT VALUE TAXES BROKER-DEALER FIRMS RECEIVING REVENUE SHARING PAYMENTS DISTRIBUTION OF CONTRACTS FINANCIAL STATEMENTS
34 -------------------------------------------------------------------------------- APPENDIX A - CONDENSED FINANCIAL INFORMATION --------------------------------------------------------------------------------
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------- -------- SEPARATE ACCOUNT DIVISION 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 ------------------------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------- -------- Capital Appreciation (Inception Date - 3/23/87) Beginning AUV............... $ 68.689 $ 52.383 $ 68.314 $ 73.501 $ 80.920 $ 88.909 $111.969 $ 65.859 $ 88.819 $107.493 Ending AUV.................. $ 52.383 $ 68.314 $ 73.501 $ 80.920 $ 88.909 $ 111.969 $ 65.859 $ 88.819 $107.493 $ 98.528 Ending Number of AUs (000).. 1,518,- 322 1,410,853 1,177,139 979,335 858,886 726,835 609,769 512,113 450,446 397,957 Government & Quality Bond (Inception Date - 9/5/84) Beginning AUV............... $ 35.240 $ 37.983 $ 38.399 $ 39.155 $ 39.630 $ 40.369 $ 42.311 $ 43.532 $ 44.758 $ 46.337 Ending AUV.................. $ 37.983 $ 38.399 $ 39.155 $ 39.630 $ 40.369 $ 42.311 $ 43.532 $ 44.758 $ 46.337 $ 48.931 Ending Number of AUs (000).. 1,616,- 580 1,320,128 1,114,432 931,893 793,638 700,074 656,931 568,709 510,239 560,506 Growth (Inception Date - 9/5/84) Beginning AUV............... $ 71.938 $ 55.218 $ 70.743 $ 77.330 $ 81.687 $ 91.253 $ 99.157 $ 58.257 $ 79.504 $ 89.488 Ending AUV.................. $ 55.218 $ 70.743 $ 77.330 $ 81.687 $ 91.253 $ 99.157 $ 58.257 $ 79.504 $ 89.488 $ 82.726 Ending Number of AUs (000).. 2,026,- 138 1,866,128 1,638,685 1,430,911 1,236,627 1,072,927 900,470 800,193 704,148 637,840 Growth and Income (Inception Date - 3/23/87) Beginning AUV............... $ 33.956 $ 25.360 $ 31.556 $ 33.025 $ 34.141 $ 37.427 $ 40.690 $ 24.354 $ 32.311 $ 35.627 Ending AUV.................. $ 25.360 $ 31.556 $ 33.025 $ 34.141 $ 37.427 $ 40.690 $ 24.354 $ 32.311 $ 35.627 $ 33.150 Ending Number of AUs (000).. 703,883 680,992 578,981 506,166 446,412 368,914 315,219 282,934 256,845 212,355 Money Market* (Inception Date - 12/31/84) Beginning AUV............... $ 20.581 $ 20.516 $ 20.294 $ 20.079 $ 20.247 $ 20.789 $ 21.400 $ 21.470 $ 21.182 N/A Ending AUV.................. $ 20.516 $ 20.294 $ 20.079 $ 20.247 $ 20.789 $ 21.400 $ 21.470 $ 21.182 $ 20.890 N/A Ending Number of AUs (000).. 1,136,- 720 872,401 757,922 631,527 596,146 574,250 595,898 391,817 346,183 N/A Multi-Asset (Inception Date - 3/23/87) Beginning AUV............... $ 34.112 $ 29.243 $ 33.712 $ 34.793 $ 35.634 $ 37.864 $ 40.504 $ 29.594 $ 36.200 $ 38.879 Ending AUV.................. 29.243 $ 33.712 $ 34.793 $ 35.634 $ 37.864 $ 40.504 $ 29.594 $ 36.200 $ 38.879 $ 37.902 Ending Number of AUs (000).. 2,041,- 766 1,801,693 1,561,606 1,325,894 1,150,010 980,546 831,959 709,896 628,617 563,317 Natural Resources (Inception Date - 1/4/88) Beginning AUV............... $ 23.109 $ 24.697 $ 35.974 $ 44.360 $ 63.917 $ 78.742 $108.864 $ 53.892 $ 84.002 $ 96.252 Ending AUV.................. $ 24.697 $ 35.974 $ 44.360 $ 63.917 $ 78.742 $ 108.864 $ 53.892 $ 84.002 $ 96.252 $ 75.682 Ending Number of AUs (000).. 300,630 271,802 283,334 294,608 245,441 209,955 172,425 165,628 142,447 114,972 Strategic Multi-Asset (Inception Date - 3/23/87) Beginning AUV............... $ 28.585 $ 24.706 $ 31.488 $ 34.521 $ 37.121 $ 40.789 $ 46.923 $ 32.671 $ 40.111 $ 44.675 Ending AUV.................. $ 24.706 $ 31.488 $ 34.521 $ 37.121 $ 40.789 $ 46.923 $ 32.671 $ 40.111 $ 44.675 $ 42.405 Ending Number of AUs (000).. 1,408,- 384 1,297,298 1,153,007 1,028,535 935,744 783,421 701,630 605,933 524,020 457,738
----------------- AUV -- Accumulation Unit Value AU -- Accumulation Unit * On November 18, 2011, the Money Market Variable Portfolio was liquidated and assets were transferred to the Government & Quality Bond Variable Portfolio. A-1 -------------------------------------------------------------------------------- APPENDIX B - STATE CONTRACT AVAILABILITY AND/OR VARIABILITY --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------- PROSPECTUS PROVISION AVAILABILITY OR VARIATION STATES --------------------------------------------------------------------------- ------------ Premium Tax We deduct premium tax charges of 0.50% for Qualified California contracts and 2.35% for Non-Qualified contracts based on contract value when you begin the Income Phase. --------------------------------------------------------------------------- ------------ Premium Tax We deduct premium tax charges of 0% for Qualified Maine contracts and 2.0% for Non-Qualified contracts based on total Purchase Payments when you begin the Income Phase. --------------------------------------------------------------------------- ------------ Premium Tax We deduct premium tax charges of 0% for Qualified Nevada contracts and 3.5% for Non-Qualified contracts based on contract value when you begin the Income Phase. --------------------------------------------------------------------------- ------------ Premium Tax For the first $500,000 in the contract, we deduct South premium tax charges of 0% for Qualified contracts Dakota and 1.25% for Non-Qualified contracts based on total Purchase Payments when you begin the Income Phase. For any amount in excess of $500,000 in the contract, we deduct front-end premium tax charges of 0% for Qualified contracts and 0.80% for Non- Qualified contracts based on total Purchase Payments when you begin the Income Phase. --------------------------------------------------------------------------- ------------ Premium Tax We deduct premium tax charges of 1.0% for Qualified West contracts and 1.0% for Non-Qualified contracts based Virginia on contract value when you begin the Income Phase. --------------------------------------------------------------------------- ------------ Premium Tax We deduct premium tax charges of 0% for Qualified Wyoming contracts and 1.0% for Non-Qualified contracts based on total Purchase Payments when you begin the Income Phase. --------------------------------------------------------------------------- ------------
B-1 Please forward a copy (without charge) of the Statement of Additional Information concerning ICAP II Variable Annuity Contracts issued by American General Life Insurance Company to: (Please print or type and fill in all information.) -------------------------------------------------------------------------------- Name -------------------------------------------------------------------------------- Address -------------------------------------------------------------------------------- City/State/Zip -------------------------------------------------------------------------------- Date: --------- Signed: ------------------------------------------------------- Return to: American General Life Insurance Company, Annuity Service Center, P.O. Box 54299, Los Angeles, California 90054-0299. STATEMENT OF ADDITIONAL INFORMATION ----------------------------------- INDIVIDUAL FLEXIBLE PAYMENT DEFERRED ANNUITY CONTRACTS ISSUED BY AMERICAN GENERAL LIFE INSURANCE COMPANY IN CONNECTION WITH VARIABLE ANNUITY ACCOUNT ONE ICAP II VARIABLE ANNUITY This Statement of Additional Information is not a prospectus; it should be read with the prospectus, dated January 2, 2013, relating to the annuity contracts described above. A copy of the prospectus may be obtained without charge by calling (800) 445-7862 or writing us at: AMERICAN GENERAL LIFE INSURANCE COMPANY ANNUITY SERVICE CENTER P.O. BOX 54299 LOS ANGELES, CALIFORNIA 90054-0299 January 2, 2013 TABLE OF CONTENTS
Page ---- Item Separate Account and the Company........................................... 3 General Account............................................................ 4 Performance Data........................................................... 5 Annuity Income Payments.................................................... 8 Annuity Unit Values........................................................ 9 Taxes...................................................................... 10 Broker-Dealer Firms Receiving Revenue Sharing Payments .................... 20 Distribution of Contracts ................................................. 21 Financial Statements........................................................ 21
-2- SEPARATE ACCOUNT AND THE COMPANY American General Life Insurance Company ("AGL" or the "Company") 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. The Company is an indirect, wholly-owned subsidiary of American International Group, Inc. ("American International Group"), a Delaware corporation. American International Group is a holding company which, through its subsidiaries, is engaged primarily in a broad range of insurance and insurance-related activities in the United States and abroad. The commitments under the contacts are the Company's, and American International Group has no legal obligation to back those commitments. On December 31, 2012, SunAmerica Annuity and Life Assurance Company ("SunAmerica Annuity"), American General Assurance Company ("AGAC"), American General Life and Accident Insurance Company ("AGLA"), American General Life Insurance Company of Delaware ("AGLD"), SunAmerica Life Insurance Company ("SALIC") and Western National Life Insurance Company, ("WNL"), affiliates of American General Life Insurance Company, merged with and into American General Life Insurance Company ("Merger"). Prior to this date, the ICAP II contracts were issued by SunAmerica Annuity in all states except New York. Variable Annuity Account One (the "Separate Account") was originally established by IR Life pursuant to Iowa insurance law on January 21, 1985. In fulfillment of the reinsurance agreement, the Separate Account was assumed intact by Anchor National Life Insurance Company ("Anchor National") on January 18, 1990 and reestablished under California insurance laws. Effective March 1, 2003, Anchor National changed its name to AIG SunAmerica Life Assurance Company ("SunAmerica Life"). Effective July 20, 2009, SunAmerica Life changed its name to SunAmerica Annuity and Life Assurance Company. These were name changes only and did not affect the substance of any contract. Prior to December 31, 2012, the Separate Account was a separate account of SunAmerica Annuity. On December 31, 2012, and in conjunction with the merger of AGL and SunAmerica Annuity, the Separate Account was transferred to and became a Separate Account of AGL under Texas law. The Separate Account meets the definition of a "Separate Account" under the federal securities laws and is registered with the SEC as a unit investment trust under the Investment Company Act of 1940. This registration does not involve supervision of the management of the Separate Account or the Company by the SEC. The assets of the Separate Account are the property of the Company. However, the assets of the Separate Account, equal to its reserves and other contract liabilities, are not chargeable with liabilities arising out of any other business the Company may conduct. Income, gains, and losses, whether or not realized, from assets allocated to the Separate Account are credited to or charged against the Separate Account without regard to other income, gains, or losses of the Company. The Separate Account is divided into Variable Portfolios, with the assets of each Variable Portfolio invested in the shares of one of the underlying funds. The Company does not guarantee the investment performance of the Separate Account, its Variable Portfolios or the underlying funds. Values allocated to the Separate Account and the amount of variable income payments will vary with the values of shares of the underlying funds, and are also reduced by contract charges. -3- The basic objective of a variable annuity contract is to provide variable income payments which will be to some degree responsive to changes in the economic environment, including inflationary forces and changes in rates of return available from various types of investments. The contract is designed to seek to accomplish this objective by providing that variable income payments will reflect the investment performance of the Separate Account with respect to amounts allocated to it both before and after the Annuity Date. Since the Separate Account is always fully invested in shares of the underlying funds, its investment performance reflects the investment performance of those entities. The values of such shares held by the Separate Account fluctuate and are subject to the risks of changing economic conditions as well as the risk inherent in the ability of the underlying funds' managements to make necessary changes in their Variable Portfolios to anticipate changes in economic conditions. Therefore, the owner bears the entire investment risk that the basic objectives of the contract may not be realized, and that the adverse effects of inflation may not be lessened. There can be no assurance that the aggregate amount of variable income payments will equal or exceed the Purchase Payments made with respect to a particular account for the reasons described above, or because of the premature death of an Annuitant. Another important feature of the contract related to its basic objective is the Company's promise that the dollar amount of variable income payments made during the lifetime of the Annuitant will not be adversely affected by the actual mortality experience of the Company or by the actual expenses incurred by the Company in excess of expense deductions provided for in the contract (although the Company does not guarantee the amounts of the variable income payments). AMERICAN HOME ASSURANCE COMPANY All references in this SAI to American Home Assurance Company ("American Home") apply to contracts issued prior to December 29, 2006 at 4:00pm 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, 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 ("AIG"). GENERAL ACCOUNT The general account is made up of all of the general assets of the Company other than those allocated to the Separate Account or any other segregated asset account of the Company. A Purchase Payment may be allocated to fixed and/or DCA (non-MVA) fixed account options available in connection with the general account, as elected by the owner at the time of purchasing a contract or when making a subsequent Purchase Payment. Assets supporting amounts allocated to fixed account options become part of the Company's general account assets and are available to fund the claims of all classes of customers of the Company, as well as of its creditors. Accordingly, all of the Company's assets held in the general account will be available to fund the Company's obligations under the contracts as well as such other claims. The Company will invest the assets of the general account in the manner chosen by the Company and allowed by applicable state laws regarding the nature and quality of investments that may be made by life insurance companies and the percentage of their assets that may be committed to any particular type of investment. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments. -4- PERFORMANCE DATA From time to time, we periodically advertise performance data relating to Variable Portfolios and Underlying Funds. We will calculate performance by determining the percentage change in the value of an Accumulation Unit by dividing the increase (or decrease) for that unit by the value of the Accumulation Unit at the beginning of the period. This performance number reflects the deduction of the Separate Account charges (including certain death benefit charges) and the Underlying Fund expenses. It does not reflect the deduction of any applicable contract maintenance fee, withdrawal (or sales) charges, if applicable, or optional feature charges. The deduction of these charges would reduce the percentage increase or make greater any percentage decrease. Any advertisement will include total return figures which reflect the deduction of the Separate Account charges (including certain death benefit charges), contract maintenance fee, withdrawal (or sales) charges and the Underlying Fund expenses. The Separate Account may advertise "total return" data for the Variable Portfolios. Total return figures are based on historical data and are not intended to indicate future performance. "Total return" is a computed rate of return that, when compounded annually over a stated period of time and applied to a hypothetical initial investment in a Variable Portfolio made at the beginning of the period, will produce the same contract value at the end of the period that the hypothetical investment would have produced over the same period (assuming a complete redemption of the contract at the end of the period). -5- For periods starting prior to the date the Variable Portfolios first became available through the Separate Account, the total return data for the Variable Portfolios of the Separate Account will be derived from the performance of the corresponding Underlying Funds, modified to reflect the charges and expenses as if the contract had been in existence since the inception date of each respective Underlying Fund. Further, returns shown are for the original class of shares of certain Underlying Funds, adjusted to reflect the fees and charges for the newer class of shares until performance for the newer class becomes available. Returns of the newer class of shares will be lower than those of the original class since the newer class of shares is subject to (higher) service fees. We commonly refer to these performance calculations as hypothetical adjusted historical returns. Performance figures similarly adjusted but based on the Underlying Funds' performance (outside of this Separate Account) should not be construed to be actual historical performance of the relevant Separate Account's Variable Portfolio. Rather, they are intended to indicate the historical performance of the corresponding Underlying Funds, adjusted to provide direct comparability to the performance of the Variable Portfolios after the date the contracts were first offered to the public (reflecting certain contractual fees and charges). Performance data for the various Divisions of the Separate Account are determined in the manner described below. Money Market Division Current yield is computed by first determining the Base Period Return attributable to a hypothetical Contract having a balance of one Accumulation Unit at the beginning of a 7 day period using the formula: Base Period Return = (EV-SV-CMF)/(SV) where: SV = value of one Accumulation Unit at the start of a 7 day period EV = value of one Accumulation Unit at the end of the 7 day period CMF = an allocated portion of the $30 annual Contract Maintenance Fee, prorated for 7 days The change in the value of an Accumulation Unit during the 7 day period reflects the income received, minus any expenses incurred, during such 7 day period. The Contract Maintenance Fee is first allocated among the Divisions and the General Account so that each Division's allocated portion of the charge is proportional to the percentage of the number of Contract Owners' accounts that have money allocated to that Division. The portion of the Fee allocable to the Money Market Division is further reduced, for purposes of the yield computation, by multiplying it by the ratio that the value of the hypothetical Contract bears to the value of an account of average size for Contracts funded by the Money Market Division. Finally, as is done with the other charges discussed above, the result is multiplied by the fraction 7/365 to arrive at the portion attributable to the 7 day period. -6- The current yield is then obtained by annualizing the Base Period Return: Current Yield = (Base Period Return) x (365/7) The Money Market Division also quotes an "effective yield" that differs from the current yield given above in that it takes into account the effect of dividend reinvestment in the Money Market Division. The effective yield, like the current yield, is derived from the Base Period Return over a 7 day period. However, the effective yield accounts for dividend reinvestment by compounding the current yield according to the formula: Effective Yield = [(Base Period Return + 1)365/7 - 1]. Net investment income for yield quotation purposes will not include either realized capital gains and losses or unrealized appreciation and depreciation, whether reinvested or not. The yield quotations also do not reflect any impact of premium taxes, transfer fees, or Withdrawal or Annuity Charges. The yields quoted should not be considered a representation of the yield of the Money Market Division in the future since the yield is not fixed. Actual yields will depend not only on the type, quality and maturities of the investments held by the Money Market Division and changes in interest rates on such investments, but also on factors such as a Contract Owner's account size (since the impact of fixed dollar charges will be greater for small accounts than for larger accounts). Yield information may be useful in reviewing the performance of the Money Market Division and for providing a basis for comparison with other investment alternatives. However, the Money Market Division's yield fluctuates, unlike bank deposits or other investments that typically pay a fixed yield for a stated period of time. Other Divisions Divisions of the Separate Account including the Money Market Division compute their performance data as "total return." Total return for a Division represents a computed annual rate of return that, when compounded annually over the time period shown and applied to a hypothetical initial investment in a Contract funded by that Division made at the beginning of the period, will produce the same Contract Value at the end of the period that the hypothetical investment would have produced over the same period. The total rate of return (T) is computed so that it satisfies the formula: P(1+T)n = ERV where: P = a hypothetical initial payment of $1000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1000 payment made at the beginning of the 1, 5, or 10 year periods at the end of the 1, 5, or 10 year periods (or fractional portion thereof). -7- The total return figures given reflect the effects of certain non-recurring and recurring charges, as discussed herein. The applicable withdrawal charge (if any) is deducted as of the end of the period, to reflect the effect of the assumed complete redemption in the case of the first of the two figures given in the table above for each Division and time period. Total return figures are derived from historical data and are not intended to be a projection of future performance. ANNUITY INCOME PAYMENTS INITIAL MONTHLY INCOME PAYMENTS The initial Annuity Income Payment is determined by applying separately that portion of the contract value allocated to the fixed investment option and the Variable Portfolio(s), less any premium tax, and then applying it to the annuity table specified in the contract for fixed and variable Income Payments. Those tables are based on a set amount per $1,000 of proceeds applied. The appropriate rate must be determined by the sex (except where, as in the case of certain Qualified contracts and other employer-sponsored retirement plans, such classification is not permitted) and age of the Annuitant and designated second person, if any. The dollars applied are then divided by 1,000 and the result multiplied by the appropriate annuity factor appearing in the table to compute the amount of the first monthly Income Payment. In the case of a variable annuity, that amount is divided by the value of an Annuity Unit as of the Annuity Date to establish the number of Annuity Units representing each variable Income Payment. The number of Annuity Units determined for the first variable Income Payment remains constant for the second and subsequent monthly variable Income Payments, assuming that no reallocation of contract values is made. SUBSEQUENT MONTHLY PAYMENTS For fixed Income Payments, the amount of the second and each subsequent monthly Income Payment is the same as that determined above for the first monthly payment. For variable Income Payments, the amount of the second and each subsequent monthly Income Payment is determined by multiplying the number of Annuity Units, as determined in connection with the determination of the initial monthly payment, above, by the Annuity Unit value as of the day preceding the date on which each Income Payment is due. -8- ANNUITY UNIT VALUES The value of an Annuity Unit is determined independently for each Variable Portfolio. The annuity tables contained in the contract are based on a 3.5% per annum assumed investment rate. If the actual net investment rate experienced by a Variable Portfolio exceed 3.5%, variable Income Payments derived from allocations to that Variable Portfolio will increase over time. Conversely, if the actual rate is less than 3.5%, variable Income Payments will decrease over time. If the net investment rate equals 3.5%, the variable Income Payments will remain constant. If a higher assumed investment rate had been used, the initial monthly payment would be higher, but the actual net investment rate would also have to be higher in order for Income Payments to increase (or not to decrease). The payee receives the value of a fixed number of Annuity Units each month. The value of a fixed number of Annuity Units will reflect the investment performance of the Variable Portfolios elected, and the amount of each Income Payment will vary accordingly. For each Variable Portfolio, the value of an Annuity Unit is determined by multiplying the Annuity Unit value for the preceding month by the Net Investment Factor for the month for which the Annuity Unit value is being calculated. The result is then multiplied by a second factor which offsets the effect of the assumed net investment rate of 3.5% per annum which is assumed in the annuity tables contained in the contract. NET INVESTMENT FACTOR The Net Investment Factor ("NIF") is an index applied to measure the net investment performance of a Variable Portfolio from one day to the next. The NIF may be greater or less than or equal to one; therefore, the value of an Annuity Unit may increase, decrease or remain the same. The NIF for any Variable Portfolio for a certain month is determined by dividing (a) by (b) where: (a) is the Accumulation Unit value of the Variable Portfolio determined as of the end of that month, and (b) is the Accumulation Unit value of the Variable Portfolio determined as of the end of the preceding month. The NIF for a Variable Portfolio for a given month is a measure of the net investment performance of the Variable Portfolio from the end of the prior month to the end of the given month. A NIF of 1.000 results from no change in the value of the Variable Portfolio; a NIF greater than 1.000 results in from increase in the value of the Variable Portfolio; and a NIF less than 1.000 results from a decrease in the value of the Variable Portfolio. The NIF is increased (or decreased) in accordance with the increases (or decreases, respectively) in the value of a share of the underlying fund in which the Variable Portfolio invests; it is also reduced by Separate Account asset charges. ILLUSTRATIVE EXAMPLE Assume that one share of a given Variable Portfolio had an Accumulation Unit value of $11.46 as of the close of the New York Stock Exchange ("NYSE") on the last business day in September; that its Accumulation Unit value had been $11.44 at the close of the NYSE on the last business day at the end of the previous month. The NIF for the month of September is: NIF = ($11.46/$11.44)= 1.00174825 -9- TAXES GENERAL Note: We have prepared the following information on taxes as a general discussion of the subject. It is not intended as tax advice to any individual. You should consult your own tax adviser about your own circumstances. Section 72 of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC") governs taxation of annuities in general. A natural owner is not taxed on increases in the value of a contract until distribution occurs, either in the form of a non-annuity distribution or as income payments under the annuity option elected. For a lump-sum payment received as a total surrender (total redemption), the recipient is taxed on the portion of the payment that exceeds the cost basis of the contract. For a payment received as a withdrawal (partial redemption), federal tax liability is determined on a last-in, first-out basis, meaning taxable income is withdrawn before the cost basis of the contract is withdrawn. A different rule applies to Purchase Payments made (including, if applicable, in the case of a contract issued in exchange for a prior contract) prior to August 14, 1982. Those Purchase Payments are considered withdrawn first for federal income tax purposes, followed by earnings on those Purchase Payments. For Non-Qualified contracts, the cost basis is generally the Purchase Payments. The taxable portion of the lump-sum payment is taxed at ordinary income tax rates. Tax penalties may also apply. If you purchase your contract under one of a number of types of employer-sponsored retirement plans, as an individual retirement annuity, or under an individual retirement account, your contract is referred to as a Qualified Contract. Examples of qualified plans or arrangements are: Individual Retirement Annuities and Individual Retirement Accounts (IRAs), Roth IRAs, Tax-Sheltered Annuities (also referred to as 403(b) annuities or 403(b) contracts), plans of self-employed individuals (often referred to as H.R. 10 Plans or Keogh Plans), pension and profit sharing plans including 401(k) plans, and governmental 457(b) plans. Typically, for employer plans and tax-deductible IRA contributions, you have not paid any tax on the Purchase Payments used to buy your contract and therefore, you have no cost basis in your contract. However, you normally will have a cost basis in a Roth IRA, a designated Roth account in a 403(b), 401(k), or governmental 457(b) plan, and you may have cost basis in a traditional IRA or in another Qualified contract. For annuity payments, the portion of each payment that is in excess of the exclusion amount is includible in taxable income. The exclusion amount for payments based on a fixed annuity option is determined by multiplying the payment by the ratio that the cost basis of the Contract (if any, and adjusted for any period or refund feature) bears to the expected return under the Contract. The exclusion amount for payments based on a variable annuity option is determined by dividing the cost basis of the Contract (adjusted for any period certain or refund guarantee) by the number of years over which the annuity is expected to be paid. Payments received after the investment in the Contract has been recovered (i.e. when the total of the excludable amount equals the investment in the Contract) are fully taxable. The taxable portion is taxed at ordinary income tax rates. For certain types of qualified plans there may be no cost basis in the Contract within the meaning of Section 72 of the Code. Owners, annuitants and beneficiaries under the -10- Contracts should seek competent financial advice about the tax consequences of any distributions. On March 30, 2010 the Health Care and Education Reconciliation Act ("Reconciliation Act") was signed into law. Among other provisions, the Reconciliation Act imposes a new tax on net investment income. This tax, which goes into effect in 2013, is at the rate of 3.8% of applicable thresholds for Modified Adjusted Gross Income ("MAGI") ($250,000 for joint filers; $125,000 for married individuals filing separately; and, $200,000 for individual filers). An individual with MAGI in excess of the threshold will be required to pay this new tax on net investment income in excess of the applicable MAGI threshold. For this purpose, net investment income generally will include taxable withdrawals from a Non-Qualified contract, as well as other taxable amounts including amounts taxed annually to an owner that is not a natural person. This new tax generally does not apply to Qualified contracts, however taxable distributions from such contracts may be taken into account in determining the applicability of the MAGI thresholds. The Company is taxed as a life insurance company under the Code. For federal income tax purposes, the Separate Account is not a separate entity from the Company and its operations form a part of the Company. WITHHOLDING TAX ON DISTRIBUTIONS Generally, you have not paid any federal taxes on the Purchase Payments used to buy a Qualified contract. As a result, most amounts withdrawn from the contract or received as income payments will be taxable income. Exceptions to this general rule include withdrawals attributable to after-tax Roth IRA contributions, designated Roth contributions to a 403(b), 401(k), or governmental 457(b) plan. Withdrawals from Roth IRAs are generally treated for federal tax purposes as coming first from the Roth contributions that have already been taxed, and as entirely tax free. Withdrawals from designated Roth accounts in a 403(b), 401(k) or governmental 457(b) plan, and withdrawals generally from Qualified contracts, are treated generally as coming pro-rata from amounts that already have been taxed and amounts that are taxed upon withdrawal. Qualified Distributions from Roth IRAs, designated Roth accounts in 403(b), 401(k), and governmental 457(b) plans which satisfy certain qualification requirements, including at least five years in a Roth account under the plan or IRA and either attainment of age 59 1/2, death or disability (or, if an IRA for the purchase of a first home), will not be subject to federal income taxation. The taxable portion of any withdrawal or income payment from a Qualified contract will be subject to an additional 10% federal penalty tax, under the IRC, except in the following circumstances: - after attainment of age 59 1/2; - when paid to your beneficiary after you die; - after you become disabled (as defined in the IRC); - as a part of a series of substantially equal periodic payments (not less frequently than annually) made for your life (or life expectancy) or the joint lives (or joint expectancies) of you and your designated beneficiary for a period of 5 years or attainment of age 59 1/2, whichever is later; -11- - payments to employees after separation from service after attainment of age 55 (does not apply to IRAs); - dividends paid with respect to stock of a corporation described in IRC Section 404(k); - for payment of medical expenses to the extent such withdrawals do not exceed limitations set by the IRC for deductible amounts paid during the taxable year for medical care; - payments to alternate payees pursuant to a qualified domestic relations order (does not apply to IRAs); - for payment of health insurance if you are unemployed and meet certain requirements; - distributions from IRAs for higher education expenses; - distributions from IRAs for first home purchases; - amounts distributed from a Code Section 457(b) plan other than amounts representing rollovers from an IRA or employer sponsored plan to which the 10% penalty would otherwise apply; and - The Pension Protection Act of 2006 created other distribution events and exemptions from the 10% early withdrawal penalty tax. These include payments to certain reservists called up for active duty after September 11, 2001 and payments up to $3,000 per year for health, life and accident insurance by certain retired public safety officers, which are federal income tax-free. The Code generally requires the Company (or, in some cases, a plan administrator) to withhold federal tax on the taxable portion of any distribution or withdrawal from a contract, subject in certain instances to the payee's right to elect out of withholding or to elect a different rate of withholding. For "eligible rollover distributions" from contracts issued under certain types of qualified plans, not including IRAs, 20% of the distribution must be withheld, unless the payee elects to have the distribution "rolled over" or transferred to another eligible plan in a direct "trustee-to- trustee" transfer. This requirement is mandatory and cannot be waived by the owner. Withholding on other types of distributions, including distributions from IRAs can be waived. An "eligible rollover distribution" is the taxable portion of any amount received by a covered employee from a traditional IRA or retirement plan qualified under Sections 401 or 403 or, if from a plan of a governmental employer, under Section 457(b) of the Code, or from a tax-sheltered annuity qualified under Section 403(b) of the Code other than (1) substantially equal periodic payments calculated using the life (or life expectancy) of the employee, or joint lives (or joint life expectancies) of the employee and his or her designated Beneficiary, or for a specified period of ten years or more; (2) financial hardship withdrawals; and (3) minimum distributions required to be made under the Code (4) distribution of contributions to a Qualified contract which were made in excess of the applicable contribution limit. Failure to "roll over" the entire amount of an eligible rollover distribution (including an amount equal to the 20% portion of the distribution that was withheld) could have adverse tax consequences, including the imposition of a federal penalty tax on premature withdrawals, described later in this section. Only (1) the participant, or, (2) in the case of the participant's death, the participant's surviving spouse, or (3) in the case of a domestic relations order, the participant's spouse or ex-spouse may roll over a distribution into a plan of the participant's own. An exception to this rule is that a non-spousal beneficiary may, subject to plan provisions, roll inherited funds from an eligible retirement plan into an Inherited IRA. An Inherited IRA is an IRA created for the sole purpose of receiving funds inherited by non-spousal beneficiaries of eligible retirement plans. The distribution must be transferred to the Inherited IRA in a direct "trustee-to-trustee" transfer. Inherited IRAs must -12- meet the distribution requirements relating to IRAs inherited by non-spousal beneficiaries under Code sections 408(a)(6) and (b)(3) and 401(a)(9). Beginning in 2008, subject to federal income limitations, funds in a Qualified contract may be rolled directly over to a Roth IRA. Withdrawals or distributions from a contract other than eligible rollover distributions are also subject to withholding on the taxable portion of the distribution, but the owner may elect in such cases to waive the withholding requirement. If not waived, withholding is imposed (1) for periodic payments, at the rate that would be imposed if the payments were wages, or (2) for other distributions, at the rate of 10%. If no withholding exemption certificate is in effect for the payee, the rate under (1) above is computed by treating the payee as a married individual claiming 3 withholding exemptions. The Small Business Jobs Act of 2010 subsequently added the ability for "in-Plan" rollovers of eligible rollover distribution from pre-tax accounts to a designated Roth account in certain employer-sponsored plans which otherwise include or permit designated Roth accounts. DIVERSIFICATION - SEPARATE ACCOUNT INVESTMENTS Section 817(h) of the Code imposes certain diversification standards on the underlying assets of Non-Qualified variable annuity contracts. These requirements generally do not apply to Qualified contracts, which are considered "Pension Plan Contracts" for purposes of these Code requirements. The Code provides that a variable annuity contract will not be treated as an annuity contract for any period (and any subsequent period) for which the investments are not adequately diversified, in accordance with regulations prescribed by the United States Treasury Department ("Treasury Department"). Disqualification of the contract as an annuity contract would result in imposition of federal income tax to the owner with respect to earnings allocable to the contract prior to the receipt of any payments under the contract. The Code contains a safe harbor provision which provides that annuity contracts, such as your contract, meet the diversification requirements if, as of the close of each calendar quarter, the underlying assets meet the diversification standards for a regulated investment company, and no more than 55% of the total assets consist of cash, cash items, U.S. government securities and securities of other regulated investment companies. The Treasury Department has issued regulations which establish diversification requirements for the investment portfolios underlying variable contracts such as the contracts. The regulations amplify the diversification requirements for variable contracts set forth in the Code and provide an alternative to the safe harbor provision described above. Under the regulations an investment portfolio will be deemed adequately diversified if (1) no more than 55% of the value of the total assets of the portfolio is represented by any one investment; (2) no more than 70% of the value of the total assets of the portfolio is represented by any two investments; (3) no more than 80% of the value of the total assets of the portfolio is represented by any three investments; and (4) no more than 90% of the value of the total assets of the portfolio is represented by any four investments. For purposes of determining whether or not the diversification standards imposed on the underlying assets of variable contracts by Section 817(h) of the Code have been met, "each United States government agency or instrumentality shall be treated as a separate issuer." -13- NON-NATURAL OWNERS Under Section 72(u) of the Code, the investment earnings on premiums for the Contracts will be taxed currently to the Owner if the Owner is a non-natural person such as a corporation or certain other entities. Such Contracts generally will not be accorded tax-deferred status. However, this treatment is not applied to a Contract held by a trust or other entity as an agent for a natural person or to Contracts held by qualified plans. Purchasers should consult their own tax counsel or other tax adviser before purchasing a Contract to be owned by a non-natural person. MULTIPLE CONTRACTS The Code provides that multiple Non-Qualified annuity contracts which are issued within a calendar year to the same contract owner by one company are treated as one annuity contract for purposes of determining the federal tax consequences of any distribution. Such treatment may result in adverse tax consequences including more rapid taxation of the distributed amounts from such combination of contracts. For purposes of this rule, contracts received in a Section 1035 exchange will be considered issued in the year of the exchange. (However, they may be treated as issued on the issue date of the contract being exchanged, for certain purposes, including for determining whether the contract is an immediate annuity contract.) Owners should consult a tax adviser prior to purchasing more than one Non-Qualified annuity contract from the same issuer in any calendar year. TAX TREATMENT OF ASSIGNMENTS OF QUALIFIED CONTRACTS Generally, a Qualified contract, including an IRA, may not be assigned or pledged. One exception to this rule is if the assignment is part of a permitted loan program under an employer-sponsored plan (other than a plan funded with IRAs) or pursuant to a domestic relations order meeting the requirements of the plan or arrangement under which the contract is issued (for many plans, a Qualified Domestic Relations Order, or QDRO), or, in the case of an IRA, pursuant to a decree of divorce or separation maintenance or a written instrument incident to such decree. TAX TREATMENT OF GIFTING, ASSIGNING OR TRANSFERRING OWNERSHIP OF A NON-QUALIFIED CONTRACT Under IRC Section 72(e), if you transfer ownership of your Non-Qualified Contract to a person other than your spouse (or former spouse if incident to divorce) for less than adequate consideration you will be taxed on the earnings above the purchase payments at the time of transfer. If you transfer ownership of your Non-Qualified Contract and receive payment less than the Contract's value, you will also be liable for the tax on the Contract's value above your purchase payments not previously withdrawn. The new Contract owner's purchase payments (basis) in the Contract will be increased to reflect the amount included in your taxable income. FEDERAL WITHDRAWAL RESTRICTIONS FROM QUALIFIED CONTRACTS The IRC limits the withdrawal of Purchase Payments from certain Tax-Sheltered Annuities (TSAs) and certain other Qualified contracts. Withdrawals generally can only be made when an owner: (1) reaches age 59 1/2 (70 1/2 in the case of Section 457(b) Plans); (2) separates from employment from the employer sponsoring the plan; (3) dies; (4) becomes disabled (as defined -14- in the IRC) (does not apply to section 457(b) plans); or (5) experiences a financial hardship (as defined in the IRC). In the case of hardship, the owner generally can only withdraw Purchase Payments. There are certain exceptions to these restrictions which are generally based upon the type of investment arrangement, the type of contributions, and the date the contributions were made. Transfers of amounts from one Qualified contract to another investment option under the same plan, or to another contract or account of the same plan type or from a qualified plan to a state defined benefit plan to purchase service credits are not considered distributions, and thus are not subject to these withdrawal limitations. Such transfers may, however, be subject to limitations under the annuity contract or Plan. On July 26, 2007, the Department of the Treasury published final 403(b) regulations that are largely effective on January 1, 2009. These comprehensive regulations include several new rules and requirements, such as a requirement that employers maintain their 403(b) plans pursuant to a written plan. The final regulations, subsequent IRS guidance, and the terms of the written plan may impose new restrictions on both new and existing contracts, including restrictions on the availability of loans, distributions, transfers and exchanges, regardless of when a contract was purchased. Prior to the effective date of the final regulations, provisions applicable to tax-free transfers AND exchanges (both referred to below as "transfers") of 403(b) annuity contracts or custodial accounts became effective September 25, 2007, replacing existing rules under IRS Revenue Ruling 90-24 ("90-24 transfer"). Under these new rules, transfers are available only to the extent permitted under the employer's 403(b) plan once established. Additionally, transfers occurring after September 24, 2007 that did not comply with these new rules could have become taxable on January 1, 2009, or the date of the transfer, whichever is later. If you make a transfer to a contract or custodial account that is not part of the employer's 403(b) plan (other than a transfer to a contract or custodial account in a different plan), and the provider and employer failed to enter into an information sharing agreement by January 1, 2009, the transfer would be considered a "failed" transfer that is subject to tax. Additional guidance issued by the IRS generally permits a failed transfer to be corrected no later than June 30, 2009 by re-transferring to a contract or custodial account that is part of the employer's 403(b) plan or that is subject to an information-sharing agreement with the employer. In general, certain contracts originally established by a 90-24 transfer prior to September 25, 2007 are exempt (or grandfathered) from some of the requirements of the final regulations; provided that no salary reduction or other contributions have ever been made to the contract, and that no additional transfers are made to made to the contract on or after September 25, 2007. Further, contracts that are not grandfathered were generally required to be part of, and subject to the requirements of an employer's 403(b) plan upon its establishment, but no later than by January 1, 2009. The new rules in the final regulations generally do not affect a participant's ability to transfer some or all of a 403(b) account to a state-defined benefit plan to purchase service credits, where such a transfer is otherwise consistent with applicable rules and requirements and with the terms of the employer's plan. You may wish to discuss the new regulations and/or the general information above with your tax advisor. -15- PARTIAL 1035 EXCHANGES OF NON-QUALIFIED ANNUITIES Section 1035 of the Code provides that a Non-Qualified annuity contract may be exchanged in a tax-free transaction for another Non-Qualified annuity contract. Historically, it was generally understood that only the exchange of an entire annuity contract, as opposed to a partial exchange, would be respected by the IRS as a tax-free exchange. In 1998, the U.S. Tax Court ruled that the direct transfer of a portion of an annuity contract into another annuity contract qualified as a tax-free exchange. In 1999, the IRS acquiesced in that Tax Court decision, but stated that it would nonetheless continue to challenge partial exchange transactions under certain circumstances. In Notice 2003-51, published on July 9, 2003, the IRS announced that, pending the publication of final regulations, it will consider all the facts and circumstances to determine whether a partial exchange and subsequent withdrawal from, or surrender of, either the surviving annuity contract or the new annuity contract within 24 months of the partial exchange should be treated as an integrated transaction, and thus whether the two contracts should be treated as a single contract to determine the tax treatment of the surrender or withdrawal under Section 72 of the Code. The IRS made this earlier guidance permanent in Revenue Procedure 2008-24, superseding Notice 2003-51, although it shortened the presumption period from 24 months to 12 months. Revenue Procedure 2008-24 provides that a transfer will be treated as a tax-free exchange under Code section 1035 if either (a) no amounts are withdrawn from, or received in surrender of, either of the contracts involved in the exchange during the 12 months beginning on the date on which amounts are treated as received as premiums or other consideration paid for the contract received in exchange (the date of transfer); or (b) the taxpayer demonstrates that one of the conditions described in Code section 72(q) or any similar life event (such as divorce or loss of employment) occurred between the date of the transfer and the date of the withdrawal or surrender. We reserve the right to treat partial transfers as tax-reportable distributions, rather than as partial 1035 exchanges, in recognition of certain questions which remain notwithstanding recent IRS guidance on the subject. Such treatment for tax reporting purposes, however, should not prevent a taxpayer from taking a different position on their return, in accordance with the advice of their tax counsel or other tax consultant, if they believe the requirements of IRC Section 1035 have been satisfied. Owners should seek their own tax advice regarding such transactions and the tax risks associated with subsequent surrenders or withdrawals. QUALIFIED PLANS The contracts offered by this prospectus are designed to be available for use under various types of qualified plans. Taxation of owners in each qualified plan varies with the type of plan and terms and conditions of each specific plan. Owners and Beneficiaries are cautioned that benefits under a qualified plan may be subject to limitations under the IRC and the employer-sponsored plan, in addition to the terms and conditions of the contracts issued pursuant to the plan. The following are general descriptions of the types of qualified plans with which the contracts may be used. Such descriptions are not exhaustive and are for general information purposes only. The tax rules regarding qualified plans are very complex and will have differing applications depending on individual facts and circumstances. Each purchaser should obtain competent tax advice prior to purchasing a contract issued under a qualified plan. Contracts issued pursuant to qualified plans include special provisions restricting contract provisions that may otherwise be available and described in this prospectus. Generally, contracts issued pursuant to qualified plans are not transferable except upon surrender or annuitization. Various penalty and excise taxes may apply to contributions or distributions made in violation of applicable limitations. Furthermore, -16- certain contractual withdrawal penalties and restrictions may apply to surrenders from Qualified contracts. (a) Plans of Self-Employed Individuals: "H.R. 10 Plans" Section 401 of the Code permits self-employed individuals to establish qualified plans for themselves and their employees, commonly referred to as "H.R. 10" or "Keogh" Plans. Contributions made to the plan for the benefit of the employees will not be included in the gross income of the employees, for federal tax purposes, until distributed from the plan if certain conditions are met. The tax consequences to owners may vary depending upon the particular plan design. However, the Code places limitations and restrictions on these plans, such as: amounts of allowable contributions; form, manner and timing of distributions; vesting and non-forfeitability of interests; nondiscrimination in eligibility and participation; and the tax treatment of distributions, withdrawals and surrenders. Purchasers of contracts for use with an H.R. 10 Plan should obtain competent tax advice as to the tax treatment and suitability of such an investment. (b) Tax-Sheltered Annuities Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by public schools and not-for-profit organizations described in Section 501(c)(3) of the Code. These qualifying employers may make contributions to the contracts for the benefit of their employees. Such contributions are not includible in the gross income of the employee until the employee receives distributions from the contract if certain conditions are met. The amount of contributions to the tax-sheltered annuity is limited to certain maximums imposed by the Code. One of these limits, on the amount that the employee may contribute on a voluntary basis, is imposed by the annuity contract as well as by the Code. That limit for 2012 is the lesser of 100% of includible compensation or $17,000. The limit may be increased by up to $3,000 for certain employees with at least fifteen years of full-time equivalent service with an eligible employer, and by an additional $5,500 in 2012 for employees age 50 or older, provided that other applicable requirements are satisfied. Total combined employer and employee contributions for 2012 may not exceed the lesser of $50,000 or 100% of compensation. Furthermore, the Code sets forth additional restrictions governing such items as transferability, distributions, nondiscrimination and withdrawals. Any employee should obtain competent tax advice as to the tax treatment and suitability of such an Investment. (c) Individual Retirement Annuities Section 408(b) of the Code permits eligible individuals to contribute to an individual retirement program known as a traditional "Individual Retirement Annuity" ("IRA"). Under applicable limitations, certain amounts may be contributed to an IRA which will be deductible from the individual's gross income. The ability to deduct an IRA contribution to a traditional IRA is subject to limits based upon income levels, retirement plan participation status, and other factors. The maximum IRA (traditional and/or Roth) contribution for 2012 is the lesser of $5,000 or 100% of compensation. Individuals age 50 or older may be able to contribute an additional $1,000 in 2012. IRAs are subject to limitations on eligibility, contributions, transferability and distributions. Sales of contracts for use with IRAs are subject to special requirements imposed by -17- the Code, including the requirement that certain informational disclosure be given to persons desiring to establish an IRA. Purchasers of contracts to be qualified as IRAs should obtain competent tax advice as to the tax treatment and suitability of such an investment. If neither the Owner or the Owner's spouse is covered by an employer retirement plan, the IRA contribution may be fully deductible. If the Owner, or if filing jointly, the Owner or spouse, is covered by an employer retirement plan, the Owner may be entitled to only a partial (reduced) deduction or no deduction at all, depending on adjusted gross income, The rules concerning what constitutes "coverage" are complex and purchasers should consult their tax advisor or Internal Revenue Service Publication 590 for more details. The effect of income on the deduction, is sometimes called the adjusted gross income limitation (AGI limit). A modified AGI at or below a certain threshold level allows a full deduction of contributions regardless of coverage under an employer's plan. If you and your spouse are filing jointly and have a modified AGI in 2012 of less than $92,000, your contribution may be fully deductible; if your income is between $92,000 and $112,000, your contribution may be partially deductible and if your income is $112,000 or more, your contribution may not be deductible. If you are single and your income in 2012 is less than $58,000, your contribution may be fully deductible; if your income is between $58,000 and $68,000, your contribution may be partially deductible and if your income is $68,000 or more, your contribution may not be deductible. If you are married filing separately and you lived with your spouse at anytime during the year, and your income exceeds $10,000, none of your contribution may be deductible. If you and your spouse file jointly, and you are not covered by a plan but your spouse is: if your modified AGI in 2012 is between $173,000 and $183,000, your contribution may be partially deductible. (d) Roth IRAs Section 408A of the Code permits an individual to contribute to an individual retirement program called a Roth IRA. Contributions to a Roth IRA are not deductible but distributions are tax-free if certain requirements are satisfied. The maximum IRA (traditional and/or Roth) contribution for 2012 is the lesser of $5,000 or 100% of compensation. Individuals age 50 or older may be able to contribute an additional $1,000 in 2012. Unlike traditional IRAs, to which everyone can contribute even if they cannot deduct the full contribution, Roth IRAs have income limitations on who can establish such a contract. Generally, you can make a full or partial contribution to a Roth IRA if you have taxable compensation and your modified adjusted gross income in 2012 is less than: $173,000 for married filing jointly or qualifying widow(er), $10,000 for married filing separately and you lived with your spouse at any time during the year, and $110,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year. All persons may be eligible to convert a distribution from an employer-sponsored plan or from a traditional IRA into a Roth IRA. Conversions or rollovers from qualified plans into Roth IRAs normally require taxes to be paid on any previously untaxed amounts included in the amount converted. If the Contracts are made available for use with Roth IRAs, they may be subject to special requirements imposed by the Internal Revenue Service ("IRS"). Purchasers of the Contracts for this purpose will be provided with such supplementary information as may be required by the IRS or other appropriate agency. -18- (e) Pension and Profit-Sharing Plans Section 401(a) of the Code permits certain employers to establish various types of retirement plans, including 401(k) plans, for employees. However, governmental employers may not establish new 401(k) plans. These retirement plans may permit the purchase of the contracts to provide benefits under the plan. Contributions to the plan for the benefit of employees will not be includible in the gross income of the employee until distributed from the plan if certain conditions are met. The tax consequences to owners may vary depending upon the particular plan design. However, the Code places limitations on all plans on such items as amount of allowable contributions; form, manner and timing of distributions; investing and non-forfeitability of interests; nondiscrimination in eligibility and participation; and the tax treatment of distributions, withdrawals and surrenders. Purchasers of contracts for use with pension or profit sharing plans should obtain competent tax advice as to the tax treatment and suitability of such an investment. (f) Deferred Compensation Plans - Section 457(b) Under Section 457(b) of the Code, governmental and certain other tax-exempt employers may establish, for the benefit of their employees, deferred compensation plans, which may invest in annuity contracts. The Code, as in the case of employer sponsored retirement plans generally establishes limitations and restrictions on eligibility, contributions and distributions. Under these plans, contributions made for the benefit of the employees will not be includible in the employees' gross income until distributed from the plan if certain conditions are met. Funds in a non-governmental 457(b) plan remain assets of the employer and are subject to claims by the creditors of the employer. As of January 1, 1999, all 457(b) plans of state and local governments must hold assets and income in a qualifying trust, custodial account, or annuity contract for the exclusive benefit of participants and their Beneficiaries. ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 AND PENSION PROTECTION ACT OF 2006 For tax years beginning in 2002, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) expanded the range of eligible tax-free rollover distributions that may be made among qualified plans and increased contribution limits applicable to these plans. The changes made to the IRC by EGTRRA were scheduled to expire on December 31, 2010. The Pension Protection Act of 2006 made permanent those provisions of EGTRRA relating to IRAs and employer sponsored plans. -19- BROKER-DEALER FIRMS RECEIVING REVENUE SHARING PAYMENTS The following list includes the names of member firms of the FINRA (or their affiliated broker-dealers) that we believe received a revenue sharing payment of more than $5,000 as of the calendar year ending December 31, 2011, from SunAmerica Annuity and Life Assurance Company and The United States Life Insurance Company in the City of New York, both affiliated life companies. Your registered representative can provide you with more information about the compensation arrangements that apply upon the sale of the Contract. BancWest Investment Services, Inc. CCO Investment Services Corporation Citigroup Global Markets Inc. CUSO Financial Services, L.P. Edward D. Jones & Co., L.P. Financial Network Investment Corporation FSC Securities Corp. Infinex Investments, Inc. ING Financial Partners, Inc. Janney Montgomery Scott LLC. J.J.B. Hilliard, W.L. Lyons, Inc. James Borello & Co Lincoln Financial Advisor Lincoln Financial Securities LPL Financial Corporation Morgan Keegan & Company, Inc. Morgan Stanley & Co., Incorporated Multi Financial Securities Corp. NEXT Financial Group, Inc. Primevest Financial Services, Inc. Raymond James & Associates Raymond James Financial RBC Capital Markets Corporation Royal Alliance Associates, Inc. SagePoint Financial, Inc. Sammons Securities Co. LLC Securities America, Inc. UBS Financial Services Inc. U.S. Bancorp Investments, Inc. Wells Fargo Advisor, LLC Wescom Financial Services We will update this list annually; interim arrangements may not be reflected. You are encouraged to review the prospectus for each Underlying Fund for any other compensation arrangements pertaining to the distribution of Underlying Fund shares. Certain broker dealers with which we have selling agreements are our affiliates. In an effort to promote the sale of our products, affiliated firms may pay their registered representatives additional cash incentives which may include but are not limited to bonus payments, expense payments, health and retirement benefits or the waiver of overhead costs or expenses in connection with the sale of the Contracts, that they would not receive in connection with the sale of contracts issued by unaffiliated companies. -20- DISTRIBUTION OF CONTRACTS The contracts are offered on a continuous basis through SunAmerica Capital Services, Inc., located at Harborside Financial Center, 3200 Plaza 5, Jersey City, NJ 07311. SunAmerica Capital Services, Inc. is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority. The Company and SunAmerica Capital Services, Inc. are each an indirect, wholly owned subsidiary of American International Group. No underwriting fees are paid in connection with the distribution of the contracts. FINANCIAL STATEMENTS PricewaterhouseCoopers LLP, located at 1201 Louisiana Street, Suite 2900, Houston, Texas 77002, serves as the independent registered public accounting firm for Variable Annuity Account One, American General Life Insurance Company ("AGL"), the life companies listed below and American International Group, Inc. We are required to include additional life companies' financial statements in the Statement of Additional Information to reflect the effect of the Merger. You may obtain a free copy of these financial statements if you write us at our Annuity Service Center or call us at 1-800-445-7862. 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: - Audited Financial Statements of Variable Annuity Account One of SunAmerica Annuity and Life Assurance Company for the year ended December 31, 2011 - Audited Consolidated Financial Statements of SunAmerica Annuity and Life Assurance Company for the years ended December 31, 2011, 2010 and 2009 - Audited Statutory Financial Statements of American General Assurance Company for years ended December 31, 2011 and 2010 - Audited Statutory Financial Statements of American General Life and Accident Insurance Company for the years ended December 31, 2011 and 2010 - Audited Financial Statements of American General Life Insurance Company of Delaware for the years ended December 31, 2011, 2010 and 2009 - Audited Statutory Financial Statements of SunAmerica Life Insurance Company for the years ended December 31, 2011 and 2010 - Audited Consolidated Financial Statements of Western National Life Insurance Company for the years ended December 31, 2011, 2010 and 2009 - Audited Consolidated Financial Statements of American General Life Insurance Company for the years ended December 31, 2011, 2010 and 2009 - Audited Statutory Financial Statements of American Home Assurance Company for the years ended December 31, 2011 and 2010 -21- The following financial statements are also included in the Statement of Additional Information: - Unaudited Pro Forma Condensed Financial Data of American General Life Insurance Company as of December 31, 2011 The financial statements of the life companies listed above should be considered only as bearing on the ability of the AGL to meet its obligation under the contracts. 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 a bearing on the ability of American Home, as guarantor, to meet its obligations under the guarantee of insurance obligations under contracts issued prior to December 29, 2006, at 4:00 p.m. Eastern Time ("Point of Termination"). Contracts with an issue date after the Point of Termination are not covered by the American Home guarantee. AMERICAN INTERNATIONAL GROUP, INC. FINANCIAL INFORMATION On March 30, 2011, American International Group, Inc. and the Company entered into an Unconditional Capital Maintenance Agreement. As a result, the financial statements of American International Group, Inc. are incorporated by reference below. American International Group, Inc. does not underwrite any contracts referenced herein. The following financial statements are incorporated by reference 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: - Consolidated Financial Statements and Financial Statement Schedules of American International Group, Inc.'s Current Report on Form 8-K dated May 4, 2012 and management's assessment of the effectiveness of internal control over financial reporting (which is included in Management's Report on Internal Control over Financial Reporting) - American International Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011 The following financial statements are also incorporated by reference in the Statement of Additional Information in reliance on the report of PricewaterhouseCoopers, independent accountants, given on the authority of said firm as experts in auditing and accounting: - Consolidated Financial Statements of AIA Group Limited incorporated by reference to American International Group, Inc.'s Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2011 -22- VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY FINANCIAL STATEMENTS DECEMBER 31, 2011 AND 2010 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY FINANCIAL STATEMENTS DECEMBER 31, 2011 AND 2010 CONTENTS Report of Independent Registered Public Accounting Firm 1 Statements of Assets and Liabilities, December 31, 2011 2 Schedules of Portfolio Investments, December 31, 2011 3 Statements of Operations, for the year ended December 31, 2011 4 Statements of Changes in Net Assets, for the year ended December 31, 2011 5 Statements of Changes in Net Assets, for the year ended December 31, 2010 6 Notes to Financial Statements 7 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of SunAmerica Annuity and Life Assurance Company and the Contractholders of its separate account, Variable Annuity Account One: In our opinion, the accompanying statements of assets and liabilities, including the schedules of portfolio investments, and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of each of the Variable Accounts constituting Variable Annuity Account One (the "Separate Account"), a separate account of SunAmerica Annuity and Life Assurance Company, at December 31, 2011, and the results of their operations for the year then ended and the changes in each of their net assets for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Separate Account's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2011 by correspondence with the custodians and transfer agents, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California April 25, 2012 1 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY STATEMENT OF ASSETS OF ASSETS AND LIABILITIES DECEMBER 31,2011
Government and Growth Strategic Capital Quality and Multi Natural Multi- Appreciation Bond Growth Income -Asset Resources Asset Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) ----------------------------------------------------------------------------------------------- Assets: Investments in shares of Anchor Series Trust, at net asset value $ 39,210,106 $27,426,635 $52,766,382 $7,039,576 $21,351,237 $8,701,326 $19,410,623 Liabilities: - - - - - - - ----------------------------------------------------------------------------------------------- Net assets: $ 39,210,106 $27,426,635 $52,766,382 $7,039,576 $21,351,237 $8,701,326 $19,410,623 =============================================================================================== Accumulation units $ 38,667,725 $26,156,701 $51,923,660 $6,900,122 $20,831,528 $8,620,209 $19,210,483 Contracts in payout (annuitization) period 542,381 1,269,934 842,722 139,454 519,709 81,117 200,140 ----------------------------------------------------------------------------------------------- Total net assets $ 39,210,106 $27,426,635 $52,766,382 $7,039,576 $21,351,237 $8,701,326 $19,410,623 =============================================================================================== Accumulation units outstanding 397,957 560,506 637,840 212,355 563,317 114,972 457,738 =============================================================================================== Unit value of accumulation units $ 98.53 $ 48.93 $ 82.73 $ 33.15 $ 37.90 $ 75.68 $ 42.41 ===============================================================================================
The accompanying notes are an integral part of the financial statement. 2 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY SCHEDULES OF PORTFOLIO INVESTMENTS DECEMBER 31,2011
Net Asset Value Net Asset Variable Accounts Shares Per Share Value Cost Level(Note A) ---------------------------------------------------------------------------------------------------------------- ANCHOR SERIES TRUST (Class 1): Capital Appreciation Portfolio (Class 1) 1,148,579 34.14 39,210,106 38,712,806 1 Government and Quality Bond Portfolio (Class 1) 1,761,400 15.57 27,426,635 26,562,999 1 Growth Portfolio (Class 1) 2,733,229 19.31 52,766,382 63,972,437 1 Growth and Income Portfolio (Class 1) 932,754 7.55 7,039,576 9,057,713 1 Multi-Asset Portfolio (Class 1) 3,587,085 5.95 21,351,237 29,562,679 1 Natural Resources Portfolio (Class 1) 356,842 24.38 8,701,326 11,212,866 1 Strategic Multi-Asset Portfolio (Class 1) 2,658,157 7.30 19,410,623 21,935,337 1
(A) Represents the level within the fair value hierarchy under which the portfolio is classified as defined in Fair Value Measurements, and described in Note 3 to the financial statements The accompanying notes are an integral part of the financial statement. 3 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,2011
Government and Growth Capital Quality and Money Multi Natural Strategic Appreciation Bond Growth Income Market -Asset Resources Multi-Asset Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) ----------------------------------------------------------------------------------------------------------------- Investment income: Dividends $- $697,049 $435,527 $2,651 $605 $287,528 $79,779 $211,067 ----------------------------------------------------------------------------------------------------------------- Expenses: Charges for distribution, mortality and expense risk (663,054) (321,412) (825,547) (115,213) (85,508) (326,320) (168,021) (306,251) ----------------------------------------------------------------------------------------------------------------- Net investment income (loss) (663,054) 375,637 (390,020) (112,562) (84,903) (38,792) (88,242) (95,184) ----------------------------------------------------------------------------------------------------------------- Net realized gains (losses) from securities transactions 913,150 331,987 (1,667,947) (1,242,167) - (1,925,787) (2,308,746) (788,173) Realized gain distributions - 97,780 - - - - 2,837,396 - ----------------------------------------------------------------------------------------------------------------- Net realized gains (losses) 913,150 429,767 (1,667,947) (1,242,167) - (1,925,787) 528,650 (788,173) ----------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments: Beginning of period 4,426,595 447,517 (8,781,675) (2,813,999) - (9,572,760) 573,150 (2,348,678) End of period 497,300 863,636 (11,206,055) (2,018,137) - (8,211,442) (2,511,540) (2,524,714) ----------------------------------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) of investments (3,929,295) 416,119 (2,424,380) 795,862 - 1,361,318 (3,084,690) (176,036) ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations $(3,679,199) $1,221,523 $(4,482,347) $(558,867) $(84,903) $(603,261) $(2,644,282) $(1,059,393) =================================================================================================================
The accompanying notes are an integral part of the financial statement. 4 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31,2011
Government and Growth Strategic Capital Quality and Money Multi- Natural Multi- Appreciation Bond Growth Income Market Asset Resources Asset Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) ----------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS: From operations: Net investment income (loss) $ (663,054) $ 375,637 $ (390,020) $ (112,562) $ (84,903) $ (38,792) $ (88,242) $ (95,184) Net realized gains (losses) 913,150 429,767 (1,667,947) (1,242,167) - (1,925,787) 528,650 (788,173) Change in net unrealized appreciation (depreciation) of investments (3,929,295) 416,119 (2,424,380) 795,862 - 1,361,318 (3,084,690) (176,036) ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations (3,679,199) 1,221,523 (4,482,347) (558,867) (84,903) (603,261) (2,644,282) (1,059,393) ----------------------------------------------------------------------------------------------------------------- From capital transactions: Net proceeds from units sold 118,043 27,428 38,847 12,778 2,211 52,413 3,891 13,921 Cost of units redeemed (4,845,518) (3,412,211) (5,205,728) (1,287,440) (597,216) (2,294,820) (1,991,148) (2,899,661) Net transfers (780,313) 5,957,160 (575,426) (273,067) (6,547,800) (228,389) (372,738) (39,513) Contract maintenance charge (22,931) (10,507) (22,253) (4,566) (4,059) (15,003) (5,075) (14,298) ----------------------------------------------------------------------------------------------------------------- Decrease in net assets from capital transactions (5,530,719) 2,561,870 (5,764,560) (1,552,295) (7,146,864) (2,485,799) (2,365,070) (2,939,551) ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets (9,209,918) 3,783,393 (10,246,907) (2,111,162) (7,231,767) (3,089,060) (5,009,352) (3,998,944) Net assets at beginning of period 48,420,024 23,643,242 63,013,289 9,150,738 7,231,767 24,440,297 13,710,678 23,409,567 ----------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 39,210,106 $27,426,635 $ 52,766,382 $ 7,039,576 $ - $21,351,237 $ 8,701,326 $19,410,623 ================================================================================================================= ANALYSIS OF INCREASE (DECREASE) IN UNITS OUTSTANDING: Units sold 1,083 579 531 348 108 1,335 60 320 Units redeemed (45,464) (72,148) (59,918) (37,053) (28,970) (60,179) (23,186) (65,427) Units transferred (8,108) 121,836 (6,921) (7,785) (317,321) (6,456) (4,349) (1,175) ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in units outstanding (52,489) 50,267 (66,308) (44,490) (346,183) (65,300) (27,475) (66,282) Beginning units 450,446 510,239 704,148 256,845 346,183 628,617 142,447 524,020 ----------------------------------------------------------------------------------------------------------------- Ending units 397,957 560,506 637,840 212,355 - 563,317 114,972 457,738 =================================================================================================================
The accompanying notes are an integral part of the financial statement. 5 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31,2010
Government Growth Strategic Capital and Quality and Money Multi Natural Multi- Appreciation Bond Growth Income Market -Asset Resources Asset Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) (Class 1) ---------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS: From operations: Net investment income (loss) $ (563,311) $ 666,486 $ (433,132) $ (117,546) $ (110,501) $ 2,913 $ (66,961) $ (319,575) Net realized gains (losses) (290,069) 283,722 (3,171,927) (952,673) - (2,393,051) (307,334) (1,334,862) Change in net unrealized appreciation (depreciation) of investments 9,458,758 (55,220) 10,667,456 1,909,545 - 4,109,284 2,039,071 4,130,851 ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations 8,605,378 894,988 7,062,397 839,326 (110,501) 1,719,146 1,664,776 2,476,414 ---------------------------------------------------------------------------------------------------------------- From capital transactions: Net proceeds from units sold 282,867 274,721 143,507 80,123 2,756 71,514 6,345 74,900 Cost of units redeemed (5,261,348) (3,447,857) (6,081,635) (719,423) (2,035,704) (2,823,536) (959,763) (2,815,764) Net transfers (663,129) 486,626 (1,681,508) (183,951) 1,088,961 (202,375) (906,299) (610,122) Contract maintenance charge (29,084) (19,484) (47,984) (7,357) (13,392) (22,811) (7,260) (19,261) ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital transactions (5,670,694) (2,705,994) (7,667,620) (830,608) (957,379) (2,977,208) (1,866,977) (3,370,247) ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets 2,934,684 (1,811,006) (605,223) 8,718 (1,067,880) (1,258,062) (202,201) (893,833) Net assets at beginning of period 45,485,340 25,454,248 63,618,512 9,142,020 8,299,647 25,698,359 13,912,879 24,303,400 ---------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 48,420,024 $ 23,643,242 $63,013,289 $9,150,738 $ 7,231,767 $24,440,297 $13,710,678 $23,409,567 ---------------------------------------------------------------------------------------------------------------- ANALYSIS OF INCREASE (DECREASE) IN UNITS OUTSTANDING: Units sold 2,975 6,049 1,732 2,450 132 1,912 69 1,852 Units redeemed (56,443) (75,116) (75,847) (22,413) (97,542) (77,718) (11,719) (68,811) Units transferred (8,199) 10,597 (21,930) (6,126) 51,776 (5,473) (11,531) (14,954) ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in units outstanding (61,667) (58,470) (96,045) (26,089) (45,634) (81,279) (23,181) (81,913) Beginning units 512,113 568,709 800,193 282,934 391,817 709,896 165,628 605,933 ---------------------------------------------------------------------------------------------------------------- Ending units 450,446 510,239 704,148 256,845 346,183 628,617 142,447 524,020 ================================================================================================================
The accompanying notes are an integral part of the financial statement. 6 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Variable Annuity Account One of SunAmerica Annuity and Life Assurance Company (the "Separate Account") is an investment account of SunAmerica Annuity and Life Assurance Company (the "Company"). The company is a direct wholly owned subsidiary of SunAmerica Life Insurance Company, which is a subsidiary of SAFG Retirement Services, Inc. (formerly known as AIG Retirement Services, Inc.), the retirement services and asset management organization within American International Group, Inc. ("American International Group"). American International Group is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services, retirement savings, and asset management. AIG Retirement Services, Inc. changed its name to SAFG Retirement Services, Inc. on June 10, 2010. The Separate Account is registered as a unit investment trust pursuant to the provisions of the Investment Company Act of 1940, as amended. The Separate Account contracts are sold through the Company's affiliated broker-dealers, independent broker-dealers, full-service securities firms, and financial institutions. The distributor of these contracts is SunAmerica Capital Services, Inc., an affiliate of the Company. No underwriting fees are paid in connection with the distribution of the contracts. The Separate Account offers the ICAP II Variable Annuity product. The Separate Account is composed of seven variable portfolios (the "Variable Accounts"). Each of the Variable Accounts is invested solely in the shares of a designated portfolio of the Anchor Series Trust ("Anchor Trust"). The Anchor Trust is a diversified open-ended investment company, affiliated with the Company, which retains investment advisers to assist in the investment activities of the Anchor Trust. Participants may elect to have investments allocated to a guaranteed-interest fund of the Company (the "General Account"), which is not a part of the Separate Account. The financial statements include balances allocated by the contractholders to the seven Variable Accounts and do not include balances allocated to the General Account. On November 18, 2011, the Anchor Trust Money Market Portfolio (Class 1) was liquidated and the portfolio was no longer an available investment portfolio for the Separate Account. On the liquidation date, funds invested in the Anchor Trust Money Market Portfolio were transferred into the Anchor Trust Government and Quality Bond Portfolio. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENT ACCOUNTING AND VALUATION: The investments are stated at the net asset value of each of the portfolios of the Anchor Trust as determined at the close of the business day. Purchases and sales of shares of the portfolios are valued at the net asset values of such portfolios, which value their investment securities at fair value, on the date the shares are purchased or sold. Dividends and capital gains distributions are recorded on the ex-distribution date. Realized gains and losses on the sale of investments in the 7 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Anchor Trust are recognized at the date of sale and are determined on a first-in, first-out basis. Accumulation unit values are computed daily based on total net assets of the portfolios. FEDERAL INCOME TAXES: The Company qualifies for federal income tax treatment granted to life insurance companies under subchapter L of the Internal Revenue Service Code (the "Code"). The operations of the Separate Account are part of the total operations of the Company and are not taxed separately. 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. Based on this, no charge is being made currently to the Separate Account for federal income taxes. The Separate Account is not treated as a regulated investment company under the Code. USE OF ESTIMATES: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported therein. Actual results could differ from these estimates. RESERVES FOR CONTRACTS IN PAYOUT (ANNUITIZATION) PERIOD: Net assets allocated to contracts in the payout period are based on the Annuity 2000 Mortality Table, the 1971 Individual Annuity Mortality Table, and the 1983(a) Individual Mortality Table depending on the calendar year of annuitization as well as other assumptions, including provisions for the risk of adverse deviation from assumptions. An assumed interest rate of 3.5% is used in determining annuity payments. The mortality risk is fully borne by the Company and may result in additional amounts being transferred into the Separate Account by the Company to cover greater longevity of the annuitant than expected. Conversely, if amounts allocated exceed amounts required, transfers may be made to the Company. Transfers are recorded as cost of units redeemed or as net proceeds from units sold in the accompanying Statements of Changes in Net Assets. Annuity benefit payments are recorded as cost of units redeemed in the accompanying Statements of Changes in Net Assets. 3. FAIR VALUE MEASUREMENTS Assets and liabilities recorded at fair value in the Separate Account balance sheet are measured and classified in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such case, the level in the fair 8 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 3. FAIR VALUE MEASUREMENTS (continued) 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's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgments. In making the assessment, the Separate Account considers factors specific to the asset or liability. Level 1 - Fair value measurements that are 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. Assets and liabilities measured at fair value on a recurring basis and classified as Level 1 include government and agency securities, actively traded listed common stocks and derivative contracts, most separate account assets, and most mutual funds. 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 liability in active markets, 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. Assets and liabilities measured at fair value on a recurring basis and classified as Level 2 generally include certain government securities, most investment-grade and high-yield corporate bonds, certain asset backed securities, certain listed equities, state, municipal, and provincial obligations, hybrid securities, and derivative contracts. Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. These measurements include circumstances in which there is little, if any, market activity for the asset or liability. Assets and liabilities measured at fair value on a recurring basis and classified as Level 3 principally include fixed maturities. The Separate Account assets measured at fair value as of December 31, 2011 consist of investments in trust, which are registered and open-end 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 as of December 31, 2011 and for the year then ended. The Separate Account had no liabilities as of December 31, 2011. See the Schedules of Portfolio Investments for the table presenting information about assets measured at fair value on a recurring basis at December 31, 2011, and respective hierarchy level. 9 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 4. CHARGES AND DEDUCTIONS Charges and deductions are applied against the current value of the Separate Account and are paid as follows: WITHDRAWAL CHARGE: The contract provides that in the event that a contract holder withdraws all or a portion of the contract value during the surrender charge period, withdrawal charges may be assessed on the excess of the free withdrawal amount as defined in the contract. The withdrawal charges are based on a table of charges applicable to the contract, with a maximum charge of 5% of any amount withdrawn that exceeds the free withdrawal amount, and are recorded as cost of units redeemed in the accompanying Statements of Changes in Net Assets. ANNUITY CHARGE: There may be an annuity charge in the event that the contract is switched to the payout phase. Option 1 for payouts provides a life income with installments guaranteed, option 2 provides a joint and survivor annuity, and Option 3 provides income for a specified period. No annuity charge is assessed if Option 1 or Option 2 is elected. If Option 3 is elected, an annuity charge equal to the withdrawal charge if the contract were surrendered may be applied. No annuity charged will be assessed if Option 3 is elected by a beneficiary under the death benefit. Annuity charges are recorded as cost of units redeemed in the accompanying Statements of Changes in Net Assets. CONTRACT MAINTENANCE CHARGE: An annual contract maintenance charge of $30 is charged, which reimburses the Company for expenses incurred in establishing and maintaining records relating to the contract. The contract maintenance charge is assessed on each anniversary during the accumulation phase. In the event that a total surrender of contract value is made, the entire charge is assessed as of the date of surrender, and deducted from that withdrawal. The contract maintenance charge is recorded as a cost of units redeemed in the accompanying Statements of Changes in Net Assets. TRANSFER FEE: A transfer fee of $25 ($10 in Pennsylvania and Texas), depending on the contract provisions, may be assessed on each transfer of funds in excess of the maximum transactions allowed within a contract year, and is recorded as a cost of units redeemed in the accompanying Statements of Changes in Net Assets. SEPARATE ACCOUNT ANNUAL CHARGE: The Separate Account deducts a separate account annual charge comprised of mortality and expense risk charges and distribution expense charges, computed on a daily basis. The separate account annual charges are recorded as a charge in the Statements of Operations. The total annual rate of the net asset value of each portfolio is 1.40%. The mortality risk charge is compensation for the mortality risks assumed by the Company from its contractual obligations to make annuity payments after the contract has annuitized for the life of the annuitant and to provide the standard death benefit. The expense risk charge is compensation for assuming the risk that the current contract administration charges will be insufficient in the future to cover the cost 10 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 4. CHARGES AND DEDUCTIONS (continued) of administering the contract. The distribution expense is deducted at an annual rate of 0.15% of the net asset value of each portfolio and is included in the respective separate account annual charge rate. It is for all expenses associated with the distribution of the contract. If this charge is not sufficient to cover the cost of distributing the contract, the Company will bear the excess loss. PREMIUM TAXES: Certain states charge the Company a tax on purchase payments up to a maximum of 3.5%. Some states assess premium taxes at the time purchase payments are made; whereas some states assess premium taxes at the time annuity payments begin or at the time of surrender. There are certain states that do not assess premium taxes. The Company currently deducts premium taxes upon annuitization; however, it reserves the right to deduct premium taxes when a purchase payment is made or upon surrender of the contract. Premium taxes are deducted from purchases when a contract annuitizes in the Statements of Changes in Net Assets. SEPARATE ACCOUNT INCOME TAXES: The Company currently does not maintain a provision for taxes, but has reserved the right to establish such a provision for taxes in the future if it determines, in its sole discretion, that it will incur a tax as a result of the operation of the Separate Account. 5. PURCHASES AND SALES OF INVESTMENTS The aggregate cost of the Trusts' shares acquired and the aggregate proceeds from shares sold during the year ended December 31, 2011 consist of the following: Cost of Shares Proceeds from Variable Account: Acquired Shares Sold ---------------- ------------- ----------- ANCHOR TRUST: Capital Appreciation Portfolio (Class 1) $1,395,678 $ 7,589,451 Government and Quality Bond Portfolio (Class 1) 9,171,203 6,135,916 Growth Portfolio (Class 1) 850,380 7,004,960 Growth and Income Portfolio (Class 1) 240,267 1,905,124 Money Market Portfolio (Class 1) 1,586,263 8,818,030 Multi-Asset Portfolio (Class 1) 525,481 3,050,072 Natural Resources Portfolio (Class 1) 4,201,291 3,817,207 Strategic Multi-Asset Portfolio (Class 1) 510,538 3,545,273 6. OTHER MATTERS The Company is a subsidiary of American International Group. Information on American International Group is publicly available in its regulatory filings with the U.S. Securities and Exchange Commission ("SEC"). 11 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 7. UNIT VALUES A summary of unit values and units outstanding for variable accounts and the expense ratios, excluding expenses of the underlying funds, total return and investment income ratios for the years ended December 31, 2011, 2010, 2009, 2008, and 2007, follows:
At December 31 For the Year Ended December 31 ---------------------------------------------------------------------- ------------------------------------- Investment Unit Net Assets Expense Income Total Year Units Fair Value ($) ($) Ratio (1) Ratio (2) Return (3) --------------------------------------- -------------- ---------- --------- ---------- ---------- Capital Appreciation Portfolio (Class 1) 2011 397,957 98.53 39,210,106 1.40% 0.00% -8.34% 2010 450,446 107.49 48,420,024 1.40% 0.13% 21.03% 2009 512,113 88.82 45,485,340 1.40% 0.00% 34.86% 2008 609,769 65.86 40,159,086 1.40% 0.00% -41.18% 2007 726,835 111.97 81,382,943 1.40% 0.34% 25.94% Government and Quality Bond Portfolio (Class 1) 2011 560,506 48.93 27,426,635 1.40% 3.00% 5.60% 2010 510,239 46.34 23,643,242 1.40% 4.04% 3.53% 2009 568,709 44.76 25,454,248 1.40% 4.71% 2.82% 2008 656,931 43.53 28,597,578 1.40% 4.03% 2.88% 2007 700,074 42.31 29,621,201 1.40% 3.71% 4.81% Growth Portfolio (Class 1) 2011 637,840 82.73 52,766,382 1.40% 0.74% -7.56% 2010 704,148 89.49 63,013,289 1.40% 0.70% 12.56% 2009 800,193 79.50 63,618,512 1.40% 1.12% 36.47% 2008 900,470 58.26 52,458,693 1.40% 0.73% -41.25% 2007 1,072,927 99.16 106,388,474 1.40% 0.70% 8.66% Growth and Income Portfolio (Class 1) 2011 212,355 33.15 7,039,576 1.40% 0.03% -6.95% 2010 256,845 35.63 9,150,738 1.40% 0.05% 10.26% 2009 282,934 32.31 9,142,020 1.40% 0.45% 32.67% 2008 315,219 24.35 7,676,979 1.40% 0.47% -40.15% 2007 368,914 40.69 15,011,146 1.40% 0.56% 8.72% Money Market Portfolio (Class 1) 2011 - - - 1.40% 0.01% -1.23% (4) 2010 346,183 20.89 7,231,767 1.40% 0.01% -1.38% 2009 391,817 21.18 8,299,647 1.40% 0.06% -1.34% 2008 595,898 21.47 12,794,169 1.40% 1.72% 0.33% 2007 574,250 21.40 12,288,890 1.40% 4.31% 2.94%
12 VARIABLE ANNUITY ACCOUNT ONE OF SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 7. UNIT VALUES (continued)
At December 31 For the Year Ended December 31 ---------------------------------------------------------------------- ------------------------------------- Investment Unit Net Assets Expense Income Total Year Units Fair Value ($) ($) Ratio (1) Ratio (2) Return (3) --------------------------------------- -------------- ---------- --------- ---------- ---------- Multi-Asset Portfolio (Class 1) 2011 563,317 37.90 21,351,237 1.40% 1.23% -2.51% 2010 628,617 38.88 24,440,297 1.40% 1.43% 7.40% 2009 709,896 36.20 25,698,359 1.40% 2.45% 22.32% 2008 831,959 29.59 24,621,600 1.40% 2.09% -26.93% 2007 980,546 40.50 39,715,911 1.40% 1.82% 6.97% Natural Resources Portfolio (Class 1) 2011 114,972 75.68 8,701,326 1.40% 0.66% -21.37% 2010 142,447 96.25 13,710,678 1.40% 0.89% 14.58% 2009 165,628 84.00 13,912,879 1.40% 1.48% 55.87% 2008 172,425 53.89 9,292,219 1.40% 0.85% -50.50% 2007 209,955 108.86 22,856,249 1.40% 1.08% 38.25% Strategic Multi-Asset Portfolio (Class 1) 2011 457,738 42.41 19,410,623 1.40% 0.96% -5.08% 2010 524,020 44.68 23,409,567 1.40% 0.00% 11.38% 2009 605,933 40.11 24,303,400 1.40% 6.23% 22.77% 2008 701,630 32.67 22,922,509 1.40% 0.00% -30.37% 2007 783,421 46.92 36,759,522 1.40% 0.00% 15.04%
(1) These amounts represent the annualized contract expenses of the variable account, consisting of distribution, mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying investment portfolios have been excluded. For additional information on charges and deductions, see footnote 4. (2) These amounts represent the dividends, excluding distributions of capital gains, received by the variable account from the underlying investment portfolio, 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 variable account is affected by the timing of the declaration of dividends by the underlying investment portfolio in which the variable account invests. The average net assets are calculated by adding ending net asset balances at the end of each month of the year and dividing it by the number of months that the portfolio had an ending asset balance during the year. (3) These amounts represent the total return for the periods indicated, including changes in the value of the underlying investment portfolio, and expenses assessed through the reduction of unit values. These ratios do not include any expenses assessed through the 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 period indicated or from the effective date through the end of the reporting period. (4) For the period ended November 18, 2011. 13 AMERICAN HOME ASSURANCE COMPANY NAIC CODE: 19380 STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 AMERICAN HOME ASSURANCE COMPANY STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 TABLE OF CONTENTS Report of Independent Auditors...........................................................................2 Statements of Admitted Assets............................................................................3 Statements of Liabilities, Capital and Surplus...........................................................4 Statements of Operations and Changes in Capital and Surplus..............................................5 Statements of Cash Flow..................................................................................6 Note 1 - Organization and Summary of Significant Statutory Basis Accounting Policies.....................7 Note 2 - Accounting Adjustments to Statutory Basis Financial Statements.................................20 Note 3 - Investments....................................................................................25 Note 4 - Reserves for Losses and LAE....................................................................37 Note 5 - Related Party Transactions.....................................................................43 Note 6 - Reinsurance....................................................................................52 Note 7 - Deposit Accounting Assets and Liabilities......................................................58 Note 8 - Federal Income Taxes...........................................................................60 Note 9 - Pension Plans and Deferred Compensation Arrangements...........................................69 Note 10 - Capital and Surplus and Dividend Restrictions.................................................73 Note 11 - Contingencies.................................................................................75 Note 12 - Other Significant Matters.....................................................................89 Note 13 - Subsequent Events.............................................................................91
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of American Home Assurance Company: We have audited the accompanying statutory statements of admitted assets, liabilities, capital and surplus of American Home Assurance Company (the Company) as of December 31, 2011 and 2010, and the related statutory statements of operations and changes in capital and surplus, and cash flow for each of the three years then ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the New York State Department of Financial Services, which practices differ from 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 and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2011 and 2010, or the results of its operations or its cash flows for each of the three years then ended December 31, 2011. 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, 2011 and 2010, and the results of its operations and its cash flows for each of the three years then ended December 31, 2011, on the basis of accounting described in Note 1. As described in Note 2 to the financial statements, during 2009, the Company adopted SSAP No. 10R, Income Taxes - Revised, A Temporary Replacement to SSAP No. 10, and has reflected the effect of this adoption within Changes in accounting principles on the Statements of Changes in Capital and Surplus. /s/ PricewaterhouseCoopers LLP April 25, 2012 New York, New York 2 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF ADMITTED ASSETS STATUTORY BASIS AS OF DECEMBER 31, 2011 AND 2010 (000'S OMITTED)
------------------------------------------------------------------------------------------------------------------ AS OF DECEMBER 31, 2011 2010 ------------------------------------------------------------------------------------------------------------------ Cash and invested assets: Bonds, primarily at amortized cost (fair value: 2011 - $18,504,022; 2010 - $15,493,142) $ 17,761,724 $ 15,148,888 Stocks: Common stocks, at fair value adjusted for non-admitted assets (cost: 2011 - $63,353; 2010 - $371,153) 84,263 397,460 Preferred stocks, primarily at fair value (cost: 2011 - $0; 2010 - $79,211) - 90,886 Other invested assets (cost: 2011 - $1,196,504; 2010 - $1,361,568) 1,440,576 1,574,423 Derivatives 1,690 - Short-term investments, at amortized cost (approximates fair value) 377,947 2,439,897 Cash and cash equivalents 68,584 181,013 Receivable for securities and other 491 1,146 ------------------------------------------------------------------------------------------------------------------ TOTAL CASH AND INVESTED ASSETS 19,735,275 19,833,713 ------------------------------------------------------------------------------------------------------------------ Investment income due and accrued 185,393 189,859 Agents' balances or uncollected premiums: Premiums in course of collection 461,753 425,340 Premiums and installments booked but deferred and not yet due 344,024 409,915 Accrued retrospective premiums 1,377,347 1,447,644 Amounts billed and receivable from high deductible policies 38,112 32,948 Reinsurance recoverable on loss payments 397,299 433,305 Funds held by or deposited with reinsurers 71,893 41,961 Net deferred tax assets 691,892 782,765 Equities in underwriting pools and associations 266,934 544,719 Receivables from parent, subsidiaries and affiliates 13,330 1,992,253 Other admitted assets 317,020 282,173 ------------------------------------------------------------------------------------------------------------------ TOTAL ADMITTED ASSETS $ 23,900,272 $ 26,416,595 ==================================================================================================================
See Notes to Statutory Basis Financial Statements 3 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF LIABILITIES, CAPITAL AND SURPLUS STATUTORY BASIS AS OF DECEMBER 31, 2011 AND 2010 (000'S OMITTED EXCEPT SHARE INFORMATION)
------------------------------------------------------------------------------------------------------ AS OF DECEMBER 31, 2011 2010 ------------------------------------------------------------------------------------------------------ LIABILITIES Reserves for losses and loss adjustment expenses $ 12,466,514 $ 14,383,093 Unearned premium reserves 2,843,572 3,213,423 Commissions, premium taxes, and other expenses payable 314,840 237,988 Reinsurance payable on paid loss and loss adjustment expenses 83,233 155,082 Current federal taxes payable to parent 23,930 60,666 Funds held by company under reinsurance treaties 1,196,004 136,869 Provision for reinsurance 78,525 99,443 Ceded reinsurance premiums payable, net of ceding commissions 388,540 405,324 Deposit accounting liabilities 97,625 189,891 Deposit accounting liabilities - funds held 4,848 990 Collateral deposit liability 364,039 404,450 Payable to parent, subsidiaries and affiliates 46,427 204,326 Derivatives - 4,250 Other liabilities 324,872 247,701 ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 18,232,969 19,743,496 ------------------------------------------------------------------------------------------------------ CAPITAL AND SURPLUS Common capital stock, par value: (2011 - $11.51; 2010 - $15.00), 1,758,158 shares authorized, 1,695,054 shares issued and outstanding 19,504 25,426 Capital in excess of par value 4,689,192 6,034,992 Unassigned surplus 507,717 351,265 Special surplus tax - SSAP 10R 450,661 260,922 Special surplus funds from retroactive reinsurance 229 494 ------------------------------------------------------------------------------------------------------ TOTAL CAPITAL AND SURPLUS 5,667,303 6,673,099 ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES, CAPITAL, AND SURPLUS $ 23,900,272 $ 26,416,595 ======================================================================================================
See Notes to Statutory Basis Financial Statements 4 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS STATUTORY BASIS FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED)
--------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2011 2010 2009 --------------------------------------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS Underwriting income: Premiums earned $ 5,682,158 $ 5,648,764 $ 6,354,545 --------------------------------------------------------------------------------------------------------------- Underwriting deductions: Losses incurred 3,932,805 5,066,245 4,699,991 Loss adjustment expenses incurred 611,264 912,853 768,136 Other underwriting expenses incurred 1,668,713 1,674,370 1,646,098 --------------------------------------------------------------------------------------------------------------- Total underwriting deductions 6,212,782 7,653,468 7,114,225 --------------------------------------------------------------------------------------------------------------- Net underwriting loss (530,624) (2,004,704) (759,680) --------------------------------------------------------------------------------------------------------------- Investment income: Net investment income earned 800,175 769,130 791,263 Net realized capital gains (net of capital gains taxes: 2011 - $90,032; 2010 - $169,323; 2009 - $57,389) 166,901 294,941 93,056 --------------------------------------------------------------------------------------------------------------- Net investment gains 967,076 1,064,071 884,319 --------------------------------------------------------------------------------------------------------------- Net loss from agents' or premium balances charged-off (16,296) (30,549) (25,860) Finance and service charges not included in premiums - - 4,596 Other (expense) income (29,775) 52,746 24,110 --------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) AFTER CAPITAL GAINS TAXES AND BEFORE FEDERAL 390,381 (918,436) 127,485 INCOME TAXES Federal income tax benefit (104,195) (141,920) (122,307) --------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 494,576 $ (776,516) $ 249,792 =============================================================================================================== CHANGES IN CAPITAL AND SURPLUS Capital and surplus, as of December 31, previous year $ 6,673,099 $ 5,872,354 $ 5,413,173 Adjustment to beginning surplus 26,048 (28,355) (32,602) --------------------------------------------------------------------------------------------------------------- Capital and surplus, as of January 1, 6,699,147 5,843,999 5,380,571 Changes in accounting principles (refer to Note 2) Adoption of SSAP 10R - - 272,916 Adoption of SSAP 43R - - (12,429) Other changes in capital and surplus: Net income (loss) 494,576 (776,516) 249,792 Change in net unrealized capital gains (net of capital gains taxes: 2011 - $3,008; 2010 - $110,099; 2009 - $202,913) 44,397 (161,330) (113,064) Change in net deferred income tax 659,647 (396,374) 59,354 Change in non-admitted assets (926,257) 513,237 (318,767) Change in SSAP 10R 189,739 (11,994) - Change in provision for reinsurance 20,918 (10,819) 6,968 Capital contribution 67,381 1,947,275 343,286 Return of capital (1,414,078) - - Change in par value of common stock (5,922) - - Dividends to stockholder (137,458) (301,343) - Other surplus adjustments (3,246) 1,494 (7,211) Foreign exchange translation (21,541) 25,470 10,938 --------------------------------------------------------------------------------------------------------------- Total changes in capital and surplus (1,031,844) 829,100 231,296 --------------------------------------------------------------------------------------------------------------- CAPITAL AND SURPLUS, AS OF DECEMBER 31, $ 5,667,303 $ 6,673,099 $ 5,872,354 ===============================================================================================================
