497 1 d884872d497.txt 497(C) [ANCHOR ADVISOR LOGO] PROSPECTUS MAY 1, 2015 FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT issued by Depositor AMERICAN GENERAL LIFE INSURANCE COMPANY in connection with VARIABLE ANNUITY ACCOUNT FOUR This variable annuity has several investment options -- Variable Portfolios (which are subaccounts of the separate account) and available Fixed Account options. Each Variable Portfolio invests exclusively in the shares of one of the Underlying Funds listed below. The Underlying Funds are part of the AIM Variable Insurance Funds (Invesco Variable Insurance Funds), American Funds Insurance Series, Anchor Series Trust, Lord Abbett Series Fund, Inc., and SunAmerica Series Trust.
UNDERLYING FUNDS: MANAGED BY: Aggressive Growth Wells Capital Management Incorporated American Funds Global Growth Capital Research and Management Company American Funds Growth Capital Research and Management Company American Funds Growth-Income Capital Research and Management Company Asset Allocation Edge Asset Management, Inc. Balanced J.P. Morgan Investment Management Inc. Blue Chip Growth Massachusetts Financial Services Company Capital Appreciation Wellington Management Company LLP Capital Growth The Boston Company Asset Management, LLC Cash Management BofA Advisors, LLC Corporate Bond Federated Investment Management Company Davis Venture Value Davis Selected Advisers, L.P. "Dogs" of Wall Street SunAmerica Asset Management, LLC Equity Opportunities OppenheimerFunds, Inc. Foreign Value Templeton Investment Counsel, LLC Fundamental Growth Wells Capital Management Incorporated Global Bond Goldman Sachs Asset Management International Global Equities J.P. Morgan Investment Management Inc. Government and Quality Bond Wellington Management Company LLP Growth Wellington Management Company LLP Growth-Income J.P. Morgan Investment Management Inc. Growth Opportunities Invesco Advisers, Inc. High-Yield Bond PineBridge Investments LLC International Diversified Equities Morgan Stanley Investment Management Inc. International Growth and Income Putnam Investment Management, LLC Invesco V.I. American Franchise Fund, Series II Shares Invesco Advisers, Inc. Invesco V.I. Comstock Fund, Series II Shares Invesco Advisers, Inc. Invesco V.I. Growth and Income Fund, Series II Shares Invesco Advisers, Inc. Lord Abbett Growth and Income Lord, Abbett & Co. LLC Mid-Cap Growth J.P. Morgan Investment Management Inc. Natural Resources Wellington Management Company LLP SA AB Growth(1) AllianceBernstein L.P. SA JPMorgan MFS Core Bond(2) J.P. Morgan Investment Management Inc. and Massachusetts Financial Services Company(2) SA Marsico Focused Growth(3) Marsico Capital Management, LLC SA MFS Massachusetts Investors Trust(4) Massachusetts Financial Services Company SA MFS Total Return(5) Massachusetts Financial Services Company Small & Mid Cap Value AllianceBernstein L.P. Technology Columbia Management Investment Advisers, LLC Telecom Utility Massachusetts Financial Services Company
1 On May 1, 2015, the Alliance Growth Portfolio was renamed SA AB Growth Portfolio. 2 On January 16, 2015, the Total Return Bond Portfolio was renamed SA JPMorgan MFS Core Bond Portfolio and the investment manager changed from Pacific Investment Management Company LLC to J.P. Morgan Investment Management Inc. and Massachusetts Financial Services Company. 3 On May 1, 2015, the Marsico Focused Growth Portfolio was renamed SA Marsico Focused Growth Portfolio. 4 On May 1, 2015, the MFS Massachusetts Investors Trust Portfolio was renamed SA MFS Massachusetts Investors Trust Portfolio. 5 On May 1, 2015, the MFS Total Return Portfolio was renamed SA MFS Total Return Portfolio. Please read this prospectus carefully before investing and keep it for future reference. It contains important information about the variable annuity, including a description of all material features of the contract. To learn more about the annuity offered in this prospectus, you can obtain a copy of the Statement of Additional Information ("SAI") dated May 1, 2015. 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 15570, Amarillo, Texas 79105-5570. 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 A CRIMINAL OFFENSE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- GLOSSARY.................................................... 3 HIGHLIGHTS.................................................. 4 FEE TABLE................................................... 5 Maximum Owner Transaction Expenses.................... 5 Contract Maintenance Fee.............................. 5 Separate Account Annual Expenses...................... 5 Total Annual Portfolio Operating Expenses............. 5 MAXIMUM AND MINIMUM EXPENSE EXAMPLES........................ 6 THE ANCHOR ADVISOR VARIABLE ANNUITY......................... 7 PURCHASING A VARIABLE ANNUITY............................... 7 Allocation of Purchase Payments....................... 8 Accumulation Units.................................... 9 Right to Examine...................................... 9 Exchange Offers....................................... 9 Important Information for Military Servicemembers..... 9 INVESTMENT OPTIONS.......................................... 10 Variable Portfolios................................... 10 AIM Variable Insurance Funds (Invesco Variable Insurance Funds)................................. 10 American Funds Insurance Series..................... 10 Anchor Series Trust................................. 10 Lord Abbett Series Fund, Inc........................ 10 SunAmerica Series Trust............................. 10 Substitution, Addition or Deletion of Variable Portfolios.......................................... 12 Fixed Accounts........................................ 12 Dollar Cost Averaging Fixed Accounts.................. 12 Dollar Cost Averaging Program......................... 13 Transfers During the Accumulation Phase............... 13 Automatic Asset Rebalancing Program................... 16 Voting Rights......................................... 16 ACCESS TO YOUR MONEY........................................ 16 Systematic Withdrawal Program......................... 16 Minimum Contract Value................................ 17 Qualified Contract Owners............................. 17 DEATH BENEFITS.............................................. 17 Death Benefit Defined Terms........................... 18 Death Benefit Options................................. 18 Optional EstatePlus Benefit........................... 19 Spousal Continuation.................................. 20 EXPENSES.................................................... 21 Separate Account Expenses............................. 21 Underlying Fund Expenses.............................. 21 Transfer Fee.......................................... 21 Optional EstatePlus Fee............................... 21 Premium Tax........................................... 21 Income Taxes.......................................... 22 Reduction or Elimination of Fees, Expenses and Additional Amounts Credited......................... 22 PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACTS............................................. 22 ANNUITY INCOME OPTIONS...................................... 23 The Income Phase...................................... 23 Annuity Income Options................................ 24 Fixed or Variable Annuity Income Payments............. 25 Annuity Income Payments............................... 25 Transfers During the Income Phase..................... 26 Deferment of Payments................................. 26 TAXES....................................................... 26 Annuity Contracts in General.......................... 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....................... 29 Contracts Owned by a Trust or Corporation............. 29 Foreign Account Tax Compliance ("FATCA").............. 29 Other Withholding Tax................................. 29 Gifts, Pledges and/or Assignments of a Contract....... 29 Diversification and Investor Control.................. 30
OTHER INFORMATION........................................... 30 The Distributor....................................... 30 The Company........................................... 30 The Separate Account.................................. 31 The General Account................................... 31 Guarantee of Insurance Obligations.................... 31 Financial Statements.................................. 32 Administration........................................ 32 Legal Proceedings..................................... 33 Registration Statements............................... 33 CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION............................................... 33 APPENDIX A - CONDENSED FINANCIAL INFORMATION................ A-1 APPENDIX B - DEATH BENEFITS FOLLOWING SPOUSAL CONTINUATION.............................................. B-1 APPENDIX C - STATE CONTRACT AVAILABILITY AND/OR VARIABILITY............................................... C-1
2 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 term "we," "us" and "our" are also used to identify the issuing Company. CONTINUATION CONTRIBUTION - An amount by which the death benefit that would have been paid to the spousal Beneficiary upon the death of the original Owner exceeds the contract value as of the Good Order date. We will contribute this amount, if any, to the contract value upon spousal continuation. 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. GENERAL ACCOUNT - The Company's account, which includes 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. GOOD ORDER - Fully and accurately completed forms, which are valid, 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 - For contracts issued prior to January 1, 2001, the Latest Annuity Date is defined as the first business day of the month following your 90th birthday or 10 years after your contract issue date, whichever is later. For contracts issued on or after January 1, 2001, your Latest Annuity Date is defined as the first business day of the month following your 95th birthday or 10 years after your contract issue date, whichever is later. 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. TRUSTS - Collectively refers to the AIM Variable Insurance Funds (Invesco Variable Insurance Funds), American Funds Insurance Series, Anchor Series Trust, Lord Abbett Series Trust, Inc., and SunAmerica 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. 3 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- HIGHLIGHTS -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The Anchor Advisor 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 Portfolios and Fixed Accounts, if available. 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 annuity income payments from your annuity to help provide for your retirement. RIGHT TO EXAMINE: You may cancel your contract within 10 days after receiving it (or whatever period is required in your state), and not be charged a withdrawal charge. 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 RIGHT TO EXAMINE IN THE PROSPECTUS. EXPENSES: There are fees and charges associated with the contract. We deduct separate account charges which equal 1.52% annually of the average daily value of your contract allocated to the Variable Portfolios. There are portfolio expenses on amounts invested in the Variable Portfolios, including Rule 12b-1 fees of up to 0.25%. If you elect optional features available under the contract we may charge additional fees for those features. PLEASE SEE THE FEE TABLE, PURCHASING AN ANCHOR ADVISOR VARIABLE ANNUITY AND EXPENSES IN THE PROSPECTUS. ACCESS TO YOUR MONEY: You may withdraw money from your contract during the Accumulation Phase. If you make a withdrawal, earnings are deemed to be withdrawn first. You will pay income taxes on earnings and untaxed contributions when you withdraw them. Annuity income 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. PLEASE SEE ACCESS TO YOUR MONEY AND TAXES IN THE PROSPECTUS. DEATH BENEFIT: A death benefit feature is available under the contract which is payable to your Beneficiaries in the event of your death during the Accumulation Phase. PLEASE SEE DEATH BENEFITS IN THE PROSPECTUS. ANNUITY INCOME OPTIONS: When you switch to the Income Phase, you can choose to receive annuity income payments on a variable basis, fixed basis or a combination of both. You may also choose from five different annuity income options, including an option for annuity 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 15570, Amarillo, Texas 79105-5570. Telephone Number: (800) 445-7862 and website (www.aig.com/annuities). PLEASE SEE ALLOCATION OF PURCHASE PAYMENTS IN THE PROSPECTUS FOR THE ADDRESS TO WHICH YOU MUST SEND PURCHASE PAYMENTS. ALL MATERIAL STATE VARIATIONS ARE DESCRIBED IN APPENDIX C - STATE CONTRACT AVAILABILITY AND/OR VARIABILITY. 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 INFORMATION REGARDING HOW MONEY IS SHARED AMONG OUR BUSINESS PARTNERS, INCLUDING BROKER-DEALERS THROUGH WHICH YOU MAY PURCHASE A VARIABLE ANNUITY AND RECEIVED FROM CERTAIN INVESTMENT ADVISERS OF THE UNDERLYING FUNDS, PLEASE SEE PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACT BELOW. 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. 4 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FEE TABLE -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- THE FOLLOWING INFORMATION DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY WHEN BUYING, OWNING, AND SURRENDERING THE CONTRACT. THE MAXIMUM OWNER TRANSACTION EXPENSES DESCRIBE THE FEES AND EXPENSES THAT YOU WILL PAY AT THE TIME THAT YOU BUY OR SURRENDER THE CONTRACT, OR TRANSFER CONTRACT VALUE BETWEEN INVESTMENT OPTIONS. MAXIMUM OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGES..... None
TRANSFER FEE $25 per transfer after the first 15 transfers in any contract year. PREMIUM TAX(1)..... 3.5%
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..... None
SEPARATE ACCOUNT ANNUAL EXPENSES (deducted from the average daily ending net asset value allocated to the Variable Portfolios) Mortality and Expense Risk Charge............. 1.37% Distribution Expense Charge................... 0.15% Optional EstatePlus Fee(2).................... 0.25% ---- Total Separate Account Annual Expenses..... 1.77% ====
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES (AS OF JANUARY 31, 2015) 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 PORTFOLIO OPERATING EXPENSES MINIMUM(3) MAXIMUM(3) -------------------------------------------- ------------ ----------- (expenses that are deducted from Underlying Fund assets, including management fees, other expenses and 12b-1 fees, if applicable).................. 0.54% 1.37%
FOOTNOTE TO THE FEE TABLE: 1 If applicable, state premium taxes of up to 3.5% may also be deducted when you begin the Income Phase. Please see PREMIUM TAX and APPENDIX C - STATE CONTRACT AVAILABILITY AND/OR VARIABILITY. 2 EstatePlus is an optional earnings enhancement death benefit. If you did not elect the EstatePlus feature, your separate account annual expenses would be 1.52%. EstatePlus is no longer available for election. 3 The maximum expense is for an Underlying Fund of SunAmerica Series Trust, as of its fiscal year ended January 31, 2015. The minimum expense is for an Underlying Fund of American Funds Insurance Series Trust as of its fiscal year ended December 31, 2014. 5 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 1.77%, including optional EstatePlus feature and investment in an Underlying Fund with total expenses of 1.37%) (1) If you surrender your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------- --------- --------- --------- $317 $969 $1,645 $3,448
(2) If you do not surrender or if you annuitize your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------- --------- --------- --------- $317 $969 $1,645 $3,448
MINIMUM EXPENSE EXAMPLES (assuming minimum separate account annual charges of 1.52%, and investment in an Underlying Fund with total expenses of 0.54%) (1) If you surrender your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------- --------- --------- --------- $209 $646 $1,108 $2,390
(2) If you do not surrender or if you annuitize your contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------- --------- --------- --------- $209 $646 $1,108 $2,390