See Notes to Statutory Basis Financial Statements 5 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF CASH FLOW STATUTORY BASIS FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED)
---------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2011 2010 2009 ---------------------------------------------------------------------------------------------------------------------- CASH FROM OPERATIONS Premiums collected, net of reinsurance $ 5,411,186 $ 5,414,448 $ 6,306,324 Net investment income 779,881 851,466 743,343 Miscellaneous (expense) income (86,020) 16,466 (2,769) ---------------------------------------------------------------------------------------------------------------------- SUB-TOTAL 6,105,047 6,282,380 7,046,898 Benefit and loss related payments 3,905,372 4,340,008 4,597,184 Payment to an affiliate under the asbestos loss portfolio transfer 783,818 - - Commission and other expense paid 2,363,249 2,416,351 2,520,462 Dividends paid to policyholders - - 233 Federal and foreign income taxes paid (recovered) 28,206 (370,410) (296,845) ---------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED FROM OPERATIONS (975,598) (103,569) 225,864 ---------------------------------------------------------------------------------------------------------------------- CASH FROM INVESTMENTS Proceeds from investments sold, matured, or repaid: Bonds 4,992,080 5,421,569 4,332,397 Stocks 545,819 1,385,481 1,731,884 Other 392,513 130,972 222,781 ---------------------------------------------------------------------------------------------------------------------- TOTAL PROCEEDS FROM INVESTMENTS SOLD, MATURED, OR REPAID 5,930,412 6,938,022 6,287,062 ---------------------------------------------------------------------------------------------------------------------- Cost of investments acquired: Bonds 7,448,761 4,509,137 6,666,144 Stocks 9,769 622,754 496,025 Other 250,178 240,465 107,966 ---------------------------------------------------------------------------------------------------------------------- TOTAL COST OF INVESTMENT ACQUIRED 7,708,708 5,372,356 7,270,135 ---------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED FROM INVESTING ACTIVITIES (1,778,296) 1,565,666 (983,073) ---------------------------------------------------------------------------------------------------------------------- CASH FROM FINANCING AND MISCELLANEOUS SOURCES Capital contribution 1,942,747 - 91,418 Return of capital (1,414,078) - - Change in par value of common stock (5,922) - - Dividends to stockholder (110,000) (301,343) - Intercompany receivable and payable, net (116,100) 169,364 771,557 Net deposit on deposit-type contracts and other insurance (1,723) 13,312 74,417 Equities in underwriting pools and association 356,715 6,643 125,605 Collateral deposit liability (40,411) (13,384) 31,448 Other (31,713) (103,508) (26,266) ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM (USED IN) FINANCING AND MISCELLANEOUS ACTIVITIES 579,515 (228,916) 1,068,179 ---------------------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS (2,174,379) 1,233,181 310,970 Cash and short-term investments: Beginning of year 2,620,910 1,387,729 1,076,759 ---------------------------------------------------------------------------------------------------------------------- END OF YEAR $ 446,531 $ 2,620,910 $ 1,387,729 ======================================================================================================================
See Notes to Statutory Basis Financial Statements 6 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT STATUTORY BASIS ACCOUNTING POLICIES A. ORGANIZATION American Home Assurance Company (the Company or American Home) is a direct wholly-owned subsidiary of Chartis U.S., Inc., a Delaware corporation, which is in turn owned by Chartis, Inc. (Chartis), a Delaware corporation. The Company's ultimate parent is American International Group, Inc. (the Ultimate Parent or AIG). See Note 5 for information about recent developments regarding AIG and Chartis, Inc. Chartis conducts the general insurance operations of AIG. Chartis presents its financial information in two operating segments -- commercial insurance and consumer insurance - with the supporting claims, actuarial, and underwriting disciplines integrated into these two major business segments. On January 17, 2012, Chartis announced that it had aligned its geographic structure to enhance execution of its commercial and consumer strategies and to add greater focus on its growth economies initiatives. Under this framework, Chartis is organized under three major geographic areas: the Americas, Asia and EMEA (Europe, Middle East and Africa). Previously, Chartis was organized in four geographic areas: the United States & Canada, Europe, the Far East, and Growth Economies (primarily consisting of Asia Pacific, the Middle East, and Latin America). This had no impact on the Company. The Company writes substantially all lines of property and casualty insurance with an emphasis on U.S. commercial business. In addition to writing substantially all classes of business insurance, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers' compensation and excess and umbrella coverages, the Company offers many specialized forms of insurance such as aviation, accident and health, warranty, equipment breakdown, directors and officers liability, difference in conditions, kidnap-ransom, export credit and political risk, and various types of errors and omissions coverages. Through AIG's risk management operation, the Company provides insurance and risk management programs to large corporate customers. In addition, through AIG's risk solution operation, the Company provides its customized structured products and through the Private Client Group the Company provides personal lines insurance to high-net-worth individuals. The Company remains diversified both in terms of classes of business and geographic locations. For calendar year 2011, 21.9 percent of its net premiums written represented workers' compensation business. Relative to geographic location, 86.4 percent of the Company's direct premiums written were foreign sourced, the majority of which was Japan based. U.S. resident business accounted for 13.6 percent of the Company's direct writings. No state accounted for more than 5.0 percent of such premiums. The Company is party to that certain Amended and Restated Inter-company Pooling Agreement, dated October 1, 2011 among the companies listed below (the Admitted Pooling Agreement), which nine companies are each a member of the Admitted Companies Pool (the Admitted Pool) governed by the Admitted Pooling Agreement. The changes to the Admitted Companies Pooling Agreement were not material and were intended to clarify certain provisions and to consolidate and modernize the 1978 agreement with 14 addenda into one document. The 7 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- member companies, their National Association of Insurance Commissioners (NAIC) company codes, inter-company pooling percentages and states of domicile are as follows:
POOL NAIC PARTICIPATION STATE OF COMPANY CO CODE PERCENTAGE DOMICILE -------- ------- ------------- ------------- (1) National Union Fire Ins. Co. of Pittsburgh, Pa. (National Union)* 19445 38% Pennsylvania (2) American Home 19380 36% New York (3) Commerce and Industry Insurance Company (C&I) 19410 11% New York (4) Chartis Property Casualty Company (Chartis PC) 19402 5% Pennsylvania (5) New Hampshire Insurance Company (New Hampshire) 23841 5% Pennsylvania (6) The Insurance Company of the State of Pennsylvania (ISOP) 19429 5% Pennsylvania (7) Chartis Casualty Company 40258 0% Pennsylvania (8) Granite State Insurance Company 23809 0% Pennsylvania (9) Illinois National Insurance Co. 23817 0% Illinois * Lead Company
The accompanying financial statements include the Company's U.S. operation and the operation of its Japan branch and its participation in the Chartis Overseas Association (the Association). The Company accepts business mainly from insurance brokers, enabling selection of specialized markets and retention of underwriting control. Any licensed insurance broker is able to submit business to the Company, but such broker has no authority to commit the Company to accept risk. In addition, the Company utilizes certain managing general agents and third party administrators for policy issuance and administration, underwriting, and claims adjustment services. The Company has significant transactions with AIG and affiliates and participates in the Admitted Pool. Refer to Note 5 for additional information. B. SUMMARY OF SIGNIFICANT STATUTORY BASIS ACCOUNTING POLICIES PRESCRIBED OR PERMITTED STATUTORY ACCOUNTING PRACTICES: 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 (formerly the Insurance Department of the State of New York) (NY SAP). NY SAP recognizes only statutory accounting practices prescribed or permitted by the State of New York 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 Law. The NAIC's Accounting Practices and Procedures Manual (NAIC SAP) has been adopted as a component of prescribed or permitted practices by the State of New York. The Superintendent of the New York State Department of Financial Services (the Superintendent) has the right to permit other specific practices that deviate from prescribed practices. 8 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NY SAP has adopted certain accounting practices that differ from those set forth in NAIC SAP; specifically the prescribed practices of (1) allowing the discounting of workers compensation known case loss reserves on a non-tabular basis; under NAIC SAP, non-tabular discounting of reserves is not permitted; and (2) NY SAP Regulation 20 (Regulation 20) allows certain offsets to the provision for reinsurance that are not permitted under NAIC SAP. A reconciliation of the Company's net income and capital and surplus between NAIC SAP and practices prescribed or permitted by NY SAP is shown below:
------------------------------------------------------------------------------------------------- DECEMBER 31, 2011 2010 2009 ------------------------------------------------------------------------------------------------- Net income (loss) , NY SAP $ 494,576 $ (776,516) $ 249,792 State prescribed practices - addition (deduction): Non-tabular discounting 60,114 (27,631) (89,222) ------------------------------------------------------------------------------------------------- NET INCOME (LOSS), NAIC SAP $ 554,690 $ (804,147) $ 160,570 ================================================================================================== Statutory surplus, NY SAP $ 5,667,303 $ 6,673,099 $ 5,872,354 State prescribed or permitted practices - (charge): Non-tabular discounting (384,510) (444,624) (416,993) Credits for reinsurance (94,824) (172,413) (190,105) ------------------------------------------------------------------------------------------------- STATUTORY SURPLUS, NAIC SAP $ 5,187,969 $ 6,056,062 $ 5,265,256 ==================================================================================================
With the concurrence of the New York State Department of Financial Services (NY DFS), the Company has discounted certain of its asbestos reserves, specifically, those for which future payments have been identified as fixed and determinable. The use of all the aforementioned prescribed practices has not adversely affected the Company's ability to comply with the NAIC's risk based capital and surplus requirements for the 2011, 2010 and 2009 reporting periods. STATUTORY ACCOUNTING PRACTICES AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: NAIC SAP is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America (GAAP). NAIC SAP and NY SAP vary in certain respects from GAAP. A description of certain of these accounting differences is set forth below: 9 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Under GAAP: a. Costs that vary directly with acquiring business related to premiums written and costs allowed by assuming reinsurers related to premiums ceded are deferred and amortized over the periods covered by the underlying policies or reinsurance agreements; b. Statutory basis adjustments, such as non-admitted assets and unauthorized reinsurance, are restored to surplus; c. The equity in earnings of affiliates with ownership between 20.0 percent and 50.0 percent is included in net income, and investments in subsidiaries with greater than 50.0 percent ownership are consolidated; d. The reserves for losses and loss adjustment expenses (LAE) and unearned premium reserves are presented gross of ceded reinsurance by establishing a reinsurance asset; e. Debt and equity securities deemed to be available-for-sale and trading securities are reported at fair value. The difference between cost and fair value of securities available-for-sale is reflected net of related deferred income tax, as a separate component of accumulated other comprehensive income in shareholder's equity. For trading and fair value option securities, the difference between cost and fair value is included in income, while securities held to maturity are valued at amortized cost; f. Direct written premium contracts that do not have sufficient risk transfer are treated as deposit accounting liabilities; g. Insurance and reinsurance contracts recorded as retroactive require the deferral and amortization of accounting gains over the settlement period of the ceded claim recoveries. Losses are recognized in the Statements of Operations; h. Deferred federal income taxes are provided for temporary differences for the expected future tax consequences of events that have been recognized in the Company's financial statements. The provision for deferred income taxes is reported in the Statements of Operations; i. For structured settlements in which the reporting entity has not been legally released from its obligation with the claimant (i.e. remains as the primary obligor), GAAP requires the deferral of any gain resulting from the purchase of a structured settlement annuity and to present an asset for the amounts to be recovered from such annuities; j. Entities termed variable interest entities (VIEs) in which equity investors do not have the characteristics of controlling interest, or do not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, are subject to consolidation by the entity that will absorb the majority of the VIE's expected losses or residual returns, if they occur; k. Investments in limited partnerships, hedge funds and private equity interests over which the Company has influence are accounted for using the equity method with changes in interest included in net realized 10 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- investment gains. Interest over which the Company does not have influence are reported, net of tax, as a component of accumulated other comprehensive income in shareholder's equity; and l. The statement of cash flow defers in certain respects from the presentation required under NAIC, including the presentation of changes in cash and cash equivalents. Under NAIC SAP: a. Costs that vary directly with acquiring business related to premiums written and costs allowed by assuming reinsurers related to premiums ceded are immediately expensed; b. Statutory basis adjustments, such as non-admitted assets and unauthorized reinsurance are charged directly to surplus; c. Subsidiaries are not consolidated. The equity in earnings of affiliates is included in unrealized appreciation/(depreciation) of investments which is reported directly in surplus. Dividends are reported as investment income; d. The reserve for losses and LAE and unearned premium reserves are presented net of ceded reinsurance; e. NAIC investment grade debt securities are reported at amortized cost, while NAIC non-investment grade debt securities (NAIC rated 3 to 6) are reported at lower of cost or fair value; f. Direct written premium contracts are reported as insurance as long as policies are issued in accordance with insurance requirements; g. Insurance and reinsurance contracts recorded as retroactive receive special accounting treatment. Gains and losses are recognized in the Statements of Operations and surplus is segregated to the extent gains are recognized. Certain retroactive intercompany reinsurance contracts are accounted for as prospective reinsurance if there is no gain in surplus as a result of the transaction; h. Deferred federal income taxes are provided for temporary differences for the expected future tax consequences of events that have been recognized in the Company's financial statements. Changes in deferred income taxes are charged directly to surplus and have no impact on statutory earnings. The admissibility of deferred tax assets is limited by statutory guidance; i. For structured settlement annuities where the claimant is the payee, statutory accounting treats these settlements as completed transactions and considers the earnings process complete (thereby allowing for immediate gain recognition), regardless of whether or not the reporting entity is the owner of the annuity; j. NAIC SAP does not require consolidation of VIEs; 11 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- k. Investments in partnerships, hedge funds and private equity interests are carried at the underlying GAAP equity with results from operations reflected in unrealized gains and losses in the Statements of Changes in Capital and Surplus; and l. The statutory statement of cash flow defers in certain respects from the GAAP presentation, including the presentation of changes in cash and short term investments instead of cash equivalents and certain miscellaneous sources are excluded from operational cash flows. The effects on the financial statements of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. SIGNIFICANT STATUTORY ACCOUNTING PRACTICES: A summary of the Company's significant statutory accounting practices are as follows: Use of Estimates: The preparation of financial statements in conformity with NY SAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. On an ongoing basis, the Company evaluates all of its estimates and assumptions. NY SAP also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from management's estimates. The significant estimates were used for loss and LAE, certain reinsurance balances, admissibility of deferred taxes, allowance for doubtful accounts and the carrying value of certain investments. Invested Assets: The Company's invested assets are accounted for as follows: o Cash, Cash Equivalents and Short-term Investments: The Company considers all highly liquid debt securities with maturities of greater than three months but less than twelve months from the date of purchase to be short-term investments. Short-term investments are carried at amortized cost which approximates fair value (as designated by the NAIC Capital Markets and Investment Analysis Office formerly known as NAIC Securities Valuation Office). Cash is in a negative position when outstanding checks exceed cash-on-hand in operating bank accounts. The Company maximizes its investment return by investing a significant amount of cash-on-hand in short term investments. Short term investments are recorded separately from cash in the accompanying financial statements. The Company funds cash accounts daily using funds from short term investments. As required by the NAIC SAP, the negative cash balance is presented as an asset. 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. o Bonds: Bonds with an NAIC designation of 1 and 2 are carried at amortized cost using the scientific method. Bonds with an NAIC designation of 3 to 6 are carried at the lower of amortized cost or fair value. Bonds that have not been filed with the NAIC Capital Markets and Investment Analysis Office within one year of purchase receive a "6*" rating and are carried at zero value, with a charge to unrealized investment loss. 12 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Bonds filed with the NAIC Capital Markets and Investment Analysis Office which receive a "6*" can carry a value greater than zero. If a bond is determined to have an other-than-temporary impairment (OTTI) in value the cost basis is written down to fair value as a new cost basis, with the corresponding charge to Net Realized Capital Gains (Losses) as a realized loss. In periods subsequent to the recognition of an OTTI loss for bonds, the Company generally accretes the difference between the new cost basis and the 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 future estimated cash flows. Loan-backed and structured securities are carried at amortized cost and generally are more likely to be prepaid than other fixed maturities. As of December 31, 2011 and 2010, the fair value of the Company's loan-backed and structured securities approximated $3,936,226 and $597,315, respectively. Loan-backed and structured securities include prepayment assumptions used at the purchase date and valuation changes caused by changes in estimated cash flow and are valued using the retrospective method. Prepayment assumptions for loan-backed and structured securities were obtained from independent third party services or internal estimates. These assumptions are consistent with the current interest rate and economic environment. As described in Note 2 - Accounting Changes, the Company adopted a change in its OTTI accounting principle pertaining to loan-backed and structured securities in the third quarter of 2009 when it adopted SSAP No. 43R (Revised), Loan-backed and Structured Securities (SSAP 43R). Under SSAP 43R, credit-related OTTI for loan-backed and structured securities is based on projected discounted cash flows, whereas, credit-related OTTI for loan-backed and structured securities was previously based on projected undiscounted cash flows under SSAP 43. o Common and Preferred Stocks: Unaffiliated common stocks are carried principally at fair value. Perpetual preferred stocks with an NAIC rating of P1 or P2 are carried at fair value. Redeemable preferred stocks with an NAIC rating of RP1 or RP2 that are subject to a 100 percent mandatory sinking fund or paid in-kind are carried at amortized cost. All below investment grade, NAIC 3 to 6 preferred stocks, are carried at the lower of amortized cost or fair value. Investments in non-publicly traded affiliates are recorded based on the underlying audited equity of the respective entity's financial statements. The Company's share of undistributed earnings and losses of the affiliates are reported in the Unassigned Surplus as unrealized gains and losses. o Other Invested Assets: Other invested assets include primarily partnerships and joint ventures. Fair values are based on the net asset value of the respective entity's financial statements. Joint ventures and partnership investments 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 or losses. For investments in joint ventures and partnerships that are determined to have an OTTI in value, the cost basis is written down to fair value as a new cost basis, with the corresponding charge to Net Realized Capital Gains/(Losses) as a realized loss. Investments in collateral loans are carried at their outstanding principal balance plus related accrued interest, less impairments, if any, and are admitted assets to the extent the fair value of the underlying collateral value equals or exceeds 100 percent of the recorded loan balance. 13 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- o Derivatives: The fair values of derivatives are determined using quoted prices in active markets and other market-evidence whenever possible, including market-based inputs to model, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The Company's cross-currency swaps are accounted for under SSAP No. 86, entitled "Accounting for Derivative Instruments and Hedging Transactions" (SSAP 86). None of the cross-currency swaps meet the hedging requirements under SSAP 86, and therefore the change in fair value of such derivatives are recorded as unrealized gains or losses in Unassigned Surplus in the Statements of Operations and Changes in Capital and Surplus. When the contract expires, realized gains and losses are recorded in investment income. o Net Investment Gains: Net investment gains consist of net investment income earned and realized gains or losses from the disposition or impairment of investments. Net investment income earned includes accrued interest, accrued dividends and distributions from partnerships and joint ventures. Investment income is recorded as earned. Realized gains or losses on the disposition of investments are determined on the basis of the specific identification. Investment income due and accrued is assessed for collectability. The Company writes off investment income due and accrued when it is probable that the amount is uncollectible by recording a charge against investment income in the period such determination is made. Any amounts over 90 days past due which have not been written-off are non-admitted by the Company. As of December 31, 2011 and 2010, no material amount of investment income due and accrued was determined to be uncollectible or non-admitted. o Unrealized Gains (Losses): Unrealized gains (losses) on all stocks, bonds carried at fair value, joint ventures, partnerships, derivatives and foreign currency translation are credited or charged to Unassigned Surplus. Other Than Temporary Impairment: The Company regularly evaluates its investments for 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 their investment portfolio. The Company's policy for determining OTTI has been established in accordance with the prescribed NAIC SAP guidance, including SSAP 43R, SSAP No. 26 - Bonds, Excluding Loan Backed and Structured Securities, SSAP No 30 - Investments in Common Stock (excluding investments in common stock of subsidiary, controlled, or affiliated entities), SSAP No 48 -- Joint Ventures, Partnerships and Limited Liability Companies, and INT 06-07 Definition of Phrase "Other Than Temporary". 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 contractual terms in effect at the acquisition date of the debt security. For loan-backed and structured securities, when a credit-related OTTI is present, the amount of OTTI recognized as a realized loss is equal to the difference between the investment's amortized cost basis and the present value of cash flows expected to be collected. If a bond is determined to have OTTI in value the cost basis is written down to fair value as a new cost basis, with the corresponding charge to Net Realized Capital Losses. In general, a security is considered a candidate for OTTI if it meets any of the following criteria: 14 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- - Trading at a significant (25 percent or more) discount to par, amortized cost (if lower) or cost for an extended period of time (nine consecutive months or longer); or - The occurrence of a discrete credit event resulting in (i) the issuer defaulting on a material outstanding obligation, (ii) the issuer seeking protection from creditors under the bankruptcy law as 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 - The Company may not realize a full recovery on their investment, irrespective of the occurrence of one of the foregoing events. Common and preferred stock investments whose fair value is less than their book value for a period greater than twelve months are considered a candidate for OTTI. Once a candidate for impairment has been identified, the investment must be analyzed to determine if any impairment would be considered other than temporary. Factors include: - The Company may not realize a full recovery on their investment; - Fundamental credit issues of the issuer; - An intent to sell the investment prior to the recovery of cost of the investment; or - Any other qualitative/quantitative factors that would indicate that an OTTI has occurred. Limited partnership investments whose fair value is less than its book value for a period greater than twelve months with a significant unrealized loss are considered a candidate for OTTI. Once a candidate for impairment has been identified, the investment must be analyzed to determine if any impairment would be considered other than temporary. Factors to consider include: - An order of liquidation or other fundamental credit issues with the partnership; - Evaluation of the cash flow activity between the Company and the partnership or fund during the year; - Evaluation of the current stage of the life cycle of the investment; - An intent to sell the investment prior to the recovery of cost of the investment; or - Any other qualitative/quantitative factors that would indicate that an OTTI has occurred. Revenue Recognition: Direct written premiums are primarily earned on a pro-rata basis over the terms of the policies to which they relate. For policies with exposure periods greater than thirteen months, premiums are earned in accordance with the methods prescribed in SSAP No. 65, Property and Casualty Contracts (SSAP 65). Accordingly, unearned premiums represent the portion of premiums written which are applicable to the unexpired 15 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- terms of policies in force. Ceded premiums are amortized into income over the contract period in proportion to the protection received. Premium estimates for retrospectively rated policies are recognized within the periods in which the related losses are incurred. In accordance with SSAP No. 66, Retrospectively Rated Contracts (SSAP 66), the Company estimates accrued retrospectively rated premium adjustments using the application of historical ratios of retrospectively rated premium development. The Company records accrued retrospectively rated premiums as an adjustment to written and earned premiums. The Company establishes non-admitted assets for 100 percent of amounts recoverable where any agent's balance or uncollected premium has been classified as non-admitted and thereafter for 10 percent of any amounts recoverable not offset by retrospectively return premiums or collateral. At December 31, 2011 and 2010, accrued premiums related to the Company's retrospectively rated return contracts amounted to $1,377,347 and $1,447,644, respectively, net of non-admitted premium balances of $58,213 and $55,910, respectively. Net written premiums that were subject to retrospective rating features were as follows:
-------------------------------------------------------------------------- For the years ended December 31, 2011 2010 2009 -------------------------------------------------------------------------- Net written premiums subject to retrospectively rated premiums $ 350,717 $ 522,917 $ 526,445 Percentage of total net written premiums 6.6% 10.1% 8.7% --------------------------------------------------------------------------
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. In accordance with SSAP No. 53, Property and Casualty Contracts -- Premiums (SSAP 53), the Company records the audit premium estimates as an adjustment to written premium, and earns these premiums immediately. For premium estimates that result in a return of premium to the policyholder, the Company immediately reduces earned premiums. When the premium exceeds the amount of collateral held, a non-admitted asset (equivalent to 10.0 percent of this excess amount) is recorded. In accordance with SSAP 53, the Company reviews its ultimate losses with respect to its unearned premium reserves. A premium deficiency liability is established if the premium reserves are not sufficient to cover the ultimate loss projection and associated acquisition expenses. Investment income is not considered in the calculation. For certain lines of business for which an insurance policy is issued on a claims-made basis, the Company offers to its insureds the option to purchase an extended reporting endorsement which permits the extended reporting of insured events after the termination of the claims-made contract. Extended reporting endorsements modify the discovery period of the underlying contract and can be for a defined period (e.g., six months, one year, five years) or an indefinite period. For defined reporting periods, premiums are earned over the term of the fixed period. For indefinite reporting periods, premiums are fully earned as written and loss and LAE liabilities associated with the unreported claims are recognized immediately. For warranty insurance, the Company will generally offer reimbursement coverage on service contracts issued by an authorized administrator and sold through a particular retail channel. Premiums are recognized over the life of the reimbursement policy in proportion to the expected loss emergence. The expected loss emergence can vary 16 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- substantially by policy due to the characteristics of products sold by the retailer, the terms and conditions of service contracts sold as well as the duration of an original warranty provided by the equipment manufacturer. The Company reviews all such factors to produce earnings curves which approximate the expected loss emergence for a particular contract in order to recognize the revenue earned. Reinsurance: Ceded premiums, commissions, expense reimbursements and reserves related to ceded business are accounted for on a basis consistent with that used in accounting for the original contracts issued and the terms of the reinsurance contract. Ceded premiums are reported as a reduction of premium earned. Amounts applicable to ceded reinsurance for unearned premium reserves, and reserves for losses and LAE have been reported as a reduction of these items, and expense allowances received in connection with ceded reinsurance are accounted for as a reduction of the related acquisition cost. Retroactive Reinsurance: Retroactive reinsurance reserves are reported separately in the balance sheet. Gains or losses are recognized in the Statements of Operations and Changes in Capital and Surplus as part of Other Income. Surplus gains are reported as segregated unassigned surplus until the actual retroactive reinsurance recovered exceeds the consideration paid. Deposit Accounting: Assumed and ceded reinsurance contracts which based on internal analysis, do not transfer a sufficient amount of insurance risk are recorded as deposit accounting transactions. In accordance with SSAP 62R, the Company records the net consideration paid or received as a deposit asset or liability, respectively. The deposit asset is reported as admitted if i) the assuming company is licensed, accredited or qualified by NY DFS; or ii) the collateral (i.e.: funds withheld, letters of credit or trusts provided by the reinsurer) meets all the requirements of NY SAP. 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 the expected future payments with a corresponding credit or charge to other gain in the Statements of Operations and Changes in Capital and Surplus. High Deductible Policies: In accordance with SSAP 65, the Company establishes loss reserves for high deductible policies net of deductibles (or reserve credits). As of December 31, 2011 and 2010, the amount of reserve credits recorded for high deductibles on unpaid claims amounted to $3,698,960 and $3,637,096, respectively. The Company establishes a non-admitted asset for 10 percent of paid loss recoverables, on high deductible policies, in excess of collateral held on an individual insured basis, or for 100 percent of paid loss recoverables where no collateral is held. As of December 31, 2011 and 2010, the net amount billed and recoverable on paid claims was $63,117 and $66,818, respectively, of which $25,005 and $33,870, respectively, were non-admitted. Additionally, the Company establishes an allowance for doubtful accounts for such paid loss recoverables in excess of collateral and after non-admitted assets, and does not recognize reserve credits where paid loss credits are deemed by the Company to be uncollectible. Foreign Property Casualty Business: As agreed with the NY DFS, the Company accounts for its participation in the business of the Association by (a) recording its net (after pooling) participation of such business as direct writings in its statutory financial statements; (b) recording in the Statements of Operations and Changes in Capital and Surplus its participation in the results of underwriting and investment income; and, (c) recording in the statements of admitted assets and liabilities, capital and surplus, its participation in the significant insurance and reinsurance balances; its net participation in all other assets (such as the invested assets) and liabilities has been recorded in Equities in Underwriting Pools and Associations. 17 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Commissions and Underwriting Expenses: Commissions, premium taxes, and certain underwriting expenses related to premiums written are charged to income at the time the premiums are written and are included in Other Underwriting Expenses Incurred. In accordance with SSAP 62R, the Company records a liability, equal to the difference between the acquisition cost and the reinsurance commissions received, on those instances where ceding commissions paid exceed the acquisition cost of the business ceded. The liability is amortized pro rata over the effective period of the reinsurance agreement in proportion to the amount of coverage provided under the reinsurance contract. Reserves for Losses and LAE: The reserves for losses and LAE, including IBNR 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 continually reviewed and updated as needed, and any resulting adjustments are recorded in the current period. Accordingly, losses and LAE are charged to income as incurred. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. The Company discounts its loss reserves on workers' compensation claims as follows: The calculation of the Company's workers' compensation tabular discount is based upon the 1979-81 Decennial Mortality Table, and applying a 3.5 percent interest rate. As of December 31, 2011 and 2010, the Company's tabular discount amounted to $202,786 and $284,288, respectively, all of which were applied against the Company's case reserves. The calculation of the Company's workers' compensation non-tabular discount is based upon the Company's own payout pattern and a 5.0 percent interest rate as prescribed by NY SAP. As of December 31, 2011 and 2010, the Company's non-tabular discount amounted to $384,510 and $444,624, respectively, all of which were applied against the Company's case reserves. As of December 31, 2011 and 2010, the discounted reserves for losses (net of reinsurance) were $1,704,799 and $1,770,687, respectively. Foreign Exchange: Assets and liabilities denominated in foreign currencies are translated at the rate of exchange in effect at the close of the reporting period. Revenues, expenses, gains, losses and surplus adjustments are translated using weighted average exchange rates. Unrealized gains and losses from translating balances from foreign currency into United States currency are recorded as adjustments to surplus. Realized gains and losses resulting from foreign currency transactions are included in Other Income in the Statements of Operations and Changes in Capital and Surplus. Statutory Basis Reserves: Certain required statutory basis reserves, principally the provision for reinsurance, are charged to surplus and reflected as a liability of the Company. Policyholders' Dividends: Dividends to policyholders are charged to income as declared. Capital and Surplus: Common capital stock and capital in excess of par value represent amounts received by the Company in exchange for shares issued. The common capital stock represents the number of shares issued multiplied by par value per share. Capital in excess of par value represents the value received by the Company in excess of the par value per share and subsequent capital contributions in cash or in kind from its shareholder. 18 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Non-Admitted Assets: Certain assets, principally electronic data processing (EDP) equipment, software, leasehold improvements, certain overdue agents' balances, accrued retrospective premiums, certain deposit accounting assets that do not meet all of the NY DFS requirements for admissibility, prepaid expenses, certain deferred taxes that exceed statutory guidance and unsupported current taxes are designated as non-admitted assets and are directly charged to Unassigned Surplus. EDP equipment primarily consists of non-operating software and is depreciated over its useful life, generally not exceeding 5 years. Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the leasehold improvement. For the years ended December 31, 2011 and 2010, depreciation and amortization expense amounted to $14,394 and $18,468, and accumulated depreciation as of December 31, 2011 and 2010 amounted to $153,908 and $139,515, respectively. Reclassifications: Certain balances contained in the 2010 and 2009 financial statements have been reclassified to conform to the current year's presentation. 19 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 2 - ACCOUNTING ADJUSTMENTS TO STATUTORY BASIS FINANCIAL STATEMENTS A. CHANGE IN ACCOUNTING PRINCIPLES: In 2011, the Company adopted the following change in accounting principles: SSAP 35R The Company adopted SSAP 35 -- Revised - Guaranty Fund and Other Assessments (SSAP 35R) effective for the reporting period beginning January 1, 2011. Under the new guidance, entities subject to assessments would recognize liabilities only when all of the following conditions would be met: 1. An assessment has been imposed or information available prior to the issuance of the statutory financial statements indicates that it is probable that an assessment will be imposed; 2. The event obligating an entity to pay an imposed or probable assessment has occurred on or before the date of the statutory financial statements; and 3. The amount of the assessment can be reasonably estimated. For premium based assessments, the amount to be accrued would be based only on current year premiums written and not estimated future premiums written. Under SSAP 35R, accounting for guaranty fund assessments would be determined in accordance with the type of guaranty fund assessment imposed. Additionally, SSAP 35R allows the anticipated recoverables from policy surcharges and premium tax offsets from accrued liability assessments to be an admitted asset. The adoption of SSAP 35R did not impact the Company's surplus as the accrual was consistent with the new guidelines. In 2010, the Company adopted the following change in accounting principles: SSAP 100 The Company adopted SSAP No. 100, Fair Value Measurements (SSAP 100), effective for reporting periods ending December 31, 2010 and thereafter. SSAP 100 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements but does not change existing guidance about whether an asset or liability is carried at fair value. There were no changes in surplus as a result of this adoption. In 2009, the Company adopted the following changes in accounting principles: SSAP 43R In the third quarter of 2009, the Company adopted SSAP 43R. Pursuant to SSAP 43R, if the fair value of a loan-backed or structured security is less than its amortized cost basis at the balance sheet date, an entity shall assess whether the 20 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- impairment is other-than temporary. When an impairment is present, SSAP 43R requires the recognition of credit-related OTTI for loan-backed and structured securities when the projected discounted cash flows for a particular security are less than the security's amortized cost. When a credit-related OTTI is present, the amount of OTTI recognized as a realized loss shall be equal to the difference between the investment's amortized cost basis and the present value of cash flows expected to be collected. Under the prescribed OTTI guidance for loan-backed and structured securities in the SSAP 43 that was in effect prior to the third quarter of 2009, OTTI was recognized when the amortized cost basis of a security exceeded undiscounted cash flows and such securities were written down to the amount of the undiscounted cash flows. SSAP 43R required application to existing and new investments held by a reporting entity on or after September 30, 2009. The guidance in SSAP 43R that was effective in the third quarter of 2009 required the identification of all the loan-backed and structured securities for which an OTTI had been previously recognized and may result in OTTI being recognized on certain securities that previously were not considered impaired under SSAP 43. For this population of securities, if a reporting entity did not intend to sell the security, and had the intent and ability to retain the investment in the security for a period of time sufficient to recover the amortized cost basis, the reporting entity should have recognized the cumulative effect of initially applying SSAP 43R as an adjustment to the opening balance of unassigned funds with a corresponding adjustment to applicable financial statement elements. As a result of the adoption of SSAP 43R, the Company recognized the following cumulative effect adjustment (CEA) in its 2009 statutory-basis financial statements, net of the related tax effect:
Direct (Charge) or Credit to Unassigned Surplus ------------------- Gross cumulative effect adjustment (CEA) - Net increase in the amortized cost of loan-backed and structured securities at adoption $ (19,122) Deferred tax on gross CEA 6,693 ------------------- Net cumulative effect of Change in Accounting Principle included in the Statement of Capital and Surplus $ (12,429) ===================
SSAP 10R On December 7, 2009, the NAIC voted to approve SSAP No. 10R, Income Taxes -- Revised, A Temporary Replacement of SSAP No. 10 (SSAP 10R). The new standard is effective December 31, 2009 for 2009 and 2010 interim and annual periods. The Company adopted SSAP 10R to account for its income taxes in its 2009 annual filing. Income tax expense and deferred tax are recorded, and deferred tax assets are admitted in accordance with SSAP 10R. In addition to the admissibility test on deferred tax assets, SSAP 10R requires assessing the need for a valuation allowance on deferred tax assets. In accordance with the additional requirements, the Company assesses its ability to realize deferred tax assets primarily based on the earnings history, the future earnings potential, the reversal of taxable temporary differences, and the tax planning strategies available to the Company when recognizing deferred tax assets. 21 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- In its 2009 annual filing, the Company admitted additional deferred tax assets of $272,916 as a result of the adoption of SSAP 10R. B. OTHER ADJUSTMENTS TO SURPLUS: The Company has dedicated significant effort to the resolution of ongoing weaknesses in internal controls. As a result of these remediation efforts, management concluded that adjustments should be made to the Assets, Liabilities, and Capital and Surplus as reported in the Company's 2010, 2009 and 2008 annual statutory basis financial statements. While these adjustments were noteworthy, after evaluating the quantitative and qualitative aspects of these corrections, the Company concluded that its prior period financial statements were not materially misstated and, therefore, no restatement was required. These adjustments resulted in after tax statutory (charges) credits that in accordance with SSAP No. 3 Accounting Changes and Correction of Errors, have been reported as an adjustment to Unassigned Surplus as of January 1, 2011, 2010 and 2009. The impact of these adjustments on policyholder surplus as of January 1, 2011, 2010 and 2009 is as follows:
---------------------------------------------------------------------------------------------------------------- POLICYHOLDERS TOTAL ADMITTED SURPLUS ASSETS TOTAL LIABILITIES ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2010 $ 6,673,099 $ 26,416,595 $ 19,743,496 Adjustments to beginning Capital and Surplus: Asset realization (includes $897 of deemed capital contribution) 47,679 47,679 - Liability correction (23,911) - 23,911 Income taxes 2,280 2,280 - ---------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS 26,048 49,959 23,911 ---------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2011, AS ADJUSTED $ 6,699,147 $ 26,466,554 $ 19,767,407 ================================================================================================================
An explanation for each of the adjustments for prior period's corrections is described below: Asset realization - The increase in net admitted assets is primarily the result of: (a) a pooling correction in equities and deposits in pools and associations; (b) an adjustment of an intangible asset; and (c) miscellaneous reserve adjustments; partially offset by (d) a miscellaneous non-admitted asset adjustment; (e) a correction of non-admitted assets related to retro premium and high deductible recoverable; and (f) other small miscellaneous adjustments. Liability correction - The increase in total liabilities is primarily the result of: (a) an increase in IBNR as a result of the reversal of asbestos reserves related to coverage in place agreements; and (b) adjustment of paid losses and loss reserves; partially offset by (c) miscellaneous reserve adjustments; and (d) other small miscellaneous adjustments. Income taxes - The increase in taxes is primarily the result of: (a) adjustments to the current tax assets and tax liabilities, and (b) the tax effect of the corresponding change in asset realization and liability corrections. 22 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------- POLICYHOLDERS TOTAL ADMITTED SURPLUS ASSETS TOTAL LIABILITIES ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2009 $ 5,872,354 $ 25,002,928 $ 19,130,574 Adjustments to beginning Capital and Surplus: Asset realization 2,147 2,147 - Liability correction (23,800) - 23,800 Income taxes (6,702) (6,702) - ---------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS (28,355) (4,555) 23,800 ---------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2010, AS ADJUSTED $ 5,843,999 $ 24,998,373 $ 19,154,374 ================================================================================================================
An explanation for each of the adjustments for prior period's corrections is described below: Asset realization - The increase in net admitted assets is primarily the result of (a) an increase in equities and deposits in pools and associations resulting from miscellaneous 2009 audit adjustments identified at the Association after the filing of the Company's 2009 financial statements; partially offset by (b) a decrease in miscellaneous accounts receivable that should have been recorded in prior periods; and (c) other small miscellaneous adjustments. Liability correction - The increase in total liabilities is primarily the result of (a) an increase in loss reserves to correct prior year calculations related to insolvent reinsurers and commuted reinsurance agreements; (b) an increase in IBNR; (c) a correction of deposit liability balances; and (d) other small miscellaneous adjustments. Income taxes - The (increase)/decrease in taxes is primarily the result of (a) adjustments to the deferred tax inventory, and (b) the tax effect of the corresponding change in asset realization and liability corrections.
---------------------------------------------------------------------------------------------------------------- POLICYHOLDERS TOTAL ADMITTED SURPLUS ASSETS TOTAL LIABILITIES ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2008 $ 5,413,173 $ 25,417,968 $ 20,004,795 Adjustments to beginning Capital and Surplus: Asset realization 30,679 30,679 - Liability correction (97,307) - 97,307 Federal income taxes (includes $5,044 of deemed capital contribution) 34,026 34,026 - ---------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS (32,602) 64,705 97,307 ---------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2009, AS ADJUSTED $ 5,380,571 $ 25,482,673 $ 20,102,102 ================================================================================================================
An explanation for each of the adjustments for prior period's corrections is described below: Asset realization - The increase in admitted assets is primarily the result of: (a) adjustments reported by the Association as of December 31, 2009 (carrying value of affiliates, foreign exchange, and reinsurance balances); (b) the reversal of a duplicate reinsurance payable balance (which had been netted against reinsurance recoverables); and (c) increases to the carrying values of certain affiliates. 23 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Liability correction - The increase in liabilities is primarily the result of: (a) adjustments to historical carried case and unearned premium reserves; (b) an adjustment to the revenue recognition policy for a specific insurance contract, resulting in the re-establishment of unearned premium reserves; (c) the accrual of an unrecorded liability for claim handling expenses; and (d) several remediation-related reinsurance accounting adjustments (including reconciliation adjustments and insolvency/commutation write-offs). Income taxes - The decrease in federal income taxes is primarily the result of: (a) non-admitted prior year income tax receivables that were not settled at year end; (b) adjustment to tax discounting on loss reserves for workers' compensation; (c) deferred tax asset reconciliation to book unrealized gains and unrealized foreign exchange gains, offset by corresponding changes in non-admitted tax assets; (d) removal of duplicated tax deduction for affiliate dividends; and (e) tax deduction for nontaxable book gain. 24 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 3 - INVESTMENTS STATUTORY FAIR VALUE OF FINANCIAL INSTRUMENTS: The following table presents the carrying values and statutory fair values of the Company's financial instruments as of December 31, 2011 and 2010.