EXPLANATION OF EXPENSE EXAMPLES 1. The purpose of the Expense Examples is to show you the various expenses you would incur directly and indirectly by investing in the variable annuity contract. The Expense Examples represent both fees of the separate account as well as the maximum and minimum total annual Underlying Fund operating expenses. Additional information on the Underlying Fund fees can be found in the Trust prospectuses. 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. 3. The Maximum Expense Examples reflect the highest possible combination of charges. Depending on when you purchased your contract and the feature you elected at that time, you may be subject to lower fees. 4. If you elected optional features, you do not pay fees for optional features once you begin the Income Phase (annuitize your contract); therefore, your expenses will be lower than those shown here. PLEASE SEE ANNUITY INCOME OPTIONS BELOW. 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. 6 ------------------------------------------------------------------------------ -------------------------------------------------------------------------------- THE ANCHOR ADVISOR 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: o Death Benefit: If you die during the Accumulation Phase, the Company pays a death benefit to your Beneficiary. o 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. o 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 insurance 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PURCHASING A VARIABLE ANNUITY -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- An initial Purchase Payment is the money you give us to purchase a contract. Any additional money you give us to invest in the contract after purchase is a subsequent Purchase Payment. The minimum initial Purchase Payment is $10,000 and subsequent amounts of $500 or more may be added to your contract. 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. For contracts owned by a non-natural owner, we reserve the right to require prior Company approval to accept any Purchase Payment. 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 and/or Annuitant to exceed these limits may also be subject to Company pre-approval. The terms creating any limit on the maximum death benefit payable would be mutually agreed upon in writing by you and the Company prior to purchasing the contract. NON-NATURAL OWNERSHIP A trust, corporation or other non-natural entity may only purchase this contract if such entity has sufficiently demonstrated an Insurable Interest in the Annuitant selected. FOR MORE INFORMATION ON NON-NATURAL OWNERSHIP, PLEASE SEE TAXES BELOW. Various considerations may apply with respect to non-natural ownership of this contract including but not limited to estate planning, tax consequences and the propriety of this contract as an investment consistent with a non-natural Owner's organizational documentation. You should consult with your tax and/or legal advisor in connection with non-natural ownership of this contract. MAXIMUM ISSUE AGE We will not issue a contract to anyone age 86 or older on the contract issue date. We will not accept subsequent Purchase Payments from contract owners age 86 or older. 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. PLEASE SEE TAXES BELOW. 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 benefits. 7 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. JOINT OWNERSHIP We allow this contract to be jointly owned by spouses (as determined for federal tax law purposes). The age of the older Owner is used to determine the availability of most 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. Certain states require that the benefits and features of the contract be made available to domestic or civil union partners ("Domestic Partners") who qualify for treatment as, or are equal to, spouses under state law. There are also states that require us to issue the contract to non-spousal joint Owners. However, non-spousal joint Owners (which can include Domestic Partners) who jointly own or are Beneficiaries of a contract should consult with their tax adviser and/or financial representative as, under current tax law, they are not eligible for spousal continuation of the contract. Therefore, the ability of such non-spousal joint Owners to fully benefit from certain benefits and features of the contract, such as optional living benefit(s), if applicable, that guarantee withdrawals over two lifetimes may be limited. ASSIGNMENT OF THE CONTRACT/CHANGE OF OWNERSHIP You may assign this contract before beginning the Income Phase by sending a written request to us at the Annuity Service Center for an assignment. Your rights and those of any other person with rights under this contract will be subject to the assignment. We will not be bound by any assignment until written notice is processed by us at our Annuity Service Center and you have received confirmation. We are not responsible for the validity, tax or other legal consequences of any assignment. An assignment will not affect any payments we may make or actions we may take before we receive notice of the assignment. We reserve the right not to recognize any assignment if it changes the risk profile of the owner of the contract, as determined in our sole discretion, if no Insurable Interest exists or if not permitted by the Internal Revenue Code. PLEASE SEE THE STATEMENT OF ADDITIONAL INFORMATION FOR DETAILS ON THE TAX CONSEQUENCES OF AN ASSIGNMENT. You should consult a qualified tax adviser before assigning the contract. 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. Thus, if we have an agreement with a broker-dealer deeming them our agent, Purchase Payments received by the broker-dealer will be priced as of the time they are received by the broker-dealer. However, if we do not have an agreement with a broker-dealer deeming them our agent, Purchase Payments received by the broker-dealer will not be priced until they are received by us. You assume any risk in market fluctuations if you submit your Purchase Payment directly to a broker-dealer that is not deemed our agent, should there be a delay in that broker-dealer delivering your Purchase Payment to us. Please check with your financial representative to determine if his/her broker-dealer has an agreement with the Company that deems the broker-dealer an agent of the Company. An initial Purchase Payment will be priced within two business days after it is received by us in Good Order if the Purchase Payment is received before Market Close. If the initial Purchase Payment is received in Good Order after Market Close, the initial Purchase Payment will be priced within two NYSE business days after the next NYSE business day. We allocate your initial Purchase Payment as of the date such Purchase Payment is priced. 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 five NYSE business days, we will send your money back to you, or obtain 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 in Good Order after Market Close, it will be priced as of the next NYSE business day. We invest your subsequent Purchase Payments in the Variable Portfolios and available 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 Purchase Payment according to your allocation instructions on file. PLEASE SEE INVESTMENT OPTIONS BELOW. Purchase Payments submitted by check can only be accepted by the Company at the Payment Center at the following address: American General Life Insurance Company Annuity Service Center P.O. Box 100330 Pasadena, CA 91189-0330 Purchase Payments sent to the Annuity Service Center will be forwarded and priced when received at the Payment Center. 8 Overnight deliveries of Purchase Payments can only be accepted at the following address: American General Life Insurance Company Annuity Service Center Building #6, Suite 120 2710 Media Center Drive Los Angeles, CA 90065-1750 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 Payment Center. 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 determine the value of each Accumulation Unit at the close of the NYSE every business day, by multiplying the Accumulation Unit value for the immediately preceding business day by a factor for the current business day. The factor is determined by: 1. dividing the net asset value per share of the Underlying Fund at the end of the current business day, plus any dividend or capital gains per share declared on behalf of the Underlying Fund as of that day, by the net asset value per share of the Underlying Fund for the previous business day; and 2. multiplying it by one minus all applicable daily asset based charges. 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. EXAMPLE: 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. RIGHT TO EXAMINE 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 your contract or with your financial representative. To cancel, you must mail the contract along with your written free look request to our Annuity Service Center at P.O. Box 15570, Amarillo, Texas 79105-5570. 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 in Good Order at the Annuity Service Center. 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 either 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 on the day we receive your request in Good Order at the Annuity Service Center. With respect to these contracts, we reserve the right to invest 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. PLEASE SEE THE STATE CONTRACT AVAILABILITY AND/OR VARIABILITY APPENDIX FOR INFORMATION ABOUT THE FREE LOOK PERIOD IN YOUR STATE. EXCHANGE OFFERS From time to time, we allow you to exchange an older variable annuity issued by the Company or one of its affiliates, for a newer product with different features and benefits issued by the Company or one of its affiliates. Such an exchange offer will be made in accordance with applicable federal securities laws and state insurance rules and regulations. We will provide the specific terms and conditions of any such exchange offer at the time the offer is made. IMPORTANT INFORMATION FOR MILITARY SERVICEMEMBERS If you are an active duty full-time servicemember, and are considering the purchase of this contract, please read the following important information before investing. Subsidized life insurance is available to members of the Armed Forces from the Federal Government under the Servicemembers' Group Life Insurance program (also referred to as "SGLI"). More details may be obtained on-line at the following website: www.insurance.va.gov. This contract is not offered or provided by the Federal Government and the Federal Government has in no way sanctioned, recommended, or encouraged the sale of this contract. No entity has received 9 any referral fee or incentive compensation in connection with the offer or sale of this contract, unless that entity has a selling agreement with the Company. -------------------------------------- -------------------------------------- INVESTMENT OPTIONS -------------------------------------- -------------------------------------- VARIABLE PORTFOLIOS The Variable Portfolios invest in the Underlying Funds of the Trusts. Additional Variable Portfolios may be available in the future. The Variable Portfolios are only available through the purchase of certain insurance contracts we offer. The Underlying Funds 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 Underlying Funds periodically and may make changes if we determine that an Underlying Fund no longer satisfies one or more of the selection criteria and/or if the Underlying Fund has not attracted significant allocations from contract owners. We offer Underlying Funds of the Anchor Series Trust -and SunAmerica Series Trust at least in part because they are managed by SunAmerica Asset Management, LLC ("SAAMCo"), a wholly-owned subsidiary of AGL. From time to time, certain Variable Portfolio names are changed. When we are notified of a name change, we will make changes so that the new name is properly shown. However, until we complete the changes, we may provide you with various forms, reports and confirmations that reflect a Variable Portfolio's prior name. 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 Underlying Funds 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. During periods of low short-term interest rates, and in part due to contract fees and expenses, the investment return of the Cash Management Variable Portfolio may become extremely low and possibly negative. In the case of negative returns, your investment in the Cash Management Variable Portfolio will lose value. The Trusts serve as the underlying investment vehicles for other variable annuity contracts issued by the Company and other affiliated and unaffiliated insurance companies. Neither the Company nor the Trusts believe that offering shares of the Trusts in this manner disadvantages you. The Trusts are monitored for potential conflicts. The Trusts may have other Underlying Funds, in addition to those listed here, that are not available for investment under this contract. We do not provide investment advice, nor do we recommend or endorse any particular Underlying Fund. The Underlying Funds along with their respective advisers are listed below. AIM VARIABLE INSURANCE FUNDS (INVESCO VARIABLE INSURANCE FUNDS) -- SERIES II SHARES Invesco Advisers, Inc. is the investment adviser to AIM Variable Insurance Funds (Invesco Variable Insurance Funds) ("AVIF"). AMERICAN FUNDS INSURANCE SERIES -- CLASS 2 SHARES Capital Research and Management Company is the investment adviser to American Funds Insurance Series ("AFIS"). ANCHOR SERIES TRUST -- CLASS 1 AND CLASS 2 SHARES SAAMCo is the investment adviser and various managers are the subadviser to Anchor Series Trust ("AST"). Only Class 2 shares of AST Underlying Funds were available to Owners who purchased their contracts from certain broker dealers between July 9, 2001 and January 10, 2003. LORD ABBETT SERIES FUND, INC. -- CLASS VC SHARES Lord, Abbett & Co. LLC is the investment adviser to Lord Abbett Series Fund, Inc. ("LASF"). SUNAMERICA SERIES TRUST -- CLASS 1, CLASS 2 AND CLASS 3 SHARES SAAMCo is the investment adviser and various managers are the subadvisers to SunAmerica Series Trust ("SAST"). Only Class 2 shares of SAST Underlying Funds were available to Owners who purchased their contracts from certain broker dealers between July 9, 2001 and January 10, 2003, with the exception of the Foreign Value, SA Marsico Focused Growth and Small & Mid Cap Value Underlying Funds of SAST which are available as Class 3 shares. (PLEASE SEE NEXT PAGE FOR FULL LIST OF INVESTMENT OPTIONS) 10
UNDERLYING FUNDS MANAGED BY: TRUST ASSET CLASS ------------------------------------------------ ---------------------------------------------- ------- ----------------- Aggressive Growth Wells Capital Management Incorporated SAST STOCK American Funds Global Growth Capital Research and Management Company AFIS STOCK American Funds Growth Capital Research and Management Company AFIS STOCK American Funds Growth-Income Capital Research and Management Company AFIS STOCK Asset Allocation Edge Asset Management, Inc. AST ASSET ALLOCATION Balanced J.P. Morgan Investment Management Inc. SAST ASSET ALLOCATION Blue Chip Growth Massachusetts Financial Services Company SAST STOCK Capital Appreciation Wellington Management Company LLP AST STOCK Capital Growth The Boston Company Asset Management, LLC SAST STOCK Cash Management BofA Advisors, LLC SAST CASH Corporate Bond Federated Investment Management Company SAST BOND Davis Venture Value Davis Selected Advisers, L.P. SAST STOCK "Dogs" of Wall Street SunAmerica Asset Management, LLC SAST STOCK Equity Opportunities OppenheimerFunds, Inc. SAST STOCK Foreign Value Templeton Investment Counsel, LLC SAST STOCK Fundamental Growth Wells Capital Management Incorporated SAST STOCK Global Bond Goldman Sachs Asset Management International SAST BOND Global Equities J.P. Morgan Investment Management Inc. SAST STOCK Government and Quality Bond Wellington Management Company LLP AST BOND Growth Wellington Management Company LLP AST STOCK Growth-Income J.P. Morgan Investment Management Inc. SAST STOCK Growth Opportunities Invesco Advisers, Inc. SAST STOCK High-Yield Bond PineBridge Investments LLC SAST BOND International Diversified Equities Morgan Stanley Investment Management Inc. SAST STOCK International Growth and Income Putnam Investment Management, LLC SAST STOCK Invesco V.I. American Franchise Fund, Series II Invesco Advisers, Inc. AVIF STOCK Shares Invesco V.I. Comstock Fund, Series II Shares Invesco Advisers, Inc. AVIF STOCK Invesco V.I. Growth and Income Fund, Series II Invesco Advisers, Inc. AVIF STOCK Shares Lord Abbett Growth and Income Lord, Abbett & Co. LLC LASF STOCK Mid-Cap Growth J.P. Morgan Investment Management Inc. SAST STOCK Natural Resources Wellington Management Company LLP AST STOCK SA AB Growth AllianceBernstein L.P. SAST STOCK SA JPMorgan MFS Core Bond J.P. Morgan Investment Management Inc. and SAST BOND Massachusetts Financial Services Company SA Marsico Focused Growth Marsico Capital Management, LLC SAST STOCK SA MFS Massachusetts Investors Trust Massachusetts Financial Services Company SAST STOCK SA MFS Total Return Massachusetts Financial Services Company SAST ASSET ALLOCATION Small & Mid Cap Value AllianceBernstein L.P. SAST STOCK Technology Columbia Management Investment Advisers, LLC SAST STOCK Telecom Utility Massachusetts Financial Services Company SAST STOCK
YOU SHOULD READ THE PROSPECTUSES FOR THE TRUSTS CAREFULLY. THESE PROSPECTUSES CONTAIN DETAILED INFORMATION ABOUT THE UNDERLYING FUNDS, INCLUDING EACH UNDERLYING FUND'S INVESTMENT OBJECTIVE AND RISK FACTORS. YOU MAY OBTAIN AN ADDITIONAL COPY OF THESE PROSPECTUSES FOR THE TRUSTS BY CALLING OUR ANNUITY SERVICE CENTER AT (800) 445-7862 OR BY VISITING OUR WEBSITE AT WWW.AIG.COM/ANNUITIES. YOU MAY ALSO OBTAIN INFORMATION ABOUT THE UNDERLYING FUNDS (INCLUDING A COPY OF THE STATEMENT OF ADDITIONAL INFORMATION) BY ACCESSING THE U.S. SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT WWW.SEC.GOV. 11 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. The minimum guaranteed interest rate can vary but is never lower than 1%. 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: o Initial Rate: The rate credited to any portion of the initial Purchase Payment allocated to a Fixed Account. o Current Rate: The rate credited to any portion of a subsequent Purchase Payment allocated to a Fixed Account. o 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. There are no restrictions with respect to transferring out of or taking a withdrawal from a Fixed Account. If you make a transfer out of or a withdrawal from a Fixed Account prior to the end of a guarantee period, you will be credited the interest earned up to the time of transfer or withdrawal. 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, if available, 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. We reserve the right to defer payments for a withdrawal from a Fixed Account for up to six months. PLEASE SEE ACCESS TO YOUR MONEY BELOW. 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. DOLLAR COST AVERAGING FIXED ACCOUNTS You may invest initial and/or subsequent Purchase Payments in the dollar cost averaging ("DCA") Fixed Accounts, if available. The minimum Purchase Payment that you must invest for the 6-month DCA Fixed Account is $600 and for the 12-month DCA Fixed Account is $1,200. Purchase Payments less than these minimum amounts will automatically be allocated to available investment options according to your instructions or your current allocation instructions on file. DCA Fixed Accounts credit a fixed rate of interest and can only be elected to facilitate a DCA program. PLEASE SEE DOLLAR COST AVERAGING PROGRAM BELOW for more information. Interest is credited to amounts allocated to the DCA Fixed Accounts while your money is transferred to available investment options over certain specified time frames. The interest rates applicable to the DCA Fixed Accounts may differ from those applicable to any other Fixed Account but will never be less than the minimum guaranteed interest rate specified in your contract. The minimum guaranteed interest rate can vary but is never lower than 1%. However, when using a DCA Fixed Account, the annual interest rate is paid on a declining balance as you systematically transfer your money to available investment options. Therefore, the actual effective yield will be less than the stated annual crediting rate. We reserve the right to change the availability of DCA Fixed Accounts offered, unless state law requires us to do otherwise. 12 DOLLAR COST AVERAGING PROGRAM The DCA program allows you to invest gradually in available investment options at no additional cost. Under the program, you systematically transfer a specified dollar amount or percentage of contract value from a Variable Portfolio, available Fixed Account or DCA Fixed Account ("source account") to any available investment options ("target account"). Fixed Accounts are not available as target accounts for the DCA program. Transfers occur on a monthly periodic schedule. The minimum transfer amount under the DCA program is $100 per transaction, regardless of the source account. Transfers resulting from your participation in the DCA program are not counted towards the number of free transfers per contract year. The DCA Fixed Accounts only accept initial and subsequent Purchase Payments because they are offered as source accounts exclusively to facilitate the DCA program for a specified time period. You may not make a transfer from a Variable Portfolio or available Fixed Account into a DCA Fixed Account. If you choose to allocate subsequent Purchase Payments to an active DCA program with an available Fixed Account serving as the source account, the rate applicable to that Fixed Account at the time we receive the subsequent Purchase Payment will apply. Further, we will begin transferring that subsequent Purchase Payment into your target account allocations on the same day of the month as the initial active DCA program. Therefore, you may not receive a full 30 days of interest prior to the first transfer to the target account(s). You may terminate the DCA program at any time. If you terminate the DCA program and money remains in the DCA Fixed Account(s), we transfer the remaining money according to your current allocation instructions on file. Upon notification of your death, we will terminate the DCA program unless your Beneficiary instructs us otherwise and we will transfer the remaining money according to the current allocation instructions on file. The DCA program is designed to lessen the impact of market fluctuations on your investment. However, the DCA program can neither guarantee a profit nor protect your investment against a loss. When you elect the DCA program, you are continuously investing in securities fluctuating at different price levels. You should consider your tolerance for investing through periods of fluctuating price levels. EXAMPLE OF DCA PROGRAM: Assume that you want to move $750 each month from one Variable Portfolio to another Variable Portfolio over six months. You set up a DCA program and purchase Accumulation Units at the following values:
MONTH ACCUMULATION UNIT VALUE UNITS PURCHASED 1 $ 7.50 100 2 $ 5.00 150 3 $10.00 75 4 $ 7.50 100 5 $ 5.00 150 6 $ 7.50 100
You paid an average price of only $6.67 per Accumulation Unit over six months, while the average market price actually was $7.08. By investing an equal amount of money each month, you automatically buy more Accumulation Units when the market price is low and fewer Accumulation Units when the market price is high. This example is for illustrative purposes only. WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE THE DCA PROGRAM AT ANY TIME AND WE WILL PROVIDE YOU NOTICE AT LEAST 30 DAYS PRIOR TO MODIFICATION, SUSPENSION OR TERMINATION OF THE DCA PROGRAM. IN THE EVENT OF SUSPENSION OR TERMINATION OF THE DCA PROGRAM, WE WILL TRANSFER THE REMAINING MONEY ACCORDING TO YOUR CURRENT DCA TARGET ALLOCATIONS ON FILE. 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, subject to the Company's and the Underlying Funds' short term trading policies, by telephone (800) 445-7862, through the Company's website (www.aig.com/annuities), by U.S. Mail addressed to our Annuity Service Center, P.O. Box 15570, Amarillo, Texas 79105-5570 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 13 modify, suspend or terminate telephone, fax and/or internet transfer privileges at any time. If telephone, fax and/or internet access is unavailable, you must 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. 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 frequent trading or 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 12 months from the date of your 5th transfer request ("Standard U.S. Mail Policy"). For example, if you made a transfer on August 16, 2014 and within the previous six months (from February 17, 2014 forward) you made 5 transfers including the August 16th transfer, then all transfers made for twelve months after August 16, 2014 must be submitted by U.S. Mail (from August 17, 2014 through August 16, 2015). 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 modified, suspended or 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. 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; 14 (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 which may be more or less restrictive than ours. 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, 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. 15 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. AUTOMATIC ASSET REBALANCING PROGRAM Market fluctuations may cause the percentage of your investment in the Variable Portfolios to differ from your original allocations. Under the Automatic Asset Rebalancing Program, you may elect to have your investments in the Variable Portfolios and/or Fixed Accounts, if applicable, periodically rebalanced to return your allocations to the percentages given at your last instructions for no additional charge. If you make a transfer, you must provide updated rebalancing instructions. If you do not provide new rebalancing instructions at the time you make such transfer, we will change your ongoing rebalancing instructions to reflect the percentage allocations among the new Variable Portfolios and/or Fixed Accounts, if applicable, resulting from your transfer which will replace any previous rebalancing instructions you may have provided ("Default Rebalancing Instructions"). You may change any applicable Default Rebalancing Instructions at any time by contacting the Annuity Service Center. Automatic Asset Rebalancing typically involves shifting a portion of your money out of investment options which had higher returns into investment options which had lower returns. At your request, rebalancing occurs on a quarterly, semiannual or annual basis. Transfers resulting from your participation in this program are not counted against the number of free transfers per contract year. WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE THE AUTOMATIC ASSET REBALANCING PROGRAM AT ANY TIME AND WE WILL NOTIFY YOU IF WE EXERCISE THAT RIGHT. IN THE EVENT OF MODIFICATION, WE WILL ADMINISTER THE PROGRAM ACCORDING TO THE PARAMETERS OF THE MODIFICATION. IN THE EVENT OF SUSPENSION OR TERMINATION OF THE PROGRAM, WE WILL NO LONGER ADMINISTER THE PROGRAM AND YOUR INVESTMENTS WILL NO LONGER BE REBALANCED. 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 the shares we own in proportion to your instructions. This includes any shares we own on our own behalf. As a result of this proportionate voting, the vote of a small number of contract owners can determine the outcome of a vote. 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ACCESS TO YOUR MONEY -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- You can access money in your contract by making a systematic, partial, or total withdrawal (surrender), and/or by receiving annuity income payments during the Income Phase. PLEASE SEE ANNUITY INCOME OPTIONS BELOW. Any request for withdrawal will be priced as of the day it is received by us in Good Order at the Annuity Service Center, 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. If you surrender your contract, we may also deduct any premium taxes, if applicable. PLEASE SEE EXPENSES BELOW. Under most circumstances, the minimum amount you can withdraw is $1,000. We require that the value left in any Variable Portfolio or available Fixed Account be at least $100 after the withdrawal, and your total contract value must be at least $500. The request for withdrawal must be in writing and sent to the Annuity Service Center. For withdrawals of $500,000 and more, you are required to include a signature guarantee issued by your broker-dealer which verifies the validity of your signature. Unless you provide us with different instructions, partial withdrawals will be made proportionately from each Variable Portfolio and the Fixed Account in which you are invested. In the event that a proportionate partial withdrawal would cause the value of any Variable Portfolio, Fixed Account or DCA Fixed Account investment to be less than $100, we will contact you to obtain alternate instructions on how to structure the withdrawal. Withdrawals made prior to age 59 1/2 may result in a 10% IRS penalty tax. PLEASE SEE TAXES BELOW. Under certain Qualified plans, access to the money in your contract may be restricted. We may be required to suspend or postpone the payment of a withdrawal for any period of time when: (1) the NYSE is closed (other than a customary weekend and holiday closings); (2) trading with the NYSE is restricted; (3) an emergency exists such that disposal of or determination of the value of shares of the Variable Portfolios is not reasonably practicable; (4) the SEC, by order, so permits for the protection of contract owners. Additionally, we reserve the right to defer payments for a withdrawal from a Fixed Account for up to six months. SYSTEMATIC WITHDRAWAL PROGRAM During the Accumulation Phase, you may elect to receive periodic withdrawals under the Systematic Withdrawal program for no additional charge. Under the program, you may choose to take monthly, quarterly, semi-annual or annual payments from your contract. Electronic transfer of these withdrawals to your bank account is also available. The minimum amount of each withdrawal is $250. There must be at least $100 remaining in your contract at all 16 times, or withdrawals may be discontinued. Withdrawals may be taxable and a 10% federal penalty tax may apply if you are under age 59 1/2. Please contact our Annuity Service Center which can provide the necessary enrollment forms. WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE THE SYSTEMATIC WITHDRAWAL PROGRAM AT ANY TIME AND WE WILL NOTIFY YOU IF WE EXERCISE THAT RIGHT. MINIMUM CONTRACT VALUE Where permitted by state law, we may terminate your contract if both of the following occur: (1) your contract value 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 that your contract is being terminated. At the end of the notice period, we will distribute the contract's remaining 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 BENEFITS -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- If you die during the Accumulation Phase of your contract, we pay a death benefit to your Beneficiary. You must select a death benefit option at the time you purchase your contract. Once selected, you cannot change your death benefit option. You should discuss the available options with your financial representative to determine which option is best for you. We do not pay a death benefit if you die after you begin the Income Phase; your Beneficiary would receive any remaining guaranteed annuity income payments in accordance with the annuity income option you selected. PLEASE SEE ANNUITY INCOME OPTIONS BELOW. You designate your Beneficiary(ies) who will receive any death benefit payments. You may change the Beneficiary at any time. If your contract is jointly owned, the surviving joint Owner is the sole Beneficiary. Joint Annuitants, if any, when the Owner is a non-natural person shall be each other's sole Beneficiary, except when the Owner is a charitable remainder trust. In designating your Beneficiary, you may impose restrictions on the timing and manner of the payment of death benefits. Those restrictions can govern the payment of the death benefit. If the contract is owned by a trust or any other non-natural person, we will treat the death of the Primary Annuitant as the death of any Owner. If any contract is owned by a trust, whether as an agent for a natural person or otherwise, you should consider the contractual provisions that apply, including provisions that apply in the event of the death or change of an Annuitant, in determining whether the contract is an appropriate trust investment. You may wish to consult with your tax and/or legal adviser. We calculate and pay the death benefit when we receive all required paperwork and satisfactory proof of death in Good Order. All death benefit calculations discussed below are made as of the day a death benefit request is received by us in Good Order at the Annuity Service Center, (including satisfactory proof of death) if the request is received before Market Close. If the death benefit request is received after Market Close, the death benefit calculations will be as of the next business day. If the death benefit request is not received by us in Good Order or if notification of the death is made by the Beneficiary prior to submitting all required paperwork and satisfactory proof of death, the Beneficiary may have the option of transferring the entire contract value to the Cash Management Variable Portfolio or available Fixed Account by contacting the Annuity Service Center. We consider due proof of death in Good Order to be satisfactory written proof of death which may include: (1) a certified copy of the death certificate; (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. For contracts in which the aggregate of all Purchase Payments in contracts issued by the Company or its affiliate, The United States Life Insurance Company in the City of New York, to the same Owner/Annuitant are in excess of $1,000,000, we reserve the right to limit the death benefit amount that is in excess of contract value at the time we receive all paperwork and satisfactory proof of death. Any limit on the maximum death benefit payable would be mutually agreed upon in writing by you and the Company prior to purchasing the contract. 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, unless otherwise required by state law. 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. EXTENDED LEGACY PROGRAM AND BENEFICIARY CONTINUATION OPTIONS The Extended Legacy program, if available, can allow a Beneficiary to take the death benefit amount in the form of annuity income payments over a longer period of time with 17 the flexibility to withdraw more than the IRS required minimum distribution. The contract continues in the original Owner's name for the benefit of the Beneficiary. The Beneficiary may elect the Extended Legacy Program on the Death Claim Form. Generally, IRS required minimum distributions must be made at least annually over a period not to exceed the Beneficiary's life expectancy as determined in the calendar year after the Owner's death. A Beneficiary may withdraw all or a portion of the contract value at any time, name their own Beneficiary to receive any remaining unpaid amount in the contract in the event of their death and make transfers among investment options. There are certain restrictions applicable to this program. No Purchase Payments are permitted. Optional features, including death benefits, elected by the original Owner are not available and any changes associated with these features will no longer be deducted. The contract may not be assigned and ownership may not be changed or jointly owned. Any Fixed Accounts that may have been available to the original Owner will no longer be available for investment to the Beneficiary. If the Beneficiary elects to participate in this program and the contract value is less than the death benefit amount as of the date we receive satisfactory proof of death and all required paperwork, we will increase the contract value by the amount which the death benefit exceeds contract value. OTHER BENEFICIARY CONTINUATION OPTIONS The Beneficiary may also elect to receive the death benefit under a 5-year settlement option. The Beneficiary may take withdrawals as desired, but the death benefit proceeds must be distributed by the fifth anniversary of death. For IRAs, the 5-year payout option is not available if the date of death is after the required beginning date for distributions (April 1 of the year following the year the original Owner reaches the age of 70 1/2). Please consult a qualified adviser regarding tax implications of these options and your particular circumstances. DEATH BENEFIT DEFINED TERMS The term "Net Purchase Payment" is used frequently in describing the death benefit payable. Net Purchase Payment is an on-going calculation. It does not represent a contract value. We define Net Purchase Payments as Purchase Payments less an adjustment for each withdrawal, including fees and charges applicable to that withdrawal. If you have not taken any withdrawals from your contract, Net Purchase Payments equal total Purchase Payments into your contract. To calculate the adjustment amount for the first withdrawal made under the contract, we determine the percentage by which the withdrawal reduced the contract value. For example, a $10,000 withdrawal from a $100,000 contract is a 10% reduction in value. This percentage is calculated by dividing the amount of each withdrawal by the contract value immediately before taking the withdrawal. The resulting percentage is then multiplied by the amount of the total Purchase Payments and subtracted from the amount of the total Purchase Payments on deposit at the time of the withdrawal. The resulting amount is the initial Net Purchase Payment. To arrive at the Net Purchase Payment calculation for subsequent withdrawals, we determine the percentage by which the contract value is reduced, by taking the amount of the withdrawal in relation to the contract value immediately before the withdrawal. We then multiply the Net Purchase Payment calculation as determined prior to the withdrawal, by this percentage. We subtract that result from the Net Purchase Payment calculation as determined prior to the withdrawal to arrive at all subsequent Net Purchase Payment calculations. The Company does not accept Purchase Payments from anyone age 86 or older. Therefore, the death benefit calculations assume that no Purchase Payments are received on or after your 86th birthday. DEATH BENEFIT OPTIONS The death benefit is the greatest of: 1. Contract value; or 2. Net Purchase Payments; or 3. Maximum anniversary value on any contract anniversary prior to the earlier of your 81st birthday or date of death. The anniversary value equals the contract value on a contract anniversary, reduced for withdrawals since that contract anniversary in the same proportion that the contract value was reduced on the date of such withdrawal, and adjusted for any Purchase Payments since that contract anniversary. THE FOLLOWING IS A DESCRIPTION OF THE DEATH BENEFIT OPTIONS IF YOUR CONTRACT WAS ISSUED BETWEEN OCTOBER 24, 2001 AND APRIL 30, 2009. OPTION 1 -- PURCHASE PAYMENT ACCUMULATION OPTION The death benefit is the greatest of: 1. Contract value; or 2. Net Purchase Payments compounded at a 4% annual growth rate until the date of death (3% growth rate if age 70 or older at the time of contract issue) plus any Purchase Payments recorded after the date of death; and reduced for any withdrawals in the same proportion that the withdrawal reduced contract value on the date of the withdrawal; or 3. Contract value on the seventh contract anniversary, plus any Purchase Payments since the seventh contract anniversary; and reduced for any withdrawals since the seventh contract anniversary in the same proportion that each withdrawal reduced the contract value on the date of the withdrawal, all 18 compounded at a 4% annual growth rate until the date of death (3% growth rate if age 70 or older at the time of contract issue) plus any purchase payments recorded after the date of death; and reduced for each withdrawal recorded after the date of death in the same proportion that each withdrawal reduced the contract value on the date of the withdrawal. For Option 1, in the state of Washington, Net