2011 2010 ---------------------------------------------------------------------------------------------------- CARRYING STATUTORY CARRYING STATUTORY VALUE FAIR VALUE VALUE FAIR VALUE --------------------------------------- ----------------------------------------------------------- Assets: Bonds $ 17,761,724 $ 18,504,022 $ 15,148,888 $ 15,493,142 Common stocks 84,263 84,263 397,460 397,460 Preferred stocks - - 90,886 90,886 Other invested assets 1,440,576 1,440,576 1,574,423 1,574,423 Derivative asset 1,690 1,690 - - Cash, cash equivalents and short-term investments 446,531 446,531 2,620,910 2,620,910 Receivable for securities and other 491 491 1,146 1,146 Equities in underwriting pools and associations 266,934 266,934 544,719 544,719 Liabilities: Derivative liability $ - $ - $ 4,250 $ 4,250 Collateral deposit liability 364,039 364,039 404,450 404,450 ----------------------------------------------------------------------------------------------------
The methods and assumptions used in estimating the statutory fair values of financial instruments are as follows: o The fair values of bonds, 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 exchange, broker or custodian or the NAIC Capital Markets and Investment Analysis Office, formerly known as NAIC Securities Valuation Office. o The statutory fair values of affiliated common stocks are based on the underlying equity of the respective entity's financial statements. o Other invested assets include primarily partnerships and joint ventures. Fair values are based on the net asset value of the respective entity's financial statements. o The fair values of derivatives are valued using quoted prices in active markets and other market-evidence whenever possible, including market-based inputs to model, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. o The carrying value of all other financial instruments approximates fair value. 25 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The carrying values and fair values of the Company's bond investments as of December 31, 2011 and 2010 are outlined in the table below:
--------------------------------------------------------------------------------------------------------------------------- GROSS GROSS CARRYING UNREALIZED UNREALIZED FAIR VALUE * GAINS LOSSES VALUE --------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2011 U.S. governments $ 1,202,854 $ 51,880 $ 30 $ 1,254,704 All other governments 866,122 34,145 3,898 896,369 States, territories and possessions 1,773,975 155,847 - 1,929,822 Political subdivisions of states, territories and possessions 2,172,432 156,627 352 2,328,707 Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 5,430,054 343,906 10,153 5,763,807 Industrial and miscellaneous 6,316,287 169,838 155,512 6,330,613 --------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS, AS OF DECEMBER 31, 2011 $ 17,761,724 $ 912,243 $ 169,945 $ 18,504,022 ===========================================================================================================================
--------------------------------------------------------------------------------------------------------------------------- GROSS GROSS CARRYING UNREALIZED UNREALIZED FAIR VALUE * GAINS LOSSES VALUE --------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2010 U.S. governments $ 1,305,760 $ 15,665 $ 8,631 $ 1,312,794 All other governments 567,033 17,293 1,187 583,139 States, territories and possessions 2,097,245 106,740 4,276 2,199,709 Political subdivisions of states, territories and possessions 2,808,873 95,840 13,723 2,890,990 Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 6,238,798 198,038 59,040 6,377,796 Industrial and miscellaneous 2,131,179 58,156 60,621 2,128,714 --------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS, AS OF DECEMBER 31, 2010 $ 15,148,888 $ 491,732 $ 147,478 $ 15,493,142 ===========================================================================================================================
At December 31, 2011 the Company held hybrid securities with a fair value of $53,235 and carrying value of $52,281. At December 31, 2010 the fair value was $74,956 and the carrying value was $66,182. These securities are included in Industrial and miscellaneous. -------------------- * Includes bonds with NAIC designation of 3 to 6 that are reported at the lower of amortized cost or fair value. As of December 31, 2011 and 2010, the carrying value of those bonds amounted to $318,273 and $136,966, respectively. 26 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The carrying values and fair values of bonds at December 31, 2011, 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 VALUE* FAIR VALUE ----------------------------------------------------------------------- Due in one year or less $ 470,555 $ 472,304 Due after one year through five years 8,273,233 8,731,654 Due after five years through ten years 3,340,837 3,562,914 Due after ten years 1,691,587 1,800,924 Structured securities 3,985,512 3,936,226 ----------------------------------------------------------------------- TOTAL BONDS $ 17,761,724 $ 18,504,022 =======================================================================
Proceeds from sales and gross realized gains and gross realized losses were as follows:
FOR THE YEARS ENDED DECEMBER 31, 2011 2010 2009 ---------------------------------------------------------------------------------------------------------------------- EQUITY EQUITY EQUITY BONDS SECURITIES BONDS SECURITIES BONDS SECURITIES ------------------------------------------------------------- --------------------------- --------------------------- Proceeds from sales $ 3,979,210 $ 104,040 $ 4,652,824 $ 1,078,800 $ 3,921,920 $ 1,636,318 Gross realized gains 168,725 14,425 99,350 536,459 36,760 628,427 Gross realized losses (9,904) (363) (28,656) (15,017) (46,196) (225,886) ----------------------------------------------------------------------------------------------------------------------
27 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The cost, fair value and carrying value of the Company's common and preferred stocks as of December 31, 2011 and 2010 are set forth in the table below:
DECEMBER 31, 2011 ---------------------------------------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING COST GAINS LOSSES VALUE VALUE ---------------------------------------------------------------------------------- Common stocks: Affiliated $ 40,792 $ 21,832 $ 5,602 $ 57,022 $ 57,022 Non-affiliated 22,561 6,312 1,632 27,241 27,241 ---------------------------------------------------------------------------------- TOTAL $ 63,353 $ 28,144 $ 7,234 $ 84,263 $ 84,263 ================================================================================== Preferred stocks: Non-affiliated $ - $ - $ - $ - $ - ---------------------------------------------------------------------------------- TOTAL $ - $ - $ - $ - $ - ==================================================================================
DECEMBER 31, 2010 ---------------------------------------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING COST GAINS LOSSES VALUE VALUE ---------------------------------------------------------------------------------- Common stocks: Affiliated $ 339,955 $ 33,987 $ 16,219 $ 357,723 $ 357,723 Non-affiliated 31,198 8,867 328 39,737 39,737 ---------------------------------------------------------------------------------- TOTAL $ 371,153 $ 42,854 $ 16,547 $ 397,460 $ 397,460 ================================================================================== Preferred stocks: Non-affiliated $ 79,211 $ 11,675 $ - $ 90,886 $ 90,886 ---------------------------------------------------------------------------------- TOTAL $ 79,211 $ 11,675 $ - $ 90,886 $ 90,886 ==================================================================================
28 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The fair value together with the aging of the gross pre-tax unrealized losses with respect to the Company's bonds and stocks as of December 31, 2011 and 2010 is set forth in the table below:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ---------------------------------------------------------------------------------------------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES --------------------------------------------------------- ----------------------- -------------------------- As of December 31, 2011: U. S. governments $ 101,528 $ 30 $ - $ - $ 101,528 $ 30 All other governments 125,873 2,625 16,280 1,273 142,153 3,898 Political subdivisions of states, territories and possessions 25,592 352 - - 25,592 352 Special revenue 295,154 427 53,323 9,726 348,477 10,153 Industrial and miscellaneous 2,107,765 120,975 274,131 34,537 2,381,896 155,512 ------------------------------------------------------- ----------------------- -------------------------- TOTAL BONDS 2,655,912 124,409 343,734 45,536 2,999,646 169,945 ------------------------------------------------------- ----------------------- -------------------------- Affiliated - - 20,584 5,602 20,584 5,602 Non-affiliated 4,075 1,328 - 304 4,075 1,632 ------------------------------------------------------- ----------------------- -------------------------- Common stock 4,075 1,328 20,584 5,906 24,659 7,234 ------------------------------------------------------- ----------------------- -------------------------- TOTAL STOCKS 4,075 1,328 20,584 5,906 24,659 7,234 ------------------------------------------------------- ----------------------- -------------------------- TOTAL BONDS AND STOCKS $ 2,659,987 $ 125,737 $ 364,318 $ 51,442 $ 3,024,305 $ 177,179 ======================================================= ======================= ==========================
29 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) --------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ---------------------------------------------------------------------------------------------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES --------------------------------------------------------- ----------------------- -------------------------- As of December 31, 2010: U. S. governments $ 349,766 $ 8,631 $ - $ - $ 349,766 $ 8,631 All other governments 117,994 1,187 - - 117,994 1,187 States, territories and possessions 255,356 4,276 - - 255,356 4,276 Political subdivisions of states, territories and possessions 661,980 13,723 - - 661,980 13,723 Special revenue 1,542,522 44,779 80,600 14,261 1,623,122 59,040 Industrial and miscellaneous 672,482 59,489 6,933 1,132 679,415 60,621 ------------------------------------------------------- ----------------------- -------------------------- TOTAL BONDS 3,600,100 132,085 87,533 15,393 3,687,633 147,478 ------------------------------------------------------- ----------------------- -------------------------- Affiliated 289,975 10,694 12,200 5,525 302,175 16,219 Non-affiliated 338 39 - 289 338 328 ------------------------------------------------------- ----------------------- -------------------------- Common stock 290,313 10,733 12,200 5,814 302,513 16,547 ------------------------------------------------------- ----------------------- -------------------------- TOTAL STOCKS 290,313 10,733 12,200 5,814 302,513 16,547 ------------------------------------------------------- ----------------------- -------------------------- TOTAL BONDS AND STOCKS $ 3,890,413 $ 142,818 $ 99,733 $ 21,207 $ 3,990,146 $ 164,025 ======================================================= ======================= ==========================
The Company reported write-downs on its bond investments due to OTTI in fair value of $61,446, $49,894 and $38,733 in 2011, 2010 and 2009, respectively and reported write-downs on its common and preferred stock investments due to OTTI in fair value of $0, $33,261 and $38,827 during 2011, 2010 and 2009, respectively. 30 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- During 2011, 2010 and 2009, the Company reported the following write-downs on its joint venture and partnership investments due to an OTTI in fair value:
-------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2011 2010 2009 -------------------------------------------------------------------------------- General Atlantic Partners 82, L.P. $ 4,427 $ - $ - General Atlantic Partners 80, L.P. 4,306 - - TH Lee Putnam Ventures, L.P. 4,079 - - Sprout IX LP 1,988 - - Advanced Technology Ventures VI, L.P. 1,894 - - General Atlantic Partners 74, L.P. - 14,793 - NEF Kamchia Co-Investment Fund, L.P. - 12,803 - General Atlantic Partners 70, L.P. - 11,535 - Prides Capital Fund I LP - 10,778 - RH Fund 1, L.P. - 6,940 - General Atlantic Partners 77, L.P. - 6,326 - AIG Black Sea Holding, L.P. (BTC Investment) - - 57,728 J.C. Flowers Fund II, L.P. - - 20,286 Electra European Fund II - - 17,266 Capvest Equity Partners, L.P. - - 13,372 Valueact Capital Partners III - - 8,811 Arrowpath Fund II, L.P. - - 4,973 AZ Auto Hldgs LLC - - 4,102 Brencourt Multi-Strategy, L.P. - - 3,899 AIG Private Equity Portfolio, L.P. - - 3,542 Blackstone Kalix Fund L.P. - - 3,179 Meritage Private Equity Fund, L.P. - - 1,239 Items less than $1.0 million 750 - 2,255 -------------------------------------------------------------------------------- TOTAL $ 17,444 $ 63,175 $ 140,652 ================================================================================
Securities carried at book adjusted carrying value of $1,316,565 and $1,363,230 were deposited with regulatory authorities as required by law as of December 31, 2011 and 2010, respectively. During 2011, 2010 and 2009, included in Net Investment Income Earned were investment expenses of $27,606, $17,034 and $11,116, respectively and interest expense of $4, $348 and $9,737, respectively. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. 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 traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An active market is one in which transactions for the asset or liability being valued occur with sufficient frequency and volume to provide pricing information on an ongoing basis. An other-than-active market is one in which there are few transactions, the prices are not current, price 31 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- quotations vary substantially either over time or among market makers, or in which little information is released publicly for the asset or liability being valued. 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 and general market conditions. The standard defines three "levels" based on observability of inputs available in the marketplace used to measure fair value. Such levels are: - Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. - 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, and inputs other than quoted prices that are observable at commonly quoted intervals. - Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. These measurements include circumstances in which there is little, if any, market activity for the asset or liability. Bonds, Common Stocks, Preferred Stocks and Derivatives: The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Whenever available, the Company uses fair values for bonds, common stocks, preferred stocks and derivatives with NAIC ratings of 3 or below where fair value is less than amortized cost. When fair values are not available, fair values are obtained from third party pricing sources. The following table presents information about financial instruments carried at fair value on a recurring basis and indicates the level of the fair value measurement per SSAP 100 as of December 31, 2011 and 2010:
-------------------------------------------------------------------------- DECEMBER 31, 2011 -------------------------------------------------------------------------- Level 1 Level 2 Level 3 Total -------------------------------------------------------------------------- Bonds $ - $ 80,765 $ 81,990 $ 162,755 Common stocks 27,241 - - 27,241 Preferred stocks - - - - Derivative asset - 1,690 - 1,690 -------------------------------------------------------------------------- Total $ 27,241 $ 82,455 $ 81,990 $ 191,686 ==========================================================================
-------------------------------------------------------------------------- DECEMBER 31, 2010 -------------------------------------------------------------------------- Level 1 Level 2 Level 3 Total -------------------------------------------------------------------------- Bonds $ - $ 3,612 $ 2,904 $ 6,516 Common stocks 36,311 3,426 - 39,737 Preferred stocks - 90,886 - 90,886 Derivative liability - (4,250) - (4,250) -------------------------------------------------------------------------- Total $ 36,311 $ 93,674 $ 2,904 $ 132,889 ==========================================================================
32 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The following table presents changes during 2011 and 2010 in Level 3 financial instruments measured at fair value on a recurring basis, and the realized and unrealized gains (losses) recorded in income during 2011 and 2010 related to the Level 3 financial instruments that remained in the balance sheet at December 31, 2011 and 2010.
------------------------------------------------------------------------------------------------------------------------------ Net Realized and Unrealized Unrealized Purchases, Gains (Losses) Included in Net Gains Sales, Balance Investment Income and (Losses) Issuances, Balance at Beginning of Realized Capital Gains Included in Settlements, December 31, Year Transfers In Transfers Out (Losses) Surplus Net 2011 ------------------------------------------------------------------------------------------------------------------------------ Bonds $ 2,904 $ 72,866 $ (3,014) $ 3,686 $ (5,172) $ 10,720 $ 81,990 Common stocks - - - - - - - Preferred stocks - - - - - - - ------------------------------------------------------------------------------------------------------------------------------ Total $ 2,904 $ 72,866 $ (3,014) $ 3,686 $ (5,172) $ 10,720 $ 81,990 ==============================================================================================================================
------------------------------------------------------------------------------------------------------------------------------ Net Realized and Unrealized Unrealized Purchases, Gains (Losses) Included in Net Gains Sales, Balance Investment Income and (Losses) Issuances, Balance at Beginning of Realized Capital Gains Included in Settlements, December 31, Year Transfers In Transfers Out (Losses) Surplus Net 2010 ------------------------------------------------------------------------------------------------------------------------------ Bonds $ 37,738 $ 2,904 $ (32,212) $ (8,652) $ 10,049 $ (6,923) $ 2,904 Common stocks - - - - - - - Preferred stocks 2,905 - (520) - 438 (2,823) - ------------------------------------------------------------------------------------------------------------------------------ Total $ 40,643 $ 2,904 $ (32,732) $ (8,652) $ 10,487 $ (9,746) $ 2,904 ==============================================================================================================================
Other Invested Assets: The Company initially estimates the fair value of investments in joint ventures and limited partnerships (predominately private limited partnerships and certain hedge funds) by reference to transaction price. Subsequently, the Company obtains the fair value of these investments generally from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually. The Company considers observable market data and performs due diligence procedures in validating the appropriateness of using the net asset value as a fair value measurement. The Company also measures the fair value of certain assets such as joint ventures and limited partnerships included in other invested assets on a non-recurring basis when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company did not have other invested assets measured at fair value on a non-recurring basis as of December 31, 2011 and 2010. Loan-Backed and Structured Securities: There was no OTTI recorded during the year for loan-backed and structured securities due to the Company's intent to sell or its inability or lack of intent to retain such securities. 33 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- At December 31, 2011, the Company held loan-backed and structured securities for which it had recognized credit-related OTTI based on the fact that the present value of projected cash flows expected to be collected was less than the amortized cost of the securities.
--------------------------------------------------------------------------------- BOOK/ADJUSTED CARRYING VALUE AMORTIZED COST PRESENT VALUE OF BEFORE CURRENT PROJECTED CASH RECOGNIZED AMORTIZED COST PERIOD OTTI FLOWS OTTI AFTER OTTI FAIR VALUE --------------------------------------------------------------------------------- $ 1,564,984 $ 1,516,679 $ 48,305 $ 1,516,679 $ 1,440,301 =================================================================================
At December 31, 2011 and 2010, the Company held securities with unrealized losses (fair value is less than carrying value) for which OTTI had not been recognized in earnings as a realized loss. Such unrealized losses include securities with a recognized OTTI for non interest (i.e. 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 loss. The aggregate amount of unrealized losses and fair values for such securities, segregated between those securities that have been in a continuous unrealized loss position for less than 12 months and greater than 12 months, respectively, were as follows:
--------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2011 --------------------------------------------------------------------------------------------------------------- Less than 12 12 Months or Months Longer Total --------------------------------------------------------------------------------------------------------------- Unrealized Unrealized Unrealized Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses --------------------------------------------------------------------------------------------------------------- Loan-backed and structured securities $ 1,805,059 $ 100,010 $ 270,280 $ 33,244 $ 2,075,339 $ 133,254 --------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities $ 1,805,059 $ 100,010 $ 270,280 $ 33,244 $ 2,075,339 $ 133,254 ===============================================================================================================
--------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2010 --------------------------------------------------------------------------------------------------------------- Less than 12 12 Months or Months Longer Total --------------------------------------------------------------------------------------------------------------- Unrealized Unrealized Unrealized Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses --------------------------------------------------------------------------------------------------------------- Loan-backed and structured securities $ 572,376 $ 58,253 $ 6,298 $ 1,130 $ 578,674 $ 59,383 --------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities $ 572,376 $ 58,253 $ 6,298 $ 1,130 $ 578,674 $ 59,383 ===============================================================================================================
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 also considers its cash and working capital requirements and generally considers 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. 34 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- During 2010, the Company and certain of its affiliated insurance companies purchased various series of Class A Notes from Metropolis II, LLC (Metropolis). Each series of notes issued by Metropolis are collateralized by a single asset backed security (or in one series, four asset backed securities), primarily, collateralized loan obligations. The Class A Notes were created as part of securitization transactions during 2010, in which the collateral was transferred to Metropolis by AIG Financial Products Corp. (AIG-FP), an affiliate of the Company, through one of AIG-FP's wholly-owned subsidiaries. In exchange for the underlying collateral, AIG-FP and its wholly-owned subsidiary received cash equal in amount to the purchase price of the Class A Notes, and Class B Notes issued by Metropolis as part of the series. The Company's and its affiliated insurance companies' participation in the purchase of Class A Notes during 2010 is as follows (par and purchase price each converted to US dollars as of the acquisition date):
COMPANY PAR PURCHASED PURCHASE PRICE National Union $ 852,455 $ 808,335 American Home 423,421 402,213 C&I 275,223 261,438 Lexington Insurance Company 423,421 402,213 Chartis Select Insurance Company 275,223 261,438 ------------------------------------ Total $ 2,249,743 $ 2,135,637 ====================================
Of the thirteen Class A Notes issued by Metropolis and purchased by the Company and its affiliates, eight series are denominated in euros, the same currency as the collateral underlying that series. The Company and each of the affiliated insurance companies participating in the transactions entered into cross-currency swaps with AIG Markets, Inc. to hedge the foreign currency risk associated with the euro-denominated Class A Notes. Pursuant to the Company's cross-currency swaps, the Company will periodically make payments in euros in exchange for a receipt of a payment in US dollars on fixed dates and fixed exchange rates. The Company is therefore exposed under this type of contract to fluctuations in value of the swaps due to changes in exchange rates. This exposure in the value of euro payments offsets the Company's exposure to changes in the value of euro receipts on the Metropolis Class A Notes discussed above. Credit Risk: The current credit exposure of the Company's derivative contracts is limited to the fair value of such contracts that are favorable to the Company at the reporting date. Credit risk is managed by entering into transactions with creditworthy counterparties and obtaining collateral. Cash Requirements: The Company is not subject to collateral requirements on the cross-currency swaps. On swap payment dates, the Company is required to make a payment in euros equal to the amount of euros physically received on the Metropolis Class A Notes. The Company has determined that the cross-currency swaps do not qualify for hedge accounting under the criteria set forth in SSAP No. 86, entitled Accounting for Derivative Instruments and Hedging Transactions. As a result, the Company's swap agreements are accounted for at fair value and the changes in fair value are recorded as unrealized gains or unrealized losses in the Statements of Operations and Changes in Capital and Surplus. 35 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The initial notional amount of each swap matched the par amounts of Class A Notes purchased. The notional amount on these swaps reduces over time, to match reductions in the par amounts of the related Class A Notes owned by the Company and its affiliates (e.g., resulting from principal repayments or sales). The aggregate outstanding notional amount of the swaps as of December 31, 2011 and 2010 was EUR 1,080,300 and EUR 1,252,015, respectively. The following table summarizes the realized and unrealized capital gains or losses, the notional amount and the fair value of the cross-currency swaps held by the Company and its affiliates as of and for the years ended December 31, 2011 and 2010:
AS OF DECEMBER 31, 2011 YEAR ENDED DECEMBER 31, 2011 --------------------------- ------------------------------------ OUTSTANDING UNREALIZED NOTIONAL ESTIMATED REALIZED CAPITAL CAPITAL GAINS / AMOUNT FAIR VALUE GAINS / (LOSSES) (LOSSES) --------------------------- ------------------------------------ COMPANY National Union EUR 434,192 $ 2,509 $ (7,961) $ 2,509 American Home 195,790 1,690 (4,985) 1,690 C&I 127,264 1,148 (2,789) 1,148 Lexington Insurance Company 195,790 1,690 (4,291) 1,690 Chartis Select Insurance Company 127,264 1,148 (2,789) 1,148 ------------------------------------------------------------------- Total EUR 1,080,300 $ 8,185 $ (22,815) $ 8,185 ===================================================================
AS OF DECEMBER 31, 2010 YEAR ENDED DECEMBER 31, 2010 --------------------------- ------------------------------------- OUTSTANDING UNREALIZED NOTIONAL ESTIMATED REALIZED CAPITAL CAPITAL GAINS / AMOUNT FAIR VALUE GAINS / (LOSSES) (LOSSES) --------------------------- ------------------------------------- COMPANY National Union EUR 493,005 $ (11,263) $ 2,580 $ (11,263) American Home 230,003 (4,250) 913 (4,250) C&I 149,502 (2,762) 593 (2,762) Lexington Insurance Company 230,003 (4,250) 913 (4,250) Chartis Select Insurance Company 149,502 (2,762) 593 (2,762) -------------------------------------------------------------------- Total EUR 1,252,015 $ (25,287) $ 5,592 $ (25,287) ====================================================================
Securities Lending During the third quarter of 2011, the Company entered into financing transactions using municipal bonds to support statutory capital by generating taxable income. In these transactions, certain available for sale high grade municipal bonds were loaned to counterparties, primarily commercial banks and brokerage firms, who receive the tax-exempt income from the bonds. No foreign securities are loaned. In return, the counterparties are required to pay the Company an income stream equal to the bond coupon of the loaned securities, plus a fee. To secure their borrowing of 36 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- the securities, counterparties are required to post liquid collateral (such as high quality fixed maturity securities and cash) equal to at least 102 percent of the fair value of the loaned securities to third-party custodians for the Company's benefit in the event of default by the counterparties. The collateral is maintained in a third-party custody account and is trued-up daily based on daily fair value measurements from a third-party pricing source. If at any time the fair value of the collateral, inclusive of accrued interest thereon, falls below 102 percent of the fair value of the securities loaned, the Company can demand that the counterparty deliver additional collateral to restore the initial 102 percent collateral requirement. The Company is contractually prohibited from reinvesting any of the collateral it received, including cash collateral, for its securities lending activity. Accordingly, the securities lending collateral is not reported on the Company's balance sheet in accordance with SSAP No. 91R, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP 91R). The Company has not pledged any of its assets as collateral. Consequently, the collateral is considered "off balance sheet". The aggregate amount of collateral received as of December 31, 2011, inclusive of accrued interest, is $953,661. The aggregate fair value of securities on loan is $919,879. NOTE 4 - RESERVES FOR LOSSES AND LAE A reconciliation of the Company's reserves for losses and LAE as of December 31, 2011, 2010 and 2009 is set forth in the table below:
------------------------------------------------------------------------------------------------ 2011 2010 2009 ------------------------------------------------------------------------------------------------ RESERVES FOR LOSSES AND LAE, END OF PRIOR YEAR $ 14,383,093 $ 13,482,501 $ 13,268,600 Incurred losses and LAE related to: Current accident year 4,293,428 4,074,495 4,528,746 Prior accident years 250,641 1,904,603 939,381 ------------------------------------------------------------------------------------------------ TOTAL INCURRED LOSSES AND LAE 4,544,069 5,979,098 5,468,127 ------------------------------------------------------------------------------------------------ Paid losses and LAE related to: Current accident year (1,368,553) (1,206,965) (1,426,132) Prior accident years (5,092,095) (3,871,541) (3,828,094) ------------------------------------------------------------------------------------------------ TOTAL PAID LOSSES AND LAE (6,460,648) (5,078,506) (5,254,226) ------------------------------------------------------------------------------------------------ RESERVES FOR LOSSES AND LAE, AS OF DECEMBER 31, $ 12,466,514 $ 14,383,093 $ 13,482,501 ================================================================================================
During 2011, the Company ceded $1,876,693 of its net asbestos and Excess Workers Compensation reserves to Eaglestone Reinsurance Company (Eaglestone) resulting in a decrease to net reserves. For 2011, the Company reported adverse loss and LAE reserve development of $250,641, including accretion of loss reserve discount, of $37,629. The adverse development was mostly attributable to Primary Casualty, Specialty Workers Compensation, and the Environmental classes of business partially offset by favorable development of Financial Lines and Excess Casualty classes of business. Catastrophe losses of $168,280 were also included in the Company's incurred losses and LAE. As 37 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- discussed in Note 5, the restructure of the foreign branch operations resulted in a decrease of $44,666 of the reserves during 2011. Following completion of its 2010 annual comprehensive loss reserve review, the Company recorded a $1,506,600 reserve charge for the fourth quarter of 2010 to strengthen loss reserves, reflecting adverse development on prior accident years in classes of business with long reporting tails. Four classes -- Asbestos, Excess Casualty, Excess Workers' Compensation, and primary Workers' Compensation -- comprise approximately 80 percent of the total charge. The majority of the reserve strengthening relates to development in accident years 2005 and prior. These adjustments reflected management's current best estimate of the ultimate value of the underlying claims. These liabilities are necessarily subject to the impact of future changes in claim severity and frequency, as well as numerous other factors. Although the Company believes that these estimated liabilities are reasonable, because of the extended period of time over which such claims are reported and settled, the subsequent development of these liabilities in future periods may not conform to the assumptions inherent in their determination and, accordingly, may vary materially from the amounts previously recorded. To the extent actual emerging loss experience varies from the current assumptions used to determine these liabilities, they will be adjusted to reflect actual experience. Such adjustments, to the extent they occur, will be reported in the period recognized. AIG continues to monitor these liabilities and will take active steps to mitigate future adverse development. Additionally, during 2010, National Union commuted its quota share and stop loss reinsurance agreements with Chartis Specialty Insurance Company (Chartis Specialty) resulting in a net decrease in reserves of $1,180,170, offset by an increase of $794,667 from its commutation of a multi-year reinsurance agreement with American International Reinsurance Company, Ltd. (AIRCO). Refer to Note 6. For 2009, the Company experienced significant adverse loss and LAE reserve development, including accretion of loss reserve discount. The adverse development was almost entirely attributable to the Excess Casualty and Excess Workers' Compensation classes of business. The Company modified its loss development assumptions for each of these classes of business in 2009 in response to the higher than expected loss emergence. For 2008, the development was slightly favorable prior to accretion of the workers compensation discount, and slightly adverse after recognition of accretion of the discount. Favorable development in Directors & Officers liability and other classes of business offset adverse development in the Company's Excess Casualty business. The adverse development in Excess Casualty was primarily related to accident years 2003 and prior. The Company and some of its affiliates have continued their strategy that started in 2010 to improve the allocation of their reinsurance between traditional reinsurance markets and capital markets. As part of this strategy, they have secured $1.45 billion in protection for U.S. hurricanes and earthquakes through three separate catastrophe bond transactions. In 2011, they secured $575 million in a bond transaction and in 2010, $875 million through two separate bond transactions. These bond transactions in 2011 and 2010 reduced net premiums written by approximately $72,420 and $74,788, respectively. As of December 31, 2011, 2010 and 2009, the Company's reserves for losses and LAE have been reduced by anticipated salvage and subrogation of $176,259, $169,676 and $166,812, respectively. In addition, as of December 31, 2011 and 2010, the Company recorded $0 and $50,400, respectively, of salvage from a related party, as a direct reduction of outstanding reserves. As of December 31, 2011, 2010 and 2009, the Company's reserves for losses and LAE have been reduced by credits for reinsurance recoverable of $5,970,806, $4,364,556 and $5,336,235, respectively (exclusive of inter-company pooling). 38 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- ASBESTOS AND ENVIRONMENTAL RESERVES The Company continues to receive 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 1984 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. The Company's environmental exposure arises from the sale of general liability, product liability or commercial multi peril liability insurance, or by assumption of reinsurance within these lines of business. 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. 39 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The Company's asbestos and environmental related loss and LAE reserves (including case & IBNR reserves) for the year ended December 31, 2011, 2010 and 2009, gross and net of reinsurance credits, are as follows:
ASBESTOS LOSSES ENVIRONMENTAL LOSSES ------------------------------------------------------------------------------------------------------------------------- 2011 2010 2009 2011 2010 2009 --------------------------------------------------------------------------------- --------------------------------------- Direct : Loss and LAE reserves, beginning of year $ 1,536,426 $ 890,649 $ 905,283 $ 67,916 $ 88,550 $ 105,450 Incurred losses and LAE (56,328) 818,692 175,575 8,700 5,138 (3,738) Calendar year paid losses and LAE (129,292) (172,915) (190,209) (20,768) (25,772) (13,162) --------------------------------------------------------------------------------- --------------------------------------- LOSS AND LAE RESERVES, END OF YEAR $ 1,350,806 $ 1,536,426 $ 890,649 $ 55,848 $ 67,916 $ 88,550 ================================================================================= ======================================= Assumed: Loss and LAE reserves, beginning of year $ 154,386 $ 85,957 $ 86,374 $ 5,476 $ 5,744 $ 5,077 Incurred losses and LAE 26,780 87,026 (1,517) 1,379 1,066 856 Calendar year paid losses and LAE (19,442) (18,597) 1,100 (1,227) (1,334) (189) --------------------------------------------------------------------------------- --------------------------------------- LOSS AND LAE RESERVES, END OF YEAR $ 161,724 $ 154,386 $ 85,957 $ 5,628 $ 5,476 $ 5,744 ================================================================================= ======================================= Net of reinsurance: Loss and LAE reserves, beginning of year $ 733,373 $ 393,257 $ 414,790 $ 41,696 $ 48,761 $ 57,647 Incurred losses and LAE 46,614 422,050 54,172 8,388 6,963 1,800 Calendar year paid losses and LAE (779,987) (81,934) (75,705) (11,497) (14,028) (10,686) --------------------------------------------------------------------------------- --------------------------------------- LOSS AND LAE RESERVES, END OF YEAR $ - $ 733,373 $ 393,257 $ 38,587 $ 41,696 $ 48,761 ================================================================================= =======================================
The amount of ending reserves for Bulk and IBNR included in the table above for Asbestos and Environmental losses is as follows:
ASBESTOS LOSSES ENVIRONMENTAL LOSSES ------------------------------------------------------------------------------------------------------------------------- 2011 2010 2009 2011 2010 2009 --------------------------------------------------------------------------------- -------------------------------------- Direct basis $ 860,891 $ 1,127,844 $ 503,724 $ 8,937 $ 17,850 $ 29,091 Assumed reinsurance basis 101,277 118,402 41,926 410 394 520 Net of ceded reinsurance basis - 552,119 221,716 4,491 8,548 14,070
The amount of ending reserves for LAE included in the table above for Asbestos and Environmental losses is as follows:
ASBESTOS LOSSES ENVIRONMENTAL LOSSES ------------------------------------------------------------------------------------------------------------------------- 2011 2010 2009 2011 2010 2009 ------------------------------------------------------------------------------------------------------------------------- Direct basis $ 98,454 $ 125,316 $ 55,969 $ 3,830 $ 7,650 $ 12,468 Assumed reinsurance basis 9,322 7,659 7,009 91 87 164 Net of ceded reinsurance basis - 55,849 26,985 3,588 3,582 5,971
Management believes that the reserves carried for the asbestos and environmental claims at December 31, 2011 are 40 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- adequate as they are based on known facts and current law. The Company continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. Estimation of asbestos and environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1984 and prior years, cannot be estimated by conventional reserving techniques. Asbestos Loss Portfolio Transfer On March 31, 2011, the Company and certain other Chartis affiliated insurers (collectively, the Chartis Reinsureds) entered into a loss portfolio transfer reinsurance agreement (Asbestos Reinsurance LPT), with an inception date of January 1, 2011, with Eaglestone. Under the Asbestos Reinsurance LPT, the Chartis Reinsureds transferred all of their net (net of discount and net of external reinsurance) U.S. asbestos liabilities to Eaglestone. The Chartis Reinsureds made a payment of $2,790,351 to Eaglestone (representing the net carrying value of their asbestos reserves) and Eaglestone agreed to provide coverage up to an aggregate limit of $5,000,000 on the assumed asbestos portfolio. The share of the net reserves (and payment) assumed by Eaglestone from each of Chartis Reinsureds is presented below. Eaglestone and the Chartis Reinsureds received the required regulatory approvals to enter into the Asbestos Reinsurance LPT. The transaction closed and settled on May 13, 2011. Eaglestone and the Chartis Reinsureds recorded the transaction as prospective reinsurance in accordance with SSAP 62R. On June 17, 2011, Eaglestone and the Chartis Reinsureds completed a transaction, effective as of January 1, 2011, with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which the bulk of the Chartis Reinsureds' U.S. asbestos liabilities that were assumed by Eaglestone under the Asbestos Reinsurance LPT were transferred through a reinsurance agreement by Eaglestone to NICO. The transaction with NICO covers potentially volatile U.S.-related asbestos exposures. The NICO transaction does not cover asbestos accounts that the Chartis reinsureds believe have already been reserved to their limit of liability or certain other ancillary asbestos exposures of Chartis affiliates. In addition to its assumption of the subject asbestos liabilities and as included as part of its liability under the reinsurance agreement with Eaglestone, NICO assumed the collection risk on the Chartis Reinsureds' third party reinsurance recoverables with respect to the asbestos reserves NICO assumed. With the concurrence of the NY DFS, the Company's provision for reinsurance recoverable both paid and unpaid has been reduced by $82,034 to reflect the transfer to an authorized reinsurer of the collection risk on certain of the Chartis companies' asbestos related third party reinsurance recoverables. This credit is reflected in the "Other allowed offset items" column of the Schedule of Reinsurance of the Company's 2011 Annual Statement. Excess Workers' Compensation Loss Portfolio Transfer On March 31, 2011, the Admitted Pool members entered into a loss portfolio transfer agreement (Excess Workers' Compensation Reinsurance LPT), with an inception date of January 1, 2011, with Eaglestone to transfer $2,720,102 of net excess workers' compensation liabilities to Eaglestone on a funds withheld basis. Eaglestone established an initial funds withheld asset in the aggregate of $2,720,102 and agreed to provide coverage up to an aggregate limit of $5,500,000 on the assumed exposures. Eaglestone will earn interest of 4.25 percent per annum on the funds withheld balance. The Company's funds held balance including accrued interest was $1,071,268 at December 31, 2011. This 41 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- was considered a non cash transaction in the statement of cash flow. The share of the net reserves assumed by Eaglestone from each of the Chartis Reinsureds is presented below.
---------------------------------------------------------------------------------------- ASBESTOS LOSS EXCESS WORKERS' COMPANY TRANSFER COMPENSATION TOTAL ---------------------------------------------------------------------------------------- ADMITTED POOL COMPANIES: National Union $ 827,363 $ 927,266 $ 1,754,629 American Home 783,818 1,092,875 1,876,693 C&I 239,500 333,934 573,434 Chartis PC 108,863 122,009 230,872 New Hampshire 108,863 122,009 230,872 ISOP 108,863 122,009 230,872 ----------------------------------------------- TOTAL ADMITTED POOL COMPANIES $ 2,177,270 $ 2,720,102 $ 4,897,372 =============================================== SURPLUS LINES POOL COMPANIES: Lexington Insurance Company $ 261,997 $ - $ 261,997 Chartis Select Insurance Company 67,370 - 67,370 Chartis Specialty Insurance Company 37,428 - 37,428 Landmark Insurance Company 7,486 - 7,486 ----------------------------------------------- TOTAL SURPLUS LINES POOL COMPANIES $ 374,281 $ - $ 374,281 =============================================== CHARTIS INTERNATIONAL Chartis Overseas Ltd. $ 212,400 $ - $ 212,400 Other 26,400 - 26,400 ----------------------------------------------- TOTAL CHARTIS INTERNATIONAL $ 238,800 $ - $ 238,800 =============================================== ----------------------------------------------- GRAND TOTAL $ 2,790,351 $ 2,720,102 $ 5,510,453 ===============================================
42 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 5 - RELATED PARTY TRANSACTIONS A. ADMITTED POOLING AGREEMENT The Company, as well as certain other insurance affiliates, is a party to an inter-company reinsurance pooling agreement. In accordance with the terms and conditions of this agreement, the member companies cede all direct and assumed business (except that of the Japan branch of the Company) to National Union (the lead pooling participant). In turn, each pooling participant receives from National Union their percentage share of the pooled business. The Company's share of the pool is 36.0 percent. Accordingly, premiums earned, losses and LAE incurred, and other underwriting expenses, as well as related assets and liabilities, in the accompanying financial statements emanate from the Company's percentage participation in the pool. A list of all pooling participants and their respective participation percentages is set forth in Note 1. B. CHARTIS OVERSEAS ASSOCIATION POOLING ARRANGEMENT AIG formed the Association; a Bermuda unincorporated association, in 1976, as the pooling mechanism for AIG's international general insurance operations. In exchange for membership in the Association at the assigned participation, the members contributed capital in the form of cash and other assets, including rights to future business written by international operations owned by the members. The legal ownership and insurance licenses of these international branches remain in the name of New Hampshire, National Union, and the Company. On annual basis the Association files audited financial statements with the NY DFS that have been prepared in accordance with NY SAP. At the time of forming the Association, the member companies entered into an open-ended reinsurance agreement, cancelable with six months written notice by any member. The reinsurance agreement governs the insurance business pooled in the Association. The initial participation established was subsequently amended for profits and losses for each year derived from reinsurance of risks situated in Japan (excluding certain Japanese situs risks and business underwritten by the Company's Japan branch which is not subject to the Admitted Pooling Agreement nor the Association). The participation for Japanese and non-Japanese business underwritten via the Association is set forth in the table below:
--------------------------------------------------------- -------------- ------------------- INITIAL PARTICIPATION NAIC CO. PARTICIPATION PERCENT SPECIFIC TO MEMBER COMPANY CODE PERCENT JAPAN RISK -------------------------------------------------------------------------------------------- Chartis Overseas Limited - 67.0% 85.0% Admitted Pool member companies, as follows: - 33.0% 15.0% New Hampshire 23841 12.0% 10.0% National Union 19445 11.0% 5.0% The Company 19380 10.0% 0.0% ============================================================================================
43 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- In accordance with the Admitted Pooling Agreement, the Admitted Pool member companies' participation in the Association is pooled among all Admitted Pool members proportional to their participation in the Admitted Pool. The Company's participation in the Association after the application of its participation in the Admitted Pooling Agreement has been presented in the accompanying financial statements as follows:
-------------------------------------------------------------------------- AS OF DECEMBER 31, 2011 2010 -------------------------------------------------------------------------- Assumed reinsurance premiums receivable $ 119,334 $ 75,852 Funds held by ceding reinsurers 41,702 12,478 Reinsurance recoverable 34,065 42,074 Equities in underwriting pools and associations 266,934 544,719 -------------------------------------------------------------------------- TOTAL ASSETS $ 462,035 $ 675,123 -------------------------------------------------------------------------- Loss and LAE reserves $ 524,705 $ 564,889 Unearned premium reserves 206,983 233,080 Funds held 10,157 13,038 Ceded balances payable 48,337 61,292 Assumed reinsurance payable 53,519 44,085 -------------------------------------------------------------------------- TOTAL LIABILITIES $ 843,701 $ 916,384 -------------------------------------------------------------------------- TOTAL SURPLUS $ (381,666) $ (241,261) ==========================================================================
As of December 31, 2011, the Association reported an asset of $2,401,126 representing the value of subsidiaries and affiliated entities (SCAs). As of December 31, 2011, Chartis Europe S.A. represented $1,748,890 and Chartis UK Holdings represented $542,447, respectively of this total SCA asset. The Company's reporting of its interest in the Association's SCA entities is consistent with the reporting of its interest in the Association and the Admitted Pooling Agreement. At December 31, 2011, the Company's interest in the Association's SCA entities was $285,254 and has been reported as a component of Equities in Underwriting Pools and Associations. As part of its efforts to simplify the legal entity structure, enhance transparency and streamline financial visibility, Chartis continued to restructure the foreign branch operations of the Admitted Pool members. Generally, the results of these foreign branch operations, with the exception of the Company's Japan and former Canadian branches, have historically been reported as part of the operations of the Association by its member companies consistent with the accounting for the Admitted Pooling Agreement, the Admitted Pool. The U.S. member companies of the Association pooled their 33 percent participation with the remaining members of the Admitted Pool. On January 1, 2011, the Company transferred the existing business of its Singapore Branch to Chartis Singapore Insurance PTE Ltd. (Chartis Singapore) an indirect wholly owned subsidiary of Chartis International, LLC. The Company also transferred the in force business of its Australia and New Zealand branches to new legal entities 44 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- formed in those jurisdictions, effective March 1, 2011 and December 1, 2011 respectively. With an effective date of December 1, 2011, the Company also transferred the in force business of its Cyprus and Malta branches to newly formed branches of Chartis Insurance UK Limited (Chartis UK). New Hampshire transferred its in force business of its Philippines branch to Chartis Philippines Insurance Inc., a subsidiary of Chartis Singapore, effective December 1, 2011. On December 1, 2011, Chartis Insurance Ireland Limited (CIIL) merged into Chartis UK (n/k/a Chartis Europe Limited). Upon merger, business previously written by CIIL will be written by a newly registered Irish branch of Chartis UK. In connection with this restructuring, certain inter-company reinsurance agreements between CIIL and the Association members were novated to Chartis UK Ireland Branch and repaneled. On that same date, Chartis UK Ireland Branch entered into a quota share and a combined working and catastrophe excess of loss reinsurance agreement directly with the Association members. During 2011, the largest restructuring were completed at Chartis Singapore, the Australia branch and the Hong Kong branches. These branches had total assets of $2,315,692 and liabilities of $1,322,618. Effective December 1, 2010, the in force business of the Hong Kong branches of National Union, the Company and New Hampshire was transferred to Chartis Insurance Hong Kong Limited, a subsidiary of Chartis Overseas Limited, under Section 25D of the Hong Kong Insurance Companies Ordinance. Consistent with the 2011 transactions, this transaction was recorded by the Admitted Pool members in calendar year 2011 with the approval of the New York and Pennsylvania Insurance Departments. The Association's fiscal year end is November 30th. Although the fiscal year end for the members of the Admitted Pool is December 31, their financial statements have historically and consistently reported the results of their participation in the Association as of the Association's fiscal year end. In order to achieve consistency in their financial reporting, the Admitted Pool members have received approval from the NY DFS and Pennsylvania Insurance Department to record the above referenced December 1, 2011 restructuring activities, including the reinsurance transactions associated with the restructuring of Chartis Ireland operations, in their 2012 statutory financial statements. These transactions are not expected to have a material impact on the Company's financial statements. C. GUARANTEE ARRANGEMENTS The Company issued guarantees whereby it unconditionally and irrevocably guaranteed all present and future obligations and liabilities of any kind 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 11. 45 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- D. INVESTMENTS IN AFFILIATES As of December 31, 2011 and 2010, the Company's common stock investments with its affiliates together with the related change in unrealized appreciation were as follows:
---------------------------------------------------------------------------------------------------------- AFFILIATE CARRYING VALUE CHANGE IN OWNERSHIP ACTUAL COST AT DECEMBER 31, CARRYING VALUE AFFILIATED COMMON STOCK INVESTMENTS PERCENT 2011 2011 2011 ---------------------------------------------------------------------------------------------------------- AIU Brasil Affiliate 100.0% $ 408 $ 476 $ (1,771) Chartis Non Life Holding Company (Japan), Inc. 0.0% - - (289,975) AIG Mexico Industrial, L.L.C. (a) 0.0% - - (10,954) American International Realty Corporation 31.5% 14,198 35,962 (6,385) Pine Street Real Estate Holdings Corporation 31.5% 5,209 2,362 227 Eastgreen, Inc. 13.8% 20,977 18,222 8,157 ---------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS - AFFILIATES $ 40,792 $ 57,022 $ (300,701) ==========================================================================================================
(a) The Company's interest was sold on July 29, 2011.