Purchase Payments are compounded at 3% annual growth rate regardless of the issue age. OPTION 2 -- MAXIMUM ANNIVERSARY OPTION The death benefit is the greatest of: 1. Contract value; or 2. Net Purchase Payments; or 3. Maximum anniversary value on any contract anniversary prior to your 81st birthday. The anniversary value equals the contract value on a contract anniversary, reduced for withdrawals since that contract anniversary in the same proportion that the contract value was reduced on the date of such withdrawal, and adjusted for any Purchase Payments since that contract anniversary. If you are age 90 or older at the time of death and selected the Maximum Anniversary Option, the death benefit will be equal to contract value at the time we receive all required paperwork and satisfactory proof of death. Accordingly, you do not get the advantage of this Option if: o you are age 81 or older at the time of contract issue; or o you are age 90 or older at the time of your death. THE FOLLOWING IS A DESCRIPTION OF THE DEATH BENEFIT OPTIONS IF YOUR CONTRACT WAS ISSUED BETWEEN FEBRUARY 21, 1997 AND OCTOBER 23, 2001: OPTION 1 -- PURCHASE PAYMENT ACCUMULATION OPTION The death benefit is the greater of: 1. Contract value; or 2. Total Purchase Payments less withdrawals, compounded at a 4% annual growth rate until the date of death (3% growth rate if age 70 or older at the time of contract issue) plus any Purchase Payments less withdrawals recorded after the date of death; or 3. Contract value on the seventh contract anniversary, plus any Purchase Payments and less any withdrawals, since the seventh contract anniversary, all compounded at a 4% annual growth rate until the date of death (3% growth rate if age 70 or older at the time of contract issue) plus any Purchase Payments less withdrawals recorded after the date of death. OPTION 2 -- MAXIMUM ANNIVERSARY OPTION The death benefit is the greater of: 1. Contract value; or 2. Total Purchase Payments less any withdrawals; or 3. Maximum anniversary value on any contract anniversary prior to your 81st birthday. The anniversary value equals the contract value on a contract anniversary plus any Purchase Payments and less any withdrawals, since that contract anniversary. If you are age 90 or older at the time of death and selected the Option 2 death benefit, the death benefit will be equal to the contract value at the time we receive all required paperwork and satisfactory proof of death. Accordingly, you do not get the advantage of option 2 if: o you are age 81 or older at the time of contract issue; or o you are age 90 or older at the time of your death. THE FOLLOWING IS A DESCRIPTION OF THE DEATH BENEFIT OPTION IF YOUR CONTRACT WAS ISSUED PRIOR TO FEBRUARY 21, 1997. OPTION 1 -- PURCHASE PAYMENT ACCUMULATION OPTION The death benefit is the greater of: 1. Contract value; or 2. Total Purchase Payments less withdrawals, ( and any fees or charges applicable to such withdrawals, compounded at a 4% annual growth rate until the date of death (3% growth rate if age 70 or older at the time of contract issue) plus any Purchase Payments less withdrawals recorded after the date of death; or 3. Contract value on the seventh contract anniversary, plus any Purchase Payments and less any withdrawals, (and any fees or charges applicable to such withdrawals), since the seventh contract anniversary, all compounded at a 4% annual growth rate until the date of death (3% growth rate if age 70 or older at the time of contract issue) plus any Purchase Payments less withdrawals recorded after the date of death. IF YOU PURCHASED YOUR CONTRACT PRIOR TO MAY 1, 2009, YOU MAY HAVE ELECTED ESTATEPLUS WHICH IS NO LONGER OFFERED. THE FOLLOWING IS A DESCRIPTION OF THE ESTATEPLUS DEATH BENEFIT, IF ELECTED, FOR CONTRACTS ISSUED BETWEEN MARCH 20, 2001 AND APRIL 30, 2009: OPTIONAL ESTATEPLUS BENEFIT EstatePlus, an optional earnings enhancement benefit of your contract, may increase the death benefit amount if you have earnings in your contract at the time of death. The fee 19 for the benefit is 0.25% of the average daily ending net asset value allocated to the Variable Portfolios. EstatePlus is not available if you are age 81 or older at the time we issued your contract. This benefit is not available for election in Washington. You must have elected EstatePlus at the time we issued your contract and you may not terminate this election. Furthermore, EstatePlus is not payable after the Latest Annuity Date. You may pay for EstatePlus and your Beneficiary may never receive the benefit if you live past the Latest Annuity Date. We will add a percentage of your contract earnings (the "EstatePlus Percentage"), subject to a maximum dollar amount (the "Maximum EstatePlus Benefit"), to the death benefit payable. The contract year of your death will determine the EstatePlus Percentage and the Maximum EstatePlus Benefit. The table below applies to contracts issued prior to your 70th birthday:
CONTRACT YEAR ESTATEPLUS MAXIMUM OF DEATH PERCENTAGE ESTATEPLUS BENEFIT Years 0 - 4 25% of Earnings 40% of Net Purchase Payments Years 5 - 9 40% of Earnings 65% of Net Purchase Payments* Years 10+ 50% of Earnings 75% of Net Purchase Payments*
The table below applies to contracts issued on or after your 70th birthday but prior to your 81st birthday:
CONTRACT YEAR ESTATEPLUS MAXIMUM OF DEATH PERCENTAGE ESTATEPLUS BENEFIT All Contract 25% of Earnings 40% of Net Purchase Years Payments*
* Purchase Payments received after the 5th contract anniversary must remain in the contract for at least 6 full months to be included as part of Net Purchase Payments for the purpose of the Maximum EstatePlus Benefit. What is the Contract Year of Death? Contract Year of Death is the number of full 12-month periods during which you have owned your contract ending on the date of death. Your Contract Year of Death is used to determine the EstatePlus Percentage and Maximum EstatePlus Benefit as indicated in the table above. What is the EstatePlus Percentage? We determine the EstatePlus benefit using the EstatePlus Percentage, indicated in the table above, which is a specified percentage of the earnings in your contract on the date of death. For the purpose of this calculation, earnings equals contract value minus Net Purchase Payments as of the date of death. If there are no earnings in your contract at the time of death, the amount of your EstatePlus benefit will be zero. What is the Maximum EstatePlus Benefit? The EstatePlus benefit is subject to a maximum dollar amount. The Maximum EstatePlus Benefit is equal to a specified percentage of your Net Purchase Payments, as indicated in the table above. A Continuing Spouse may continue EstatePlus if they are age 80 or younger on the Continuation Date or terminate the benefit. If a Continuing Spouse is age 81 or older on the Continuation Date, they may continue the contract only and may not continue the EstatePlus feature. If the Continuing Spouse terminates EstatePlus or dies after the Latest Annuity Date, no EstatePlus benefit will be payable to the Continuing Spouse's Beneficiary. PLEASE SEE SPOUSAL CONTINUATION BELOW. SPOUSAL CONTINUATION The Continuing Spouse may elect to continue the contract after your death. Generally, the contract, its benefits and elected features, if any, remain the same. The Continuing Spouse is subject to the same fees, charges and expenses applicable to the original Owner of the contract. A spousal continuation can only take place once, upon the death of the original Owner of the contract. Non-spousal joint Owners (which can include Domestic Partners) who jointly own or are Beneficiaries of a contract should consult with their tax adviser and/or financial representative as, under current tax law, they are not eligible for spousal continuation of the contract. To the extent that the Continuing Spouse invests in the Variable Portfolios, he/she will be subject to investment risk as was the original Owner. Upon a spousal continuation, we will contribute to the contract value an amount by which the death benefit that would have been paid to the Beneficiary upon the death of the original Owner, exceeds the contract value as of the Good Order date ("Continuation Contribution"), if any. We will add any Continuation Contribution as of the date we receive both the Continuing Spouse's written request to continue the contract and satisfactory proof of death of the original Owner ("Continuation Date") at the Annuity Service Center. The Continuation Contribution is not considered a Purchase Payment for the purposes of any other calculations except the death benefit following the Continuing Spouse's death. Generally, the age of the Continuing Spouse on the Continuation Date and on the date of the Continuing Spouse's death will be used in determining any future death benefits under the contract. PLEASE SEE THE SPOUSAL CONTINUATION APPENDIX FOR A DISCUSSION OF THE DEATH BENEFIT CALCULATIONS UPON A CONTINUING SPOUSE'S DEATH. 20 ------------------------------------------------------------------------------ -------------------------------------------------------------------------------- EXPENSES -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- There are fees and expenses associated with your contract which reduce your investment return. We will not increase certain contract fees, such as mortality and expense charges or withdrawal charges for the life of your contract. Underlying Fund investment management fees may increase or decrease. Some states may require that we charge less than the amounts described below. PLEASE SEE THE STATE CONTRACT AVAILABILITY AND/OR VARIABILITY APPENDIX FOR STATE-SPECIFIC EXPENSES. 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 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 EXPENSES The mortality and expense risk charge and distribution expense charge is 1.52% of the average daily ending net asset value allocated to the Variable Portfolios. 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 annuity 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 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 mortality and expense risk charge is expected to result in a profit. Profit may be used for any cost or expense including supporting distribution. PLEASE SEE PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACT BELOW. UNDERLYING FUND EXPENSES INVESTMENT MANAGEMENT FEES Each Variable Portfolio purchases shares of a corresponding Underlying Fund. The Accumulation Unit value for each Variable Portfolio reflects the investment management fees and other expenses of the corresponding Underlying Fund. These fees may vary. They are not fixed or specified in your annuity contract, rather the fees are set by the Underlying Funds' own board of directors. 12b-1 FEES Certain Underlying Funds available in this product assess a 12b-1 fee of 0.25% of the average daily net assets allocated to those Underlying Funds. Over time these fees will increase the cost of your investment. There is an annualized 0.25% fee applicable to Series II of the AIM Invesco Insurance Funds (Invesco Variable Insurance Funds), Class 2 shares of the American Funds Insurance Series, and Class 3 shares of SunAmerica Series Trust. This amount is generally used to pay financial intermediaries for services provided over the life of your contract. If you invested in Class 1 shares of Anchor Series Trust or SunAmerica Series Trust, the Underlying Funds are not subject to 12b-1 Fees. Only Class 2 shares of AST and SAST Underlying Funds were available to Owners who purchased their contracts from certain broker dealers between July 9, 2001 and January 10, 2003, with the exception of the Foreign Value, SA Marsico Focused Growth and Small & Mid Cap Value Underlying Funds of SAST which are available as Class 3 shares. The 12b-1 fees compensate us for costs associated with the servicing of these shares, including, but not limited to, reimbursing us for expenditures we make to registered representatives in selling firms for providing services to contract owners who are indirect beneficial owners of these shares and for maintaining contract owner accounts. There are deductions from and expenses paid out of the assets of each Underlying Fund. DETAILED INFORMATION ABOUT THESE DEDUCTIONS AND EXPENSES CAN BE FOUND IN THE PROSPECTUSES FOR THE UNDERLYING FUNDS. TRANSFER FEE We permit 15 free transfers between investment options each contract year. We charge you $25 for each additional transfer that contract year. The transfer fee compensates us for the cost of processing your transfer. OPTIONAL ESTATEPLUS FEE The annualized fee for the optional EstatePlus benefit is 0.25% of the average daily ending net asset value allocated to the Variable Portfolio(s). EstatePlus is no longer offered for election. PREMIUM TAX Certain states charge the Company a tax on Purchase Payments up to a maximum of 3.5%. These states permit us to either deduct the premium tax when you make a Purchase Payment or when you fully surrender your contract or begin the Income Phase. PLEASE SEE THE STATE CONTRACT AVAILABILITY AND/OR VARIABILITY 21 APPENDIX for a listing of the states that charge premium taxes, the percentage of the tax and distinctions in impact on Qualified and Non-Qualified contracts. 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 contracts to groups of similarly situated individuals may lower our fees and expenses. We reserve the right to reduce or waive certain fees and expenses when this type of sale occurs. In addition, we may also credit additional amounts to contracts sold to such groups. We determine which groups are eligible for this treatment. Some of the criteria we evaluate to make a determination are size of the group; amount of expected Purchase Payments; relationship existing between us and the prospective purchaser; 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 fees and expenses may be reduced. The Company may make such a determination regarding sales to its employees, its affiliates' employees and employees of currently contracted broker-dealers; its registered representatives; and immediate family members of all of those described. WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE ANY SUCH DETERMINATION OR THE TREATMENT APPLIED TO A PARTICULAR GROUP AT ANY TIME. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PAYMENTS IN CONNECTION WITH DISTRIBUTION OF THE CONTRACTS -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 affiliated and unaffiliated 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 AIG Capital Services, Inc., 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 2.50% 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 for the life of the contract. 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 2014 in the Statement of Additional Information which is available upon request. NON-CASH COMPENSATION. Some registered representatives and their supervisors 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 22 educational and/or business seminars. Any such compensation is paid in accordance with SEC and FINRA rules. 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 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. PAYMENTS WE RECEIVE We and our affiliates 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 pay us higher amounts. 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 and our affiliates generally receive three kinds of payments described below. RULE 12b-1 OR SERVICE FEES. We receive 12b-1 fees of up to 0.25% or service fees of up to 0.50% of the average daily net assets in certain Underlying Funds. These fees are deducted directly from the assets of the Underlying Funds. PLEASE SEE EXPENSES ABOVE. ADMINISTRATIVE, MARKETING AND SUPPORT SERVICE FEES. We receive compensation of up to 0.525% 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 profits the investment adviser realizes on 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. The payments we receive 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. The amount may be significant. 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ANNUITY 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. 23 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. For contracts issued prior to January 1, 2001, the Latest Annuity Date is defined as the first business day of the month following your 90th birthday or 10 years after your contract issue date, whichever is later. For contracts issued on or after January 1, 2001, your Latest Annuity Date is defined as the first business day of the month following your 95th birthday or 10 years after your contract issue date, whichever is later. If your contract is jointly owned, the Latest Annuity Date is based on the older Owner's date of birth. HOW DO I ELECT TO BEGIN THE INCOME PHASE? You must select one of the annuity 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 annuity income payment option, your contract will be annuitized in accordance with the default annuity income payment option specified under Annuity Income Options below. WHAT IS THE IMPACT ON THE DEATH BENEFIT IF I ANNUITIZE? Upon annuitizing the contract, the death benefit will terminate. PLEASE SEE DEATH BENEFITS ABOVE. CAN I EXTEND THE ACCUMULATION PHASE PAST THE LATEST ANNUITY DATE? If you do not begin the Income Phase earlier, annuity income payments must begin on your Latest Annuity Date. For contracts issued prior to January 1, 2001, with a Latest Annuity Date of age 90, 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 upon your request. 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. 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. In accordance with the Company's final settlement of a multi-state audit and market conduct examination, and other related state regulatory inquiries regarding unclaimed property, if you qualify for Extension Periods you must notify us that you want to extend your Accumulation Phase. Please see LEGAL PROCEEDINGS for more information about the settlement and our enhanced practices related to the handling of unclaimed property. If you do not notify us that you wish to enter an Extension Period, your contract will be annuitized on the Latest Annuity Date using the default option specified below. You can elect a different Annuity Payout Option by completing and mailing an Annuity Option Selection Form to our Annuity Service Center. 