---------------------------------------------------------------------------------------------------------- AFFILIATE CARRYING VALUE CHANGE IN OWNERSHIP ACTUAL COST AT DECEMBER 31, CARRYING VALUE AFFILIATED COMMON STOCK INVESTMENTS PERCENT 2010 2010 2010 ---------------------------------------------------------------------------------------------------------- Chartis Non Life Holding Company (Japan), Inc.(c) 100.0% $ 300,384 $ 289,975 $ 210,017 AIU Brasil Affiliate 100.0% 408 2,247 155 AIG Mexico Industrial, L.L.C. 49.0% 6,981 10,954 567 American International Realty Corporation 31.5% 14,169 42,347 21,723 Pine Street Real Estate Holdings Corporation 31.5% 5,209 2,135 (58) Eastgreen, Inc. 13.4% 12,804 10,065 138 Fuji Fire and Marine Insurance Company (c) 2.8% - - (12,180) ---------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS - AFFILIATES $ 339,955 $ 357,723 $ 220,362 ==========================================================================================================
(c) The Company's ownership of Fuji Fire and Marine Insurance Company was consolidated with its ownership of Chartis Non Life Holding Company (Japan), Inc. On August 4, 2011, the Company closed a transaction in which it sold its interest in Chartis Non-Life Holding Company (Japan), Inc., an intermediate holding company whose primary asset consisted of approximately 38.6 percent of the common stock of Fuji Japan, to Chartis Pacific Rim Holdings, L.L.C, also a subsidiary of Chartis International, LLC, for approximately $433,600. The Company realized a capital gain of $133,220 and incurred a tax expense of $46,627 on this transaction. The tax liability was relieved through a deemed capital contribution. In 2010, the Company's ownership of Fuji Fire and Marine Insurance Company was consolidated with its ownership of Chartis Non Life Holding Company (Japan) Inc. Investments in affiliates are included in common stocks based on the net worth of the entity except for publicly 46 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- traded affiliates which are based on quoted fair values, less a discount as prescribed by NAIC SAP (see Note 1). The Company has ownership interests in certain affiliated real estate holding companies. From time to time, the Company may own investments in partnerships across various other AIG affiliated entities with a combined percentage greater than 10.0 percent. As of December 31, 2011 and 2010, the Company's total investments in partnerships with affiliated entities where AIG's interest was greater than 10.0 percent amounted to $566,665 and $802,931, respectively. E. RESTRUCTURING DOMESTIC OPERATIONS As discussed in Note 6, effective January 1, 2010 and April 1, 2010, National Union commuted its quota share and stop loss reinsurance agreements with Chartis Specialty and a multi-year reinsurance agreement with AIRCO, respectively. The Company recorded its share of these transactions based upon its stated pool percentage. Effective October 7, 2010, National Union Fire Insurance Company of Louisiana (NULA), Audubon Insurance Company (Audubon Insurance) and Audubon Indemnity Company (Audubon Indemnity) were merged with and into National Union. National Union is the surviving company and has assumed all of the existing obligations of the merged companies. The mergers were recorded as of October 1, 2010 with the approval of the Pennsylvania Insurance Department. As a result of the merger, National Union's total assets increased by $55,529; total liabilities increased by $4,901; gross paid in and contributed capital increased by $7,130; and unassigned surplus increased by $43,498. The increase to National Union's post-merger surplus is net of eliminations of $1,541 that is primarily related to the provision for reinsurance $1,308. This item is presented as Other Surplus Adjustments in National Union's Statement of Operations and Changes in Capital and Surplus. The other members of the Admitted Pool settled with National Union and recorded their proportionate share in accordance with the pooling agreement. With the approval of National Union's domiciliary regulator, none of the prior years' results or historical schedules have been restated for the merger. The transaction was accounted for as a statutory merger. National Union did not issue any new shares of stock as a result of the merger. On June 10, 2009, the Company sold 12,826 shares of Transatlantic Holdings, Inc. (TRH) for $470,341 and recorded a realized gain of $450,511. As of December 31, 2009, the Company continued to own 9,193 common shares of TRH, representing approximately 13.9 percent of TRH's common shares issued, which were sold in March 2010. The Company had previously owned 33.2 percent of TRH. In addition, the Company recorded a capital contribution of $75,923 pursuant to the terms of a make whole agreement between the Company and AIG, whereby AIG agreed to contribute capital to the Company in an amount equal to the difference between the statutory carrying value of TRH and the consideration received by the Company for the sale of its shares. The Company also received a deemed contribution of approximately $157,679 pursuant to the Tax Sharing Agreement (Agreement) in connection with this sale. The Agreement provides that AIG will reimburse the Company for any current tax liabilities arising from the sale of an operating subsidiary during the term of the Credit Facility, except amounts required to be remitted as Net Cash Proceeds, as defined in the Credit Facility. The Department issued a determination of non-control ruling relative to the Company's ownership of TRH. Accordingly, the Company's investment in TRH common stock has been reported as an unaffiliated investment in this financial statement and 47 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- has been reported at fair value in accordance with SSAP No. 30, Investments in Common Stock. During 2010, the Company sold all but one hundred of the remaining shares of TRH and realized a profit of $463,417. Effective July 1, 2009, the 21st Century Personal Auto Group (PAG) was sold to Farmers Group, Inc. (FGI), a subsidiary of Zurich Financial Services Group for $1.9 billion. Of the $1.9 billion proceeds received by AIG member companies from the sale of the PAG entities to FGI, $0.2 billion was retained by Chartis U.S., Inc. as consideration for the PAG entities it owned and $1.7 billion was provided to the Chartis U.S. insurance entities. American International Insurance Company (AIIC) was the lead company in the Personal Lines Pool which was the mechanism for sharing the PAG and the Private Client Group (PCG) business underwritten among the Personal Lines Pool members. PCG business was underwritten directly by member companies of the Personal Lines Pool as well as the insurance entities of Chartis U.S., Inc. not subject to this sale ("Chartis U.S., Inc. companies"). The PCG business written by Chartis U.S., Inc. companies was ceded 100 percent to AIIC as the pool lead. The total of the PCG business assumed by AIIC, the PCG business underwritten directly by Personal Lines Pool members, as well as the PAG business retained by AIIC ("net business of the Personal Lines Pool") was then subject to a 50 percent quota share to National Union. The Admitted Pool members participated in this business assumed by National Union at their stated pool percentages. In connection with this sale, various reinsurance agreements between the PAG companies and the Chartis U.S., Inc. companies (including the Company) were partially or fully commuted as of June 30, 2009. The major transactions are summarized below: 1. The quota share reinsurance agreement between National Union and AIIC under which AIIC ceded 50 percent of the net business of the Personal Lines Pool to National Union was commuted as of June 30, 2009. 2. All liabilities relating to existing PCG business that was written on a direct basis by members of the Personal Lines Pool were transferred to National Union under the terms of the PCG Business Reinsurance and Administration Agreement, effective June 30, 2009. 3. All obligations and liabilities relating to the PCG business that was directly written and ceded by Chartis U.S., Inc. companies to AIIC under various quota share reinsurance agreements were commuted as of June 30, 2009. Following these transactions the Chartis U.S., Inc. companies settled all amounts due to AIIC in securities and cash totaling $871.9 million. The Company's share of this settlement was $293.3 million. The Chartis U.S., Inc. companies which owned 21st Century Insurance Group (a member company of PAG), recorded dividend income and a resulting intangible asset of approximately $527.5 million for the fair value of the PCG business, which was not subject to the PAG sale and was retained by the Chartis U.S., Inc. companies going forward. Additionally, capital contributions were received by the owners of 21st Century Insurance Group of $184.6 million from Chartis U.S. as part of the tax sharing agreement. The Company's share of these transactions was dividend income of $79.7 million and a capital contribution of $27.9 million. Following the sale of the PAG entities, which included the Company's ownership in 21st Century Insurance Group and AIG Hawaii Insurance Company, Inc., the Company received $182.6 million of the $1.7 billion of proceeds 48 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- received by the Chartis U.S., Inc. companies. As a result of these transactions involving the sale of these PAG entities, the Company recorded a pre-tax loss of $14.5 million. FOREIGN OPERATIONS Pursuant to a tender offer that expired on March 24, 2011, Chartis Japan Capital Company, LLC (CJCC), a newly formed subsidiary of National Union, acquired 43.59 percent of the outstanding shares of Fuji Fire and Marine Insurance Company, Limited (Fuji Japan). As a result of this transaction, as of March 31, 2011, Chartis owned 98.4 percent of Fuji Japan's outstanding voting shares. In a transaction that closed on August 4, 2011, National Union sold its interest in CJCC to Chartis Japan Holdings, LLC, a subsidiary of Chartis International, LLC, for approximately $586,800. Additionally, on the same date, the Company closed a transaction in which it sold its interest in Chartis Non-Life Holding Company (Japan), Inc., an intermediate holding company whose primary asset consisted of approximately 38.6 percent of the common stock of Fuji Japan, to Chartis Pacific Rim Holdings, L.L.C, also a subsidiary of Chartis International, LLC, for approximately $433,600. Chartis' total ownership of Fuji Japan has not changed as a result of these transactions. F. OTHER RELATED PARTY TRANSACTIONS The following table summarizes transactions (excluding reinsurance and cost allocation transactions) that occurred during 2011 and 2010 between the Company and any affiliated companies that exceeded one-half of one percent of the Company's admitted assets as of December 31, 2011 and 2010 and all capital contributions and dividends.
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 ------------------------------------------------------------------------------------------------------------------------------------ 03/28/11 Purchase of securities AIG Inc. Matched Investment Program $ 587,841 Securities $ 587,841 Cash 08/18/11 Purchase of securities Chartis Select 179,406 Securities 179,406 Cash 08/18/11 Purchase of securities Lexington 747,122 Securities 747,122 Cash 08/18/11 Sale of securities Chartis Select 210,304 Cash 200,294 Securities 08/18/11 Sale of securities Lexington 854,193 Cash 814,422 Securities 03/01/11 Dividend Chartis U.S., Inc. - - 11,448 In kind 06/29/11 Dividend Chartis U.S., Inc. - - 110,000 Cash 11/01/11 Dividend Chartis U.S., Inc. - - 16,010 In kind 03/31/11 Return of capital (a) Chartis U.S., Inc. - - 1,020,000 Cash 09/19/11 Return of capital Chartis U.S., Inc. - - 400,000 Cash 06/30/11 Capital contributions Chartis U.S., Inc. 5,623 Cash - - Various Capital contributions (b) Chartis U.S., Inc. 57,153 In kind - - Various Capital contribution Chartis U.S., Inc. 4,605 In kind - - ------------------------------------------------------------------------------------------------------------------------------------ (a) Refer immediately below this table for Eaglestone Reinsurance Company capitalization Chartis Select: Chartis Select Insurance Company (b) Capital contributions in lieu of Tax Sharing Agreement Lexington: Lexington Insurance Company ------------------------------------------------------------------------------------------------------------------------------------
Funding of Eaglestone Capitalization On March 31, 2011, National Union, the Company, and New Hampshire (Funding Participants), with the approval of the NY DFS and the Pennsylvania Insurance Department (PA DOI), returned $1,700,000 of capital to their immediate parent (Chartis U.S., Inc.) as part of a plan to capitalize Eaglestone with each of the companies contributing $510,000, 49 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- $1,020,000 and $170,000, respectively. Eaglestone was significantly overcapitalized relative to its risk based capital target after the loss portfolio transfer was executed with NICO. Accordingly, on July 26, 2011, Eaglestone received approval from PA DOI to return $1,030,000 in cash from its gross paid-in and contributed surplus to Chartis U.S., Inc. The distribution was made to Chartis U.S., Inc. on July 27, 2011. On that same date, Chartis U.S., Inc. contributed $620,000 to National Union, $130,000 to New Hampshire, and $100,000 to Chartis PC.
ASSETS RECEIVED BY ASSETS TRANSFERRED BY THE COMPANY THE COMPANY ------------------------------------------------------------------------------------------------------------- DATE OF STATEMENT STATEMENT TRANSACTION EXPLANATION OF TRANSACTION NAME OF AFFILIATE VALUE DESCRIPTION VALUE DESCRIPTION ------------------------------------------------------------------------------------------------------------- 02/12/10 Dividend Chartis U.S., Inc. $ - - $ 300,000 Cash 04/08/10 Dividend Chartis U.S., Inc. - - 1,343 Cash Various Capital contribution (a) Chartis U.S., Inc. 5,322 In kind - - 03/31/10 Capital contribution Chartis U.S., Inc. 4,829 In kind - - Capital contribution(b) 12/31/10 Chartis U.S., Inc. 1,937,124 Receivable - - 06/24/10 Sale of securities National Union 708,005 Cash 708,005 Securities
(a) Capital contributions in lieu of Tax Sharing agreement (b) Capital contribution was received on February 25, 2011 In the ordinary course of business, the Company utilizes its affiliates for data center systems, investment services, salvage and subrogation, and claims management. The following table summarizes transactions (excluding reinsurance and cost allocation transactions) that occurred during 2011, 2010 and 2009 between the Company and affiliated companies that exceeded one-half of one percent of the Company's admitted assets as of December 31, 2011, 2010 and 2009:
FOR THE YEARS ENDED DECEMBER 31, 2011 2010 2009 ---------------------------------------------------------------------- Chartis Global Claims Services, Inc. $ 250,065 $ 245,427 $ 255,941 Chartis Global Services, Inc. 272,803 - - ---------------------------------------------------------------------- TOTAL $ 522,868 $ 245,427 $ 255,941 ======================================================================
Effective January 1, 2011, Chartis Global Services, Inc. is the shared services organization for Chartis U.S., Inc. and Chartis International, LLC. In 2010 and 2009, the expenses were paid by other members of the Admitted Pool and allocated to the Company in accordance with the Pooling Agreement. As of December 31, 2011 and 2010, short-term investments included amounts invested in the AIG Managed Money Market Fund of $376,438 and $1,881,287, respectively. Federal and foreign income taxes payable to the Ultimate Parent as of December 31, 2011 and 2010 amounted to $23,930 and $60,666, respectively. At December 31, 2011 and 2010, the amount due from/(to) National Union, as the lead company of the intercompany 50 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- pool, was $3,447 and $(121,756), respectively. As of December 31, 2011 and 2010, the Company had the following balances receivable/payable from/to its affiliates (excluding reinsurance transactions):
------------------------------------------------------------------------------- AS OF DECEMBER 31, 2011 2010 ------------------------------------------------------------------------------- Balances with admitted pool companies $ 6,325 $ 31,954 Balances less than 0.5% of admitted assets 7,005 23,175 Capital contributions receivable from Chartis U.S. Inc. - 1,937,124 ------------------------------------------------------------------------------- RECEIVABLE FROM PARENT, SUBSIDIARIES AND AFFILIATES $ 13,330 $ 1,992,253 =============================================================================== Balances with admitted pool companies $ 145 $ 122,198 Balances less than 0.5% of admitted assets 46,282 82,128 ------------------------------------------------------------------------------- PAYABLE TO PARENT, SUBSIDIARIES AND AFFILIATES $ 46,427 $ 204,326 ===============================================================================
On February 23, 2011, NY SAP approved the Company's request to receive a capital contribution of $1,937,124 in cash from its parent Chartis U.S., Inc. and to reflect such contribution in its December 31, 2010 annual statement. The capital contribution was received by the Company on February 25, 2011 and reported as Receivable from Affiliate at December 31, 2010. On March 31, 2005 the Company and certain of its affiliates entered into a settlement agreement with an insured to release all the asbestos claims and other products coverage potentially available under the applicable insurance policies by making specified payments to the insured on a quarterly basis from March 2005 to December 2016. Between March 31, 2006 and March 25, 2008 the insured entered into a series of receivable sale agreements with AICC whereby AICC purchased the insured's March 2006 to December 2016 receivables of $365,000 for $278,930. The Company did not reduce its loss reserves for the agreements between the insured and AICC. On October 27, 2009 AIG Funding, Inc. (AIGF) entered into an assignment and assumption agreement with AICC whereby AIGF assumed the remaining outstanding receivables from AICC, at net book value, as a partial payment against outstanding intercompany loan principal balances owed to AIGF by AICC. The amount, at net book value, was $225,962. Refer to Notes 3, 4, 6, 7, 8, 9, 10 and 13 for other disclosures on transactions with related parties. G. EVENTS OCCURRING AT THE AIG LEVEL In September 2008, liquidity issues resulted in AIG seeking and receiving governmental support through a credit facility from the Federal Reserve Bank of New York (the FRBNY, and such credit facility, the FRBNY Credit Facility) and funding from the United States Department of the Treasury (Department of the Treasury) through the Troubled 51 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Asset Relief Program (TARP). On January 14, 2011, AIG was recapitalized (the Recapitalization) and the FRBNY Credit Facility was repaid and terminated through a series of transactions that resulted in the Department of the Treasury becoming AIG's majority shareholder with ownership of approximately 92 percent of outstanding AIG Common Stock at that time. AIG understands that, subject to market conditions, the Department of the Treasury intends to dispose of its ownership interest over time, and AIG has granted certain registration rights to the Department of the Treasury to facilitate such sales. On May 27, 2011, AIG and the Department of the Treasury, as the selling shareholder, completed a registered public offering of AIG Common Stock. AIG issued and sold 100 million shares of AIG Common Stock for aggregate net proceeds of approximately $2.9 billion and the Department of the Treasury sold 200 million shares of AIG Common Stock. AIG did not receive any of the proceeds from the sale of the shares of AIG Common Stock by the Department of the Treasury. As a result of the sale of AIG Common Stock in this offering, the Series G Cumulative Mandatory Convertible Preferred Stock, par value $5.00 per share (the Series G Preferred Stock) was cancelled and the ownership of the outstanding AIG Common Stock by the Department of the Treasury was reduced from approximately 92 percent to approximately 77 percent after the completion of the offering. NOTE 6 - REINSURANCE In the ordinary course of business, the Company reinsures certain risks with affiliates and other companies. Such arrangements serve to limit the Company's maximum loss on catastrophes, large and unusually hazardous risks. To the extent that any reinsuring company might be unable to meet its obligations, the Company would be liable for its respective participation in such defaulted amounts. The Company purchased catastrophe excess of loss reinsurance covers protecting its net exposures from an excessive loss arising from property insurance losses and excessive losses in the event of a catastrophe under workers' compensation contracts issued without limit of loss. 52 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- During 2011, 2010 and 2009, the Company's net premiums written and net premiums earned were comprised of the following:
FOR THE YEARS ENDED DECEMBER 31, 2011 2010 2009 ------------------------------------------------------------------------------------------------------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED -------------------------------------------------------------- ------------------------- -------------------------- Direct premiums $ 1,327,507 $ 1,425,212 $ 1,471,932 $ 1,494,653 $ 2,181,231 $ 2,429,839 Reinsurance premiums assumed: Affiliates 6,868,230 7,283,623 6,775,226 7,113,494 7,553,633 8,250,685 Non-affiliates 102,880 74,710 64,497 37,427 51,887 46,888 -------------------------------------------------------------- ------------------------- -------------------------- GROSS PREMIUMS 8,298,617 8,783,545 8,311,655 8,645,574 9,786,751 10,727,412 -------------------------------------------------------------- ------------------------- -------------------------- Reinsurance premiums ceded: Affiliates 1,403,977 1,497,360 1,574,099 1,537,046 2,624,677 3,172,378 Non-affiliates 1,585,708 1,604,027 1,542,184 1,459,764 1,099,681 1,200,489 -------------------------------------------------------------- ------------------------- -------------------------- NET PREMIUMS $ 5,308,932 $ 5,682,158 $ 5,195,372 $ 5,648,764 $ 6,062,393 $ 6,354,545 ============================================================== ========================= ==========================
The maximum amount of return commissions which would have been due reinsurers if all of the Company's reinsurance had been cancelled as of December 31, 2011 and 2010 with the return of the unearned premium reserve is as follows:
ASSUMED REINSURANCE CEDED REINSURANCE NET -------------------------------------------------------------- ------------------------- -------------------------- UNEARNED UNEARNED UNEARNED PREMIUM COMMISSION PREMIUM COMMISSION PREMIUM COMMISSION RESERVES EQUITY RESERVES EQUITY RESERVES EQUITY -------------------------------------------------------------- ------------------------- -------------------------- DECEMBER 31, 2011 Affiliates $ 3,342,813 $ 394,470 $ 830,856 $ 138,051 $ 2,511,957 $ 256,419 Non-affiliates 65,890 7,775 444,215 73,807 (378,325) (66,032) -------------------------------------------------------------- ------------------------- -------------------------- TOTAL $ 3,408,703 $ 402,245 $ 1,275,071 $ 211,858 $ 2,133,632 $ 190,387 ============================================================== ========================= ========================== DECEMBER 31, 2010 Affiliates $ 3,758,923 $ 421,024 $ 924,159 $ 129,587 $ 2,834,764 $ 291,437 Non-affiliates 37,720 4,225 462,613 64,868 (424,893) (60,643) -------------------------------------------------------------- ------------------------- -------------------------- TOTAL $ 3,796,643 $ 425,249 $ 1,386,772 $ 194,455 $ 2,409,871 $ 230,794 ============================================================== ========================= ==========================
53 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- As of December 31, 2011 and 2010 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 PAID LOSSES RESERVES FOR PREMIUM AND LOSSES AND RESERVES LAE LAE ----------------------------------------------------------------- December 31, 2011 Affiliates $ 830,856 $ 124,663 $ 10,409,887 Non-affiliates 444,215 272,636 2,977,082 ----------------------------------------------------------------- TOTAL $ 1,275,071 $ 397,299 $ 13,386,969 ================================================================= December 31, 2010 Affiliates $ 924,159 $ 131,717 $ 10,701,691 Non-affiliates 462,613 301,588 3,194,427 ----------------------------------------------------------------- TOTAL $ 1,386,772 $ 433,305 $ 13,896,118 =================================================================
54 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The Company's unsecured reinsurance recoverables as of December 31, 2011 in excess of 3.0 percent of its capital and surplus is set forth in the table below:
------------------------------------------------------------------------ NAIC CO. REINSURER CODE 2011 ------------------------------------------------------------------------ Affiliates: Chartis U.S., Inc. Admitted Pool - $ 8,527,665 Eaglestone Reinsurance Company 10651 722,458 Chartis Overseas Ltd. - 548,081 AIU Insurance Company 19399 142,755 American International Reinsurance Co. Ltd - 53,151 Lexington Insurance Company 19437 28,535 United Guaranty Insurance Company 11715 23,187 Chartis Europe S.A. - 6,375 Chartis Insurance UK Ltd - 5,725 Chartis Specialty Insurance Company 26883 4,901 Landmark Insurance Company 35637 2,696 US Life Ins Co of NY (F/ Amer Int Life Ass NY) 70106 2,434 Chartis Insurance Company Of Canada - 1,750 Chartis Select Insurance Company 10932 1,718 Other affiliates below $1.0 million - 4,469 ------------------------------------------------------------------------ TOTAL AFFILIATES 10,075,900 ------------------------------------------------------------------------ Non-Affiliates: Swiss Re Group - 232,415 Lloyds Syndicates - 223,289 Transatlantic Group - 216,955 Munich Re Group - 174,362 ------------------------------------------------------------------------ TOTAL NON-AFFILIATES 847,021 ------------------------------------------------------------------------ Total affiliates and non-affiliates $ 10,922,921 ========================================================================
During 2011, 2010 and 2009, the Company reported in its Statements of Operations statutory losses of $2,152, $135,317 and $10,863, respectively, as a result of commutations with the following reinsurers. The 2011 loss was comprised of losses incurred of $2,146 and premiums earned of $(6); the 2010 loss was comprised of losses incurred of $135,412, commissions incurred of $(98) and premiums earned of $(3); the 2009 losses were from losses incurred. 55 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) --------------------------------------------------------------------------------
-------------------------------------------------------------------------- COMPANY 2011 2010 2009 -------------------------------------------------------------------------- Argonaut Midwest Insurance Company $ 1,882 $ - $ - American International Reinsurance Company, Ltd. (a) - 131,629 10,284 Continental Casualty Company - 1,270 - Reliastar Life Insurance Company - 1,296 - Other reinsurers below $1 million 270 1,122 579 -------------------------------------------------------------------------- TOTAL $ 2,152 $ 135,317 $ 10,863 ==========================================================================
(a) Effective April 1, 2010, National Union commuted a multi-year reinsurance agreement with AIRCO. The commutation resulted in the members of the Admitted Pool recapturing loss and LAE reserves of $2,576,715 in exchange for consideration of $2,211,079, resulting in a loss of $365,636, which was pooled in accordance with the Admitted Pooling Agreement. The commutation was approved by the NY DFS and Pennsylvania Insurance Department. The Company recorded its share of these transactions based upon its stated pool percentage as follows:
COMPANY'S POOLED TOTAL ALLOCATION ----------- ----------------- Liabilities: Outstanding losses $ 2,576,715 $ 927,617 ============ ================= P&L: Paid losses 365,636 131,629 ============ ================= Net cash $ 2,211,079 $ 795,988 ============ =================
As of December 31, 2011 and 2010, the Company had reinsurance recoverables on paid losses in dispute of $102,721 and $115,859, respectively. During 2011, 2010 and 2009, the Company recovered/(wrote off) reinsurance recoverable balances of $14,092, $(1,224) and $8,952, respectively. 56 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- As described in Note 5, the Company is party to an inter-company pooling agreement. In the ordinary course of business, the Company also assumes business, primarily from affiliated entities. As of December 31, 2011 and 2010, the Company's premium receivable and losses payable on assumed business are as follows:
------------------------------------------------------------------------------- 2011 AFFILIATE NON-AFFILIATE TOTAL ------------------------------------------------------------------------------- Premiums in course of collection $ 165,233 $ 36,933 $ 202,166 Reinsurance payable on paid loss and loss adjustment expenses 71,426 11,807 83,233
------------------------------------------------------------------------------- 2010 AFFILIATE NON-AFFILIATE TOTAL ------------------------------------------------------------------------------- Premiums in course of collection $ 146,906 $ 11,982 $ 158,888 Reinsurance payable on paid loss and loss adjustment expenses 150,327 4,755 155,082
The primary components of the affiliated assumed reinsurance balances summarized above, and excluding members of the Admitted Pool, relate to reinsurance agreements with the following:
2011 2010 ------------------------------------------------------------------------------------------------------------------- PREMIUMS IN REINSURANCE PAYABLE PREMIUMS IN REINSURANCE PAYABLE COURSE OF ON PAID LOSS AND LOSS IN COURSE ON PAID LOSS AND LOSS COLLECTION ADJUSTMENT EXPENSES COLLECTION ADJUSTMENT EXPENSES ------------------------------------------------------------------------------------------------------------------- Chartis Overseas Ltd. $ 42,610 $ 13,061 $ 14,735 $ 20,053 Chartis Excess Ltd. 8,210 36 - - Lexington Insurance Co. 7,986 10,262 16,421 17,730 Chartis Europe SA 7,984 9,237 7,544 11,977 Chartis Insurance Company of Canada 7,179 6,348 - - Chartis Insurance UK Ltd. 6,947 6,679 11,225 4,051 CA De Seguros American Intl 5,270 1,337 - - La Meridional Compania Argentina de Seguros S.A. 3,757 1,210 - - Chartis Specialty Insurance. Co. 3,195 1,321 388 597 National Union Ins. Co. of Vermont 2,225 9,024 47 15,310 Chartis Insurance Company - Puerto Rico 1,473 1,269 10,632 310 United Guaranty Residential Ins. Co. 461 (50,400) 245 20,558 Chartis Australia Insurance Ltd. - 4,945 - - AIU Insurance Co. (2,539) (3,624) (8,361) (8,316)
Effective January 1, 2010, Chartis Specialty Insurance Company (Chartis Specialty) commuted its quota share and stop loss reinsurance agreements with National Union. In accordance with the commutation agreement, National Union transferred cash and securities totaling $4,041,671 to Chartis Specialty. This amount was net of a ceding commission 57 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- of $220,094. The Company recorded its share of these transactions based upon its stated pool percentage and reported the net impact on its financial statements from these transactions as follows:
COMPANY'S POOLED TOTAL ALLOCATION ------------ ----------------- Liabilities: Outstanding losses $ 3,278,251 $ 1,180,170 Unearned premium reserves 933,787 336,163 Other 49,727 17,902 ------------ ----------------- 4,261,765 1,534,235 ------------ ----------------- P&L: Ceding commission 220,094 79,234 ------------ ----------------- $ 4,041,671 $ 1,455,001 ============ =================
NOTE 7 - DEPOSIT ACCOUNTING ASSETS AND LIABILITIES Certain of the products offered by the Company include funding components or have been structured in a manner such that little or no insurance risk is transferred. Funds received in connection with these arrangements are recorded as deposit liabilities, rather than premiums and incurred losses. In addition, the Company has entered into several ceded reinsurance arrangements, both treaty and facultative, which were determined to be deposit agreements. Conversely, funds paid in connection with these arrangements are recorded as deposit assets, rather than as ceded premiums and ceded incurred losses. As of December 31, 2011 and 2010, the Company's deposit assets and liabilities were comprised of the following:
--------------------------------------------------------------------------- Deposit Deposit Funds Held Funds Held Assets Liabilities Assets Liabilities ----------------------------------------------- -------------------------- December 31, 2011: Direct $ - $ 97,581 $ - $ - Assumed - 44 - - Ceded 3 - - 4,848 ----- ----------------------------------------- -------------------------- TOTAL $ 3 $ 97,625 $ - $ 4,848 =============================================== ==========================
58 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) --------------------------------------------------------------------------------
----------------------------------------------------------------------------------------- DEPOSIT DEPOSIT FUNDS HELD FUNDS HELD ASSETS LIABILITIES ASSETS LIABILITIES -------------------------------------------------------------- ------------------------- December 31, 2010: Direct $ - $ 100,648 $ - $ - Assumed - 89,243 88,515 - Ceded 686 - - 990 -------------------------------------------------------------- ------------------------- TOTAL $ 686 $ 189,891 $ 88,515 $ 990 ============================================================== =========================
A reconciliation of the Company's deposit asset and deposit liabilities as of December 31, 2011 and 2010 is set forth in the table below:
2011 2010 ----------------------------------------------------------------- --------------------------- DEPOSIT DEPOSIT DEPOSIT DEPOSIT ASSETS LIABILITIES ASSETS LIABILITIES ----------------------------------------------------------------- --------------------------- Balance at January 1 $ 686 $ 189,891 $ 1,595 $ 178,479 Deposit activity, including loss recoveries (683) (90,764) (1,622) 8,358 Interest income or expense, net of amortization of margin - (1,502) 713 3,054 Non-admitted asset portion - - - - ----------------------------------------------------------------- --------------------------- BALANCE AS OF DECEMBER 31 $ 3 $ 97,625 $ 686 $ 189,891 ================================================================= ===========================
2011 2010 ----------------------------------------------------------------- --------------------------- FUNDS HELD FUNDS HELD FUNDS HELD FUNDS HELD ASSETS LIABILITIES ASSETS LIABILITIES ----------------------------------------------------------------- --------------------------- Balance at January 1 $ 88,515 $ 990 $ 88,515 $ - Contributions - 4,753 - 990 Withdrawals (88,515) (895) - - Interest - - - - ----------------------------------------------------------------- --------------------------- BALANCE AS OF DECEMBER 31 $ - $ 4,848 $ 88,515 $ 990 ================================================================= ===========================
In 2011, the Company determined, based on settlement of related litigation, that an assumed reinsurance deposit transaction had terminated, and the Company eliminated assumed deposit liabilities of $90,000 and related funds held assets of $88,200. 59 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 8 - FEDERAL INCOME TAXES The Company files a consolidated U.S. federal income tax return with the Ultimate Parent, AIG. AIG's domestic subsidiaries can be found on Schedule Y of the Company's annual statement. The Company is allocated U.S. federal income taxes based upon an accounting policy that was amended, effective January 1, 2010. This accounting policy provides that the Company shall reflect in its financial statements the tax liability that would have been paid by the Company if it had filed a separate federal income tax return except that Chartis, Inc. assumes the current liability (and future risks and rewards of the tax position taken) associated with the Company's unrecognized tax benefits by means of a deemed capital contribution transaction. Unrecognized tax benefits is defined as any liability recorded in accordance with Financial Accounting Standards Board Interpretation No. 48 -- Accounting for Uncertainty in Income Taxes (FIN 48) which would include any tax liability recorded as the result of an agreed upon adjustment with the tax authorities, except ones arising as a result of errors or omissions. While the accounting policy described above governs the current and deferred tax recorded to the income tax provision, the amount of cash that will be paid or received for U.S. federal income taxes is governed by an intercompany tax settlement arrangement entered into with Chartis, Inc. The terms of this intercompany cash settlement arrangement are based on principles consistent with the accounting policy for allocating income tax expense or benefit to the Company above, except that: - Any tax realized by the Company from the creation of a deferred inter-company gain (as determined under Treasury Regulation Section 1.1502-13) in which no consideration was received will be paid by the Subgroup Parent. - To the extent that (1) tax attributes are created outside of the normal course of business, (2) that cash benefit is received by Chartis, Inc. under its separate tax allocation agreement with Parent in advance of when the attributes are actually utilized in the AIG consolidated U.S. federal tax return, and (3) these identified tax attributes expire unused in the AIG consolidated tax return, Chartis, Inc. shall reimburse Parent for this amount and apportion such amount to the Company to the appropriate extent. The Company shall make any required reimbursements within 30 days after Chartis, Inc. receives notice from Parent. Consistent SSAP 10R principles and the Company's tax accounting policy for allocating taxes, any payment made under this provision would be accounted for as a distribution. At December 31, 2011, the Company has not generated any attributes outside of the normal course of business that could cause this provision of the agreement to become applicable. - In accordance with N.Y. Department of Insurance Circular Letter 1979-33, Subgroup Parent or Parent shall establish and maintain an escrow account for amounts where the Company's separate return liability exceeds the consolidated tax liability of the Parent group. The Company had a prior tax sharing agreement in place during the 2008 and 2009 years with Chartis, Inc. The key differences between the 2008/2009 tax sharing agreement and the 2010 tax sharing agreement are: (i) the Company had to pay its separate federal income tax liability without taking into account tax credits, whereas they may take into account tax credits under the 2010 tax sharing agreement; (ii) the Company did not have to pay for any tax arising from 60 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- gains from Qualifying Transactions (which were defined as deferred intercompany gains as defined in Treas. Reg. Section 1502-13 from the sale of stock or substantially all the assets of an operating subsidiary), whereas the 2010 agreement only exempts for deferred intercompany transactions for which no consideration was received; (iii) the Company did not have to pay any tax arising from Asset Sales (which were defined in the FRBNY credit facility between AIG and the Federal Reserve), so long as the net proceeds were remitted to AIG, whereas the 2010 agreement deletes references to Asset Sales since AIG repaid its obligations to FRBNY under the credit facility and (iv) the Company was paid for the use by the Subgroup of the Company's excess attributes that were utilized by the Subgroup, but under the 2010 agreement, the Company must be able to utilize the asset on its own separate company liability basis. The federal income tax recoverable/payable in the accompanying statement of admitted assets, liabilities, capital and surplus are due to/from Chartis, Inc. The statutory U.S. federal income tax rate is 35 percent at December 31, 2011. The components of the Company's net deferred tax assets/liabilities ("DTA"/"DTL") as of December 31, 2011 and 2010 are as follows:
DECEMBER 31, 2011 DECEMBER 31, 2010 ---------------------------------------- --------------------------------------- DESCRIPTION ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL -------------------------------------- ---------------------------------------- --------------------------------------- Gross deferred tax assets $ 1,632,616 $ 122,640 $ 1,755,256 $ 1,501,814 $ 265,330 $ 1,767,144 Less statutory valuation allowance - - - 633,968 131,367 765,335 ---------------------------------------- --------------------------------------- Adjusted gross deferred tax assets 1,632,616 122,640 1,755,256 867,846 133,963 1,001,809 Gross deferred tax liabilities (58,661) (176,253) (234,914) (67,312) (133,963) (201,275) ---------------------------------------- --------------------------------------- Net deferred tax asset/(liabilities) 1,573,955 (53,613) 1,520,342 800,534 - 800,534 Deferred tax assets non-admitted (828,450) - (828,450) (17,769) - (17,769) ---------------------------------------- --------------------------------------- Net admitted deferred tax assets $ 745,505 $ (53,613) $ 691,892 $ 782,765 $ - $ 782,765 ======================================== ======================================= CHANGE ---------------------------------------- DESCRIPTION ORDINARY CAPITAL TOTAL -------------------------------------- ---------------------------------------- Gross deferred tax assets $ 130,802 $ (142,690) $ (11,888) Less statutory valuation allowance (633,968) (131,367) (765,335) ---------------------------------------- Adjusted gross deferred tax assets 764,770 (11,323) 753,447 Gross deferred tax liabilities 8,651 (42,290) (33,639) ---------------------------------------- Net deferred tax asset/(liabilities) 773,421 (53,613) 719,808 Deferred tax assets non-admitted (810,681) - (810,681) ---------------------------------------- Net admitted deferred tax assets $ (37,260) $ (53,613) $ (90,873)
The Company has elected to admit DTAs pursuant to paragraph 10.e. It recorded an increase in admitted DTAs as the result of its election to employ the provision of Paragraph 10.e. as follows:
DECEMBER 31, 2011 DECEMBER 31, 2010 ------------------------------ ------------------------------- DESCRIPTION ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL --------------------------------------------------------------------- ------------------------------ ------------------------------- Increase in DTA from carried back losses that reverse in subsequent three calendar years that are carried back to recoup taxes $ - $ - $ - $ - $ - $ - Increase in DTA from the lesser of adjusted gross DTAs realizable within 36 months or 15% of statutory surplus 450,661 - 450,661 260,922 - 260,922 Increase in DTA from adjusted gross DTAs that can be offset against DTLs - - - - - - ------------------------------ ------------------------------- Total Increase in DTA admitted pursuant to Paragraph 10.e $ 450,661 $ - $ 450,661 $ 260,922 $ - $ 260,922 ============================== =============================== CHANGE ------------------------------ DESCRIPTION ORDINARY CAPITAL TOTAL --------------------------------------------------------------------- ------------------------------ Increase in DTA from carried back losses that reverse in subsequent three calendar years that are carried back to recoup taxes $ - $ - $ - Increase in DTA from the lesser of adjusted gross DTAs realizable within 36 months or 15% of statutory surplus 189,739 - 189,739 Increase in DTA from adjusted gross DTAs that can be offset against DTLs - - - ------------------------------ Total Increase in DTA admitted pursuant to Paragraph 10.e $ 189,739 $ - $ 189,739 ==============================
61 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The amount of admitted deferred tax assets, admitted assets, statutory surplus and total adjusted capital in the risk-based capital calculation resulting from the use of paragraph 10.a., 10.b., 10.c., 10.e. are as follows:
DECEMBER 31, 2011 DECEMBER 31, 2010 ----------------------------------- ------------------------------------ DESCRIPTION ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL ------------------------------------------------------ ----------------------------------- ------------------------------------ Carried back losses that reverse in subsequent calendar year $ - $ - $ - $ - $ - $ - The lesser of adjusted gross DTAs realizable within 12 months or 10% of statutory surplus 241,231 - 241,231 521,844 - 521,844 ----------------------------------- ------------------------------------ Adjusted gross DTAs that can be offset against DTLs 112,273 122,641 234,914 67,312 133,963 201,275 ----------------------------------- ------------------------------------ Total DTA admitted pursuant to Paragraphs 10.a, 10.b and 10.c 353,504 122,641 476,145 589,156 133,963 723,119 ----------------------------------- ------------------------------------ Admission Calculation Components SSAP 10R, Paragraph 10.e Carried back losses that reverse in subsequent three calendar years - - - - - - The lesser of adjusted gross DTAs realizable within 36 months or 15% of statutory surplus 450,661 - 450,661 260,922 - 260,922 ----------------------------------- ------------------------------------ Adjusted gross DTAs that can be offset against DTLs - - - - - - ----------------------------------- ------------------------------------ Additional DTA admitted pursuant to Paragraph 10.e 450,661 - 450,661 260,922 - 260,922 ----------------------------------- ------------------------------------ Total DTA Admitted Under SSAP 10R 804,165 122,641 926,806 850,077 133,963 984,040 Total DTL (58,661) (176,253) (234,914) (67,312) (133,963) (201,275) ----------------------------------- ------------------------------------ Net Admitted DTA $ 745,504 $ (53,612) $ 691,892 $ 782,765 $ - $ 782,765 =================================== ==================================== Used in SSAP 10R, Par. 10 d Total adjusted capital - - 5,282,793 - - 6,376,918 ------------ ----------- Authorized control level - - 1,237,484 - - 1,524,545 ------------ ----------- CHANGE ------------------------------------ DESCRIPTION ORDINARY CAPITAL TOTAL ------------------------------------------------------ ------------------------------------ Carried back losses that reverse in subsequent calendar year $ - $ - $ - The lesser of adjusted gross DTAs realizable within 12 months or 10% of statutory surplus (280,613) - (280,613) ------------------------------------ Adjusted gross DTAs that can be offset against DTLs 44,961 (11,322) 33,639 ------------------------------------ Total DTA admitted pursuant to Paragraphs 10.a, 10.b and 10.c (235,652) (11,322) (246,974) ------------------------------------ Admission Calculation Components SSAP 10R, Paragraph 10.e Carried back losses that reverse in subsequent three calendar years - - - The lesser of adjusted gross DTAs realizable within 36 months or 15% of statutory surplus 189,739 - 189,739 ------------------------------------ Adjusted gross DTAs that can be offset against DTLs - - - ------------------------------------ Additional DTA admitted pursuant to Paragraph 10.e 189,739 - 189,739 ------------------------------------ Total DTA Admitted Under SSAP 10R (45,912) (11,322) (57,234) Total DTL 8,651 (42,290) (33,639) ------------------------------------ Net Admitted DTA $ (37,261) $ (53,612) $ (90,873) ==================================== Used in SSAP 10R, Par. 10 d Total adjusted capital - - (1,094,125) ------------- Authorized control level - - (287,061) -------------
The following table provides the Company's assets, capital and surplus, and Risk Based Capital information with the DTA calculated under SSAP 10R paragraphs 10.a. to 10.c. and the additional DTA determined under SSAP 10R paragraph 10.e.:
DECEMBER 31, 2011 DECEMBER 31, 2010 ------------------------------------ ---------------------------------- DESCRIPTION ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL ------------------------------------------- ------------------------------------ ------------- --------- ---------- SSAP 10R, Paragraphs 10.a, 10.b, and 10.c Admitted deferred tax assets $ 294,843 $ (53,612) $ 241,231 $ 521,844 $ - $ 521,844 Admitted assets - - 23,449,611 - - 26,155,673 Adjusted statutory surplus - - 5,216,642 - - 6,412,177 Total adjusted capital from DTA - - 5,216,642 - - 6,412,177 Increased amounts due to SSAP 10R, Paragraph 10.e Admitted deferred tax assets 745,504 (53,612) 691,892 782,765 - 782,765 Admitted assets - - 23,900,272 - - 26,416,595 Statutory surplus - - $ 5,667,303 - - $ 6,673,099 CHANGE ------------------------------------ DESCRIPTION ORDINARY CAPITAL TOTAL ------------------------------------------- ------------------------------------ SSAP 10R, Paragraphs 10.a, 10.b, and 10.c Admitted deferred tax assets $(227,001) $ (53,612) $ (280,613) Admitted assets - - (2,706,062) Adjusted statutory surplus - - (1,195,535) Total adjusted capital from DTA - - (1,195,535) Increased amounts due to SSAP 10R, Paragraph 10.e Admitted deferred tax assets (37,261) (53,612) (90,873) Admitted assets - - (2,516,323) Statutory surplus - - $ (1,005,796)
The Company has employed tax planning strategies in determining the amount of adjusted gross and net admitted deferred tax assets. Tax planning strategies increased ordinary adjusted gross DTAs by $1,312,815 and net admitted DTAs by $64,523. Tax planning strategies had no impact upon capital adjusted gross DTAs and net admitted capital DTAs, all of which were non-admitted. 62 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- During 2011, 2010 and 2009, the Company's current income tax expense/(benefit) was comprised of the following:
For the years ended December 31, 2011 2010 2009 ------------------------------------------------------------------------------------ Federal income tax $ (95,734) $ (142,812) $ (215,953) Foreign income tax (8,461) (5,462) 37,836 -------------------------------------- Subtotal (104,195) (148,274) (178,117) Federal income tax on net capital gains 90,032 169,323 57,389 Other - including return to provision - 6,354 55,810 -------------------------------------- Federal and foreign income taxes incurred $ (14,163) $ 27,403 $ (64,918) =====================================