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 May 2, 2011 (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 annuity income payment option specified below and in your contract. You may select another annuity 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. ANNUITY INCOME OPTIONS You must send a written request to our Annuity Service Center to select an annuity income option. Once you begin receiving annuity income payments, you cannot change your annuity income option. If you elect to receive annuity income payments but do not select an annuity income option, your annuity income payments shall be in accordance with Option 4 for a period of 10 years; for annuity income 24 payments based on joint lives, the default is Option 3 for a period of 10 years. Generally, the amount of each annuity income payment will be less with greater frequency of payments or if you chose a longer period certain guarantee. We base our calculation of annuity income payments on the life expectancy of the Annuitant and the annuity rates set forth in your contract. In most contracts, the Owner and Annuitant are the same person. The Owner may change the Annuitant if different from the Owner at any time prior to the Annuity Date. The Owner must notify us if the Annuitant dies before the Annuity Date and designate a new Annuitant. If we do not receive a new Annuitant election, the Owner may not select an annuity income option based on the life of the Annuitant. If the contract is owned by a non-natural Owner, the Annuitant cannot be changed after the contract has been issued and the death of the Annuitant will trigger the payment of the death benefit. ANNUITY INCOME OPTION 1 - LIFE INCOME ANNUITY This option provides annuity income payments for the life of the Annuitant. Annuity income payments end when the Annuitant dies. ANNUITY INCOME OPTION 2 - JOINT AND SURVIVOR LIFE INCOME ANNUITY This option provides annuity 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 annuity income payments during the lifetime of the survivor. Annuity income payments end when the survivor dies. ANNUITY INCOME OPTION 3 - JOINT AND SURVIVOR LIFE INCOME ANNUITY WITH 10 YEARS GUARANTEED This option is similar to Option 2 above, with an additional guarantee of payments for at least 10 years. If the Annuitant and the survivor die before all of the guaranteed annuity income payments have been made, the remaining annuity income payments are made to the Beneficiary under your contract. ANNUITY INCOME OPTION 4 - LIFE INCOME ANNUITY WITH 10 OR 20 YEARS GUARANTEED This option is similar to income Option 1 above with an additional guarantee of payments for at least 10 or 20 years, depending on the period chosen. If the Annuitant dies before all guaranteed annuity income payments are made, the remaining annuity income payments are made to the Beneficiary under your contract. ANNUITY INCOME OPTION 5 - INCOME FOR A SPECIFIED PERIOD This option provides annuity income payments for a guaranteed period ranging from 5 to 30 years, depending on the period chosen. If the Annuitant dies before all the guaranteed annuity income payments are made, the remaining annuity income payments are made to the Beneficiary under your contract. Additionally, if variable annuity income payments are elected under this option, you (or the Beneficiary under the contract if the Annuitant dies prior to all guaranteed annuity income payments being made) may redeem any remaining guaranteed variable annuity income payments after the Annuity Date. The amount available upon such redemption would be the discounted present value of any remaining guaranteed variable annuity income payments. The value of an Annuity Unit, regardless of the option chosen, takes into account separate account charges which includes a mortality and expense risk charge. Since Option 5 does not contain an element of mortality risk, no benefit is derived from this charge. Please see the Statement of Additional Information for a more detailed discussion of the annuity income options. FIXED OR VARIABLE ANNUITY INCOME PAYMENTS You can choose annuity income payments that are fixed, variable or both. Unless otherwise elected, if at the date when annuity income payments begin you are invested in the Variable Portfolios only, your annuity income payments will be variable and if your money is only in Fixed Accounts at that time, your annuity income payments will be fixed in amount. Further, if you are invested in both Fixed Accounts and Variable Portfolios when annuity income payments begin, your payments will be fixed and variable, unless otherwise elected. If annuity income payments are fixed, the Company guarantees the amount of each payment. If the annuity income payments are variable, the amount is not guaranteed and may fluctuate as described under ANNUITY INCOME PAYMENTS below. ANNUITY INCOME PAYMENTS We make annuity income payments on a monthly, quarterly, semi-annual or annual 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 state law allows and the selected annuity income option results in annuity income payments of less than $50 per payment, we may decrease the frequency of payments. If you are invested in the Variable Portfolios after the Annuity Date, your annuity income payments vary depending on the following: o for life income options, your age when annuity income payments begin; and o the contract value attributable to the Variable Portfolios on the Annuity Date; and o the 3.5% assumed investment rate used in the annuity table for the contract; and o the performance of the Variable Portfolios in which you are invested during the time you receive annuity income payments. 25 If you are invested in both the Fixed Accounts and the Variable Portfolios after the Annuity Date, the allocation of funds between the Fixed Accounts and Variable Portfolios also impacts the amount of your annuity income payments. The value of fixed annuity income payments, if elected, is based on the guaranteed minimum interest rate specified in your contract and will not be less than 1%. The value of variable annuity income payments, if elected, is based on an assumed interest rate ("AIR") of 3.5% compounded annually. Variable annuity income payments generally increase or decrease from one annuity income payment date to the next based upon the performance of the applicable Variable Portfolios. If the performance of the Variable Portfolios selected is equal to the AIR, the annuity income payments will remain constant. If performance of Variable Portfolios is greater than the AIR, the annuity income payments will increase and if it is less than the AIR, the annuity income payments will decline. 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. DEFERMENT OF PAYMENTS We may defer making fixed payments for up to six months, or less if required by law. Interest is credited to you during the deferral period. PLEASE SEE ACCESS TO YOUR MONEY ABOVE FOR A DISCUSSION OF WHEN PAYMENTS FROM A VARIABLE PORTFOLIO MAY BE SUSPENDED OR POSTPONED. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TAXES -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- THE CONTRACTS PROVIDE TAX-DEFERRED ACCUMULATION OVER TIME, BUT MAY BE SUBJECT TO CERTAIN FEDERAL INCOME AND EXCISE TAXES, MENTIONED BELOW. REFER TO THE STATEMENT OF ADDITIONAL INFORMATION FOR FURTHER DETAILS. SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE ("IRC"). WE DO NOT ATTEMPT TO DESCRIBE ANY POTENTIAL ESTATE OR GIFT TAX, OR ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX LAW OTHER THAN POSSIBLE PREMIUM TAXES MENTIONED UNDER "PREMIUM TAX CHARGE." DISCUSSIONS REGARDING THE TAX TREATMENT OF ANY ANNUITY CONTRACT OR RETIREMENT PLANS AND PROGRAMS ARE INTENDED FOR GENERAL PURPOSES ONLY AND ARE NOT INTENDED AS TAX ADVICE, EITHER GENERAL OR INDIVIDUALIZED, NOR SHOULD THEY BE INTERPRETED TO PROVIDE ANY PREDICTIONS OR GUARANTEES OF A PARTICULAR TAX TREATMENT. SUCH DISCUSSIONS GENERALLY ARE BASED UPON THE COMPANY'S UNDERSTANDING OF CURRENT TAX RULES AND INTERPRETATIONS, AND MAY INCLUDE AREAS OF THOSE RULES THAT ARE MORE OR LESS CLEAR OR CERTAIN. TAX LAWS ARE SUBJECT TO LEGISLATIVE MODIFICATION, AND WHILE MANY SUCH MODIFICATIONS WILL HAVE ONLY A PROSPECTIVE APPLICATION, IT IS IMPORTANT TO RECOGNIZE THAT A CHANGE COULD HAVE RETROACTIVE EFFECT AS WELL. YOU SHOULD SEEK COMPETENT TAX OR LEGAL ADVICE, AS YOU DEEM NECESSARY OR APPROPRIATE, REGARDING YOUR OWN CIRCUMSTANCES. 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 IRC 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 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 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 26 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. The 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: o after attaining age 59 1/2; o when paid to your Beneficiary after you die; o after you become disabled (as defined in the IRC); o 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; o under an immediate annuity contract; o 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, which went into effect in 2013, 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"). 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: o after attainment of age 59 1/2; o when paid to your Beneficiary after you die; o after you become disabled (as defined in the IRC); o 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; o payments to employees after separation from service after attainment of age 55 (does not apply to IRAs); o dividends paid with respect to stock of a corporation described in IRC Section 404(k); o 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; o transfers to alternate payees pursuant to a qualified domestic relations order (does not apply to IRAs); o for payment of health insurance if you are unemployed and meet certain requirements; o distributions from IRAs for qualifying higher education expenses or first home purchases, with certain limitations; o 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; o payments to certain individuals called up for active duty after September 11, 2001; and o 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 elective deferral Purchase Payments from a Tax-Sheltered Annuity (TSA) contract under IRC 403(b). 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 27 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 less restrictive 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 IRC, treasury 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 Purchase Payments (including contributions, 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 IRA), 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 sever employment 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 sever employment, 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. Upon notification of your death, we will terminate the automatic required minimum distribution unless your Beneficiary instructs us otherwise. 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 28 minimum distributions made under an irrevocable annuity income option. You should discuss the effect of these 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. 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. FOREIGN ACCOUNT TAX COMPLIANCE ("FATCA") A Contract Owner who is not a "United States person" which is defined to mean: o a citizen or resident of the United States o a partnership or corporation created or organized in the United States or under the law of the United States or of any state, or the District of Columbia o any estate or trust other than a foreign estate or foreign trust (see Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust) o a person that meets the substantial presence test o any other person that is not a foreign person. should be aware that FATCA, enacted in 2010, provides that a 30% withholding tax will be imposed on certain gross payments (which could include distributions from cash value life insurance or annuity products) made to a foreign entity if such entity fails to provide applicable certifications under a Form W-9, Form W-8-BEN-E, Form W-8-IMY, or other applicable form, each of which is effective for three years from date of signature unless a change in circumstances makes any information on the form incorrect. Notwithstanding the preceding sentence, certain withholding certifications will remain effective until a change in circumstances makes any information on the form incorrect. The Contract Owner must inform the Company within 30 days of any change in circumstances that makes any information on the form incorrect by furnishing a new IRS Form W-8 or acceptable substitute form. OTHER WITHHOLDING TAX A Contract Owner that is not exempt from United States federal withholding tax should consult its tax advisor as to the availability of an exemption from, or reduction of, such tax under an applicable income tax treaty, if any. 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. 29 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. 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 AIG Capital Services, Inc., Harborside Financial Center, 3200 Plaza 5, Jersey City, NJ 07311-4992, distributes the contracts. AIG Capital Services, Inc., 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 AIG Capital Services, Inc. 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"), a former 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. 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. The Merger also did not result in any adverse tax consequences for any contract Owners. 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. 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. 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 30 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. THE SEPARATE ACCOUNT Before December 31, 2012, Variable Annuity Account Four was a separate account of SunAmerica Annuity, originally established under California law on November 8, 1994. On December 31, 2012, and in conjunction with the merger of AGL and SunAmerica Annuity, Variable Annuity Account Four 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. 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 31 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, Inc. 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, Guarantor and -Separate Account 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 Center, 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 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 15570 Amarillo, Texas 79105-5570 Telephone Number: (800) 445-7862 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. CYBER SECURITY The Company is highly dependent upon the effective operation of our computer systems and those of our business partners. As a result, the Company is potentially susceptible 32 to operational and information security risks resulting from a cyber-attack. These risks include, among other things, the theft, misuse, corruption and destruction of data maintained online or digitally, denial of service attacks on websites and other operational disruption and unauthorized release of confidential contract owner information. Cyber-attacks affecting us, the Underlying Funds, intermediaries and other affiliated or third-party service providers may adversely affect us and your contract value. For instance, cyber-attacks may interfere with our processing of contract transactions, including the processing orders from our website or with the Underlying Funds, impact our ability to calculate accumulation unit values, cause the release and possible destruction of confidential contract owner or business information, impede order processing, subject us and/or our service providers and intermediaries to regulatory fines and financial losses and/or cause reputational damage. Cyber security risks may also impact the issuers of securities in which the Underlying Funds invest, which may cause the Underlying Funds to lose value. There can be no assurance that we or the Underlying Funds or our service providers will avoid losses affecting your contract due to cyber-attacks or information security breaches in the future. LEGAL PROCEEDINGS 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 April 30, 2015, 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. 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, 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 15570, Amarillo, Texas 79105-5570 or by calling (800) 445-7862. The table of contents of the SAI is listed below. Separate Account and the Company General Account Performance Data Annuity Income Payments Annuity Unit Values Taxes Broker-Dealer Firms Receiving Revenue Sharing Payments Distribution of Contracts Financial Statements 33 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- APPENDIX A - CONDENSED FINANCIAL INFORMATION -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 ================================================== ================ ================ ================ AGGRESSIVE GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$14.731 (a)$15.776 (a)$17.604 (b)$14.592 (b)$15.589 (b)$17.351 Ending AUV....................................... (a)$15.776 (a)$17.604 (a)$17.254 (b)$15.589 (b)$17.351 (b)$16.964 Ending Number of AUs............................. (a)727,670 (a)551,178 (a)472,972 (b)4,781 (b)4,239 (b)3,201 --------------------------------------------------- AGGRESSIVE GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$14.643 (a)$15.658 (a)$17.446 (b)$14.527 (b)$15.496 (b)$17.221 Ending AUV....................................... (a)$15.658 (a)$17.446 (a)$17.074 (b)$15.496 (b)$17.221 (b)$16.813 Ending Number of AUs............................. (a)89,057 (a)41,385 (a)39,546 (b)6,482 (b)5,333 (b)4,137 --------------------------------------------------- AMERICAN FUNDS GLOBAL GROWTH - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$16.310 (a)$18.325 (a)$21.736 (b)$16.209 (b)$18.167 (b)$21.494 Ending AUV....................................... (a)$18.325 (a)$21.736 (a)$24.587 (b)$18.167 (b)$21.494 (b)$24.253 Ending Number of AUs............................. (a)1,351,797 (a)1,852,469 (a)1,981,668 (b)66,682 (b)71,713 (b)59,744 --------------------------------------------------- AMERICAN FUNDS GROWTH - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$16.252 (a)$18.599 (a)$20.190 (b)$16.161 (b)$18.448 (b)$19.977 Ending AUV....................................... (a)$18.599 (a)$20.190 (a)$22.342 (b)$18.448 (b)$19.977 (b)$22.050 Ending Number of Aus............................. (a)1,805,720 (a)2,213,982 (a)2,246,398 (b)101,094 (b)87,147 (b)79,207 --------------------------------------------------- AMERICAN FUNDS GROWTH-INCOME - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$15.434 (a)$16.088 (a)$18.254 (b)$15.342 (b)$15.952 (b)$18.055 Ending AUV....................................... (a)$16.088 (a)$18.254 (a)$18.886 (b)$15.952 (b)$18.055 (b)$18.633 Ending Number of AUs............................. (a)3,460,009 (a)4,482,719 (a)4,777,257 (b)167,110 (b)157,939 (b)154,653 --------------------------------------------------- ASSET ALLOCATION - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$22.327 (a)$23.083 (a)$25.309 (b)$22.124 (b)$22.816 (b)$24.953 Ending AUV....................................... (a)$23.083 (a)$25.309 (a)$27.031 (b)$22.816 (b)$24.953 (b)$26.585 Ending Number of AUs............................. (a)1,700,748 (a)1,596,213 (a)1,514,381 (b)8,329 (b)7,924 (b)9,451 --------------------------------------------------- ASSET ALLOCATION - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$22.218 (a)$22.936 (a)$25.110 (b)$22.052 (b)$22.708 (b)$24.798 Ending AUV....................................... (a)$22.936 (a)$25.110 (a)$26.779 (b)$22.708 (b)$24.798 (b)$26.380 Ending Number of AUs............................. (a)610,059 (a)564,600 (a)502,047 (b)22,665 (b)20,414 (b)19,709 --------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/08 12/31/09 12/31/10 12/31/11 ================================================== ================ ================ ================ ================ AGGRESSIVE GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$17.254 (a)$8.048 (a)$11.136 (a)$13.288 (b)$16.964 (b)$7.893 (b)$10.894 (b)$12.967 Ending AUV....................................... (a)$8.048 (a)$11.136 (a)$13.288 (a)$12.829 (b)$7.893 (b)$10.894 (b)$12.967 (b)$12.488 Ending Number of AUs............................. (a)388,768 (a)293,591 (a)255,549 (a)222,790 (b)3,185 (b)3,329 (b)3,039 (b)3,026 --------------------------------------------------- AGGRESSIVE GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$17.074 (a)$7.952 (a)$10.986 (a)$13.090 (b)$16.813 (b)$7.810 (b)$10.764 (b)$12.793 Ending AUV....................................... (a)$7.952 (a)$10.986 (a)$13.090 (a)$12.619 (b)$7.810 (b)$10.764 (b)$12.793 (b)$12.301 Ending Number of AUs............................. (a)26,953 (a)24,575 (a)17,836 (a)15,085 (b)4,112 (b)3,728 (b)3,560 (b)3,783 --------------------------------------------------- AMERICAN FUNDS GLOBAL GROWTH - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$24.587 (a)$14.919 (a)$20.911 (a)$23.014 (b)$24.253 (b)$14.680 (b)$20.524 (b)$22.531 Ending AUV....................................... (a)$14.919 (a)$20.911 (a)$23.014 (a)$20.653 (b)$14.680 (b)$20.524 (b)$22.531 (b)$20.169 Ending Number of AUs............................. (a)1,690,798 (a)1,499,823 (a)1,351,840 (a)1,192,228 (b)54,833 (b)54,584 (b)46,807 (b)33,932 --------------------------------------------------- AMERICAN FUNDS GROWTH - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$22.342 (a)$12.329 (a)$16.929 (a)$19.788 (b)$22.050 (b)$12.137 (b)$16.624 (b)$19.383 Ending AUV....................................... (a)$12.329 (a)$16.929 (a)$19.788 (a)$18.656 (b)$12.137 (b)$16.624 (b)$19.383 (b)$18.229 Ending Number of Aus............................. (a)2,089,498 (a)1,901,648 (a)1,700,753 (a)1,508,789 (b)72,594 (b)68,409 (b)50,806 (b)55,051 --------------------------------------------------- AMERICAN FUNDS GROWTH-INCOME - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$18.886 (a)$11.561 (a)$14.944 (a)$16.399 (b)$18.633 (b)$11.377 (b)$14.670 (b)$16.059 Ending AUV....................................... (a)$11.561 (a)$14.944 (a)$16.399 (a)$15.856 (b)$11.377 (b)$14.670 (b)$16.059 (b)$15.489 Ending Number of AUs............................. (a)5,006,870 (a)4,092,204 (a)3,655,834 (a)3,157,740 (b)128,400 (b)118,698 (b)94,951 (b)92,443 --------------------------------------------------- ASSET ALLOCATION - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$27.031 (a)$20.487 (a)$24.678 (a)$27.673 (b)$26.585 (b)$20.099 (b)$24.150 (b)$27.013 Ending AUV....................................... (a)$20.487 (a)$24.678 (a)$27.673 (a)$27.508 (b)$20.099 (b)$24.150 (b)$27.013 (b)$26.785 Ending Number of AUs............................. (a)1,228,597 (a)1,066,473 (a)945,864 (a)804,770 (b)9,043 (b)7,860 (b)10,338 (b)8,657 --------------------------------------------------- ASSET ALLOCATION - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$26.779 (a)$20.265 (a)$24.374 (a)$27.291 (b)$26.380 (b)$19.914 (b)$23.892 (b)$26.684 Ending AUV....................................... (a)$20.265 (a)$24.374 (a)$27.291 (a)$27.088 (b)$19.914 (b)$23.892 (b)$26.684 (b)$26.419 Ending Number of AUs............................. (a)451,067 (a)388,375 (a)292,869 (a)300,762 (b)17,973 (b)17,240 (b)16,735 (b)15,103 --------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/12 12/31/13 12/31/14 ================================================== ================ ================ =============== AGGRESSIVE GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$12.829 (a)$14.685 (a)$20.675 (b)$12.488 (b)$14.258 (b)$20.025 Ending AUV....................................... (a)$14.685 (a)$20.675 (a)$20.475 (b)$14.258 (b)$20.025 (b)$19.782 Ending Number of AUs............................. (a)199,694 (a)179,897 (a)159,129 (b)3,024 (b)3,019 (b)3,013 --------------------------------------------------- AGGRESSIVE GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$12.619 (a)$14.422 (a)$20.275 (b)$12.301 (b)$14.025 (b)$19.667 Ending AUV....................................... (a)$14.422 (a)$20.275 (a)$20.049 (b)$14.025 (b)$19.667 (b)$19.399 Ending Number of AUs............................. (a)9,908 (a)8,981 (a)8,788 (b)3,771 (b)108 (b)108 --------------------------------------------------- AMERICAN FUNDS GLOBAL GROWTH - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$20.653 (a)$24.930 (a)$31.720 (b)$20.169 (b)$24.285 (b)$30.823 Ending AUV....................................... (a)$24.930 (a)$31.720 (a)$31.965 (b)$24.285 (b)$30.823 (b)$30.983 Ending Number of AUs............................. (a)1,030,450 (a)914,235 (a)618,068 (b)29,333 (b)27,746 (b)22,141 --------------------------------------------------- AMERICAN FUNDS GROWTH - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$18.656 (a)$21.661 (a)$27.758 (b)$18.229 (b)$21.112 (b)$26.988 Ending AUV....................................... (a)$21.661 (a)$27.758 (a)$29.666 (b)$21.112 (b)$26.988 (b)$28.771 Ending Number of Aus............................. (a)1,335,741 (a)1,221,331 (a)744,164 (b)45,407 (b)38,964 (b)22,424 --------------------------------------------------- AMERICAN FUNDS GROWTH-INCOME - AFIS Class 2 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$15.856 (a)$18.347 (a)$24.126 (b)$15.489 (b)$17.876 (b)$23.449 Ending AUV....................................... (a)$18.347 (a)$24.126 (a)$26.289 (b)$17.876 (b)$23.449 (b)$25.487 Ending Number of AUs............................. (a)2,817,911 (a)2,494,967 (a)1,769,145 (b)91,574 (b)84,572 (b)60,754 --------------------------------------------------- ASSET ALLOCATION - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$27.508 (a)$30.329 (a)$35.216 (b)$26.785 (b)$29.458 (b)$34.119 Ending AUV....................................... (a)$30.329 (a)$35.216 (a)$37.272 (b)$29.458 (b)$34.119 (b)$36.021 Ending Number of AUs............................. (a)679,218 (a)584,102 (a)492,717 (b)7,002 (b)6,024 (b)5,740 --------------------------------------------------- ASSET ALLOCATION - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$27.088 (a)$29.821 (a)$34.574 (b)$26.419 (b)$29.012 (b)$33.552 Ending AUV....................................... (a)$29.821 (a)$34.574 (a)$36.538 (b)$29.012 (b)$33.552 (b)$35.370 Ending Number of AUs............................. (a)235,759 (a)239,241 (a)238,838 (b)12,130 (b)7,966 (b)7,838 ---------------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. EstatePlus is no longer being offered to contracts issued on or after May 1, 2009. A-1
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 12/31/08 ========================================= ================ ================ ================ ================ BALANCED - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$14.964 (a)$15.017 (a)$16.398 (a)$17.023 (b)$14.819 (b)$14.835 (b)$16.158 (b)$16.733 Ending AUV.............................. (a)$15.017 (a)$16.398 (a)$17.023 (a)$12.425 (b)$14.835 (b)$16.158 (b)$16.733 (b)$12.183 Ending Number of AUs.................... (a)1,328,618 (a)1,154,984 (a)970,721 (a)828,947 (b)8,069 (b)7,553 (b)6,923 (b)6,063 ------------------------------------------ BALANCED - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$14.881 (a)$14.912 (a)$16.259 (a)$16.856 (b)$14.769 (b)$14.763 (b)$16.056 (b)$16.604 Ending AUV.............................. (a)$14.912 (a)$16.259 (a)$16.856 (a)$12.285 (b)$14.763 (b)$16.056 (b)$16.604 (b)$12.072 Ending Number of AUs.................... (a)291,468 (a)234,198 (a)208,851 (a)163,676 (b)14,167 (b)9,439 (b)8,357 (b)7,166 ------------------------------------------ BLUE CHIP GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$5.996 (a)$6.056 (a)$6.357 (a)$7.142 (b)$5.935 (b)$5.980 (b)$6.261 (b)$7.017 Ending AUV.............................. (a)$6.056 (a)$6.357 (a)$7.142 (a)$4.290 (b)$5.980 (b)$6.261 (b)$7.017 (b)$4.205 Ending Number of AUs.................... (a)257,480 (a)213,613 (a)210,779 (a)164,590 (b)75,886 (b)67,420 (b)53,002 (b)44,081 ------------------------------------------ BLUE CHIP GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$5.980 (a)$6.030 (a)$6.321 (a)$7.090 (b)$5.930 (b)$5.965 (b)$6.237 (b)$6.979 Ending AUV.............................. (a)$6.030 (a)$6.321 (a)$7.090 (a)$4.253 (b)$5.965 (b)$6.237 (b)$6.979 (b)$4.176 Ending Number of AUs.................... (a)253,847 (a)179,160 (a)113,259 (a)118,231 (b)35,883 (b)32,038 (b)30,739 (b)29,833 ------------------------------------------ CAPITAL APPRECIATION - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$36.106 (a)$39.703 (a)$43.571 (a)$54.805 (b)$35.743 (b)$39.206 (b)$42.917 (b)$53.849 Ending AUV.............................. (a)$39.703 (a)$43.571 (a)$54.805 (a)$32.197 (b)$39.206 (b)$42.917 (b)$53.849 (b)$31.556 Ending Number of AUs.................... (a)1,263,794 (a)1,137,127 (a)1,020,333 (a)940,450 (b)45,904 (b)42,792 (b)35,821 (b)27,686 ------------------------------------------ CAPITAL APPRECIATION - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$35.995 (a)$39.522 (a)$43.307 (a)$54.407 (b)$35.710 (b)$39.111 (b)$42.750 (b)$53.573 Ending AUV.............................. (a)$39.522 (a)$43.307 (a)$54.407 (a)$31.906 (b)$39.111 (b)$42.750 (b)$53.573 (b)$31.338 Ending Number of AUs.................... (a)218,390 (a)174,039 (a)148,220 (a)129,277 (b)24,535 (b)19,486 (b)16,940 (b)15,021 ------------------------------------------ CAPITAL GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$6.975 (a)$7.117 (a)$8.177 (a)$9.145 (b)$6.904 (b)$7.027 (b)$8.054 (b)$8.985 Ending AUV.............................. (a)$7.117 (a)$8.177 (a)$9.145 (a)$4.939 (b)$7.027 (b)$8.054 (b)$8.985 (b)$4.841 Ending Number of AUs.................... (a)121,681 (a)159,177 (a)156,237 (a)124,556 (b)9,648 (b)9,678 (b)9,674 (b)9,656 ------------------------------------------ CAPITAL GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$6.93 (a)$7.074 (a)$8.115 (a)$9.063 (b)$6.887 (b)$6.999 (b)$8.009 (b)$8.922 Ending AUV.............................. (a)$7.074 (a)$8.115 (a)$9.063 (a)$4.887 (b)$6.999 (b)$8.009 (b)$8.922 (b)$4.799 Ending Number of AUs.................... (a)59,761 (a)61,685 (a)21,307 (a)29,435 (b)6,544 (b)2,503 (b)2,006 (b)1,674 ------------------------------------------ CASH MANAGEMENT - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$12.838 (a)$12.997 (a)$13.394 (a)$13.787 (b)$12.712 (b)$12.838 (b)$13.197 (b)$13.550 Ending AUV.............................. (a)$12.997 (a)$13.394 (a)$13.787 (a)$13.740 (b)$12.838 (b)$13.197 (b)$13.550 (b)$13.470 Ending Number of AUs.................... (a)1,047,946 (a)1,098,355 (a)1,104,516 (a)1,870,239 (b)10,661 (b)12,816 (b)14,025 (b)40,250 ------------------------------------------ FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 ========================================= ============= ============= ============= ============= ============= ============= BALANCED - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$12.425 (a)$15.179 (a)$16.719 (a)$16.841 (a)$18.765 (a)$22.083 (b)$12.183 (b)$14.845 (b)$16.311 (b)$16.389 (b)$18.215 (b)$21.383 Ending AUV.............................. (a)$15.179 (a)$16.719 (a)$16.841 (a)$18.765 (a)$22.083 (a)$24.239 (b)$14.845 (b)$16.311 (b)$16.389 (b)$18.215 (b)$21.383 (b)$23.412 Ending Number of AUs.................... (a)717,776 (a)648,513 (a)573,907 (a)502,733 (a)529,144 (a)453,432 (b)5,427 (b)5,154 (b)9,358 (b)9,050 (b)8,031 (b)8,332 ------------------------------------------ BALANCED - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$12.285 (a)$14.985 (a)$16.481 (a)$16.577 (a)$18.442 (a)$21.671 (b)$12.072 (b)$14.688 (b)$16.113 (b)$16.167 (b)$17.941 (b)$21.030 Ending AUV.............................. (a)$14.985 (a)$16.481 (a)$16.577 (a)$18.442 (a)$21.671 (a)$23.751 (b)$14.688 (b)$16.113 (b)$16.167 (b)$17.941 (b)$21.030 (b)$22.990 Ending Number of AUs.................... (a)145,783 (a)103,886 (a)120,107 (a)100,185 (a)106,588 (a)114,634 (b)5,901 (b)6,117 (b)5,656 (b)5,409 (b)3,699 (b)3,253 ------------------------------------------ BLUE CHIP GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$4.290 (a)$5.782 (a)$6.408 (a)$5.958 (a)$6.548 (a)$8.640 (b)$4.205 (b)$5.653 (b)$6.248 (b)$5.796 (b)$6.353 (b)$8.363 Ending AUV.............................. (a)$5.782 (a)$6.408 (a)$5.958 (a)$6.548 (a)$8.640 (a)$9.524 (b)$5.653 (b)$6.248 (b)$5.796 (b)$6.353 (b)$8.363 (b)$9.195 Ending Number of AUs.................... (a)139,053 (a)142,651 (a)128,808 (a)94,040 (a)85,833 (a)79,762 (b)36,553 (b)10,956 (b)7,581 (b)7,515 (b)7,460 (b)7,412 ------------------------------------------ BLUE CHIP GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$4.253 (a)$5.724 (a)$6.333 (a)$5.880 (a)$6.452 (a)$8.501 (b)$4.176 (b)$5.606 (b)$6.187 (b)$5.730 (b)$6.272 (b)$8.243 Ending AUV.............................. (a)$5.724 (a)$6.333 (a)$5.880 (a)$6.452 (a)$8.501 (a)$9.357 (b)$5.606 (b)$6.187 (b)$5.730 (b)$6.272 (b)$8.243 (b)$9.050 Ending Number of AUs.................... (a)108,697 (a)80,267 (a)90,689 (a)82,822 (a)65,246 (a)85,151 (b)22,037 (b)21,787 (b)20,888 (b)18,096 (b)16,190 (b)15,940 ------------------------------------------ CAPITAL APPRECIATION - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$32.197 (a)$43.370 (a)$52.425 (a)$47.995 (a)$58.566 (a)$78.348 (b)$31.556 (b)$42.400 (b)$51.125 (b)$46.688 (b)$56.829 (b)$75.835 Ending AUV.............................. (a)$43.370 (a)$52.425 (a)$47.995 (a)$58.566 (a)$78.348 (a)$88.928 (b)$42.400 (b)$51.125 (b)$46.688 (b)$56.829 (b)$75.835 (b)$85.860 Ending Number of AUs.................... (a)694,829 (a)606,250 (a)530,630 (a)438,745 (a)372,645 (a)324,316 (b)20,933 (b)16,573 (b)15,851 (b)7,696 (b)7,178 (b)8,453 ------------------------------------------ CAPITAL APPRECIATION - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$31.906 (a)$42.913 (a)$51.795 (a)$47.347 (a)$57.689 (a)$77.059 (b)$31.338 (b)$42.044 (b)$50.620 (b)$46.157 (b)$56.098 (b)$74.748 Ending AUV.............................. (a)$42.913 (a)$51.795 (a)$47.347 (a)$57.689 (a)$77.059 (a)$87.335 (b)$42.044 (b)$50.620 (b)$46.157 (b)$56.098 (b)$74.748 (b)$84.505 Ending Number of AUs.................... (a)103,518 (a)85,015 (a)68,461 (a)65,319 (a)63,163 (a)59,857 (b)14,376 (b)12,370 (b)11,573 (b)10,317 (b)9,449 (b)9,080 ------------------------------------------ CAPITAL GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$4.939 (a)$6.981 (a)$7.510 (a)$7.299 (a)$8.190 (a)$10.428 (b)$4.841 (b)$6.824 (b)$7.323 (b)$7.100 (b)$7.947 (b)$10.092 Ending AUV.............................. (a)$6.981 (a)$7.510 (a)$7.299 (a)$8.190 (a)$10.428 (a)$11.153 (b)$6.824 (b)$7.323 (b)$7.100 (b)$7.947 (b)$10.092 (b)$10.767 Ending Number of AUs.................... (a)115,452 (a)103,416 (a)89,863 (a)78,970 (a)73,130 (a)54,566 (b)9,604 (b)9,622 (b)9,057 (b)9,057 (b)9,057 (b)9,057 ------------------------------------------ CAPITAL GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$4.887 (a)$6.897 (a)$7.409 (a)$7.190 (a)$8.056 (a)$10.241 (b)$4.799 (b)$6.756 (b)$7.239 (b)$7.008 (b)$7.832 (b)$9.932 Ending AUV.............................. (a)$6.897 (a)$7.409 (a)$7.190 (a)$8.056 (a)$10.241 (a)$10.936 (b)$6.756 (b)$7.239 (b)$7.008 (b)$7.832 (b)$9.932 (b)$10.580 Ending Number of AUs.................... (a)33,997 (a)33,254 (a)35,359 (a)38,905 (a)34,945 (a)32,566 (b)1,637 (b)1,684 (b)1,837 (b)1,800 (b)1,771 (b)1,739 ------------------------------------------ CASH MANAGEMENT - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV........................... (a)$13.740 (a)$13.539 (a)$13.303 (a)$13.066 (a)$12.838 (a)$12.612 (b)$13.470 (b)$13.240 (b)$12.977 (b)$12.714 (b)$12.460 (b)$12.210 Ending AUV.............................. (a)$13.539 (a)$13.303 (a)$13.066 (a)$12.838 (a)$12.612 (a)$12.387 (b)$13.240 (b)$12.977 (b)$12.714 (b)$12.460 (b)$12.210 (b)$11.962 Ending Number of AUs.................... (a)935,603 (a)680,091 (a)587,247 (a)402,820 (a)434,125 (a)500,786 (b)14,881 (b)10,391 (b)11,364 (b)4,528 (b)25,752 (b)29,422 ------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. A-2