63 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The composition of the Company's net deferred tax assets as of December 31, 2011 and 2010, along with the changes in deferred income taxes for 2011, is set forth in the table below: Deferred tax assets:
Ordinary 2011 2010 CHANGE ----------------------------------------- Loss reserve discount $ 416,180 $ 488,039 $ (71,859) Non-admitted assets 126,696 146,586 (19,890) Unearned premium reserve 200,003 224,940 (24,937) Goodwill & deferred revenue 29,941 29,941 - Bad debt expense 74,123 88,502 (14,379) Net operating loss carryforward 461,242 376,835 84,407 Foreign tax credits 69,946 99,895 (29,949) Deferred tax of foreign entities 43,675 38,621 5,054 Investments 118,681 - 118,681 Deferred loss on branch conversion 9,555 - 9,555 Intangibles 22,280 - 22,280 Other temporary difference 60,293 8,455 51,838 ----------------------------------------- Subtotal 1,632,615 1,501,814 130,801 Statutory valuation allowance adjustment - (633,968) 633,968 Non-admitted (828,450) (17,769) (810,681) ----------------------------------------- Admitted ordinary deferred tax assets 804,165 850,077 (45,912) ----------------------------------------- Capital Investments writedown 110,936 149,630 (38,694) Unrealized capital losses 11,335 87,003 (75,668) Deferred intercompany loss - 28,697 (28,697) Other temporary difference 370 - 370 ------------- ------------- --------------- Subtotal 122,641 265,330 (142,689) Statutory valuation allowance adjustment - (131,367) 131,367 Non-admitted - - - ----------------------------------------- Admitted capital deferred tax assets 122,641 133,963 (11,322) ----------------------------------------- ----------------------------------------- TOTAL ADMITTED DEFERRED TAX ASSETS $ 926,806 $ 984,040 $ (57,234) =========================================
64 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Deferred tax liabilities:
Ordinary 2011 2010 CHANGE ---------------------------------------- Investments $ (46,868) $ (17,160) $ (29,708) Other (including items <5% of total ordinary tax liabilities) (11,793) (50,152) 38,359 ---------------------------------------- Subtotal (58,661) (67,312) 8,651 Capital Investments (19,064) - (19,064) Unrealized capital gains (157,189) (133,963) (23,226) ---------------------------------------- Subtotal (176,253) (133,963) (42,290) ---------------------------------------- TOTAL DEFERRED TAX LIABILITIES $ (234,914) $ (201,275) $ (33,639) ---------------------------------------- NET ADMITTED DEFERRED TAX ASSETS/(LIABILITIES): $ 691,892 $ 782,765 $ (90,873) ========================================
The change in net deferred tax assets is comprised of the following: (this analysis is exclusive of non-admitted assets as the Change in Non-Admitted Assets is reported separately from the Change in Net Deferred Income Taxes in the surplus section of the Annual Statement): 65 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) --------------------------------------------------------------------------------
Description 2011 2010 CHANGE -------------------------------------- Adjusted gross deferred tax assets $ 1,755,256 $ 1,001,809 $ 753,447 Total deferred tax liabilities (234,914) (201,275) (33,639) -------------------------------------- Net deferred tax assets 1,520,342 800,534 719,808 Deferred tax assets/(liabilities) - SSAP 3 - Deferred tax assets/(liabilities) - unrealized 3,008 Deferred tax - noncash settlement through paid-in-capital 57,153 ------------ Total change in deferred tax 659,647 ============ Change in deferred tax - current year 643,845 Change in deferred tax - current year - other surplus items 15,802 ------------ Change in deferred tax - current year - total 659,647 ============
CURRENT DEFERRED TOTAL -------------------------------------- SSAP 3 impact: SSAP 3 - general items (20,102) 90,565 70,463 SSAP 3 - unrealized gain/loss - (101,902) (101,902) -------------------------------------- Total SSAP 3 (20,102) (11,337) (31,439) SSAP 3 - statutory valuation allowance - 11,337 11,337 -------------------------------------- SSAP 3 - adjusted tax assets and liabilities (20,102) - (20,102) SSAP 3 - non-admitted impact 22,382 - 22,382 -------------------------------------- Total SSAP 3 impact $ 2,280 - $ 2,280 ======================================
STATUTORY VALUATION ALLOWANCE Under SSAP 10R, statutory gross deferred tax assets must be reduced to the extent it is determined that valuation allowance would be required under U.S. GAAP valuation allowance principles pursuant to Accounting Standard Codification (ASC) 740, Income Taxes. Significant judgment is required in determining the provision for income taxes and, in particular, in the assessment of whether and in what magnitude a valuation allowance should be recorded. At December 31, 2011, the Company recorded gross deferred tax assets before valuation allowance of tax assets of $1,755,256. Management believes that it is more likely than not that these assets will be realized in the forseeable future therefore the Company has not recorded a valuation allowance against its deferred tax asset. This assessment is based on the Company's expectation based on a "more likely than not" standard in measuring its ability to realize its gross deferred tax assets reported on the Company's statement of admitted assets at December 31, 2011. When making its assessment about the realization of its deferred tax assets at December 31, 2011, the Company considered all available evidence, as required by income tax accounting guidance, including: - the nature, frequency, and severity of current and cumulative financial reporting losses; 66 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- - transactions completed and transactions expected to be completed in the near future; - the carryforward periods for the net operating and capital loss and foreign tax credit carryforward; - the application of the amended tax sharing agreement between the tax Sub Group and the Ultimate Parent; and - tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax assets. Despite the existence of cumulative losses in recent years, including losses related to adverse development in 2009, 2010 and 2011, the Company has been able to implement tax planning strategies to protect against the loss of deferred tax assets, and the Company has concluded that it is more likely than not that its net deferred tax assets will be realized at December 31, 2011. In concluding that a portion of the statutory gross deferred tax assets are realizable under the U.S. GAAP valuation allowance model, the Company considered both the positive and negative evidence regarding its ability to generate sufficient taxable income to realize the reported adjusted deferred tax assets. Negative evidence included (i) the existence of cumulative losses in recent years, including losses related to adverse development in 2009 and 2010 of $1,006,000 and $1,506,600, respectively; (ii) the risk that the Company will not be able to execute upon on all of its strategies and actions in the anticipated timeframe; (iii) that Chartis is unable to continue generating profits from the foreign insurance business which the Company has asserted that it can reinsure into the Company; and (iv) that the Company is unable to identify securities earning the investment yields contemplated in the projections and strategies which represented yields ranging from 3.75 percent to 10.8 percent. Positive evidence included the availability of prudent and feasible tax planning strategies and AIG's, Chartis' and the Company's ability to execute on tax planning strategies and/or actions, if required, that would allow the Company to generate taxable income in order to realize the statutory gross deferred tax assets. These tax planning strategies included: (i) converting tax-exempt investment income to taxable investment income through both the municipal bond borrowing program or through the sale of additional tax-exempt securities to third parties and affiliates and reinvestment of the proceeds in taxable securities; and (ii) investing available resources into higher yielding assets. It is important to note, estimates of future taxable income generated from specific transactions and tax planning strategies could change in the near term, perhaps materially, which may require the Company to adjust its assessment of the need for a valuation allowance. Such adjustments could be material to the Company's financial condition or its results of operations for an individual reporting period. STATUTORY ADMISSIBILITY Once the $1,755,256 of adjusted gross deferred tax asset was quantified, this value was assessed for statutory admissibility using SSAP 10R's three part test. The first test allows for the admissibility of adjusted gross deferred tax assets that are expected to reverse in the next three years and could be used to recover taxes paid in prior years. Based upon the Company's tax sharing agreements discussed at Note 8, no carryback potential exists and thus no adjusted gross deferred tax asset can be admitted under this first test. The second test allows for an adjusted gross deferred tax asset to be admitted based upon the lesser of 15 percent of adjusted statutory surplus of the most recently filed 67 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- statement and the adjusted gross deferred tax assets expected to reverse within the next three years and that it is expected to be realized (i.e., provide incremental cash tax savings). Under this test, the Company is required to project future taxable income. If operating results differ from those expected in the Company's projections, the amount of the adjusted gross deferred tax asset admitted could materially change. The Company's projections used in determining the admissibility of adjusted gross deferred tax assets included the consideration of the tax planning actions and strategies discussed above and carry similar risks, including the possibility of continuing adverse development in the prior year loss reserves. Finally, the adjusted gross deferred tax assets not admitted under the first two tests can be admitted to the extent there are existing deferred tax liabilities allowable under the relevant tax law. As a result of these tests for statutory admissibility, $691,892 of adjusted gross deferred tax assets were admitted as of December 31, 2011. The Company does not have any unrecorded deferred tax liabilities. The Company's income tax incurred and change in deferred income tax differs from the amount obtained by applying the federal statutory rate of 35 percent to income before income taxes as follows:
2011 2010 2009 --------------------- ------------------------ ------------------------ Description AMOUNT TAX EFFECT AMOUNT TAX EFFECT AMOUNT TAX EFFECT --------------------------------------------- --------------------- ------------------------ ------------------------ Net income before federal income taxes and capital gains taxes $ 480,413 $ 168,145 $ (749,113) $ (262,190) $ 184,874 $ 64,706 Book to tax adjustments: Tax exempt income (304,201) (106,470) (420,450) (147,157) (456,093) (159,633) Intercompany dividends (6,294) (2,203) - - (94,815) (33,185) Dividend received deduction (451) (158) (8,767) (3,069) (18,128) (6,345) Subpart F income, gross-up & foreign tax credits 14,771 (3,291) (36,387) (13,104) - - Meals and entertainment - - 567 199 862 302 Stock options and other compensation 27,409 9,593 4,644 1,625 - - Non-deductible penalties 1,442 505 - - - - Change in non-admitted assets 84,424 29,549 162,087 56,731 (102,726) (35,954) Change in tax position - (5,702) - 11,310 - 59,878 Statutory valuation allowance (753,998) (753,998) 765,335 765,335 - - Sale of divested entities - - - - (70,576) (24,702) Return to provision - (5,690) - 19,394 - 11,457 Branch incorporation & conversion (Hong Kong/Singapore/Australia) (536) (188) - - - - Non-deductible expenses 34,253 11,989 - - - 1,399 Other (252) (89) - (5,297) (4,392) (2,195) ------------------------------------------------------------------------------------------------------------------------ Total book to tax adjustments (903,433) (826,153) 467,029 685,967 (745,868) (188,978) ------------------------------------------------------------------------------------------------------------------------ Total federal taxable income and tax $(423,020) $(658,008) $ (282,084) $ 423,777 $ (560,994) $(124,272) ======================================================================================================================== Federal income tax incurred (104,195) (141,920) (122,307) Federal income tax on realized capital gains 90,032 169,323 57,389 Change in deferred tax (659,647) 396,374 (59,354) Less: Change in deferred tax - other surplus items 15,802 - - --------- ----------- ------------- Total tax $(658,008) $ 423,777 $ (124,272) ========= =========== =============
As of December 31, 2011, the Company had $69,946 foreign tax credits carry forwards expiring through the year 2021, and $1,317,835 of net operating loss carry forwards expiring through the year 2031 that are available to offset against future taxable income. The Company has no capital loss carry forwards remaining as of December 31, 2011 and no other unused tax credits available to offset against future taxable income as of December 31, 2011 and 2010. The Company has an enforceable right to recoup federal income taxes in the event of future net losses which it may 68 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- incur or to recoup its net losses carried forward as an offset to future net income subject to federal income taxes. Currently, there is no federal income tax incurred available for recoupment in the event of future net operating losses for tax purposes. As of December 31, 2011, the Company had no deposits under IRC Section 6603. In 2009, tax liabilities relating to uncertain tax positions and tax return errors and omissions relating to the Company were held by Chartis, Inc., the Subgroup Parent. Pursuant to the amended tax sharing agreement that was effective January 1, 2010, Chartis, Inc. continues to assume the liabilities for uncertain tax positions of the Company; however any change in liability relating to tax return errors and omissions are now reflected as liabilities of the Company at December 31, 2011. As of December 31, 2011, the Company recorded gross liabilities related to tax return errors and omissions in the amount of $17,411. Listed below are the tax years that remain subject to examination by major tax jurisdictions: At December 31, 2011
MAJOR TAX JURISDICTIONS OPEN TAX YEARS -------------------------------------------------- UNITED STATES 2000 - 2010
NOTE 9 - PENSION PLANS AND DEFERRED COMPENSATION ARRANGEMENTS A. PENSION PLAN Employees of AIG, its subsidiaries and certain affiliated companies, including employees in foreign countries, are generally covered under various funded and insured pension plans. Eligibility for participation in the various plans is based on either completion of a specified period of continuous service or date of hire, subject to age limitation. The AIG Retirement Plan (the AIG U.S. Plan) is a qualified, non-contributory defined benefit retirement plan which is subject to the provisions of the Employee Retirement Income Security Act (ERISA) of 1974. All employees of AIG and most of its subsidiaries and affiliates who are regularly employed in the United States, including certain U.S. citizens employed abroad on a U.S. dollar payroll, and who have attained age 21 and completed twelve months of continuous service are eligible to participate in this plan. An employee with 5 or more years of service is entitled to pension benefits beginning at normal retirement at age 65. Benefits are based upon a percentage of average final compensation multiplied by years of credited service limited to 44 years of credited service. The average final compensation is subject to certain limitations. The employees may elect certain options with respect to their receipt of their pension benefits including a joint and survivor annuity. An employee with 10 or more years of service may retire early from age 55 to 64. An early retirement factor is applied resulting in a reduced benefit. If an employee terminates with less than 5 years of service, such employee forfeits his or her right to receive any accumulated pension benefits. The Company is jointly and severally responsible with AIG and other participating companies for funding 69 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- obligations for the AIG U.S. Plan, ERISA qualified defined contribution plans and ERISA plans issued by other AIG subsidiaries (the ERISA Plans). If the ERISA Plans do not have adequate funds to pay obligations due participants, the Pension Benefit Guaranty Corporation or Department of Labor could seek payment of such amounts from the members of the AIG ERISA control group, including the Company. Accordingly, the Company is contingently liable for such obligations. The Company believes that the likelihood of payment under any of these plans is remote. Accordingly, the Company has not established any liability for such contingencies. Annual funding requirements are determined based on the "traditional unit credit" cost method. The objective under this method is to fund each participant's benefit under the plan as it accrues. Thus, the total pension to which each participant is expected to become entitled at retirement is broken down into units, each associated with a year of past or future credited service. Effective April 1, 2012, the AIG U.S. Plan and AIG Excess plans will be converted from final average pay to cash balance formulas comprised of pay credits based on 6 percent of a plan participant's annual compensation (subject to IRS limitations for the qualified plan) and annual interest credits. However, employees satisfying certain age and service requirements remain covered under the final average pay formula in the respective plans. The following table sets forth the funded status of the AIG U.S. Plan, valued in accordance with SSAP No. 89, Accounting for Pensions (SSAP 89).
----------------------------------------------------------------------- AS OF DECEMBER 31, 2011 2010 ----------------------------------------------------------------------- Fair value of plan assets $ 3,432,515 $ 3,424,553 Less projected benefit obligation 4,219,931 3,574,840 ----------------------------------------------------------------------- Funded status $ (787,416) $ (150,287) =======================================================================
The weighted average assumptions that were used to determine its pension benefit obligations as of December 31, 2011, 2010 and 2009 are set forth in the table below:
--------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2011 2010 2009 --------------------------------------------------------------------------------------------------------- Discount rate 4.62% 5.50% 6.00% Rate of compensation increase (average) 4.00% 4.00% 4.00% Measurement date December 31, 2011 December 31, 2010 December 31, 2009 Medical cost trend rate N/A N/A N/A --------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------
In 2011 and 2010, AIG allocated defined benefit expenses to the Company and its affiliates. The Company's allocated share of net expense for the AIG U.S. Plan was approximately $7,922 and $11,968 for 2011 and 2010, respectively. 70 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- AIG also sponsors several unfunded nonqualified defined benefit plans for certain employees, including key executives, designed to supplement pension benefits provided by AIG's other retirement plans. These include the AIG Excess Retirement Income Plan, which provides a benefit equal to the reduction in benefits payable to certain employees under the AIG U.S. Plan as a result of federal tax limitations on compensation and benefits payable, and the Supplemental Executive Retirement Plan (SERP), which provides additional retirement benefits to designated executives. The results in this footnote do not include the nonqualified plans. B. POSTRETIREMENT BENEFIT PLANS AIG's U.S. postretirement medical and life insurance benefits are based upon the employee electing immediate retirement and having a minimum of 10 years of service. Retirees and their dependents that were 65 years old by May 1, 1989 participate in the medical plan at no cost. Employees who retired after May 1, 1989 or prior to January 1, 1993 pay the active employee premium if under age 65 and 50 percent of the active employee premium if over age 65. Retiree contributions are subject to adjustment annually. Other cost sharing features of the medical plan include deductibles, coinsurance and Medicare coordination. The maximum life insurance benefit prior to age 70 is $33, with a maximum $25 thereafter. Effective January 1, 1993 both plans' provisions were amended: employees who retire after January 1, 1993 are required to pay the actual cost of the medical insurance benefit premium reduced by a credit which is based upon years of service at retirement. The life insurance benefit varies by age at retirement from $5 for retirement at ages 55 through 59 and $10 for retirement at ages 60 through 64 and $15 from retirement at ages 65 and over. AIG's U.S. postretirement medical and life insurance benefits obligations, valued in accordance with SSAP No. 14, Postretirement Benefits Other Than Pensions (SSAP 14), as of December 31, 2011 and 2010 were $201,960 and $202,418, respectively. These obligations are not currently funded. The Company's allocated share of other postretirement benefit plan expenses were $589 and $112 for the years ended December 31, 2011 and 2010, respectively. Effective April 1, 2012, the Company subsidy for the retiree medical plan will only be provided to employees whose combination of age and credited service is equal to or greater than 65 points, who are at least age 55, and have at least 5 years of credited service as of March 31, 2012. The retiree plan will only provide access to coverage for all other retirees, but the Company subsidy will no longer be available to them. As sponsor of the AIG U.S. Plan and other benefit plans, AIG is ultimately responsible for the maintenance of these plans in compliance with law. The Company is not directly liable for obligations under the plan; its direct obligations result from AIG's allocation of its share of expenses from the plans. Such allocation is based on the Company's payroll. C. STOCK OPTION AND DEFERRED COMPENSATION PLANS Some of the Company's officers and key employees receive share-based compensation pursuant to awards granted under the AIG 2010 Stock Incentive Plan including share-based cash settled awards such as the Stock Salary and TARP RSU Awards and several other legacy AIG-sponsored employee compensation plans, which are linked to AIG common stock. Share-based cash settled awards are recorded as liabilities until the final payout is made or 71 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- the award is replaced with a stock-settled award. Unlike stock-settled awards, which have a fixed grant-date fair value (unless the award is subsequently modified), the fair value of unsettled or unvested liability awards are remeasured at the end of each reporting period based on the change in fair value of one share of AIG common stock. Legacy plans for which awards were still outstanding at December 31, 2011 include the AIG 1999 Stock Option Plan, as amended, AIG 2002 Stock Incentive Plan, as amended under which AIG has issued time-vested restricted stock units and performance restricted stock units and the AIG 2007 Stock Incentive Plan, as amended. During 2011 and 2010, AIG allocated to the Company compensation expense totaling $4,034 and $14,408, respectively, related to stock options and restricted stock units granted under these plans. In December 2009, AIG established the Long Term Incentive Plan under which management employees were offered the opportunity to receive additional compensation in the form of cash and stock appreciation rights (SARs) if certain performance metrics are met. During 2011 and 2010, AIG allocated to the Company $4,986 and $9,861, respectively, for expenses incurred under this plan. In addition to several small defined contribution plans, AIG sponsors a voluntary savings plan for U.S. employees, (the AIG Incentive Savings Plan), which provides for salary reduction contributions by employees and matching U.S. contributions by AIG of up to 7 percent of annual salary depending on the employees' years of service and subject to certain compensation limits. The Company's allocated pre-tax expense associated with this plan was, $4,957 and $7,156 in 2011 and 2010, respectively. Effective January 1, 2012, the AIG Incentive Savings Plan was amended to change the company matching contribution to 100 percent of the first 6 percent of participant contributions and to allow all employees to contribute up the annual IRS contribution maximum of $17. D. POST-EMPLOYMENT BENEFITS AND COMPENSATED ABSENCES AIG provides certain benefits to inactive employees who are not retirees. Certain of these benefits are insured and expensed currently; other expenses are provided for currently. Such expenses include long-term disability benefits, medical and life insurance continuation and Consolidated Omnibus Budget Reconciliation Act (COBRA) medical subsidies. The costs of these plans are borne by AIG and its participating subsidiaries. E. IMPACT OF MEDICARE MODERNIZATION ACT ON POST RETIREMENT BENEFITS On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law. The postretirement medical plan benefits provided by the plan are actuarially equivalent to Medicare Part D under the 2003 Medicare Act and eligible for the federal subsidy. Effective January 1, 2007, this subsidy is passed on to the participants through reduced contributions. The expected amount of subsidy that AIG will receive for 2011 is $3,100. 72 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 10 - CAPITAL AND SURPLUS AND DIVIDEND RESTRICTIONS A. CAPITAL AND SURPLUS The Company returned $1,420,000 in capital to its immediate parent as a result of reducing the par value of its common capital stock from $0.015 per share to $0.0115065 per share. The return of capital was accomplished by two separate transactions. On March 31, 2011, the Company reduced the par value of its common stock from $0.015 per share to $0.0124578 per share. On September 30, 2011, the Company further reduced the par value of its common stock to $0.0115065 per share. As a result of these transactions, the Company's common capital stock was reduced by $5,922 and its gross paid in and contributed surplus was reduced by $1,414,078. Both transactions were approved by the Company's board of directors and NY DFS. The portion of unassigned surplus as of December 31, 2011 and 2010 represented by each item below is as follows:
-------------------------------------------------------- 2011 2010 -------------------------------------------------------- Unrealized gains $ 198,889 $ 220,760 Non-admitted asset values (1,224,794) (458,968) Provision for reinsurance (78,525) (99,443) -------------------------------------------------------- --------------------------------------------------------
In calculating the provision for reinsurance as of December 31, 2011, management utilized collateral including letters of credit provided by its Ultimate Parent of $381,134. In calculating the provision for reinsurance as of December 31, 2010, management utilized collateral including letters of credit and assets in trust provided by its Ultimate Parent of $314,752 and $26,752, respectively. The use of these assets was approved by the domiciliary regulator. 73 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The changes in unrealized gains and non-admitted assets reported in the Statements of Operations and Changes in Capital and Surplus were derived as follows:
--------------------------------------------------------- ------------ ------------- Change in net unrealized gains 2011 2010 2009 --------------------------------------------------------- ------------ ------------- Unrealized gains, current year $ 198,889 $ 220,760 $ 441,772 Unrealized gains, previous year 220,760 441,772 739,654 ------------- ------------- ------------- Change in unrealized gains (21,871) (221,012) (297,882) Change in tax on unrealized gains 3,008 110,099 202,913 Change in accounting principles SSAP 43R - - (6,693) Adjustments to beginning surplus 2,913 (40,963) (8,900) Derivatives - change in foreign exchange 5,940 (4,250) - Amortization of goodwill (7,967) (5,204) (2,502) Other - Japan UTA 62,374 - - ------------- ------------- ------------- Change in unrealized, net of taxes $ 44,397 $ (161,330) $ (113,064) ============= ============= =============
(a) The 2009 balance includes $3,395 of adjustments to the income tax effect of capital gains.
--------------------------------------------------------------------------- Change in non-admitted asset values 2011 2010 --------------------------------------------------------------------------- Non-admitted asset values, current year $ (1,224,794) $ (458,968) Non-admitted asset values, previous year (458,968) (1,087,959) --------------- --------------- Change in non-admitted assets (765,826) 628,991 Change in SSAP 10R (189,739) 11,994 Adjustments to beginning surplus 29,308 (128,361) Other surplus adjustments - 613 --------------- --------------- Change in non-admitted assets $ (926,257) $ 513,237 =============== ===============
B. RISK-BASED CAPITAL REQUIREMENTS The NAIC has adopted a Risk-Based Capital (RBC) formula to be applied to all property and casualty insurance companies. RBC is a method of establishing the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. A company's RBC is calculated by applying different factors to various asset classes, net premiums written and loss and LAE reserves. A company's result from the RBC formula is then compared to certain established minimum capital benchmarks. To the extent a company's RBC result does not either reach or exceed these established benchmarks, certain regulatory actions may be taken in order for the insurer to meet the statutorily-imposed minimum capital and surplus requirements. In connection therewith, the Company has satisfied the capital and surplus requirements of RBC for the 2011 74 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- reporting period. C. DIVIDEND RESTRICTIONS Under New York law, the Company may pay cash dividends only from earned surplus determined on a statutory basis. Further, the Company is restricted (on the basis of the lower of 10.0 percent of the Company's statutory earned surplus as of December 31, 2011, or 100.0 percent of the Company's adjusted net investment income for the preceding 36 month period ending December 31, 2011) as to the amount of dividends it may declare or pay in any twelve-month period without the prior approval of NY DFS. As of December 31, 2011, the maximum dividend payment, which may be made without prior approval during 2012, is approximately $308,827. Within the limitations noted above, no dividends may be paid out of segregated surplus. There are no restrictions placed on the portion of Company profits that may be paid as ordinary dividends to stockholders. There were no restrictions placed on the Company's surplus including for whom the surplus is being held. There is no stock held by the Company for any special purpose. As of December 31, 2011 and 2010, the Company paid dividends to Chartis U.S., Inc. of $137,458 and $301,343, respectively, which included $0 of extraordinary dividends. NOTE 11 - CONTINGENCIES A. LEGAL PROCEEDINGS The Company is involved in various legal proceedings incident to the operation of its business. Such proceedings include claims litigation in the normal course of business involving disputed interpretations of policy coverage. Other proceedings in the normal course of business include allegations of underwriting errors or omissions, bad faith in the handling of insurance claims, employment claims, regulatory activity, and disputes relating to the Company's business ventures and investments. Other legal proceedings include the following: The National Association of Insurance Commissioners Market Analysis Working Group, led by the states of Ohio and Iowa, is conducting a multi-state examination of certain accident and health products, including travel products, issued by National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union"). The examination formally commenced in September 2010 after National Union, based on the identification of certain regulatory issues related to the conduct of its accident and health insurance business, including rate and form issues, producer licensing and appointment, and vendor management, requested that state regulators collectively conduct an examination of the regulatory issues in its accident and health business. In addition to Ohio and Iowa, the lead states in the multi-state examination are Minnesota, New Jersey and Pennsylvania, and currently a total of 38 states have agreed to participate in the multi-state examination. As part of the multi-state examination, an Interim Consent Order was entered into with Ohio on (A) January 7, 2011, in which National Union agreed, on a nationwide basis, to cease marketing directly to individual bank customers accident/sickness policy forms that had 75 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- been approved to be sold only as policies providing blanket coverage, and to certain related remediation and audit procedures and (B) on February 14, 2012, in which National Union agreed, on a nationwide basis, to limit outbound telemarketing to certain forms and rates. A Consent Order was entered into with Minnesota on February 10, 2012, in which National Union and Travel Guard Group Inc. agreed to (i) cease automatically enrolling Minnesota residents in certain insurance relating to air travel, (ii) pay a civil penalty to Minnesota of $250 and (iii) refund premium to Minnesota residents who were automatically enrolled in certain insurance relating to air travel. In early 2012, Chartis U.S., Inc., on behalf of itself, National Union, and certain of Chartis U.S., Inc.'s insurance companies (collectively, "Chartis U.S.") and the lead regulators agreed in principle upon certain terms to resolve the multi-state examination. The terms include Chartis U.S.'s (i) payment of a civil penalty of up to $51,000, (ii) agreement to enter into a corrective action plan describing agreed-upon specific steps and standards for evaluating Chartis U.S.'s ongoing compliance with laws and regulations governing the regulatory issues identified in the examination, and (iii) agreement to pay a contingent fine in the event that Chartis U.S. fails to substantially comply with the steps and standards agreed to in the corrective action plan. AIG has established a reserve equal to the amount of the civil penalty under the proposed agreement. As the terms outlined above are subject to agreement by the lead and participating states and appropriate agreements or orders, the Company (i) can give no assurance that these terms will not change prior to a final resolution of the multi-state examination that is binding on all parties and (ii) cannot predict what other regulatory action, if any, will result from resolving the multi-state examination. There can be no assurance that any regulatory action resulting from the issues identified will not have a material adverse effect on Chartis's consolidated results of operations for an individual reporting period, the ongoing operations of the business being examined, or on similar business written by other AIG carriers. National Union and other Chartis companies are also currently subject to civil litigation relating to the conduct of their accident and health business, and may be subject to additional litigation relating to the conduct of such business from time to time in the ordinary course. AIG, National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), and Chartis Specialty Insurance Company (f/k/a American International Specialty Lines Insurance Company) have been named defendants (the AIG Defendants) in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). The plaintiffs in the second-filed action have intervened in the first-filed action, and the second-filed action has been dismissed. An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current action, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that the AIG Defendants and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage. In their complaint, plaintiffs request compensatory damages for the 1999 class in the amount of $3,200,000, plus punitive damages. The AIG Defendants deny the allegations of fraud and suppression and have asserted, inter alia, that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement. The AIG Defendants further assert that the current claims are barred by the statute of limitations and that plaintiffs' assertions that the statute was tolled cannot stand against the public disclosure of the excess coverage. Plaintiffs, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations. The intervening plaintiffs had requested a stay of all trial court proceedings pending their appeal of an order 76 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- dismissing certain lawyers and law firms who represented parties in the underlying class and derivative actions. After the Alabama Supreme Court affirmed the trial court's dismissal in September 2008, the intervening plaintiffs filed an Amended Complaint in Intervention on December 1, 2008, which named Caremark, AIG and certain subsidiaries, including National Union and Chartis Specialty Insurance Company, as defendants, and purported to bring claims against all defendants for deceit and conspiracy to deceive, and to bring a claim against AIG and its subsidiaries for aiding and abetting Caremark's alleged deception. After the defendants moved to dismiss the Amended Complaint in Intervention and, in the alternative, for a more definite statement, and the plaintiffs reached an agreement to withdraw additional motions seeking to disqualify certain plaintiffs' counsel, on March 2, 2009, the court granted the intervening plaintiffs' motion to withdraw the Amended Complaint in Intervention. On April 14, 2009, the court established a schedule for class action discovery. The parties are presently engaged in class discovery, and plaintiffs' motion for class certification is scheduled for a hearing starting on May 30, 2012. As of April 18, 2012, the parties have not commenced general discovery, and the court has not determined if a class action is appropriate or the size or scope of any class. The Company is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation. On September 2, 2005, certain AIG companies including American Home Assurance Company, AIU Insurance Company and New Hampshire Insurance Company (collectively, the AIG Parties) sued (i) The Robert Plan Corporation (RPC), an agency that formerly serviced assigned risk automobile insurance business for the AIG Parties; (ii) certain affiliates of RPC; and (iii) two of RPC's senior executives. This suit was brought in New York Supreme Court and alleges the misappropriation of funds and other violations of contractual arrangements. On September 26, 2005, RPC countersued the AIG Parties and AIG itself for, among other things, $370,000 in disgorged profits and $500,000 of punitive damages under a claim of fraud. On March 10, 2006, RPC moved to dismiss its fraud claim without prejudice for the purposes of bringing that claim in New Jersey. On that date, RPC also amended its counterclaim, setting forth a number of causes of action for breach of contract. The parties filed cross motions to dismiss various counts of the complaint and counterclaims. These motions were granted in part and denied in part by the court. RPC appealed certain aspects of the court's ruling. That appeal remains pending. On August 25, 2008, RPC, one of its affiliates, and one of the defendant RPC executives filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code). On October 7, 2008, the Court entered an Order staying this action in light of those bankruptcy proceedings. On January 15, 2009, RPC filed a notice of removal to the United States District Court for the Southern District of New York. The action was subsequently transferred to the Eastern District of New York and then referred to the United States Bankruptcy Court for that District. The AIG Parties moved to remand the case, and the Court granted that motion on April 12, 2010. In July 2007, RPC (along with Eagle Insurance Company (Eagle) and Newark Insurance Corporation (Newark), two of RPC's subsidiary insurance companies) filed a separate complaint in New Jersey alleging claims for fraud and negligent misrepresentation against AIG and the AIG Parties in connection with certain 2002 contracts. That complaint seeks damages of at least $100,000, unspecified punitive damages, declaratory relief, and imposition of a constructive trust. 77 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Because Eagle and Newark are in liquidation with the Commissioner of the New Jersey Department of Banking and Insurance as liquidator, the AIG Parties believe that only the Commissioner -- and not RPC -- has the authority to direct Eagle and Newark to bring the claims asserted in this action. On December 7, 2007, this action was stayed pending judicial determination of this issue in the Eagle/Newark rehabilitation/liquidation proceeding. In October 2008, the Court dismissed the action without prejudice for failure to prosecute. Nevertheless, on January 14, 2009, RPC filed a notice of removal of the New Jersey action to the United States District Court for the District of New Jersey and, on February 2, 2009, moved to transfer the New Jersey action to the Eastern District of New York, where RPC's bankruptcy proceeding is pending. The AIG Parties filed a motion to dismiss the case for lack of subject matter jurisdiction because the purportedly removed action had been dismissed three months before RPC filed its purported notice of removal, and consideration of RPC's transfer motion was stayed until the Court ruled on the AIG Parties' motion to dismiss. On August 10, 2009, the Court granted the AIG Parties' motion to dismiss and denied RPC's transfer motion as moot. To the AIG Parties' knowledge, since that time, RPC has not sought to have the New Jersey state court action reinstated. The settlement discussed below contains a release from RPC to the AIG Parties that covers the claims RPC asserted against the AIG Parties in the New Jersey Action. On December 28, 2010, the Bankruptcy Court granted motions to approve settlements entered into in September 2010 between the AIG parties and the RPC Defendants (other than two of RPC's affiliates whose corporate privileges have been suspended by their respective states of incorporation and are therefore unable to enter into contracts) resolving all claims and counterclaims between the AIG parties and the RPC Defendants, and on March 16, 2011 the Court entered an Order dismissing the case with prejudice. The settlements will not have a material adverse effect on the AIG parties' financial position. On March 23, 2011, certain AIG entities were served with a Summons with Notice of a suit filed in New York Supreme Court (Nassau County) by William Wallach, The William Wallach Irrevocable Trust, Lawrence Wallach, and Richard Wallach. Prior to his death in 2010, William Wallach was the majority shareholder in RPC. The Summons with Notice indicates that the suit purports to seek damages of $375,000 for breach of contract, misrepresentation, breach of fiduciary duty, fraud, deceit, tortious interference with contractual relations and prima facie tort. Following motion practice in the District Court, the matter was referred to the Bankruptcy Court as related to the settlement that was approved on March 16, 2011. The AIG Defendants requested leave to move for sanctions because they assert the complaint is frivolous, and the plaintiffs indicated their intent to file an amended complaint. On October 5, 2011, the Bankruptcy Court set a 60-day deadline for plaintiffs to amend, if so advised, and to determine whether they wish to proceed notwithstanding AIG Defendants' assertion that the claim is frivolous. The plaintiffs neither withdrew nor amended their complaint within the 60-day deadline set by the Bankruptcy Court. On December 7, 2011, the Bankruptcy Court indicated that the AIG Defendants should file their motions to dismiss and for sanctions against the plaintiffs' existing complaint, returnable January 18, 2012. The AIG Defendants filed their motions to dismiss and for sanctions on December 19, 2011. On February 1, 2012, the bankruptcy court dismissed the complaint without prejudice and set a March 5, 2012 hearing date for the AIG Defendants' sanctions motion. At that hearing, the Court granted the AIG Defendants' sanctions motion. 78 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- Effective February 9, 2006, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice (the DOJ), the United States Securities and Exchange Commission (the SEC), the Office of the Attorney General of the State of New York (the NYAG) and the New York Insurance Department (the NYDOI). The settlements resolve outstanding litigation and allegations by such agencies against AIG in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, as well as claims relating to the underpayment of certain workers compensation premium taxes and other assessments. As a result of these settlements, AIG recorded an after-tax-charge of $1,150,000 in the fourth quarter of 2005, and made payments or placed in escrow approximately $1,640,000 including (i) $375,000 into a fund under the supervision of the NYAG and NYDOI to be available principally to pay certain AIG insurance company subsidiary policyholders who purchased excess casualty policies through Marsh & McLennan Companies, Inc. and Marsh Inc. (the Excess Casualty Fund) and (ii) $343,000 into a fund under the supervision of the NYAG and the NYDOI to be used to compensate various states in connection with the underpayment of certain workers compensation premium taxes and other assessments. As of February 29, 2008, eligible policyholders entitled to receive approximately $358,700 (or 95 percent) of the Excess Casualty Fund had opted to receive settlement payments in exchange for releasing AIG and its subsidiaries from liability relating to certain insurance brokerage practices. In accordance with the settlement agreements, all amounts remaining in the Excess Casualty Fund were used by AIG to settle claims from other policyholders relating to such practices. Various state regulatory agencies have reviewed certain other transactions and practices of AIG and its subsidiaries, including the Company, in connection with certain industry-wide and other inquiries including, but not limited to, insurance brokerage practices relating to contingent commissions and the liability of certain AIG subsidiaries, including the Company, for taxes, assessments and surcharges relating to the underreporting or misreporting of workers compensation premium. On January 29, 2008 AIG reached settlements in connection with these state reviews, subject to court approval, with the Attorneys General of the States of Florida, Hawaii, Maryland, Michigan, Oregon, Texas and West Virginia, the Commonwealths of Massachusetts and Pennsylvania, and the District of Columbia; the Florida Department of Financial Services; and the Florida Office of Insurance Regulation. The settlement agreements call for AIG to pay a total of $12,500 to be allocated among the ten jurisdictions and also require AIG to continue to maintain certain producer compensation disclosure and ongoing compliance initiatives. On March 13, 2008, AIG also reached a settlement with the Pennsylvania Insurance Department, which calls for AIG to provide annual reinsurance reports and maintain certain producer compensation disclosure and ongoing compliance initiatives, and to pay a total of $13,500, $4,400 of which was previously paid to Pennsylvania in connection with prior settlement agreements. On May 24, 2007, the National Workers Compensation Reinsurance Pool (NWCRP), on behalf of its participant members, filed a lawsuit against AIG and certain of its subsidiaries, including the Company (collectively, the AIG parties), with respect to the underpayment of residual market assessments for workers compensation insurance. The complaint alleges claims for violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), breach of contract, fraud and related state law claims arising out of AIG's alleged underpayment of these assessments between 1970 and the present and seeks damages purportedly in excess of $1,000,000. On August 6, 2007, the court denied the AIG parties' motion seeking to dismiss or stay the complaints or in the alternative, to transfer to the Southern District of New York. On December 26, 2007, the court denied the AIG parties' motion to dismiss the complaint. On March 17, 2008, the AIG parties filed an amended answer, counterclaims and third-party claims against the National Council on Compensation Insurance (in its capacity as attorney-in-fact for the 79 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NWCRP), the NWCRP, its board members, and certain of the other insurance companies that are members of the NWCRP alleging violations of RICO, as well as claims for conspiracy, fraud, and breach of fiduciary duty. The counterclaim-and third-party defendants filed motions to dismiss on June 9, 2008. On January 26, 2009, the AIG parties filed a motion to dismiss all claims in the complaint for lack of subject-matter jurisdiction. On February 23, 2009, the Court issued an order denying the motion to dismiss the AIG parties' counterclaims; granting the portion of the third-party defendants' motion to dismiss as to the AIG parties' third-party claims for RICO violations and conspiracy; and denying the portion of the third-party defendants' motion to dismiss as to the AIG parties' third-party claims for fraud, breach of fiduciary duty and unjust enrichment. On April 13, 2009, one of the third-party defendants filed third-party counterclaims against AIG, certain of its subsidiaries and certain former executives. On August 20, 2009, the court granted the AIG parties' motion to dismiss the NWCRP's claims for lack of subject matter jurisdiction. On September 25, 2009, the AIG parties, now in the position of plaintiff, filed an amended complaint that repleads their RICO and conspiracy claims -- previously counterclaims that were dismissed without prejudice -- against several competitors, as well as repleads the AIG parties' already sustained claims for fraud, breach of fiduciary duty and unjust enrichment against those parties, the NWCRP and the NCCI. On October 8, 2009, one competitor filed amended counterclaims against the AIG parties. The amended counterclaim is substantially similar to the complaint initially filed by the NWCRP, but also seeks damages related to non-NWCRP states and guaranty funds, in addition to asserting claims for other violations of state law. On October 30, 2009, all of the parties now in the position of defendant -- the AIG parties' competitors, the NWCRP and NCCI -- filed motions to dismiss many of the AIG parties' amended claims, and the AIG parties filed a motion to dismiss many of their competitor's counterclaims. On July 1, 2010 the Court denied the pending motions to dismiss as to all claims, except that it dismissed the AIG parties' claim for unjust enrichment. On July 30, 2010, the NWCRP filed a motion for reconsideration of the Court's decision denying its motion to dismiss the accounting claim asserted against it by the AIG parties, and that motion was denied on August 16, 2010. On April 1, 2009, a purported class action was filed in Illinois federal court against AIG and certain of its subsidiaries on behalf of a putative class of NWCRP participant members with respect to the underpayment of residual market assessments for workers compensation insurance. The complaint was styled as an "alternative complaint," should the court grant the AIG parties' motion to dismiss all claims against the defendants in the NWCRP lawsuit for lack of subject matter jurisdiction. The allegations in the class action complaint are substantially similar to those filed by the NWCRP, but the complaint adds certain former AIG executives as defendants and a RICO claim against those individuals. On August 28, 2009, the class action plaintiffs filed an amended complaint, removing the AIG executives as defendants. On October 30, 2009, the AIG parties filed a motion to dismiss many of the claims asserted in the class action complaint. On July 1, 2010, the Court denied the pending motion to dismiss as to all claims, except that it dismissed the plaintiffs' claim for promissory estoppel against the AIG subsidiary defendants (the promissory estoppel claim against AIG survives). Class discovery has been completed, and on July 16, 2010, the plaintiffs filed a motion for class certification. The AIG parties filed their opposition to this motion on October 8, 2010. On January 5, 2011, the AIG parties executed a term sheet with a group of intervening plaintiffs, made up of seven participating members of the NWCRP that filed a motion to intervene in the class action for the purpose of settling 80 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- the claims at issue on behalf of a settlement class. The proposed class-action settlement would require AIG to pay $450,000 to satisfy all liabilities to the class members arising out of the workers compensation premium reporting issues, a portion of which would be funded out of the remaining amount held in a fund established as part of AIG's settlement with the NYAG and NYDOI in 2006 (the "Workers Compensation Fund"), as addressed above, less any amounts previously withdrawn to satisfy AIG's regulatory settlement obligations, as addressed below. On January 13, 2011, their motion to intervene was granted. On January 19, 2011, the intervening class plaintiffs filed their Complaint in Intervention. On January 28, 2011, the AIG parties and the intervening class plaintiffs entered into a settlement agreement embodying the terms set forth in the January 5, 2011 term sheet and filed a joint motion for certification of the settlement class and preliminary approval of the settlement. If Court approval becomes final, the settlement agreement will resolve and dismiss with prejudice all claims that have been made or that could have been made in the consolidated litigations pending in the Northern District of Illinois arising out of workers compensation premium reporting, including the class action, other than claims that are brought by or against any class member that opts out of the settlement. On April 29, 2011, Liberty Mutual Group filed papers in opposition to preliminary approval of the proposed settlement and in opposition to certification of a settlement class, in which it alleged that AIG's actual exposure should the class action continue through judgment to be in excess of $3,000,000. The AIG parties dispute this allegation. On August 1, 2011, the Court issued an opinion and order granting the pending motion for settlement class certification and preliminarily approving the proposed class action settlement, subject to certain minor modifications to the settlement agreement that the Court noted the parties already had agreed to make. The opinion and order stated that it would become effective upon entry of a separate Findings and Order Preliminarily Certifying a Settlement Class and Preliminarily Approving Proposed Settlement, which was then entered on August 5, 2011. Liberty Mutual sought leave from the United States Court of Appeals for the Seventh Circuit to appeal the August 5, 2011 class certification decision, which was denied on August 19, 2011. Notice of the settlement was issued to the class members on August 19, 2011 advising that any class member wishing to opt out of or object to the class action-settlement was required to do so by October 3, 2011. RLI Insurance Company and its affiliates, which were to receive less than one thousand dollars under the proposed settlement, sent the only purported opt-out notice. Liberty Mutual, including its subsidiaries Safeco and Ohio Casualty, and the Kemper group of insurance companies, through their affiliate Lumbermens Mutual Casualty, were the only two objectors. The AIG parties and the settling class plaintiffs filed responses to the objectors' submissions on October 28, 2011. The Court conducted a final fairness hearing on November 29, 2011. Immediately prior to the hearing, Lumbermens Mutual Casualty withdrew its objection to the settlement. On December 21, 2011, the Court issued an Order granting final approval of the settlement, but staying that ruling pending a forthcoming opinion. On February 28, 2012, the Court entered a final order and judgment approving the class action settlement. Liberty Mutual, Safeco and Ohio Casualty filed notices of their intent to appeal the Court's final order and judgment. The Court of Appeals for the Seventh Circuit has consolidated the appeals. Liberty Mutual, Safeco and Ohio Casualty are to submit their opening briefs on or before May 29, 2012. The $450,000 settlement amount, which is currently held in escrow pending final resolution of the class action settlement, was funded in part from the approximately $191,500 remaining in the Workers' Compensation Fund, after the transfer of the $146,500 in fines, penalties, and premium taxes discussed in the NAIC Examination of Workers' Compensation Premium Reporting matter below. In the event that the appeal of the class action 81 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- settlement is successful, the litigation could resume. AIG has an accrued liability equal to the amounts payable under the settlement. A purported class action was filed in South Carolina federal court on January 25, 2008 against AIG and certain of its subsidiaries on behalf of a class of employers that obtained workers compensation insurance from AIG companies and allegedly paid inflated premiums as a result of AIG's alleged underreporting of workers compensation premiums. An amended complaint was filed on March 24, 2008, and the AIG parties filed a motion to dismiss the amended complaint on April 21, 2008. On July 8, 2008, the court granted the AIG parties' motion to dismiss all claims without prejudice and granted plaintiff leave to refile subject to certain conditions. Plaintiffs filed their second amended complaint on July 22, 2008. On March 27, 2009, the court granted the AIG parties' motion to dismiss all claims in the second amended complaint related to pre-2001 policies and all claims against certain AIG subsidiaries, denied the motion to dismiss as to claims against AIG and the remaining subsidiaries, and granted the AIG parties' motion to strike certain allegations from the complaint. On July 19, 2010, the South Carolina Supreme Court held that the filed-rate doctrine did not bar plaintiffs' claims. On December 21, 2011, plaintiffs filed a motion for class certification, which the AIG parties opposed on January 23, 2012. On February 29, 2012, the parties agreed in principle to settle the case for a payment by defendants of $4,000. If that settlement is approved by the court and the settlement becomes final, the case will be concluded. In April 2007, the National Association of Insurance Commissioners (the NAIC) formed a Settlement Review Working Group, directed by the State of Indiana, to review the Workers Compensation Residual Market Assessment portion of the settlement between AIG, the NYAG, and the NYDOI. In late 2007, the Settlement Review Working Group, under the direction of Indiana, Minnesota and Rhode Island, recommended that a multi-state targeted market conduct examination focusing on workers compensation insurance be commenced under the direction of the NAIC's Market Analysis Working Group. AIG was informed of the multi-state targeted market conduct examination in January 2008. The lead states in the multi-state examination are Delaware, Florida, Indiana, Massachusetts, Minnesota, New York, Pennsylvania and Rhode Island. All other states (and the District of Columbia) agreed to participate in the multi-state examination. The examination focused on legacy issues related to AIG's writing and reporting of workers compensation insurance between 1985 and 1996. On December 17, 2010, AIG and the lead states reached an agreement to settle all regulatory liabilities arising out of the subjects of the multistate examination. The regulatory settlement agreement includes, among other terms, (i) AIG's payment of $100,000 in regulatory fines and penalties; (ii) AIG's payment of $46,500 in outstanding premium taxes; (iii) AIG's agreement to enter into a compliance plan describing agreed-upon specific steps and standards for evaluating AIG's ongoing compliance with state regulators governing the setting of workers compensation insurance premium rates and the reporting of workers compensation premiums; and (iv) AIG's agreement to pay up to $150,000 in contingent fines in the event that AIG fails to comply substantially with the compliance plan requirements. The $146,500 in fines, penalties and premium taxes can be funded out of the $338,000 held in the Workers Compensation Fund, discussed above, to the extent that such monies have not already been used to fund the class action settlement discussed above. The regulatory settlement originally was contingent upon, among other events: (i) a final, court-approved settlement being reached in all the lawsuits currently pending in Illinois arising out of workers compensation premium reporting issues, discussed above, including the putative class action, except that such settlement need not resolve claims between AIG and the Liberty Mutual Group and (ii) a settlement being reached and consummated between AIG and certain state 82 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- insurance guaranty funds that may assert claims against AIG for underpayment of guaranty-fund assessments. AIG and the other parties to the regulatory settlement agreement subsequently agreed to waive the settlement contingency of a final settlement in the lawsuits, provided that such waiver will not become effective until AIG consummates a settlement with the state insurance guaranty associations. AIG and certain subsidiaries have established a reserve equal to the amounts payable under the proposed settlement. After the NYAG filed its complaint against insurance broker Marsh, policyholders brought multiple federal antitrust and Racketeer Influenced and Corrupt Organizations Act (RICO) class actions in jurisdictions across the nation against insurers and brokers, including AIG and a number of its subsidiaries, alleging that the insurers and brokers engaged in a broad conspiracy to allocate customers, steer business, and rig bids. These actions, including 24 complaints filed in different federal courts naming AIG or an AIG subsidiary as a defendant, were consolidated by the judicial panel on multi-district litigation and transferred to the United States District Court for the District of New Jersey for coordinated pretrial proceedings. The consolidated actions have proceeded in that court in two parallel actions, In re insurance Brokerage Antitrust Litigation (the Commercial Complaint) and In re Employee Benefit Insurance Brokerage Antitrust Litigation (the Employee Benefits Complaint, and, together with the Commercial Complaint, the multi-district litigation). The plaintiffs in the Commercial Complaint are a group of corporations, individuals and public entities that contracted with the broker defendants for the provision of insurance brokerage services for a variety of insurance needs. The broker defendants were alleged to have placed insurance coverage on the plaintiffs' behalf with a number of insurance companies named as defendants, including certain AIG subsidiaries, including American Home Assurance Company (American Home), AIU Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., Chartis Specialty Insurance Company (f/k/a American International Specialty Lines Insurance Company), Chartis Property Casualty Company (f/k/a both Birmingham Fire Insurance Company of Pennsylvania and AIG Casualty Company), Commerce and Industry Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Louisiana, New Hampshire Insurance Company, and The Insurance Company of the State of Pennsylvania. The Commercial Complaint also named various brokers and other insurers as defendants (three of which have since settled). The Commercial Complaint alleges that defendants engaged in a widespread conspiracy to allocate customers through "bid-rigging" and "steering" practices. The Commercial Complaint also alleges that the insurer defendants permitted brokers to place business with AIG subsidiaries through wholesale intermediaries affiliated with or owned by those same brokers rather than placing the business with AIG subsidiaries directly. Finally, the Commercial Complaint alleges that the insurer defendants entered into agreements with broker defendants that tied insurance placements to reinsurance placements in order to provide additional compensation to each broker. Plaintiffs assert that the defendants violated the Sherman Antitrust Act, RICO, the antirust laws of 48 states and the District of Columbia, and were liable under common law breach of fiduciary duty and unjust enrichment theories. Plaintiffs seek treble damages plus interest and attorneys' fees as a result of the alleged RICO and the Sherman Antitrust Act violations. The plaintiffs in the Employee Benefits Complaint are a group of individual employees and corporate and municipal employees alleging claims on behalf of two separate nationwide purported classes: an employee class 83 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- and an employer class that acquired insurance products from the defendants from January 1, 1998 to December 31, 2004. The Employee Benefits Complaint names AIG, and certain of its subsidiaries, including American Home, as well as various other brokers and insurers, as defendants. The activities alleged in the Employee Benefits Complaint, with certain exceptions, tracked the allegations of contingent commissions, bid-rigging and tying made in the Commercial Complaint. The court in connection with the Commercial Complaint granted (without leave to amend) defendants' motions to dismiss the federal antitrust and RICO claims on August 31, 2007 and September 28, 2007, respectively. The court declined to exercise supplemental jurisdiction over the state law claims in the Commercial Complaint and therefore dismissed it in its entirety. On January 14, 2008, the court granted defendants' motion for summary judgment on the ERISA claims in the Employee Benefits Complaint and subsequently dismissed the remaining state law claims without prejudice, thereby dismissing the Employee Benefits Complaint in its entirety. On February 12, 2008 plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit with respect to the dismissal of the Employee Benefits Complaint. Plaintiffs previously appealed the dismissal of the Commercial Complaint to the United States Court of Appeals for the Third Circuit on October 10, 2007. On August 16, 2010, the Third Circuit affirmed the dismissal of the Employee Benefits Complaint in its entirety, affirmed in part and vacated in part the District Court's dismissal of the Commercial Complaint, and remanded the case for further proceedings consistent with the opinion. The Third Circuit also affirmed in part and vacated in part the District Court's dismissal of the Commercial Complaint, and remanded the case for further proceedings consistent with the opinion. With respect to the antitrust claims in the Commercial Complaint, the Third Circuit affirmed the dismissal of all of plaintiffs' claims, except reversed the District Court's dismissal of an alleged "Marsh-centered" conspiracy to protect incumbent insurers that is based on allegations of bid-rigging involving excess casualty insurance. The Court remanded this claim to the District Court, instructing it to consider whether plaintiffs must satisfy the heightened pleading standard for fraud, and if so, whether this remaining claim meets that standard. With respect to the RICO claims in the Commercial Complaint, the Third Circuit affirmed the dismissal of all of plaintiffs' claims, except reversed the District Court's dismissal of an alleged "Marsh-centered" enterprise based on allegations of bid-rigging involving excess casualty insurance. The Court remanded this claim to the District Court for consideration as to whether plaintiffs had adequately pled the remaining RICO elements not previously considered by the District Court dismissing the Commercial Complaint. Because the Third Circuit vacated in part the judgment dismissing the federal claims in the Commercial Complaint, the Third Circuit also vacated the District Court's dismissal of the state-law claims in the Commercial Complaint. On October 1, 2010, defendants in the Commercial Complaint filed motions to dismiss the remaining remanded claims in the District Court of New Jersey. On March 18, 2011, AIG, certain subsidiaries and certain other insurer and broker defendants agreed in principle to settle the multi-district litigation with a class consisting of all purchasers of commercial insurance policies from 1998 through 2004 that were issued by any of the defendants named in the Commercial Complaint and brokered through any of the insurance brokers named as defendants in the Commercial Complaint. Once the settlement is finalized approved by the Court and any appeals of Court approval or exhausted, the AIG defendants will pay a total of $6,750 towards a total group settlement payment of $36,750. A portion of the total settlement fund, which includes plaintiffs' attorneys' fees and class notice and administration fees, would be distributed to purchasers of excess casualty policies from any of the settling defendants and brokered through Marsh, with the remainder being 84 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- used to fund a settlement that would be paid to a charitable or educational organization to be agreed to by the settling parties. On June 20, 2011, the Court "administratively terminated" without prejudice the various Defendants' pending motions to dismiss the proposed class plaintiffs' operative pleading indicating that those motions may be re-filed after adjudication of all issues related to the proposed class settlement and subject to the approval of the Magistrate Judge. On June 27, 2011, the Court preliminarily approved the class settlement. On June 30, 2011, AIG and certain subsidiaries placed their portion of the total settlement payment into escrow. If the settlement does not receive final court approval, those funds will revert to those parties. A final fairness hearing took place on September 14, 2011. On March 30, 2012, the Court granted final approval of the class settlement. The deadline for objectors to initiate appeals, if any, from the order granting final approval of the settlement is April 30, 2012. A number of complaints making allegations similar to those in the multi-district litigation have been filed against AIG, certain AIG subsidiaries and other defendants in state and federal courts around the country. The defendants have thus far been successful in having the federal actions transferred to the District of New Jersey and consolidated into the multi-district litigation. These additional consolidated actions are still pending in the District of New Jersey. The AIG defendants have sought to have state court actions making similar allegations stayed pending resolution of the multi-district litigation. These efforts have generally been successful, although four cases have proceeded (one each in Florida and New Jersey state courts that have settled, and one each in Texas and Kansas state courts that are proceeding). In the Texas case, a hearing was held on November 11, 2009 on defendants' Special Exceptions. In the Kansas case, defendants are appealing the trial court's April 2010 denial of defendants' motion to dismiss to the Kansas Supreme Court. On October 17, 2011, the Court conducted a conference in connection with the tag-along actions that have been consolidated with the Multi-District Litigation, and subsequently ordered that discovery and motion practice may proceed in those cases. The parties subsequently submitted proposed scheduling orders for discovery and any additional motion practice to the Court, and a scheduling conference has been scheduled before the magistrate judge for April 30, 2012. AIG is also subject to various legal proceedings which have been disclosed in AIG's periodic filings under the Securities Exchange Act of 1934, as amended, in which the Company is not named as a party, but whose outcome may nonetheless adversely affect the Company's financial position or results of operation. Except as may have been otherwise noted above with respect to specific matters, the Company cannot predict the outcome of the matters described above, reasonably estimate the potential costs related to these matters, or determine whether other AIG subsidiaries, including the Company, would have exposure to proceedings in which they are not named parties by virtue of their participation in an intercompany pooling arrangement. In the opinion of management, except as may have been otherwise noted above with respect to specific matters, the Company's ultimate liability for the matters referred to above is not likely to have a material adverse effect on the Company's financial position, although it is possible that the effect would be material to the Company's results of operations for an individual reporting period. 85 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- B. LEASES As of December 31, 2009, all leases were transferred from the Company to National Union. Lease expenses are allocated to each affiliate based upon the percentage of space occupied. The Company's share of these transactions is based on its allocation as a member of the Admitted Pool, based upon its stated pool percentage. C. OTHER CONTINGENCIES In the ordinary course of business, the Company enters into structured settlements to settle certain claims. Structured settlements involve the purchase of an annuity to fund future claim obligations. In the event the life insurers providing the annuity, on certain structured settlements, are not able to meet their obligations, the Company would be liable for the payments of benefits. As of December 31, 2011, the Company has not incurred a loss and there has been no default by any of the life insurers included in the transactions. Management believes that based on the financial strength of the life insurers involved in these structured settlements the likelihood of a loss is remote. The estimated loss reserves eliminated by such structured settlement annuities and the present value of annuities due from all life insurers (mostly affiliates) which the Company remains contingently liable amounted to $1,542,389 as of December 31, 2011. Also, as of December 31, 2011, the Company had the following amounts of annuities in excess of 1 percent of its policyholders' surplus due from the following life insurers:
----------------------------------------------------------------------------------------------------------- Licensed in Name of life insurer Location Balances New York ----------------------------------------------------------------------------------------------------------- American General Life Insurance Company Texas $ 82,441 No The United States Life Insurance Company in the City of New York New York 879,607 Yes American General Life Insurance Company of Delaware Delaware 311,845 No BMO Life Assurance Company Canada 206,164 No -----------------------------------------------------------------------------------------------------------
As part of its private equity portfolio investment, as of December 31, 2011 the Company may be called upon for an additional capital investment of up to $263,490. The Company expects only a small portion of this portfolio will be called during 2012. 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. All 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 guaranteed entities failed to make payments under the policies of insurance issued during the period of the guarantee. For guarantees that have been terminated, the Company remains contingently liable for all policyholder obligations associated with insurance policies issued by the guaranteed entities during the period in which the guarantee was in force. The Company has not been required to perform under any of the guarantees that it had issued. 86 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- 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. Additionally, 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. Furthermore, for any former affiliate that has been sold, the purchaser has provided the Company with a hold harmless agreement relative to the guarantee. Accordingly, management believes that the likelihood of payment under any of the guarantees is remote. 87 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The following schedule sets forth the effective and termination dates of each guarantee, the amount of direct policyholder obligations guaranteed, the invested assets, estimated loss to the Company and policyholder surplus for each guaranteed entity as of December 31, 2011:
------------------------------------------------------------------------------------------------------------------------------- POLICYHOLDER INVESTED DATE DATE OBLIGATIONS ASSETS @ ESTIMATED LOSS POLICYHOLDERS' SURPLUS GUARANTEED COMPANY ISSUED TERMINATED @ 12/31/2011 12/31/2011 @ 12/31/2011 @ 12/31/2011 ------------------------------------------------------------------------------------------------------------------------------- 21st Century Advantage Insurance Company (f/k/a AIG Advantage Insurance Company) * 12/15/97 8/31/09 $ 5,645 $ 28,397 $ - $ 26,124 AIG Edison Life Insurance Company (formerly GE Edison Life Insurance Company) ** 8/29/03 3/31/11 26,660,158 26,944,023 - 2,123,663 Farmers Insurance Hawaii (f/k/a AIG Hawaii Insurance Company, Inc.) * 11/5/97 8/31/09 16,983 84,066 - 76,624 Chartis Seguros Mexico SA (f/k/a AIG Mexico Seguros Interamericana, S.A. de C.V.) 12/15/97 - 166,073 100,369 - 81,157 American General Life and Accident Insurance Company 3/3/03 9/30/10 8,440,946 9,262,389 - 629,299 American General Life Insurance Company 3/3/03 12/29/06 31,095,613 41,395,196 - 7,393,647 American International Assurance Company (Australia) Limited 11/1/02 10/31/10 380,000 1,308,000 - 404,000 21st Century North America Insurance Company (f/k/a American International Insurance Company) * 11/5/97 8/31/09 37,488 587,979 - 489,328 21st Century Superior Insurance Company (f/k/a American International Insurance Company of California, Inc.) * 12/15/97 8/31/09 1,910 29,818 - 27,209 21st Century Pinnacle Insurance Company (f/k/a American International Insurance Company of New Jersey) * 12/15/97 8/31/09 13,789 42,910 - 38,272 Chartis Europe, S.A. (formerly AIG Europe, S.A.) 9/15/98 - 6,527,141 6,654,194 - 3,390,807 Chartis UK (f/k/a Landmark Insurance Company, Limited (UK)) 3/2/98 11/30/07 188,322 5,379,752 - 1,949,112 Lloyd's Syndicate 1414 (Ascot Corporate Name) 1/20/05 10/31/07 139,593 663,562 - 151,865 SunAmerica Annuity and Life Assurance Company (Anchor National Life Insurance Company) 1/4/99 12/29/06 14,680,609 25,906,187 - 814,143 SunAmerica Life Insurance Company 1/4/99 12/29/06 9,474,897 13,652,491 - 2,907,242 The United States Life Insurance Company in the City of New York 3/3/03 4/30/10 9,667,411 22,548,377 - 1,842,268 The Variable Annuity Life Insurance Company 3/3/03 12/29/06 45,334,090 64,692,369 - 4,238,814 ------------------------------------------------------------------------------------------------------------------------------- TOTAL GUARANTEES $ 152,830,668 $ 219,280,079 $ - $ 26,583,574 ===============================================================================================================================
* The guaranteed company was formerly part of AIG's Personal Auto Group and was sold on July 1, 2009 to Farmers Group, Inc., a subsidiary of Zurich Financial Services Group (ZFSG). As part of the sale, ZFSG issued a hold harmless agreement to the Company with respect to its obligations under this guarantee. ** AIG Edison Life Insurance Company was sold by AIG to Prudential Financial, Inc (PFI) on February 1, 2011. As part of the sale, PFI provided the Company with a hold harmless agreement with respect to its obligations under this guarantee. Amounts disclosed are based on the Edison's fiscal year end of 3/31/2011. 88 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 12 - OTHER SIGNIFICANT MATTERS The Company underwrites a significant concentration of its direct business with brokers. As of December 31, 2011 and 2010, other admitted assets as reported in the accompanying Statements of Admitted Assets were comprised of the following balances:
-------------------------------------------------------------------------------- OTHER ADMITTED ASSETS 2011 2010 -------------------------------------------------------------------------------- Allowance provision $ (103,402) $ (245,740) Deposit accounting assets 3 686 Deposit accounting assets - funds held - 88,515 Guaranty funds receivable and on deposit 10,011 12,199 Intangible asset - Canada (63,660) (107,372) Loss funds on deposit 51,722 40,858 Note receivable - reinsurance commutation - 37,044 Paid loss clearing 346,118 318,312 Other assets 76,228 137,671 -------------------------------------------------------------------------------- TOTAL OTHER ADMITTED ASSETS $ 317,020 $ 282,173 ================================================================================
Guaranty funds receivable represent payments to various state insolvency funds which are recoupable against future premium tax payments in the respective states. Various states allow insurance companies to recoup assessments over a period of five to ten years. As of December 31, 2011 and 2010, the Company has a liability for insolvency assessments, workers' compensation second injury and miscellaneous other assessments in the amounts of $138,076 and $40,428, respectively, with related assets for premium tax credits of $10,011 and $12,183, respectively. Of the amount accrued, the Company expects to pay approximately $73,994 for insolvency assessments, workers' compensation second injury and miscellaneous assessments during the next year and $54,071 in future periods. In addition, the Company anticipates it will realize $6,311 of premium tax offset credits and the associated liability in years two through five. The remaining $3,700 will be realized between years six and ten. A reconciliation of assets recognized from paid and accrued premium tax offsets as of December 31, 2011 is set forth below: a. Assets recognized from paid and accrued premium tax offsets and policy surcharges prior year-end $ 12,183 b. Decreases current year: Guarantuy fund refunds 403 Premium tax offset applied 2,639 c. Increases current year: Premium tax offset paid 870 d. Assets recognized from paid and accrued premium tax offsets ----------- and policy surcharges current year-end $ 10,011 ===========
89 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- The Company routinely assesses the collectability of its receivable balances for potentially uncollectible premiums receivable due from agents and reinsurance recoverable balances. In connection therewith, as of December 31, 2011 and 2010, the Company had established an allowance for doubtful accounts of $103,402 and $245,740, respectively, which was reported as a contra asset within Other Admitted Assets in the accompanying Statements of Admitted Assets. During 2011, 2010 and 2009, the Company recorded $16,296, $30,549 and $25,860, respectively, for allowance for doubtful accounts to Net Loss from Agents' Balances Charged-off in the accompanying Statements of Operations. As of December 31, 2011 and 2010, other liabilities as reported in the accompanying Statements of Liabilities, Capital and Surplus were comprised of the following balances:
----------------------------------------------------------------------------------------- OTHER LIABILITIES 2011 2010 ----------------------------------------------------------------------------------------- Accounts payable $ 42,160 $ 29,894 Accrued retrospective premiums 64,385 64,651 Advance premiums 9,915 11,102 Amounts withheld or retained by company for account of others 4,467 12,459 Deferred commission earnings 4,161 4,357 Liability for pension and severance pay 20,276 16,448 Loss clearing - 1,777 Policyholder funds on deposit 9,831 9,057 Remittances and items not allocated 24,870 28,426 Retroactive reinsurance payable 352 1,258 Retroactive reinsurance reserves - assumed - 4,174 Retroactive reinsurance reserves - ceded (899) (2,077) Servicing carrier liability 6,929 5,597 Escrow funds (NICO) 25,693 - Other legal contingencies 52,613 - Other liabilities, includes suspense accounts, expense account balances and certain accruals 60,119 60,578 ---------------------------------------------------------------------------- ------------ TOTAL OTHER LIABILITIES $ 324,872 $ 247,701 =========================================================================================
On March 28, 2012, the balances reported as other legal contingencies were transferred to the parent company and recorded a deemed capital contribution in accordance with SSAP No. 72, Surplus and Quasi-reorganizations (SSAP 72). NICO funds third party reinsurance recoverable on behalf of Chartis Reinsureds. Chartis reports the balances collected and due to NICO as Escrow funds. 90 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 13 - SUBSEQUENT EVENTS Type I - Recognized Subsequent Events: Subsequent events have been considered through April 25, 2012 for the statutory statement issued on April 27, 2012. None Type II - Nonrecognized Subsequent Events: Subsequent events have been considered through April 25, 2012 for the statutory statement issued on April 27, 2012. Effective February 17, 2012, the Company, together with the members of the Admitted Pool, the Chartis U.S. Surplus Lines Pool and AIU Insurance Company (collectively, the "Fleet") entered into a Capital Maintenance Agreement (CMA) with AIG and Chartis, Inc. (AIG CMA). The AIG CMA provides that in the event that the Fleet's Total Adjusted Capital (TAC) falls below the specified minimum percentage of 350 percent of the Fleet's Authorized Control Level (ACL) Risk Based Capital (RBC), as estimated by Chartis, Inc. on a semi-annual basis subject to any adjustments or modifications required by the Company's domiciliary regulator or its independent auditors (the "SMP"), AIG will, within a specified time period prior to the close of the following fiscal quarter, contribute cash, cash equivalents, securities or other acceptable instruments that qualify as admitted assets to the Fleet so that the Fleet's TAC is projected to be equal to or greater than the SMP of the upcoming year-end. Additionally, each of Chartis and each Fleet member agreed, subject to approval by its board of directors and, if necessary, its domestic regulator, as applicable, to pay dividends that will be paid to AIG up to an amount equal to the lesser of (i) the amount necessary to reduce the Fleets ACL RBC to an amount not materially greater than the SMP or (ii) the maximum dividends permitted by any applicable domiciliary regulator. Effective February 17, 2012, the Fleet entered into a CMA (Chartis CMA) with Chartis, Inc., Chartis U.S., Inc. and Chartis International, LLC (the Chartis entities). The Chartis CMA provides that in the event that the Fleet's TAC exceeds the SMP (as determined pursuant to the terms of the AIG CMA) while at the same time any Fleet member, as an individual legal entity, has a Total Adjusted Capital below 300 percent of such Company's Authorized Control Level RBC (the "Individual Entity Minimum Percentage") (as determined by Chartis pursuant to the methodology set forth in the AIG CMA that is used to determine the SMP), the Chartis Entities and each Fleet member agree to make contributions, pay dividends or cause other transactions to occur that would result in each Fleet member's TAC being above the Individual Entity Minimum Percentage. No Fleet member is required to pay any dividend which would trigger the extraordinary dividend provisions of its domiciliary state or that is otherwise prohibited by such state. The Company received the approval from the NY DFS to pay dividends of $50,000 to its immediate parent. The dividend was made up of municipal securities and cash of $48,411 and $1,589, respectively, was paid on March 27, 2012. On April 4, 2012 and effective March 31, 2012, the Company received permission from the NY DFS to effect a quasi-reorganization as set forth in the Statement of Statutory Accounting Principles No. 72. On March 31, 2012, the Company reallocated $1,000,000 from its Gross Paid in and Contributed Surplus to Unassigned Funds. The permitted practice had no impact on the Company's surplus to policyholders or its net income. In addition, there was no impact 91 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2011, 2010 AND 2009 (000'S OMITTED) -------------------------------------------------------------------------------- on the Company's risk based capital results as a result of this permitted practice. On March 28, 2012, the balances reported as other legal contingencies were transferred to the parent company and recorded a deemed capital contribution in accordance with SSAP 72. 92 AMERICAN HOME ASSURANCE COMPANY Notes to Statutory Basis Financial Statements December 31, 2011, 2010 and 2009 (000's Omitted) -------------------------------------------------------------------------------- NOTE 14 - EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S REPORT STORM SANDY Storm Sandy represented a large catastrophic event occurring in October 2012. The Company's preliminary estimate of its pre-tax losses related to Storm Sandy, net of reinsurance, is approximately $271 million. Due to the complexity of factors contributing to the losses, there can be no assurance that the Company's ultimate losses associated with this storm will not differ from this estimate, perhaps materially. Such estimate includes the Company's share of amounts assumed by the Company under an intercompany excess of loss property catastrophe reinsurance agreement pursuant to which the Company reinsures Lexington Insurance Company (Lexington) and Chartis Specialty (the Surplus Pool). Such reinsurance agreement provides the Surplus Pool with 60% quota share coverage for up to $2.75 billion in first event per occurrence property losses in excess of $1 billion. Losses related to Storm Sandy will be reflected in the Company's annual statutory statement and any subsequent changes will be recorded in the period in which they occur. This preliminary estimate involves the exercise of considerable judgment. As a result of the estimated losses related to Storm Sandy, the Company is currently assessing the need to record a valuation allowance. The impact, if recorded, could be material to the Company's financial condition or its results of operations. Significant judgment is required in determining the provision for income taxes and, in particular, in the assessment of whether and in what magnitude a valuation allowance should be recorded. Refer to Note 8 for a discussion of statutory valuation allowances. The Company expects to receive a capital contribution from its parent for $300 million. LEGAL PROCEEDINGS In connection with the previously disclosed multi-state examination of certain accident and health products, including travel products, issued by National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), Chartis Inc., on behalf of itself, National Union, and certain of Chartis Inc.'s insurance and non-insurance companies (collectively, the Chartis parties) entered into a Regulatory Settlement Agreement with regulators from 50 U.S. jurisdictions effective November 29, 2012. Under the agreement, and without admitting any liability for the issues raised in the examination, Chartis agreed to (i) pay a civil penalty of $50 million, (ii) enter into a corrective action plan describing agreed-upon specific steps and standards for evaluating the Chartis parties' ongoing compliance with laws and regulations governing the issues identified in the examination, and (iii) pay a contingent fine in the event that the Chartis parties fail to satisfy certain terms of the corrective action plan. As of September 30, 2012, National Union has an accrued liability equal to the amount of the civil penalty. National Union and other AIG companies are also currently subject to civil litigation relating to the conduct of their accident and health business, and may be subject to additional litigation relating to the conduct of such business from time to time in the ordinary course. There can be no assurance that any regulatory action resulting from the issues identified will not have a material adverse effect on AIG's ongoing operations of the business subject to the agreement, or on similar business written by other AIG carriers. In connection with the previously disclosed putative class action pending in state court in Alabama that arises out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc., on August 15, 2012, the court granted AMERICAN HOME ASSURANCE COMPANY Notes to Statutory Basis Financial Statements December 31, 2011, 2010 and 2009 (000's Omitted) -------------------------------------------------------------------------------- plaintiffs' motion for class certification. Defendants filed a notice of appeal of that order to the Alabama Supreme Court on September 25, 2012. The case in the trial court will be stayed until that appeal is resolved. In connection with the previously disclosed settlement of the class action filed against AIG and certain of its subsidiaries on behalf of a putative class of NWCRP participant members with respect to the underpayment of residual market assessments for workers compensation insurance, and the appeal by Liberty Mutual, Safeco and Ohio Casualty challenging the certification of the settlement class and final approval of the class action settlement, oral argument on that appeal took place on November 29, 2012. In connection with the previously disclosed settlement of the purported class action in South Carolina federal court against AIG and certain of its subsidiaries on behalf of a class of employers that obtained workers compensation insurance from AIG companies and allegedly paid inflated premiums as a result of AIG's alleged underreporting of workers compensation premiums, the court granted final approval of the settlement on September 14, 2012. No appeals from that final approval order were filed, so the matter is now concluded. In connection with the previously disclosed multi-state targeted market conduct examination focusing on workers compensation insurance, and the related pre-litigation claims asserted by state insurance guaranty associations, on May 29, 2012, AIG completed its $25 million settlement with the guaranty associations, and the regulatory settlement was deemed effective on that date. The $146.5 million in fines, penalties and premium taxes were then disbursed to the regulatory settlement recipients pursuant to the terms of the associated escrow agreement. In connection with the previously disclosed settlement of the federal antitrust and RICO class actions against insurers and brokers, including AIG and a number of its subsidiaries, alleging that the insurers and brokers engaged in a broad conspiracy to allocate customers, steer business, and rig bids, which were consolidated by the judicial panel on multi-district litigation and transferred to the United States District Court for the District of New Jersey for coordinated pretrial proceedings, on April 27, 2012, three notices of appeal of the order granting final approval of the class action settlement were filed, two of which were subsequently withdrawn. The United States Court of Appeals for the Third Circuit issued an order on December 5, 2012 dismissing the appeal of the final appellant for failure to file a timely brief. In connection with the previously disclosed tag-along actions that have been consolidated with the Multi-District Litigation, a scheduling order was entered by the magistrate judge on April 30, 2012 that sets, among other things, a deadline of January 22, 2013 for the close of fact discovery in those cases. Refer to Note 11 - Contingencies for additional disclosures about legal proceedings. AMERICAN GENERAL LIFE INSURANCE COMPANY UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA AS OF DECEMBER 31, 2011 On December 31, 2012, American General Life Insurance Company of Delaware ("AGD"), American General Assurance Company ("AGAC"), American General Life and Accident ("AGLA"), Western National Life Insurance Company ("WNL"), SunAmerica Annuity and Life Assurance Company ("SAAL") and SunAmerica Life Insurance Company ("SALIC") (collectively the "Merged Entities") will merge with and into American General Life Insurance Company ("AGL") (the "Merger"). AGL, AGD, AGLA and WNL are wholly-owned subsidiaries of AGC Life Insurance Company ("AGC Life"), AGAC and SALIC are wholly-owned subsidiaries of SunAmerica Financial Group, Inc. and SAAL is a wholly-owned subsidiary of SALIC. The ultimate parent of all entities is American International Group, Inc. ("AIG"). Also on December 31, 2012, the ownership of The Variable Annuity Life Insurance Company ("VALIC") will be transferred from AGL to AGC Life. The primary purpose of the Merger is to reduce costs, complexity and regulatory requirements by reducing the number of separate legal entities. The following tables set forth certain unaudited pro forma condensed financial data of AGL, and are based on the historical financial data prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") of AGL and the Merged Entities. The Unaudited Pro Forma Condensed Financial Statements of AGL have been prepared assuming the proposed Merger is accounted for as a transaction between entities under common control and give effect to the proposed Merger by combining AGL's and the Merged Entities' results of operations as if AGL and the Merged Entities had been combined since inception. Assets and liabilities transferred between entities under common control are accounted for at historical cost. The unaudited pro forma information set forth below is not necessarily indicative of the results that actually would have been achieved had the transaction been consummated as of the aforementioned date, or that may be achieved in the future. The accompanying Unaudited Pro Forma Condensed Financial Statements should be read in conjunction with the historical financial statements of AGL and the Merged Entities. 2 AMERICAN GENERAL LIFE INSURANCE COMPANY UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
December 31, 2011 ---------------------------------------------------------------------- VALIC AGL AGD AGAC AGLA WNL SALIC Deconsolidation (a) -------- ------ ----- ------- ------- ------- ------------------- (In Millions, except share data) ASSETS Investments: Fixed maturity securities, available for sale, at fair value................................................ $ 67,802 $6,329 $ 148 $ 8,650 $41,327 $ 9,726 $(34,328) Fixed maturity securities, trading, at fair value...... 509 52 -- 58 460 150 (276) Hybrid securities, at fair value....................... 25 22 -- 9 131 24 (25) Equity securities, available for sale, at fair value................................................ 69 11 5 22 61 34 (47) Mortgage and other loans receivable.................... 6,282 454 -- 956 2,695 1,951 (3,912) Policy loans........................................... 1,718 235 -- 417 32 140 (901) Investment real estate................................. 166 18 -- 6 119 103 (88) Partnerships and other invested assets................. 3,418 157 1 247 2,460 2,662 (2,183) Aircraft............................................... 540 -- -- -- 555 -- -- Short-term investments................................. 622 98 9 62 532 2,058 (287) Derivative assets, at fair value....................... 64 1 -- -- 33 603 (29) -------- ------ ----- ------- ------- ------- -------- Total investments....................................... 81,215 7,377 163 10,427 48,405 17,451 (42,076) Cash.................................................... 144 2 -- 18 11 365 (136) Restricted cash......................................... 44 -- -- -- 49 2 -- Reinsurance receivables................................. 1,084 81 40 63 -- 574 -- Deferred policy acquisition costs and value of business acquired..................................... 5,163 108 -- 628 1,239 434 (1,736) Deferred sales inducements.............................. 221 -- -- -- 380 117 (178) Income taxes receivable................................. -- -- 1 -- 70 -- -- Deferred tax asset...................................... -- -- -- -- -- 422 -- Other assets............................................ 1,271 88 20 228 469 502 (329) Separate account assets, at fair value.................. 26,061 2,174 -- -- 60 21,039 (24,231) -------- ------ ----- ------- ------- ------- -------- TOTAL ASSETS $115,203 $9,830 $ 224 $11,364 $50,683 $40,906 $(68,686) ======== ====== ===== ======= ======= ======= ======== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits................................. $ 16,726 $3,024 $ 90 $ 4,558 $ 2,992 $ 772 $ (23) Policyholder contract deposits......................... 50,253 3,434 1 3,128 40,040 13,795 (36,205) Policy claims and benefits payable..................... 483 100 14 211 3 11 -- Other policyholders' funds............................. 1,905 29 5 86 -- 1 -- Income taxes payable................................... 2,540 33 -- 12 -- 153 (148) Deferred income taxes payable.......................... -- -- (8) 467 313 -- (884) Derivative liabilities, at fair value.................. 39 5 -- 2 -- 698 (27) Other liabilities...................................... 1,163 63 9 139 762 1,014 (225) Separate account liabilities........................... 26,061 2,174 -- -- 60 21,039 (24,231) -------- ------ ----- ------- ------- ------- -------- TOTAL LIABILITIES 99,170 8,862 111 8,603 44,170 37,483 (61,743) -------- ------ ----- ------- ------- ------- -------- AGL SHAREHOLDER'S EQUITY: Preferred stock, $ 100 par value, 8,500 shares authorized, issued and outstanding................... 1 -- -- -- -- -- -- Common stock, $10 par value, 600,000 shares authorized, issued and outstanding................... 6 5 3 79 3 6 -- Additional paid-in capital............................. 12,896 1,005 223 3,358 11,940 4,854 (6,248) Retained earnings (Accumulated deficit)................ -- (236) (119) (1,324) (6,326) (1,532) 504 Accumulated other comprehensive income................. 3,026 194 6 648 757 95 (1,096) -------- ------ ----- ------- ------- ------- -------- TOTAL AGL SHAREHOLDER'S EQUITY 15,929 968 113 2,761 6,374 3,423 (6,840) -------- ------ ----- ------- ------- ------- -------- NONCONTROLLING INTERESTS 104 -- -- -- 139 -- (103) -------- ------ ----- ------- ------- ------- -------- TOTAL EQUITY 16,033 968 113 2,761 6,513 3,423 (6,943) -------- ------ ----- ------- ------- ------- -------- TOTAL LIABILITIES AND EQUITY $115,203 $9,830 $ 224 $11,364 $50,683 $40,906 $(68,686) ======== ====== ===== ======= ======= ======= ========