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 12/31/08 =========================================== ================ ================ ================ ================ CASH MANAGEMENT - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$12.776 (a)$12.915 (a)$13.289 (a)$13.658 (b)$12.687 (b)$12.793 (b)$13.131 (b)$13.463 Ending AUV................................ (a)$12.915 (a)$13.289 (a)$13.658 (a)$13.591 (b)$12.793 (b)$13.131 (b)$13.463 (b)$13.362 Ending Number of AUs...................... (a)283,753 (a)218,021 (a)220,740 (a)444,621 (b)17,484 (b)48,516 (b)68,640 (b)71,686 -------------------------------------------- CORPORATE BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$17.153 (a)$17.217 (a)$17.951 (a)$18.648 (b)$16.977 (b)$16.997 (b)$17.677 (b)$18.318 Ending AUV................................ (a)$17.217 (a)$17.951 (a)$18.648 (a)$16.938 (b)$16.997 (b)$17.677 (b)$18.318 (b)$16.597 Ending Number of AUs...................... (a)1,078,009 (a)1,152,296 (a)1,243,557 (a)1,129,362 (b)35,953 (b)29,618 (b)26,709 (b)21,534 -------------------------------------------- CORPORATE BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$17.077 (a)$17.115 (a)$17.817 (a)$18.482 (b)$16.924 (b)$16.920 (b)$17.570 (b)$18.180 Ending AUV................................ (a)$17.115 (a)$17.817 (a)$18.482 (a)$16.762 (b)$16.920 (b)$17.570 (b)$18.180 (b)$16.447 Ending Number of AUs...................... (a)445,743 (a)411,889 (a)431,868 (a)391,404 (b)48,298 (b)47,849 (b)41,742 (b)34,493 -------------------------------------------- DAVIS VENTURE VALUE - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$31.548 (a)$34.369 (a)$39.032 (a)$40.618 (b)$31.231 (b)$33.939 (b)$38.448 (b)$39.910 Ending AUV................................ (a)$34.369 (a)$39.032 (a)$40.618 (a)$24.739 (b)$33.939 (b)$38.448 (b)$39.910 (b)$24.247 Ending Number of AUs...................... (a)2,752,424 (a)2,455,170 (a)2,126,888 (a)1,664,221 (b)31,636 (b)26,103 (b)26,351 (b)22,789 -------------------------------------------- DAVIS VENTURE VALUE - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$31.362 (a)$34.116 (a)$38.687 (a)$40.198 (b)$31.088 (b)$33.733 (b)$38.157 (b)$39.549 Ending AUV................................ (a)$34.116 (a)$38.687 (a)$40.198 (a)$24.447 (b)$33.733 (b)$38.157 (b)$39.549 (b)$23.992 Ending Number of AUs...................... (a)508,636 (a)460,070 (a)405,052 (a)342,021 (b)52,225 (b)46,903 (b)43,177 (b)39,171 -------------------------------------------- "DOGS" OF WALL STREET - SAST Class 1 (Inception Date - 7/9/01) Beginning AUV............................. (a)$11.385 (a)$10.906 (a)$13.067 (a)$12.621 (b)$11.272 (b)$10.771 (b)$12.873 (b)$12.403 Ending AUV................................ (a)$10.906 (a)$13.067 (a)$12.621 (a)$9.125 (b)$10.771 (b)$12.873 (b)$12.403 (b)$8.944 Ending Number of AUs...................... (a)444,393 (a)366,486 (a)248,713 (a)189,963 (b)2,391 (b)1,174 (b)1,174 (b)1,174 -------------------------------------------- "DOGS" OF WALL STREET - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$11.348 (a)$10.855 (a)$12.986 (a)$12.524 (b)$11.239 (b)$10.724 (b)$12.797 (b)$12.311 Ending AUV................................ (a)$10.855 (a)$12.986 (a)$12.524 (a)$9.041 (b)$10.724 (b)$12.797 (b)$12.311 (b)$8.864 Ending Number of AUs...................... (a)185,694 (a)143,323 (a)81,439 (a)60,269 (b)14,376 (b)11,629 (b)11,186 (b)10,493 -------------------------------------------- EQUITY OPPORTUNITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$17.603 (a)$18.148 (a)$20.859 (a)$20.567 (b)$17.423 (b)$17.917 (b)$20.543 (b)$20.204 Ending AUV................................ (a)$18.148 (a)$20.859 (a)$20.567 (a)$12.463 (b)$17.917 (b)$20.543 (b)$20.204 (b)$12.213 Ending Number of AUs...................... (a)799,430 (a)618,674 (a)510,851 (a)378,364 (b)11,830 (b)12,111 (b)10,226 (b)7,262 -------------------------------------------- EQUITY OPPORTUNITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$17.524 (a)$18.039 (a)$20.703 (a)$20.381 (b)$17.389 (b)$17.855 (b)$20.441 (b)$20.073 Ending AUV................................ (a)$18.039 (a)$20.703 (a)$20.381 (a)$12.332 (b)$17.855 (b)$20.441 (b)$20.073 (b)$12.115 Ending Number of AUs...................... (a)125,823 (a)108,264 (a)76,918 (a)63,278 (b)23,078 (b)18,015 (b)17,788 (b)17,170 -------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 =========================================== ================ ================ ============= ============= ============= CASH MANAGEMENT - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$13.591 (a)$13.372 (a)$13.120 (a)$12.867 (a)$12.623 (b)$13.362 (b)$13.114 (b)$12.835 (b)$12.556 (b)$12.287 Ending AUV................................ (a)$13.372 (a)$13.120 (a)$12.867 (a)$12.623 (a)$12.382 (b)$13.114 (b)$12.835 (b)$12.556 (b)$12.287 (b)$12.023 Ending Number of AUs...................... (a)320,848 (a)186,318 (a)265,927 (a)204,126 (a)227,248 (b)32,033 (b)9,549 (b)9,281 (b)9,636 (b)8,962 -------------------------------------------- CORPORATE BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$16.938 (a)$21.850 (a)$23.881 (a)$25.029 (a)$27.465 (b)$16.597 (b)$21.356 (b)$23.283 (b)$24.341 (b)$26.643 Ending AUV................................ (a)$21.850 (a)$23.881 (a)$25.029 (a)$27.465 (a)$27.430 (b)$21.356 (b)$23.283 (b)$24.341 (b)$26.643 (b)$26.543 Ending Number of AUs...................... (a)1,097,726 (a)973,745 (a)826,600 (a)721,405 (a)616,312 (b)22,482 (b)21,500 (b)19,050 (b)16,628 (b)12,892 -------------------------------------------- CORPORATE BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$16.762 (a)$21.590 (a)$23.561 (a)$24.657 (a)$27.016 (b)$16.447 (b)$21.131 (b)$23.003 (b)$24.013 (b)$26.245 Ending AUV................................ (a)$21.590 (a)$23.561 (a)$24.657 (a)$27.016 (a)$26.941 (b)$21.131 (b)$23.003 (b)$24.013 (b)$26.245 (b)$26.107 Ending Number of AUs...................... (a)341,332 (a)308,669 (a)292,469 (a)289,469 (a)259,641 (b)34,068 (b)34,107 (b)34,765 (b)35,539 (b)30,538 -------------------------------------------- DAVIS VENTURE VALUE - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$24.739 (a)$32.530 (a)$35.942 (a)$33.903 (a)$37.636 (b)$24.247 (b)$31.804 (b)$35.052 (b)$32.980 (b)$36.520 Ending AUV................................ (a)$32.530 (a)$35.942 (a)$33.903 (a)$37.636 (a)$49.555 (b)$31.804 (b)$35.052 (b)$32.980 (b)$36.520 (b)$47.966 Ending Number of AUs...................... (a)1,398,791 (a)1,191,781 (a)994,176 (a)860,022 (a)728,590 (b)20,164 (b)18,107 (b)16,412 (b)14,768 (b)12,954 -------------------------------------------- DAVIS VENTURE VALUE - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$24.447 (a)$32.098 (a)$35.412 (a)$33.352 (a)$36.969 (b)$23.992 (b)$31.422 (b)$34.579 (b)$32.487 (b)$35.920 Ending AUV................................ (a)$32.098 (a)$35.412 (a)$33.352 (a)$36.969 (a)$48.603 (b)$31.422 (b)$34.579 (b)$32.487 (b)$35.920 (b)$47.107 Ending Number of AUs...................... (a)300,815 (a)250,054 (a)233,098 (a)207,148 (a)171,543 (b)35,381 (b)34,171 (b)32,704 (b)32,201 (b)28,090 -------------------------------------------- "DOGS" OF WALL STREET - SAST Class 1 (Inception Date - 7/9/01) Beginning AUV............................. (a)$9.125 (a)$10.799 (a)$12.415 (a)$13.779 (a)$15.447 (b)$8.944 (b)$10.558 (b)$12.109 (b)$13.406 (b)$14.990 Ending AUV................................ (a)$10.799 (a)$12.415 (a)$13.779 (a)$15.447 (a)$20.786 (b)$10.558 (b)$12.109 (b)$13.406 (b)$14.990 (b)$20.122 Ending Number of AUs...................... (a)184.082 (a)149,533 (a)142,474 (a)128,876 (a)118,599 (b)1,144 (b)1,140 (b)1,140 (b)1,140 (b)1,140 -------------------------------------------- "DOGS" OF WALL STREET - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$9.041 (a)$10.683 (a)$12.264 (a)$13.591 (a)$15.213 (b)$8.864 (b)$10.449 (b)$11.965 (b)$13.227 (b)$14.768 Ending AUV................................ (a)$10.683 (a)$12.264 (a)$13.591 (a)$15.213 (a)$20.441 (b)$10.449 (b)$11.965 (b)$13.227 (b)$14.768 (b)$19.793 Ending Number of AUs...................... (a)48,617 (a)38,143 (a)35,954 (a)36,636 (a)37,369 (b)7,926 (b)7,926 (b)8,314 (b)5,340 (b)5,638 -------------------------------------------- EQUITY OPPORTUNITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$12.463 (a)$16.215 (a)$18.699 (a)$18.398 (a)$21.173 (b)$12.213 (b)$15.850 (b)$18.232 (b)$17.894 (b)$20.541 Ending AUV................................ (a)$16.215 (a)$18.699 (a)$18.398 (a)$21.173 (a)$27.366 (b)$15.850 (b)$18.232 (b)$17.894 (b)$20.541 (b)$26.484 Ending Number of AUs...................... (a)293,940 (a)255,935 (a)205,259 (a)180,705 (a)145,186 (b)7,262 (b)7,145 (b)4,124 (b)4,013 (b)2,021 -------------------------------------------- EQUITY OPPORTUNITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$12.332 (a)$16.020 (a)$18.447 (a)$18.123 (a)$20.825 (b)$12.115 (b)$15.700 (b)$18.033 (b)$17.671 (b)$20.256 Ending AUV................................ (a)$16.020 (a)$18.447 (a)$18.123 (a)$20.825 (a)$26.876 (b)$15.700 (b)$18.033 (b)$17.671 (b)$20.256 (b)$26.076 Ending Number of AUs...................... (a)54,810 (a)59,071 (a)35,176 (a)26,330 (a)22,312 (b)16,346 (b)16,577 (b)14,959 (b)15,029 (b)14,467 -------------------------------------------- FISCAL YEAR ENDED VARIABLE PORTFOLIOS 12/31/14 =========================================== ============= CASH MANAGEMENT - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$12.382 (b)$12.023 Ending AUV................................ (a)$12.143 (b)$11.761 Ending Number of AUs...................... (a)317,004 (b)9,152 -------------------------------------------- CORPORATE BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$27.430 (b)$26.543 Ending AUV................................ (a)$28.584 (b)$27.591 Ending Number of AUs...................... (a)514,732 (b)12,655 -------------------------------------------- CORPORATE BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$26.941 (b)$26.107 Ending AUV................................ (a)$28.033 (b)$27.097 Ending Number of AUs...................... (a)249,380 (b)28,390 -------------------------------------------- DAVIS VENTURE VALUE - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$49.555 (b)$47.966 Ending AUV................................ (a)$52.096 (b)$50.300 Ending Number of AUs...................... (a)617,861 (b)12,166 -------------------------------------------- DAVIS VENTURE VALUE - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$48.603 (b)$47.107 Ending AUV................................ (a)$51.020 (b)$49.325 Ending Number of AUs...................... (a)155,578 (b)25,784 -------------------------------------------- "DOGS" OF WALL STREET - SAST Class 1 (Inception Date - 7/9/01) Beginning AUV............................. (a)$20.786 (b)$20.122 Ending AUV................................ (a)$22.675 (b)$21.895 Ending Number of AUs...................... (a)100,156 (b)1,140 -------------------------------------------- "DOGS" OF WALL STREET - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$20.441 (b)$19.793 Ending AUV................................ (a)$22.264 (b)$21.506 Ending Number of AUs...................... (a)33,806 (b)5,609 -------------------------------------------- EQUITY OPPORTUNITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$27.366 (b)$26.484 Ending AUV................................ (a)$29.768 (b)$28.736 Ending Number of AUs...................... (a)124,055 (b)2,029 -------------------------------------------- EQUITY OPPORTUNITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV............................. (a)$26.876 (b)$26.076 Ending AUV................................ (a)$29.191 (b)$28.251 Ending Number of AUs...................... (a)20,699 (b)14,544 --------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. A-3
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 12/31/08 ================================================ ================ ================ ================ ================ FOREIGN VALUE - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.................................. (a)$14.701 (a)$15.918 (a)$19.918 (a)$22.377 (b)$14.602 (b)$15.770 (b)$19.684 (b)$22.059 Ending AUV..................................... (a)$15.918 (a)$19.918 (a)$22.377 (a)$12.999 (b)$15.770 (b)$19.684 (b)$22.059 (b)$12.782 Ending Number of AUs........................... (a)696,234 (a)809,632 (a)870,236 (a)589,502 (b)26,095 (b)20,011 (b)19,415 (b)9,930 ------------------------------------------------- FUNDAMENTAL GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$17.473 (a)$18.253 (a)$19.018 (a)$21.569 (b)$17.300 (b)$18.028 (b)$18.736 (b)$21.196 Ending AUV..................................... (a)$18.253 (a)$19.018 (a)$21.569 (a)$11.718 (b)$18.028 (b)$18.736 (b)$21.196 (b)$11.487 Ending Number of AUs........................... (a)78,635 (a)74,993 (a)62,268 (a)47,473 (b)6,072 (b)4,887 (b)2,485 (b)1,962 ------------------------------------------------- FUNDAMENTAL GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$17.371 (a)$18.120 (a)$18.851 (a)$21.357 (b)$17.238 (b)$17.936 (b)$18.613 (b)$21.034 Ending AUV..................................... (a)$18.120 (a)$18.851 (a)$21.357 (a)$11.586 (b)$17.936 (b)$18.613 (b)$21.034 (b)$11.383 Ending Number of AUs........................... (a)13,598 (a)10,919 (a)12,456 (a)15,957 (b)2,680 (b)2,049 (b)1,335 (b)1,164 ------------------------------------------------- GLOBAL BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$17.087 (a)$17.601 (a)$18.006 (a)$19.753 (b)$16.917 (b)$17.383 (b)$17.738 (b)$19.411 Ending AUV..................................... (a)$17.601 (a)$18.006 (a)$19.753 (a)$20.557 (b)$17.383 (b)$17.738 (b)$19.411 (b)$20.150 Ending Number of AUs........................... (a)322,542 (a)317,644 (a)445,946 (a)472,703 (b)3,598 (b)3,138 (b)5,159 (b)4,068 ------------------------------------------------- GLOBAL BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$16.994 (a)$17.480 (a)$17.855 (a)$19.558 (b)$16.851 (b)$17.289 (b)$17.617 (b)$19.249 Ending AUV..................................... (a)$17.480 (a)$17.855 (a)$19.558 (a)$20.324 (b)$17.289 (b)$17.617 (b)$19.249 (b)$19.952 Ending Number of AUs........................... (a)117,624 (a)114,313 (a)102,712 (a)105,708 (b)6,989 (b)8,645 (b)9,427 (b)5,668 ------------------------------------------------- GLOBAL EQUITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$17.285 (a)$19.712 (a)$24.050 (a)$26.498 (b)$17.111 (b)$19.465 (b)$23.689 (b)$26.036 Ending AUV..................................... (a)$19.712 (a)$24.050 (a)$26.498 (a)$14.774 (b)$19.465 (b)$23.689 (b)$26.036 (b)$14.480 Ending Number of AUs........................... (a)445,675 (a)384,820 (a)324,105 (a)231,108 (b)5,165 (b)6,477 (b)5,913 (b)3,455 ------------------------------------------------- GLOBAL EQUITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$17.205 (a)$19.591 (a)$23.866 (a)$26.257 (b)$17.049 (b)$19.365 (b)$23.532 (b)$25.824 Ending AUV..................................... (a)$19.591 (a)$23.866 (a)$26.257 (a)$14.617 (b)$19.365 (b)$23.532 (b)$25.824 (b)$14.340 Ending Number of AUs........................... (a)49,997 (a)49,818 (a)33,944 (a)36,620 (b)4,970 (b)3,061 (b)3,061 (b)72 ------------------------------------------------- GOVERNMENT AND QUALITY BOND - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$16.972 (a)$17.157 (a)$17.456 (a)$18.274 (b)$16.805 (b)$16.946 (b)$17.198 (b)$17.959 Ending AUV..................................... (a)$17.157 (a)$17.456 (a)$18.274 (a)$18.779 (b)$16.946 (b)$17.198 (b)$17.959 (b)$18.409 Ending Number of AUs........................... (a)1,658,067 (a)1,553,577 (a)1,537,810 (a)1,769,008 (b)52,669 (b)41,425 (b)40,968 (b)37,480 ------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 ================================================ ================ ================ ============= ============= ============= FOREIGN VALUE - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.................................. (a)$12.999 (a)$16.636 (a)$16.865 (a)$14.641 (a)$17.202 (b)$12.782 (b)$16.317 (b)$16.501 (b)$14.290 (b)$16.747 Ending AUV..................................... (a)$16.636 (a)$16.865 (a)$14.641 (a)$17.202 (a)$20.854 (b)$16.317 (b)$16.501 (b)$14.290 (b)$16.747 (b)$20.252 Ending Number of AUs........................... (a)541,200 (a)524,185 (a)478,634 (a)417,934 (a)397,664 (b)10,659 (b)12,164 (b)19,616 (b)13,080 (b)20,725 ------------------------------------------------- FUNDAMENTAL GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$11.718 (a)$15.694 (a)$18.085 (a)$16.836 (a)$19.261 (b)$11.487 (b)$15.345 (b)$17.640 (b)$16.381 (b)$18.693 Ending AUV..................................... (a)$15.694 (a)$18.085 (a)$16.836 (a)$19.261 (a)$26.004 (b)$15.345 (b)$17.640 (b)$16.381 (b)$18.693 (b)$25.174 Ending Number of AUs........................... (a)50,924 (a)40,969 (a)30,671 (a)28,097 (a)17,456 (b)1,907 (b)1,425 (b)1,466 (b)1,469 (b)211 ------------------------------------------------- FUNDAMENTAL GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$11.586 (a)$15.494 (a)$17.829 (a)$16.572 (a)$18.931 (b)$11.383 (b)$15.184 (b)$17.428 (b)$16.160 (b)$18.414 Ending AUV..................................... (a)$15.494 (a)$17.829 (a)$16.572 (a)$18.931 (a)$25.520 (b)$15.184 (b)$17.428 (b)$16.160 (b)$18.414 (b)$24.761 Ending Number of AUs........................... (a)13,940 (a)12,477 (a)12,132 (a)7,090 (a)10,168 (b)1,138 (b)1,039 (b)1,041 (b)1,038 (b)963 ------------------------------------------------- GLOBAL BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$20.557 (a)$21.765 (a)$22.783 (a)$23.730 (a)$24.279 (b)$20.150 (b)$21.281 (b)$22.220 (b)$23.086 (b)$23.561 Ending AUV..................................... (a)$21.765 (a)$22.783 (a)$23.730 (a)$24.279 (a)$23.067 (b)$21.281 (b)$22.220 (b)$23.086 (b)$23.561 (b)$22.329 Ending Number of AUs........................... (a)424,710 (a)402,285 (a)352,241 (a)344,225 (a)289,350 (b)4,911 (b)12,611 (b)11,839 (b)12,038 (b)16,812 ------------------------------------------------- GLOBAL BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$20.324 (a)$21.486 (a)$22.456 (a)$23.355 (a)$23.859 (b)$19.952 (b)$21.040 (b)$21.936 (b)$22.756 (b)$23.190 Ending AUV..................................... (a)$21.486 (a)$22.456 (a)$23.355 (a)$23.859 (a)$22.634 (b)$21.040 (b)$21.936 (b)$22.756 (b)$23.190 (b)$21.944 Ending Number of AUs........................... (a)82,341 (a)97,754 (a)97,597 (a)100,441 (a)93,113 (b)5,653 (b)5,725 (b)4,871 (b)4,803 (b)3,986 ------------------------------------------------- GLOBAL EQUITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$14.774 (a)$18.829 (a)$21.204 (a)$18.715 (a)$21.545 (b)$14.480 (b)$18.408 (b)$20.678 (b)$18.205 (b)$20.906 Ending AUV..................................... (a)$18.829 (a)$21.204 (a)$18.715 (a)$21.545 (a)$26.781 (b)$18.408 (b)$20.678 (b)$18.205 (b)$20.906 (b)$25.921 Ending Number of AUs........................... (a)183,573 (a)159,810 (a)138,992 (a)117,817 (a)100,771 (b)1,383 (b)1,112 (b)2,033 (b)1,758 (b)1,704 ------------------------------------------------- GLOBAL EQUITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$14.617 (a)$18.601 (a)$20.916 (a)$18.434 (a)$21.189 (b)$14.340 (b)$18.203 (b)$20.418 (b)$17.949 (b)$20.581 Ending AUV..................................... (a)$18.601 (a)$20.916 (a)$18.434 (a)$21.189 (a)$26.299 (b)$18.203 (b)$20.418 (b)$17.949 (b)$20.581 (b)$25.480 Ending Number of AUs........................... (a)30,517 (a)25,512 (a)26,273 (a)20,813 (a)24,016 (b)72 (b)72 (b)2 (b)0 (b)-- ------------------------------------------------- GOVERNMENT AND QUALITY BOND - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$18.779 (a)$19.284 (a)$19.940 (a)$21.032 (a)$21.500 (b)$18.409 (b)$18.857 (b)$19.450 (b)$20.463 (b)$20.866 Ending AUV..................................... (a)$19.284 (a)$19.940 (a)$21.032 (a)$21.500 (a)$20.734 (b)$18.857 (b)$19.450 (b)$20.463 (b)$20.866 (b)$20.073 Ending Number of AUs........................... (a)1,523,474 (a)1,265,808 (a)954,233 (a)812,325 (a)667,442 (b)32,070 (b)37,107 (b)30,739 (b)31,763 (b)17,267 ------------------------------------------------- FISCAL YEAR ENDED VARIABLE PORTFOLIOS 12/31/14 ================================================ ============= FOREIGN VALUE - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.................................. (a)$20.854 (b)$20.252 Ending AUV..................................... (a)$19.108 (b)$18.509 Ending Number of AUs........................... (a)247,677 (b)5,342 ------------------------------------------------- FUNDAMENTAL GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$26.004 (b)$25.174 Ending AUV..................................... (a)$27.556 (b)$26.610 Ending Number of AUs........................... (a)12,029 (b)211 ------------------------------------------------- FUNDAMENTAL GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$25.520 (b)$24.761 Ending AUV..................................... (a)$27.003 (b)$26.134 Ending Number of AUs........................... (a)11,075 (b)958 ------------------------------------------------- GLOBAL BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$23.067 (b)$22.329 Ending AUV..................................... (a)$22.642 (b)$21.863 Ending Number of AUs........................... (a)240,086 (b)3,758 ------------------------------------------------- GLOBAL BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$22.634 (b)$21.944 Ending AUV..................................... (a)$22.184 (b)$21.454 Ending Number of AUs........................... (a)91,233 (b)3,186 ------------------------------------------------- GLOBAL EQUITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$26.781 (b)$25.921 Ending AUV..................................... (a)$27.483 (b)$26.534 Ending Number of AUs........................... (a)91,655 (b)1,634 ------------------------------------------------- GLOBAL EQUITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$26.299 (b)$25.480 Ending AUV..................................... (a)$26.948 (b)$26.044 Ending Number of AUs........................... (a)20,097 (b)-- ------------------------------------------------- GOVERNMENT AND QUALITY BOND - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$20.734 (b)$20.073 Ending AUV..................................... (a)$21.476 (b)$20.739 Ending Number of AUs........................... (a)564,213 (b)29,251 -------------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. * Only available as Class 3 shares of SunAmerica Series Trust for all contracts. A-4