------------------------- Pro Forma Pro Forma Adjustments Combined ----------- --------- ASSETS Investments: Fixed maturity securities, available for sale, at fair value................................................ $ (69)(c) $ 99,585 Fixed maturity securities, trading, at fair value...... -- 953 Hybrid securities, at fair value....................... -- 186 Equity securities, available for sale, at fair value................................................ -- 155 Mortgage and other loans receivable.................... -- 8,426 Policy loans........................................... 1(c) 1,642 Investment real estate................................. (1)(c) 323 Partnerships and other invested assets................. (26)(c) 6,736 Aircraft............................................... -- 1,095 Short-term investments................................. -- 3,094 Derivative assets, at fair value....................... -- 672 ------- -------- Total investments....................................... (95) 122,867 Cash.................................................... -- 404 Restricted cash......................................... -- 95 Reinsurance receivables................................. -- 1,842 Deferred policy acquisition costs and value of business acquired..................................... (741)(b) 5,095 Deferred sales inducements.............................. 15(b) 555 Income taxes receivable................................. (71)(c) -- Deferred tax asset...................................... (422)(b,c) -- Other assets............................................ (191)(c) 2,058 Separate account assets, at fair value.................. -- 25,103 ------- -------- TOTAL ASSETS $(1,505) $158,019 ======= ======== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits................................. $ 9(c) $ 28,148 Policyholder contract deposits......................... (1)(c) 74,445 Policy claims and benefits payable..................... (1)(c) 821 Other policyholders' funds............................. -- 2,026 Income taxes payable................................... (2,565)(c) 25 Deferred income taxes payable.......................... 1,819(b,c) 1,707 Derivative liabilities, at fair value.................. -- 717 Other liabilities...................................... (15)(c) 2,910 Separate account liabilities........................... -- 25,103 ------- -------- TOTAL LIABILITIES (754) 135,902 ------- -------- AGL SHAREHOLDER'S EQUITY: Preferred stock, $ 100 par value, 8,500 shares authorized, issued and outstanding................... -- 1 Common stock, $10 par value, 600,000 shares authorized, issued and outstanding................... (96)(c) 6 Additional paid-in capital............................. (778)(c) 27,250 Retained earnings (Accumulated deficit)................ 22(b,c) (9,011) Accumulated other comprehensive income................. 81(b,c) 3,711 ------- -------- TOTAL AGL SHAREHOLDER'S EQUITY (771) 21,957 ------- -------- NONCONTROLLING INTERESTS 20(c) 160 ------- -------- TOTAL EQUITY (751) 22,117 ------- -------- TOTAL LIABILITIES AND EQUITY $(1,505) $158,019 ======= ========
See Notes to Unaudited Pro Forma Condensed Financial Statements on page 7. 3 AMERICAN GENERAL LIFE INSURANCE COMPANY UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME (LOSS)
For the year ended December 31, 2011 -------------------------------------------------------------- VALIC AGL AGD AGAC AGLA WNL SALIC Deconsolidation (a) ------ ---- ---- ------ ------ ------ ------------------- (In Millions) REVENUES: Premiums and other considerations..................... $1,032 $112 $42 $ 424 $ 20 $ (14) $ -- Net investment income (loss).......................... 4,279 415 13 613 2,328 877 (2,164) Net realized investment gains (losses)................ 396 31 -- 44 (41) (525) (112) Insurance charges..................................... 895 108 -- 286 20 64 (9) Other................................................. 778 37 2 (1) 111 1,465 (422) ------ ---- --- ------ ------ ------ ------- TOTAL REVENUES......................................... 7,380 703 57 1,366 2,438 1,867 (2,707) ------ ---- --- ------ ------ ------ ------- BENEFITS AND EXPENSES: Policyholder benefits................................. 2,561 373 24 616 301 95 (6) Interest credited on policyholder contract deposits... 1,856 150 -- 132 1,426 468 (1,279) Amortization of deferred policy acquisition costs..... 608 12 -- 115 378 232 (269) Amortization of deferred sales inducements............ 23 -- -- 3 126 64 (17) General and administrative expenses, net of deferrals. 517 76 7 194 146 644 (183) Commissions, net of deferrals......................... 159 28 17 71 16 541 (81) ------ ---- --- ------ ------ ------ ------- TOTAL BENEFITS AND EXPENSES............................ 5,724 639 48 1,131 2,393 2,044 (1,835) ------ ---- --- ------ ------ ------ ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)...... 1,656 64 9 235 45 (177) (872) INCOME TAX EXPENSE (BENEFIT): Current............................................... (196) 22 4 35 (266) 100 153 Deferred.............................................. 198 53 (1) 16 (90) (305) 30 ------ ---- --- ------ ------ ------ ------- TOTAL INCOME TAX EXPENSE (BENEFIT)..................... 2 75 3 51 (356) (205) 183 ------ ---- --- ------ ------ ------ ------- NET INCOME (LOSS)...................................... 1,654 (11) 6 184 401 28 (1,055) LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS............................................ (29) -- -- -- (21) -- 29 ------ ---- --- ------ ------ ------ ------- NET INCOME (LOSS) ATTRIBUTABLE TO AGL.................. $1,683 $(11) $ 6 $ 184 $ 422 $ 28 $(1,084) ====== ==== === ====== ====== ====== =======
---------------------- Pro Forma Pro Forma Adjustments Combined ----------- --------- REVENUES: Premiums and other considerations..................... $ (1)(c) $ 1,615 Net investment income (loss).......................... 79(c) 6,440 Net realized investment gains (losses)................ (11)(c) (218) Insurance charges..................................... 1(c) 1,365 Other................................................. -- 1,970 ---- ------- TOTAL REVENUES......................................... 68 11,172 ---- ------- BENEFITS AND EXPENSES: Policyholder benefits................................. 1(c) 3,965 Interest credited on policyholder contract deposits... 1(c) 2,754 Amortization of deferred policy acquisition costs..... (94)(b) 982 Amortization of deferred sales inducements............ 6(b) 205 General and administrative expenses, net of deferrals. 127(b,c) 1,528 Commissions, net of deferrals......................... 7(b,c) 758 ---- ------- TOTAL BENEFITS AND EXPENSES............................ 48 10,192 ---- ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)...... 20 980 INCOME TAX EXPENSE (BENEFIT): Current............................................... 1(c) (147) Deferred.............................................. (18)(c) (117) ---- ------- TOTAL INCOME TAX EXPENSE (BENEFIT)..................... (17) (264) ---- ------- NET INCOME (LOSS)...................................... 37 1,244 LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS............................................ (14)(c) (35) ---- ------- NET INCOME (LOSS) ATTRIBUTABLE TO AGL.................. $ 51 $ 1,279 ==== =======
See Notes to Unaudited Pro Forma Condensed Financial Statements on page 7. 4 AMERICAN GENERAL LIFE INSURANCE COMPANY UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME (LOSS) (Continued)
For the year ended December 31, 2010 -------------------------------------------------------------- VALIC AGL AGD AGAC AGLA WNL SALIC Deconsolidation (a) ------ ---- ---- ------ ------ ------ ------------------- (In Millions) REVENUES: Premiums and other considerations..................... $1,029 $110 $58 $ 438 $ 14 $ (16) $ -- Net investment income (loss).......................... 4,589 485 9 692 2,604 1,081 (2,253) Net realized investment gains (losses)................ (170) 99 2 18 37 (596) 223 Insurance charges..................................... 962 101 -- 268 25 71 (11) Other................................................. 775 45 3 1 106 1,310 (380) ------ ---- --- ------ ------ ------ ------- TOTAL REVENUES......................................... 7,185 840 72 1,417 2,786 1,850 (2,421) ------ ---- --- ------ ------ ------ ------- BENEFITS AND EXPENSES: Policyholder benefits................................. 2,419 338 22 522 31 5 (7) Interest credited on policyholder contract deposits... 1,860 159 -- 131 1,471 526 (1,271) Amortization of deferred policy acquisition costs..... 642 6 1 142 218 201 (102) Amortization of deferred sales inducements............ 17 -- -- 4 94 75 (8) General and administrative expenses, net of deferrals. 519 68 10 195 147 701 (167) Commissions, net of deferrals......................... 153 30 23 76 14 474 (79) ------ ---- --- ------ ------ ------ ------- TOTAL BENEFITS AND EXPENSES............................ 5,610 601 56 1,070 1,975 1,982 (1,634) ------ ---- --- ------ ------ ------ ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)...... 1,575 239 16 347 811 (132) (787) INCOME TAX EXPENSE (BENEFIT): Current............................................... 153 15 3 138 (75) (109) (141) Deferred.............................................. (561) (79) 4 (72) (341) (386) 321 ------ ---- --- ------ ------ ------ ------- TOTAL INCOME TAX EXPENSE (BENEFIT)..................... (408) (64) 7 66 (416) (495) 180 ------ ---- --- ------ ------ ------ ------- NET INCOME (LOSS)...................................... 1,983 303 9 281 1,227 363 (967) LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS............................................ 2 -- -- -- 10 -- (2) ------ ---- --- ------ ------ ------ ------- NET INCOME (LOSS) ATTRIBUTABLE TO AGL.................. $1,981 $303 $ 9 $ 281 $1,217 $ 363 $ (965) ====== ==== === ====== ====== ====== =======
----------------------- Pro Forma Pro Forma Adjustments Combined ----------- --------- REVENUES: Premiums and other considerations..................... $ (1)(c) $ 1,632 Net investment income (loss).......................... 6(c) 7,213 Net realized investment gains (losses)................ (17)(c) (404) Insurance charges..................................... -- 1,416 Other................................................. (1)(c) 1,859 ----- ------- TOTAL REVENUES......................................... (13) 11,716 ----- ------- BENEFITS AND EXPENSES: Policyholder benefits................................. (1)(c) 3,329 Interest credited on policyholder contract deposits... (1)(c) 2,875 Amortization of deferred policy acquisition costs..... (116)(b) 992 Amortization of deferred sales inducements............ (3)(b) 179 General and administrative expenses, net of deferrals. 106(b,c) 1,579 Commissions, net of deferrals......................... 8(b,c) 699 ----- ------- TOTAL BENEFITS AND EXPENSES............................ (7) 9,653 ----- ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)...... (6) 2,063 INCOME TAX EXPENSE (BENEFIT): Current............................................... 1(c) (15) Deferred.............................................. 1(c) (1,113) ----- ------- TOTAL INCOME TAX EXPENSE (BENEFIT)..................... 2 (1,128) ----- ------- NET INCOME (LOSS)...................................... (8) 3,191 LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS............................................ (3)(c) 7 ----- ------- NET INCOME (LOSS) ATTRIBUTABLE TO AGL.................. $ (5) $ 3,184 ===== =======
See Notes to Unaudited Pro Forma Condensed Financial Statements on page 7. 5 AMERICAN GENERAL LIFE INSURANCE COMPANY UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME (LOSS) (Continued)
For the year ended December 31, 2009 ----------------------------------------------------------------- VALIC AGL AGD AGAC AGLA WNL SALIC Deconsolidation (a) ------- ---- ---- ------ ------- ------- ------------------- (In Millions) REVENUES: Premiums and other considerations..................... $ 1,038 $111 $67 $ 463 $ 12 $ (9) $ -- Net investment income (loss).......................... 3,841 484 11 621 2,520 866 (2,022) Net realized investment gains (losses)................ (1,258) (30) (2) (80) (1,094) (463) 906 Insurance charges..................................... 1,067 98 -- 263 73 51 -- Other................................................. 585 27 3 1 108 1,245 (341) ------- ---- --- ------ ------- ------- ------- TOTAL REVENUES......................................... 5,273 690 79 1,268 1,619 1,690 (1,457) ------- ---- --- ------ ------- ------- ------- BENEFITS AND EXPENSES: Policyholder benefits................................. 2,210 361 20 528 18 64 (12) Interest credited on policyholder contract deposits... 1,843 160 -- 128 1,529 758 (1,274) Amortization of deferred policy acquisition costs..... 517 15 2 120 314 464 (94) Amortization of deferred sales inducements............ 13 -- -- 3 108 25 (3) General and administrative expenses, net of deferrals. 535 72 11 203 184 695 (168) Commissions, net of deferrals......................... 150 23 30 71 22 472 (82) ------- ---- --- ------ ------- ------- ------- TOTAL BENEFITS AND EXPENSES............................ 5,268 631 63 1,053 2,175 2,478 (1,633) ------- ---- --- ------ ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)...... 5 59 16 215 (556) (788) 176 INCOME TAX EXPENSE (BENEFIT): Current............................................... (14) 57 4 120 (2) (433) (49) (c) Deferred.............................................. 205 (83) 14 61 (63) 1,810 (27) (c) ------- ---- --- ------ ------- ------- ------- TOTAL INCOME TAX EXPENSE (BENEFIT)..................... 191 (26) 18 181 (65) 1,377 (76) ------- ---- --- ------ ------- ------- ------- NET INCOME (LOSS)...................................... (186) 85 (2) 34 (491) (2,165) 252 LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS............................................ (6) -- -- -- (3) -- -- ------- ---- --- ------ ------- ------- ------- NET INCOME (LOSS) ATTRIBUTABLE TO AGL.................. $ (180) $ 85 $(2) $ 34 $ (488) $(2,165) $ 252 ======= ==== === ====== ======= ======= =======
--------------------- Pro Forma Pro Forma Adjustments Combined ----------- --------- REVENUES: Premiums and other considerations..................... $ -- $ 1,682 Net investment income (loss).......................... -- 6,321 Net realized investment gains (losses)................ (6)(c) (2,027) Insurance charges..................................... -- 1,552 Other................................................. -- 1,628 ---- ------- TOTAL REVENUES......................................... (6) 9,156 ---- ------- BENEFITS AND EXPENSES: Policyholder benefits................................. -- 3,189 Interest credited on policyholder contract deposits... -- 3,144 Amortization of deferred policy acquisition costs..... 35(b) 1,373 Amortization of deferred sales inducements............ -- 146 General and administrative expenses, net of deferrals. -- 1,532 Commissions, net of deferrals......................... -- 686 ---- ------- TOTAL BENEFITS AND EXPENSES............................ 35 10,070 ---- ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)...... (41) (914) INCOME TAX EXPENSE (BENEFIT): Current............................................... (13)(c) (330) Deferred.............................................. -- 1,917 ---- ------- TOTAL INCOME TAX EXPENSE (BENEFIT)..................... (13) 1,587 ---- ------- NET INCOME (LOSS)...................................... (28) (2,501) LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS............................................ 2(c) (7) ---- ------- NET INCOME (LOSS) ATTRIBUTABLE TO AGL.................. $(30) $(2,494) ==== =======
See Notes to Unaudited Pro Forma Condensed Financial Statements on page 7. 6 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS 1. GENERAL The following notes set forth the assumptions used in preparing the Unaudited Pro Forma Condensed Financial Statements. The pro forma adjustments are based on estimates made by AGL's management using information currently available. 2. PRO FORMA ADJUSTMENTS The adjustments to the accompanying Unaudited Pro Forma Condensed Balance Sheet are described below: (a)Deconsolidation of VALIC from AGL. Impact on total assets $(68,686) million; total liabilities $(61,743) million; equity $(6,943) million. (b)Deferred policy acquisition cost adjustments per the adoption of the Financial Accounting Standards Board ("FASB") Accounting Standard Update ("ASU") ASU 2010-26 on January 1, 2012. Impact on total assets $(467) million; total liabilities $5 million; equity $(472) million. (c)Various consolidation adjustments, primarily: . Castle 2003-1 Trust and Castle 2003-2 Trust consolidation / elimination adjustments to re-compute the controlling/noncontrolling interests from the deconsolidation of VALIC and merging of WNL. . Intercompany elimination entries. . Common stock to additional paid in capital ("APIC") reclasses to cancel the common stock of the Merged Entities. . Current and deferred tax asset / liability reclasses. . Impact of various consolidation adjustments on total assets $(1,038) million; total liabilities $(759) million; equity $(279) million. The adjustments to the accompanying Unaudited Pro Forma Condensed Statements of Income (Loss) are described below: (a)Deconsolidation of VALIC from AGL. Impact on income (loss) before income tax expense (benefit): . 2011 - $(872) million . 2010 - $(787) million . 2009 - $176 million (b)Deferred policy acquisition cost adjustments per the adoption of FASB ASU 2010-26 on January 1, 2012. Impact on income (loss) before income tax expense (benefit): . 2011 - $(48) million . 2010 - $3 million . 2009 - $(35) million (c)Various consolidation adjustments, primarily: . Castle 2003-1 Trust, Castle 2003-2 Trust and intercompany elimination adjustments. Impact on income (loss) before income tax expense (benefit): . 2011 - $68 million . 2010 - $(9) million . 2009 - $(6) million . Income tax expense (benefit) adjustments. 7 PART C -- OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements The following financial statements are incorporated by reference or included herein, as indicated below, to this Registration Statement: - Audited Financial Statements of Variable Annuity Account One of SunAmerica Annuity and Life Assurance Company for the year ended April 30, 2012 are included in Part B of the registration statement. - Audited Consolidated Financial Statements of SunAmerica Annuity and Life Assurance Company for the years ended December 31, 2011, 2010 and 2009 are incorporated by reference to Post-Effective Amendment No. 11 to Form N-4 Registration Statement (File Nos. 333-157199) of Variable Separate Account filed on April 26, 2012. - Audited Statutory Financial Statements of American General Assurance Company for the years ended December 31, 2011 and 2010 are incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 333-185762) of Variable Separate Account filed on January 2, 2013. - Audited Statutory Financial Statements of American General Life and Accident Insurance Company for the years ended December 31, 2011 and 2010 are incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 333-185762) of Variable Separate Account filed on January 2, 2013. - Audited Financial Statements of American General Life Insurance Company of Delaware for the years ended December 31, 2011, 2010 and 2009 are incorporated by reference to Post-Effective Amendment No. 27 to Form N-6 Registration Statement (File No. 333-34199) of American General Life Insurance Company of Delaware Separate Account II filed on April 30, 2012. - Audited Statutory Financial Statements of SunAmerica Life Insurance Company for the years ended December 31, 2011 and 2010 are incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 333-185762) of Variable Separate Account filed on January 2, 2013. - Audited Consolidated Financial Statements of Western National Life Insurance Company for the years ended December 31, 2011, 2010 and 2009 are incorporated by reference to Post-Effective Amendment No. 26 to Form N-4 Registration Statement (File No. 033-86464) of AG Separate Account A filed on April 30, 2012. - Audited Consolidated Financial Statements of American General Life Insurance Company for the years ended December 31, 2011, 2010 and 2009 are incorporated by reference to Post-Effective Amendment No. 4 to Form N-6 Registration Statement (File No. 333-151576) of American General Life Insurance Company Separate Account VL-R filed on April 30, 2012. - Audited Statutory Financial Statements of American Home Assurance Company for the years ended December 31, 2011 and 2010 are included in Part B of the registration statement. - Unaudited Pro Forma Condensed Financial Data of American General Life Insurance Company as of December 31, 2011 is included in Part B of the registration statement. (b) Exhibits (1) Resolutions Establishing Separate Account.................................... 2 (2) Custody Agreements........................................................... Not Applicable (3) (a) Form of Distribution Contract........................................... 2 (b) Selling Agreement....................................................... 11 (4) Variable Annuity Contract.................................................... 2 (5) (a) Application for Contract................................................ 2 (b) Merger Endorsement...................................................... 11 (6) Corporate Documents of Depositor (a) Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective December 31, 1991.......................... 1 (b) Amendment to the Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective July 13, 1995........ 3 (c) By-Laws of American General Life Insurance Company, restated as of June 8, 2005................................................................. 5 (7) Reinsurance Contract......................................................... Not Applicable
(8) Material Contracts (a) Form of Anchor Series Trust Fund Participation Agreement................ 10 (b) Form of Consents to Assignment of Fund Participation and other Agreements.............................................................. 11 (9) (a) Opinion of Counsel and Consent of Depositor............................. Filed Herewith (b) Opinion of Counsel and Consent of Sullivan & Cromwell LLP, Counsel to American Home Assurance Company......................................... 6 (10) Consents..................................................................... Filed Herewith (11) Financial Statements Omitted from Item 23.................................... Not Applicable (12) Initial Capitalization Agreement............................................. Not Applicable (13) Other (a) Power of Attorney (1) American General Life Insurance Company Directors.................. Not Applicable (2) American Home Assurance Company Directors.......................... Filed Herewith (b) General Guarantee Agreement by American Home Assurance Company.......... 4 (c) Notice of Termination of Guarantee as Published in The Wall Street Journal on November 24, 2006............................................ 7 (d) Notice of Termination of Support Agreement.............................. 8 (e) Unconditional Capital Maintenance Agreement between American International Group, Inc. and American General Life Insurance Company... 9 (f) Specimen Form of Agreement and Plan of Merger........................... 11
-------- 1 Incorporated by reference to Initial Registration Statement, File No. 033- 43390 of American General Life Insurance Company Separate Account D, filed on October 16, 1991. 2 Incorporated by reference to Post-Effective Amendment No. 17 and Amendment No. 32, File Nos. 033-32569 and 811-04296, filed on January 30, 1998, Accession No. 0000950148-98-000134. 3 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, Accession No. 0000899243-98-001661. 4 Incorporated by reference to Post-Effective Amendment No. 29 and Amendment No. 44, File Nos. 033-32569 and 811-04296, filed on August 12, 2005, Accession No. 0000950129-05-008153. 5 Incorporated by reference to Post-Effective Amendment No. 11 and Amendment No. 46, File Nos. 333-43264 and 811-08561, of American General Life Insurance Company Separate Account VL-R, filed on August 12, 2005, Accession No. 0001193125-05-165474. 6 Incorporated by reference to Post-Effective Amendment No. 18 and Amendment No. 22, File Nos. 333-67685 and 811-07727, filed on October 21, 2005, Accession No. 0000950134-05-019473. 7 Incorporated by reference to Post-Effective Amendment No. 16 and Amendment No. 17, File Nos. 333-66106 and 811-07727, filed on December 12, 2006, Accession No. 0000950124-06-007496. 8 Incorporated by reference to Post-Effective Amendment No. 17 and Amendment No. 18, File Nos. 333-137867 and 811-03859, filed on April 27, 2011, Accession No. 0000950123-11-040070. 9 Incorporated by reference to Post-Effective Amendment No. 3 and Amendment No. 149, File Nos. 333-151576 and 811-08561, of American General Life Insurance Company Separate Account VL-R, filed on May 2, 2011, Accession No. 0001193125-11-120309. 10 Incorporated by reference to Post-Effective Amendment No. 4 and Amendment No. 5, File Nos. 333-172003 and 811-03859, filed on July 13, 2012, Accessions No. 0000950123-12-010016. 11 Incorporated by reference to Initial Registration Statement, File Nos. 333- 185762 and 811-03859, filed on January 2, 2013, Accession No. 0000950123-12- 014430. ITEM 25. 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 2929 Allen Parkway, Houston, Texas 77019, unless otherwise noted.
NAMES POSITIONS AND OFFICES HELD WITH DEPOSITOR ----------------------------------------------- James A. Mallon Director, Acting Chairman, President and Chief Executive Officer Curtis W. Olson(1) President -- Benefit Solutions Mary Jane B. Fortin Director, Executive Vice President and Chief Financial Officer Jeffrey H. Carlson(9) Director, Executive Vice President John B. Deremo Executive Vice President Kyle L. Jennings(10) Director, Executive Vice President, General Counsel and Secretary Steven D. Anderson Senior Vice President Erik A. Baden Senior Vice President Wayne A. Barnard Senior Vice President and Illustration Actuary Robert M. Beuerlein(9) Director, Senior Vice President and Chief and Appointed Actuary David Butterfield(1) Senior Vice President Don W. Cummings Director, Senior Vice President Terry B. Festervand Senior Vice President and Treasurer Brad J. Gabel(4) Senior Vice President, Chief Underwriter John Gatesman Senior Vice President David S. Jorgensen Senior Vice President Terry Keiper Senior Vice President Frank A. Kophamel(9) Senior Vice President Glen D. Keller(9) Senior Vice President Stephen Kennedy(9) Senior Vice President Simon J. Leech(9) Senior Vice President Edmund D. McClure(9) Senior Vice President Richard D. McFarland(9) Senior Vice President Laura E. Milazzo(9) Senior Vice President Larry Nisenson Senior Vice President John W. Penko(2) Senior Vice President Rodney E. Rishel Senior Vice President Sharon K. Roberson Senior Vice President Dale W. Sachtleben(3) Senior Vice President Stephen Stone Senior Vice President Carol B. Whaley(1) Senior Vice President Chris N. Aiken(9) Vice President Chris Ayers(9) Vice President Joan M. Bartel Vice President Robert Beauchamp Vice President Michael B. Boesen Vice President Laura J. Borowski(4) Vice President David R. Brady(11) Vice President Dan Chamberlain(9) Vice President Mark E. Childs(9) Vice President Robert M. Cicchi(9) Vice President Lawrence C. Cox Vice President Julie Cotton Hearne Vice President and Assistant Secretary Timothy M. Donovan Vice President Jay Drucker Vice President Farideh N. Farrokhi(9) Vice President and Assistant Secretary
NAMES POSITIONS AND OFFICES HELD WITH DEPOSITOR ----------------------------------------------- Royce Fithen(6) Vice President Frederick J. Garland, Jr. Vice President Manda Ghaferi Vice President Liza Glass(9) Vice President Leo W. Grace Vice President and Assistant Secretary Richard L. Gravette(9) Vice President and Assistant Treasurer Lori S. Guadagno(5) Vice President Daniel J. Gutenberger(9) Vice President and Medical Director Joel H. Hammer(8) Vice President D. Leigh Harrington(9) Vice President Tracy Harris Vice President Michael S. Harrison Vice President Tim Heslin Vice President Keith C. Honig(7) Vice President Stephen D. Howard(2) Vice President S. Caitlin Irby(9) Vice President Walter P. Irby Vice President Sharla A. Jackson(6) Vice President Wesley E. Jarvis(1) Vice President Debra H. Kile(9) Vice President and Medical Director Michael J. Krugel(4) Vice President Kenneth R. Kiefer Vice President Mel McFall(9) Vice President Lochlan O. McNew Vice President and Investment Officer (handling private placement and commercial mortgage loans) Gwendolyn J. Mallett(9) Vice President W. Larry Mask Vice President, Real Estate Investment Officer and Assistant Secretary Beverly Meyer(4) Vice President Candace A. Michael(9) Vice President Michael R. Murphy(4) Vice President David Napoli Vice President Deanna D. Osmonson(1) Vice President Cathy A. Percival(9) Vice President and Medical Director Carin M. Phelan Vice President Glenn H. Plotkin(4) Vice President Debbie Runge Vice President, Human Resources Jeanise L. Ryser Vice President Michael Sibley(2) Vice President T. Clay Spires Vice President and Tax Officer Gregory R. Thornton(3) Vice President Cynthia Wieties Vice President Jeffrey L. Winkelmann(4) Vice President Joann K. Brown Assistant Vice President Dori A. Artis Administrative Officer Wayne P. Arzberger Administrative Officer Brenda G. Esslinger Administrative Officer Beverly Farris Administrative Officer Robin F. Farris Administrative Officer Deborah G. Fewell Administrative Officer
NAMES POSITIONS AND OFFICES HELD WITH DEPOSITOR ----------------------------------------------- Maike M. George Administrative Officer Brandy Harris Administrative Officer Cassandra Hendricks Administrative Officer Stephen Johnson Administrative Officer Donna Johnston Administrative Officer Jalen V. Lohman Administrative Officer Beverly Macias Administrative Officer Jody Powers Administrative Officer Donna J. Robertson Administrative Officer Phillip W. Schraub Administrative Officer Michael A. Sepanski Administrative Officer Marie M. Cerligione Assistant Secretary Keith Coleman Assistant Secretary Jeffrey P. Conklin Assistant Secretary Debra L. Herzog Assistant Secretary Virginia N. Puzon Assistant Secretary Mary Carmen Rodriguez Assistant Secretary Barbara J. Moore Assistant Tax Officer William P. Hayes(10) Chief Compliance Officer Lesli K. Martin Anti Money Laundering Officer Becky L. Strom Privacy Officer Marc Herling General Counsel, Benefit Solutions and Assistant Secretary Roger E. Hahn Investment Officer (Handling Strategic Investment Allocation and Asset/liability matching)
-------- (1) 3600 Route 66, Neptune, NJ 07753 (2) Walnut Glen Tower, 8141 Walnut Hill Lane, Dallas, TX 75231 (3) 3051 Hollis Drive, Springfield, IL 62704 (4) 1200 N. Mayfair Road, Milwaukee, WI 53226 (5) 599 Lexington Avenue, New York, N 10022 (6) 205 E. 10th Avenue, Amarillo, TX 79101 (7) 1 SunAmerica Center, 1999 Avenue of the Stars, Los Angeles, CA 90067 (8) 32 Old Slip, New York, NY 10005 (9) 2727-A Allen Parkway, Houston, TX 77019 (10) 2919 Allen Parkway, Houston, TX 77019 (11) 200 Liberty Street, New York, NY 10281 ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH DEPOSITOR OR REGISTRANT The Registrant is a separate account of American General Life Insurance Company ("Depositor"). 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 No. 001-08787, Accession No. 0001047469-11-001369, filed on February 23, 2012. Exhibit 21 is incorporated herein by reference. ITEM 27. NUMBER OF CONTRACT OWNERS As of November 30, 2012, the number of ICAP II contracts funded by Variable Annuity Account One was 5,477 of which 3,111 were qualified contracts and 2,366 were non-qualified contracts. ITEM 28. 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 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 29. PRINCIPAL UNDERWRITER (a) SunAmerica Capital Services, Inc. acts as distributor for the following investment companies: American General Life Insurance Company -- Variable Separate Account American General Life Insurance Company -- Variable Annuity Account One American General Life Insurance Company -- Variable Annuity Account Two American General Life Insurance Company -- Variable Annuity Account Four American General Life Insurance Company -- Variable Annuity Account Five American General Life Insurance Company -- Variable Annuity Account Seven American General Life Insurance Company -- Variable Annuity Account Nine The United States Life Insurance Company in the City of New York -- FS Variable Separate Account The United States Life Insurance Company in the City of New York -- FS Variable Annuity Account One The United States Life Insurance Company in the City of New York -- FS Variable Annuity Account Two The United States Life Insurance Company in the City of New York -- FS Variable Annuity Account Five Anchor Series Trust Seasons Series Trust SunAmerica Series Trust SunAmerica Equity Funds SunAmerica Income Funds SunAmerica Series, Inc. SunAmerica Money Market Funds, Inc. SunAmerica Senior Floating Rate Fund, Inc. SunAmerica Specialty Series (b) Directors, Officers and principal place of business:
OFFICER/DIRECTORS* POSITION ------------------ -------- Peter A. Harbeck Director James T. Nichols Director, President & Chief Executive Officer Stephen A. Maginn(1) Director, Chief Distribution Officer Frank Curran Vice President, Controller, Financial Operation Principal and Chief Financial Officer, Treasurer Rebecca Snider Chief Compliance Officer John T. Genoy Vice President Mallary L. Reznik(2) Vice President Christine A. Nixon(2) Secretary Virginia N. Puzon(2) Assistant Secretary
-------- * Unless otherwise indicated, the principal business address of SunAmerica Capital Services, Inc. and of each of the above individuals is Harborside Financial Center, 3200 Plaza 5, Jersey City, New Jersey 07311. (1) Principal business address is 21650 Oxnard Street, Suite 750, Woodland Hills, CA 91367-4901. (2) Principal business address is 1999 Avenue of the Stars, Los Angeles, California 90067-6121. (c) SunAmerica Capital Services, Inc. retains no compensation or commissions from the Registrant. ITEM 30. 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 Annuity Service Center located at 21650 Oxnard Street, Suite 750, Woodland Hills, California 91367-4901. ITEM 31. MANAGEMENT SERVICES Not Applicable. ITEM 32. UNDERTAKINGS Undertakings of the Registrant ------------------------------ Registrant undertakes to: (a) file post-effective amendments to this Registration Statement as frequently as is necessary to ensure that the audited financial statements in the Registration Statement are never more than 16 months old for so long as payments under the variable annuity Contracts may be accepted; (b) include either (1) as part of any application to purchase a contract offered by the prospectus forming a part of the Registration Statement, a space that an applicant can check to request a Statement of Additional Information, or (2) a postcard or similar written communication affixed to or included in the prospectus that the Applicant can remove to send for a Statement of Additional Information; and (c) deliver any Statement of Additional Information and any financial statements required to be made available under this Form N-4 promptly upon written or oral request. Undertakings of the Depositor Regarding Guarantor ------------------------------------------------- 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 auditors of American Home regarding such financial statements. During the American Home Guarantee Period, the Depositor hereby undertakes to include in the prospectus to policy owners, an offer to supply the Statement of Additional Information which shall contain 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 Contracts. The American Home Guarantee will not cover any Contracts with an issue date later than the Point of Termination. The American Home Guarantee will continue to cover Contracts with a date of issue earlier than the Point of Termination until all insurance obligations under such contracts are satisfied in full. Effective as of 11:59 p.m. Eastern time, on December 31, 2012, SunAmerica Annuity and Life Assurance Company, an affiliate of American General Life Insurance Company, merged with and into American General Life Insurance Company. Texas law provides for the continuation of guarantees for contracts and certificates issued prior to a merger. Therefore, the American Home Guarantee will continue to cover Contracts with a date of issue earlier than the Point of Termination. REPRESENTATION REGARDING THE REASONABLENESS OF AGGREGATE FEES AND CHARGES DEDUCTED UNDER THE CONTRACTS PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940 American General Life Insurance Company represents that the fees and charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by American General Life Insurance Company. POWERS OF ATTORNEY Each person whose signature appears below hereby appoints Mary Jane B. Fortin, Manda Ghaferi, Steven A. Glover and David S. Jorgensen and each of them, any one of whom may act without the joinder of the others, as his/her attorney-in-fact to sign on his/her behalf and in the capacity stated below and to file all amendments to this Registration Statement, which amendment or amendments may make such changes and additions to this Registration Statement as such attorney- in-fact may deem necessary or appropriate. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, Variable Annuity Account One, has duly caused this Registration Statement to be signed on its behalf, in the City of Houston, and State of Texas on this 28th day of December, 2012. VARIABLE ANNUITY ACCOUNT ONE (Registrant) By: AMERICAN GENERAL LIFE INSURANCE COMPANY (On behalf of the Registrant and itself) By: /s/ MARY JANE B. FORTIN ------------------------------------ MARY JANE B. FORTIN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER As required by the Securities Act of 1933, this Registration Statement has been signed below by the following persons, on behalf of the Registrant and Depositor, in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES A. MALLON Director, Acting Chairman, December 28, 2012 ----------------------------- President JAMES A. MALLON and Chief Executive Officer /s/ MARY JANE B. FORTIN Director, Executive Vice President December 28, 2012 ----------------------------- and Chief Financial Officer MARY JANE B. FORTIN /s/ DON W. CUMMINGS Director and Senior Vice President December 28, 2012 ----------------------------- DON W. CUMMINGS /s/ ROBERT M. BEUERLEIN Director December 28, 2012 ----------------------------- ROBERT M. BEUERLEIN /s/ JEFFREY H. CARLSON Director December 28, 2012 ----------------------------- JEFFREY H. CARLSON /s/ KYLE L. JENNINGS Director December 28, 2012 ----------------------------- KYLE L. JENNINGS
SIGNATURES American Home Assurance Company has caused this amended 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 28th day of December, 2012. AMERICAN HOME ASSURANCE COMPANY BY: /s/ SEAN T. LEONARD ------------------------------------ SEAN T. LEONARD CHIEF FINANCIAL OFFICER AND SENIOR VICE PRESIDENT This amended Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- *PETER D. HANCOCK Chairman and Director December 28, 2012 ------------------------------ PETER D. HANCOCK *PETER J. EASTWOOD Director, President and December 28, 2012 ------------------------------ Chief Executive Officer PETER J. EASTWOOD *SEAN T. LEONARD Director, Chief Financial Officer December 28, 2012 ------------------------------ and Senior Vice President SEAN T. LEONARD *ALEXANDER R. BAUGH Director December 28, 2012 ------------------------------ ALEXANDER R. BAUGH *JAMES BRACKEN Director December 28, 2012 ------------------------------ JAMES BRACKEN *JOHN Q. DOYLE Director December 28, 2012 ------------------------------ JOHN Q. DOYLE *DAVID NEIL FIELDS Director December 28, 2012 ------------------------------ DAVID NEIL FIELDS *DAVID L. HERZOG Director December 28, 2012 ------------------------------ DAVID L. HERZOG Director ------------------------------ MONIKA MARIA MACHON *RALPH W. MUCERINO Director December 28, 2012 ------------------------------ RALPH W. MUCERINO Director ------------------------------ SID SANKARAN *CHRISTOPHER L. SPARRO Director December 28, 2012 ------------------------------ CHRISTOPHER L. SPARRO Director ------------------------------ MARK TIMOTHY WILLIS *BY: /s/ SEAN T. LEONARD ------------------------ SEAN T. LEONARD ATTORNEY-IN-FACT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- (9)(a) Opinion of Counsel and Consent of Depositor 10 Consents (13)(a)(2) Power of Attorney -- American Home Assurance Company Directors
EX-9.(A) 2 w20035exv9wxay.htm EX-9.(A) exv9wxay
(AMERICAN GENERAL GRAPHIC)
     
 
  Manda Ghaferi
 
  Vice President
 
  Direct Line (310) 772-6545
 
  Facsimile (310) 772-6569
 
  E-mail: mghaferi@sunamerica.com
December 31, 2012
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Madam/Sir:
Referring to this Registration Statement on behalf of Variable Annuity Account One (the “Separate Account”) and the Registration Statement on Form N-4 filed January 2, 2013 (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 SunAmerica Annuity and Life Assurance Company (“SunAmerica Annuity”). On December 31, 2012 and in conjunction with the merger of AGL and SunAmerica Annuity, the Separate Account will be transferred to and will become a separate account of AGL under Texas law.
 
  3)   Assets allocated to the Separate Account will be owned by AGL and AGL is not a trustee with respect thereto. The annuity contracts provide that the portion of the assets of the Separate Account equal to the reserves and other annuity contract 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 annuity contracts being registered by the Registration Statement will, upon sale thereof, be duly authorized and will 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-10 3 w20035exv10.htm EX-10 exv10
Exhibit 10
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form N-4 (the “Registration Statement”) of our report dated April 25, 2012, relating to the financial statements of Variable Annuity Account One, which appears in such Registration Statement. We also consent to the incorporation by reference in this Registration Statement of our report dated April 25, 2012, relating to the consolidated financial statements of SunAmerica Annuity and Life Assurance Company, which appears in such Registration Statement. We also consent to the incorporation by reference in this Registration Statement of our report dated April 25, 2012, relating to the consolidated financial statements of American General Life Insurance Company, which appears in such Registration Statement. We also consent to the incorporation by reference in this Registration Statement of our report dated April 25, 2012, relating to the financial statements of American General Life Insurance Company of Delaware, which appears in such Registration Statement. We also consent to the incorporation by reference in this Registration Statement of our report dated April 25, 2012, relating to the consolidated financial statements of Western National Life Insurance Company, which appears in such Registration Statement. We also consent to the incorporation by reference in this Registration Statement of our report dated May 25, 2012, relating to the statutory financial statements of American General Assurance Company, which appears in such Registration Statement. We also consent to the incorporation by reference in this Registration Statement of our report dated May 25, 2012, relating to the statutory financial statements of American General Life and Accident Insurance Company, which appears in such Registration Statement. We also consent to the incorporation by reference in this Registration Statement of our report dated May 25, 2012, relating to the statutory financial statements of SunAmerica Life Insurance Company which appears in such Registration Statement. We also consent to the use in this Registration Statement of our report dated April 25, 2012, relating to the statutory financial statements of American Home Assurance Company, which appears in such Registration Statement. We also consent to the incorporation by reference in such Registration Statement of our report dated February 23, 2012, except with respect to our opinion on the consolidated financial statements insofar as it relates to changes in the presentation of segment information, the effects of the adoption of the accounting standard relating to accounting for acquisition costs associated with acquiring or renewing insurance contracts, and the effects of the adoption of the accounting standard related to the presentation of comprehensive income discussed in Note 1, as to which the date is May 4, 2012, relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting, which appears in American International Group, Inc.’s Current Report on Form 8-K dated May 4, 2012. We also consent to the reference to us under the heading “Financial Statements” in such Registration Statement.
 
 
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
December 26, 2012

 

CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration Statement on Form N-4 (the “Registration Statement”) of our report dated 24 February 2012 relating to the consolidated financial statements of AIA Group Limited which appears in American International Group, Inc.’s Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10K for the year ended 31 December 2011. We also consent to the reference to us under the heading “Financial Statements” in such Registration Statement.
 
 
/s/ PricewaterhouseCoopers
Hong Kong
26 December 2012

EX-13.(A)(2) 4 w20035exv13wxayx2y.txt EX-13.(A)(2) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby constitutes and appoints SEAN T. LEONARD and RICHARD T. PISANO, 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 and all capacities, to sign any and all amendments to the Registration Statements listed below, for which AMERICAN GENERAL LIFE ASSURANCE COMPANY serves as Depositor and AMERICAN HOME ASSURANCE COMPANY 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 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 American Pathway II 811-03859 Polaris Polaris II PolarisAmerica Polaris Platinum II / Polaris II Platinum Series Polaris Choice II / Polaris Choice III WM Diversified Strategies WM Diversified Strategies III Polaris Advisor Polaris Protector Polaris Preferred Solution ------------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT ONE ICAP II 811-04296 ------------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT TWO Vista Capital Advantage 811-08626 ------------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT FOUR Anchor Advisor 811-08874 ------------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT FIVE Seasons / Seasons Select II 811-07727 Seasons Select Seasons Triple Elite / Seasons Elite Seasons Advisor Seasons Advisor II Seasons Preferred Solution ------------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT SEVEN Polaris Plus 811-09003 Polaris II A-Class / Polaris II Asset Manager / Polaris II A-Class Platinum Series ------------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT NINE Ovation 811-21096 Ovation Plus Ovation Advantage Ovation Advisor -------------------------------------------------------------------------------------
SIGNATURE TITLE DATE --------- ----- ---- /s/ PETER D. HANCOCK Chairman and Director December 28, 2012 ------------------------------ PETER D. HANCOCK /s/ PETER J. EASTWOOD Director, President and December 28, 2012 ------------------------------ Chief Executive Officer PETER J. EASTWOOD /s/ SEAN T. LEONARD Director, Senior Vice President and December 28, 2012 ------------------------------ Chief Financial Officer SEAN T. LEONARD /s/ ALEXANDER R. BAUGH Director December 28, 2012 ------------------------------ ALEXANDER R. BAUGH /s/ JAMES BRACKEN Director December 28, 2012 ------------------------------ JAMES BRACKEN /s/ JOHN Q. DOYLE Director December 28, 2012 ------------------------------ JOHN Q. DOYLE /s/ DAVID NEIL FIELDS Director December 28, 2012 ------------------------------ DAVID NEIL FIELDS /s/ DAVID L. HERZOG Director December 28, 2012 ------------------------------ DAVID L. HERZOG Director ------------------------------ MONIKA MARIA MACHON /s/ RALPH W. MUCERINO Director December 28, 2012 ------------------------------ RALPH W. MUCERINO Director ------------------------------ SIDDHARTHA SANKARAN /s/ CHRISTOPHER L. SPARRO Director December 28, 2012 ------------------------------ CHRISTOPHER L. SPARRO Director ------------------------------ MARK TIMOTHY WILLIS
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