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 12/31/08 ================================================ ================ ================ ============= ============= GOVERNMENT AND QUALITY BOND - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$16.887 (a)$17.046 (a)$17.317 (a)$18.101 (b)$16.757 (b)$16.873 (b)$17.098 (b)$17.828 Ending AUV..................................... (a)$17.046 (a)$17.317 (a)$18.101 (a)$18.573 (b)$16.873 (b)$17.098 (b)$17.828 (b)$18.247 Ending Number of AUs........................... (a)809,378 (a)703,156 (a)668,281 (a)689,539 (b)117,558 (b)105,067 (b)96,475 (b)56,795 ------------------------------------------------- GROWTH - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$29.142 (a)$30.747 (a)$34.307 (a)$37.234 (b)$28.856 (b)$30.369 (b)$33.800 (b)$36.593 Ending AUV..................................... (a)$30.747 (a)$34.307 (a)$37.234 (a)$21.849 (b)$30.369 (b)$33.800 (b)$36.593 (b)$21.419 Ending Number of AUs........................... (a)760,191 (a)620,293 (a)499,080 (a)397,072 (b)9,900 (b)8,185 (b)8,008 (b)8,380 ------------------------------------------------- GROWTH - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$29.039 (a)$30.593 (a)$34.083 (a)$36.937 (b)$28.803 (b)$30.268 (b)$33.637 (b)$36.362 Ending AUV..................................... (a)$30.593 (a)$34.083 (a)$36.937 (a)$21.642 (b)$30.268 (b)$33.637 (b)$36.362 (b)$21.252 Ending Number of AUs........................... (a)127,065 (a)108,324 (a)80,966 (a)69,299 (b)18,123 (b)14,259 (b)13,748 (b)14,560 ------------------------------------------------- GROWTH-INCOME - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$28.342 (a)$29.925 (a)$31.663 (a)$34.653 (b)$28.063 (b)$29.557 (b)$31.195 (b)$34.056 Ending AUV..................................... (a)$29.925 (a)$31.663 (a)$34.653 (a)$19.486 (b)$29.557 (b)$31.195 (b)$34.056 (b)$19.102 Ending Number of AUs........................... (a)1,642,478 (a)1,278,463 (a)997,911 (a)795,523 (b)11,441 (b)9,200 (b)9,198 (b)8,492 ------------------------------------------------- GROWTH-INCOME - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$28.166 (a)$29.694 (a)$31.372 (a)$34.283 (b)$27.949 (b)$29.392 (b)$30.974 (b)$33.765 Ending AUV..................................... (a)$29.694 (a)$31.372 (a)$34.283 (a)$19.249 (b)$29.392 (b)$30.974 (b)$33.765 (b)$18.910 Ending Number of AUs........................... (a)180,206 (a)138,714 (a)110,365 (a)87,918 (b)16,827 (b)13,312 (b)12,357 (b)11,853 ------------------------------------------------- GROWTH OPPORTUNITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$4.786 (a)$5.075 (a)$5.670 (a)$6.789 (b)$4.742 (b)$5.016 (b)$5.590 (b)$6.677 Ending AUV..................................... (a)$5.075 (a)$5.670 (a)$6.789 (a)$4.287 (b)$5.016 (b)$5.590 (b)$6.677 (b)$4.206 Ending Number of AUs........................... (a)171,603 (a)168,142 (a)183,474 (a)116,267 (b)5,749 (b)11,899 (b)11,351 (b)9,546 ------------------------------------------------- GROWTH OPPORTUNITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$4.772 (a)$5.052 (a)$5.636 (a)$6.738 (b)$4.726 (b)$4.991 (b)$5.554 (b)$6.623 Ending AUV..................................... (a)$5.052 (a)$5.636 (a)$6.738 (a)$4.249 (b)$4.991 (b)$5.554 (b)$6.623 (b)$4.166 Ending Number of AUs........................... (a)106,528 (a)95,733 (a)71,348 (a)50,093 (b)18,901 (b)5,095 (b)5,696 (b)3,765 ------------------------------------------------- HIGH-YIELD BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$17.401 (a)$18.658 (a)$21.072 (a)$21.041 (b)$17.250 (b)$18.450 (b)$20.785 (b)$20.702 Ending AUV..................................... (a)$18.658 (a)$21.072 (a)$21.041 (a)$14.060 (b)$18.450 (b)$20.785 (b)$20.702 (b)$13.799 Ending Number of AUs........................... (a)927,030 (a)906,100 (a)683,734 (a)606,727 (b)11,079 (b)9,771 (b)9,013 (b)9,281 ------------------------------------------------- HIGH-YIELD BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$17.316 (a)$18.539 (a)$20.906 (a)$20.844 (b)$17.171 (b)$18.338 (b)$20.628 (b)$20.515 Ending AUV..................................... (a)$18.539 (a)$20.906 (a)$20.844 (a)$13.907 (b)$18.338 (b)$20.628 (b)$20.515 (b)$13.654 Ending Number of AUs........................... (a)233,242 (a)221,067 (a)155,448 (a)141,861 (b)16,615 (b)16,681 (b)13,803 (b)12,962 ------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 ================================================ ============= ============= ============= ============= ============= GOVERNMENT AND QUALITY BOND - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$18.573 (a)$19.044 (a)$19.663 (a)$20.708 (a)$21.137 (b)$18.247 (b)$18.664 (b)$19.222 (b)$20.193 (b)$20.559 Ending AUV..................................... (a)$19.044 (a)$19.663 (a)$20.708 (a)$21.137 (a)$20.354 (b)$18.664 (b)$19.222 (b)$20.193 (b)$20.559 (b)$19.748 Ending Number of AUs........................... (a)587,444 (a)451,975 (a)409,188 (a)375,450 (a)298,398 (b)51,662 (b)44,491 (b)39,108 (b)41,931 (b)38,037 ------------------------------------------------- GROWTH - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$21.849 (a)$29.782 (a)$33.482 (a)$30.915 (a)$34.700 (b)$21.419 (b)$29.123 (b)$32.659 (b)$30.080 (b)$33.679 Ending AUV..................................... (a)$29.782 (a)$33.482 (a)$30.915 (a)$34.700 (a)$46.201 (b)$29.123 (b)$32.659 (b)$30.080 (b)$33.679 (b)$44.730 Ending Number of AUs........................... (b)324,624 (a)266,090 (a)219,107 (a)188,234 (a)150,907 (b)9,411 (b)7,914 (b)6,069 (b)6,050 (b)5,947 ------------------------------------------------- GROWTH - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$21.642 (a)$29.455 (a)$33.065 (a)$30.484 (a)$34.166 (b)$21.252 (b)$28.852 (b)$32.307 (b)$29.711 (b)$33.216 Ending AUV..................................... (a)$29.455 (a)$33.065 (a)$30.484 (a)$34.166 (a)$45.422 (b)$28.852 (b)$32.307 (b)$29.711 (b)$33.216 (b)$44.050 Ending Number of AUs........................... (a)55,198 (a)49,672 (a)41,260 (a)35,493 (a)34,480 (b)13,182 (b)12,405 (b)12,643 (b)11,129 (b)9,768 ------------------------------------------------- GROWTH-INCOME - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$19.486 (a)$24.600 (a)$27.015 (a)$28.827 (a)$32.294 (b)$19.102 (b)$24.055 (b)$26.352 (b)$28.049 (b)$31.343 Ending AUV..................................... (a)$24.600 (a)$27.015 (a)$28.827 (a)$32.294 (a)$41.909 (b)$24.055 (b)$26.352 (b)$28.049 (b)$31.343 (b)$40.574 Ending Number of AUs........................... (a)674.726 (a)562,169 (a)485,961 (a)420,460 (a)359,244 (b)7,886 (b)7,756 (b)10,363 (b)11,270 (b)4,434 ------------------------------------------------- GROWTH-INCOME - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$19.249 (a)$24.264 (a)$26.607 (a)$28.350 (a)$31.711 (b)$18.910 (b)$23.778 (b)$26.009 (b)$27.643 (b)$30.844 Ending AUV..................................... (a)$24.264 (a)$26.607 (a)$28.350 (a)$31.711 (a)$41.092 (b)$23.778 (b)$26.009 (b)$27.643 (b)$30.844 (b)$39.868 Ending Number of AUs........................... (a)78,455 (a)57,169 (a)59,401 (a)49,978 (a)45,675 (b)11,249 (b)8,617 (b)8,244 (b)8,175 (b)7,110 ------------------------------------------------- GROWTH OPPORTUNITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$4.287 (a)$4.994 (a)$6.115 (a)$5.880 (a)$6.808 (b)$4.206 (b)$4.887 (b)$5.969 (b)$5.725 (b)$6.613 Ending AUV..................................... (a)$4.994 (a)$6.115 (a)$5.880 (a)$6.808 (a)$9.241 (b)$4.887 (b)$5.969 (b)$5.725 (b)$6.613 (b)$8.953 Ending Number of AUs........................... (a)100,610 (a)85,916 (a)103,770 (a)87,339 (a)71,080 (b)9,271 (b)6,673 (b)4,451 (b)3,207 (b)3,307 ------------------------------------------------- GROWTH OPPORTUNITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$4.249 (a)$4.941 (a)$6.042 (a)$5.801 (a)$6.707 (b)$4.166 (b)$4.833 (b)$5.894 (b)$5.645 (b)$6.510 Ending AUV..................................... (a)$4.941 (a)$6.042 (a)$5.801 (a)$6.707 (a)$9.090 (b)$4.833 (b)$5.894 (b)$5.645 (b)$6.510 (b)$8.801 Ending Number of AUs........................... (a)37,215 (a)24,729 (a)35,662 (a)34,048 (a)34,012 (b)1,004 (b)1,004 (b)1,004 (b)994 (b)994 ------------------------------------------------- HIGH-YIELD BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$14.060 (a)$19.667 (a)$22.199 (a)$22.799 (a)$26.269 (b)$13.799 (b)$19.254 (b)$21.678 (b)$22.209 (b)$25.526 Ending AUV..................................... (a)$19.667 (a)$22.199 (a)$22.799 (a)$26.269 (a)$27.920 (b)$19.254 (b)$21.678 (b)$22.209 (b)$25.526 (b)$27.062 Ending Number of AUs........................... (a)575,583 (a)489,485 (a)439,443 (a)402,220 (a)338,480 (b)8,654 (b)14,492 (b)10,537 (b)18,132 (b)18,353 ------------------------------------------------- HIGH-YIELD BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$13.907 (a)$19.424 (a)$21.892 (a)$22.450 (a)$25.829 (b)$13.654 (b)$19.023 (b)$21.385 (b)$21.876 (b)$25.106 Ending AUV..................................... (a)$19.424 (a)$21.892 (a)$22.450 (a)$25.829 (a)$27.411 (b)$19.023 (b)$21.385 (b)$21.876 (b)$25.106 (b)$26.577 Ending Number of AUs........................... (a)161,876 (a)118,760 (a)116,993 (a)119,379 (a)107,097 (b)20,155 (b)18,776 (b)17,222 (b)16,513 (b)13,778 ------------------------------------------------- FISCAL YEAR ENDED VARIABLE PORTFOLIOS 12/31/14 ================================================ ============= GOVERNMENT AND QUALITY BOND - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$20.354 (b)$19.748 Ending AUV..................................... (a)$21.052 (b)$20.374 Ending Number of AUs........................... (a)307,402 (b)31,566 ------------------------------------------------- GROWTH - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$46.201 (b)$44.730 Ending AUV..................................... (a)$48.894 (b)$47.219 Ending Number of AUs........................... (a)126,660 (b)5,845 ------------------------------------------------- GROWTH - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$45.422 (b)$44.050 Ending AUV..................................... (a)$48.000 (b)$46.433 Ending Number of AUs........................... (a)29,233 (b)8,748 ------------------------------------------------- GROWTH-INCOME - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$41.909 (b)$40.574 Ending AUV..................................... (a)$47.100 (b)$45.486 Ending Number of AUs........................... (a)299,870 (b)4,348 ------------------------------------------------- GROWTH-INCOME - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$41.092 (b)$39.868 Ending AUV..................................... (a)$46.112 (b)$44.627 Ending Number of AUs........................... (a)42,709 (b)7,088 ------------------------------------------------- GROWTH OPPORTUNITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$9.241 (b)$8.953 Ending AUV..................................... (a)$9.441 (b)$9.124 Ending Number of AUs........................... (a)60,757 (b)3,235 ------------------------------------------------- GROWTH OPPORTUNITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$9.090 (b)$8.801 Ending AUV..................................... (a)$9.272 (b)$8.956 Ending Number of AUs........................... (a)28,098 (b)1,989 ------------------------------------------------- HIGH-YIELD BOND - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$27.920 (b)$27.062 Ending AUV..................................... (a)$27.732 (b)$26.812 Ending Number of AUs........................... (a)223,030 (b)10,534 ------------------------------------------------- HIGH-YIELD BOND - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................. (a)$27.411 (b)$26.577 Ending AUV..................................... (a)$27.186 (b)$26.293 Ending Number of AUs........................... (a)66,465 (b)13,484 -------------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. A-5
FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 ============================================================ ================ ================ ================ INTERNATIONAL DIVERSIFIED EQUITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$10.686 (a)$11.975 (a)$14.561 (b)$10.581 (b)$11.828 (b)$14.347 Ending AUV................................................. (a)$11.975 (a)$14.561 (a)$16.543 (b)$11.828 (b)$14.347 (b)$16.258 Ending Number of AUs....................................... (a)1,462,719 (a)1,344,028 (a)1,111,188 (b)808 (b)2,727 (b)1,784 ------------------------------------------------------------- INTERNATIONAL DIVERSIFIED EQUITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$10.643 (a)$11.910 (a)$14.460 (b)$10.547 (b)$11.772 (b)$14.257 Ending AUV................................................. (a)$11.910 (a)$14.460 (a)$16.403 (b)$11.772 (b)$14.257 (b)$16.133 Ending Number of AUs....................................... (a)242,513 (a)196,304 (a)182,554 (b)20,329 (b)15,581 (b)13,234 ------------------------------------------------------------- INTERNATIONAL GROWTH & INCOME - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$13.431 (a)$15.119 (a)$18.918 (b)$13.293 (b)$14.926 (b)$18.630 Ending AUV................................................. (a)$15.119 (a)$18.918 (a)$19.968 (b)$14.926 (b)$18.630 (b)$19.615 Ending Number of AUs....................................... (a)688,635 (a)779,718 (a)813,577 (b)6,756 (b)8,505 (b)7,781 ------------------------------------------------------------- INTERNATIONAL GROWTH & INCOME - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$13.386 (a)$15.045 (a)$18.798 (b)$13.285 (b)$14.895 (b)$18.564 Ending AUV................................................. (a)$15.045 (a)$18.798 (a)$19.811 (b)$14.895 (b)$18.564 (b)$19.516 Ending Number of AUs....................................... (a)241,546 (a)225,440 (a)201,796 (b)14,386 (b)11,262 (b)11,173 ------------------------------------------------------------- INVESCO V.I. AMERICAN FRANCHISE FUND, SERIES II SHARES (Inception Date - 12/10/01) Beginning AUV.............................................. (a)$9.057 (a)$9.602 (a)$9.705 (b)$8.952 (b)$9.466 (b)$9.544 Ending AUV................................................. (a)$9.602 (a)$9.705 (a)$11.150 (b)$9.466 (b)$9.544 (b)$10.938 Ending Number of AUs....................................... (a)135,111 (a)159,275 (a)136,702 (b)17,356 (b)16,016 (b)14,186 ------------------------------------------------------------- INVESCO V.I. COMSTOCK FUND, SERIES II SHARES (Inception Date - 12/10/01) Beginning AUV.............................................. (a)$12.064 (a)$12.371 (a)$14.139 (b)$11.978 (b)$12.252 (b)$13.968 Ending AUV................................................. (a)$12.371 (a)$14.139 (a)$13.601 (b)$12.252 (b)$13.968 (b)$13.404 Ending Number of AUs....................................... (a)1,711,110 (a)2,082,815 (a)2,081,629 (b)127,517 (b)112,674 (b)98,557 ------------------------------------------------------------- INVESCO V.I. GROWTH AND INCOME FUND, SERIES II SHARES (Inception Date - 1/25/02) Beginning AUV.............................................. (a)$12.520 (a)$13.529 (a)$15.454 (b)$12.424 (b)$13.392 (b)$15.259 Ending AUV................................................. (a)$13.529 (a)$15.454 (a)$15.605 (b)$13.392 (b)$15.259 (b)$15.370 Ending Number of AUs....................................... (a)1,073,082 (a)1,569,658 (a)1,714,845 (b)34,442 (b)39,506 (b)43,813 ------------------------------------------------------------- LORD ABBETT SERIES FUND GROWTH AND INCOME - LASF Class VC Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$11.713 (a)$11.911 (a)$13.758 (b)$11.624 (b)$11.791 (b)$13.586 Ending AUV................................................. (a)$11.911 (a)$13.758 (a)$14.016 (b)$11.791 (b)$13.586 (b)$13.806 Ending Number of AUs....................................... (a)1,525,011 (a)2,024,561 (a)2,177,467 (b)55,496 (b)56,591 (b)55,356 ------------------------------------------------------------- MID-CAP GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$10.605 (a)$10.778 (a)$10.888 (b)$10.499 (b)$10.643 (b)$10.725 Ending AUV................................................. (a)$10.778 (a)$10.888 (a)$12.541 (b)$10.643 (b)$10.725 (b)$12.323 Ending Number of AUs....................................... (a)486,379 (a)448,140 (a)352,918 (b)18,828 (b)18,763 (b)16,694 ------------------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/08 12/31/09 12/31/10 12/31/11 ============================================================ ================ ================ ================ ================ INTERNATIONAL DIVERSIFIED EQUITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$16.543 (a)$9.863 (a)$12.546 (a)$13.406 (b)$16.258 (b)$9.669 (b)$12.268 (b)$13.077 Ending AUV................................................. (a)$9.863 (a)$12.546 (a)$13.406 (a)$11.275 (b)$9.669 (b)$12.268 (b)$13.077 (b)$10.971 Ending Number of AUs....................................... (a)908,506 (a)807,607 (a)687,637 (a)555,265 (b)2,998 (b)5,382 (b)9,463 (b)0 ------------------------------------------------------------- INTERNATIONAL DIVERSIFIED EQUITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$16.403 (a)$9.765 (a)$12.402 (a)$13.233 (b)$16.133 (b)$9.580 (b)$12.137 (b)$12.917 Ending AUV................................................. (a)$9.765 (a)$12.402 (a)$13.233 (a)$11.113 (b)$9.580 (b)$12.137 (b)$12.917 (b)$10.821 Ending Number of AUs....................................... (a)178,933 (a)193,715 (a)165,492 (a)116,043 (b)11,516 (b)8,845 (b)8,788 (b)7,622 ------------------------------------------------------------- INTERNATIONAL GROWTH & INCOME - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$19.968 (a)$10.638 (a)$13.386 (a)$14.119 (b)$19.615 (b)$10.424 (b)$13.083 (b)$13.766 Ending AUV................................................. (a)$10.638 (a)$13.386 (a)$14.119 (a)$11.988 (b)$10.424 (b)$13.083 (b)$13.766 (b)$11.659 Ending Number of AUs....................................... (a)386,600 (a)297,061 (a)253,704 (a)220,498 (b)5,986 (b)7,630 (b)6,669 (b)10,960 ------------------------------------------------------------- INTERNATIONAL GROWTH & INCOME - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$19.811 (a)$10.539 (a)$13.241 (a)$13.946 (b)$19.516 (b)$10.356 (b)$12.979 (b)$13.635 Ending AUV................................................. (a)$10.539 (a)$13.241 (a)$13.946 (a)$11.823 (b)$10.356 (b)$12.979 (b)$13.635 (b)$11.531 Ending Number of AUs....................................... (a)145,724 (a)108,116 (a)84,545 (a)83,184 (b)11,331 (b)10,348 (b)10,067 (b)10,312 ------------------------------------------------------------- INVESCO V.I. AMERICAN FRANCHISE FUND, SERIES II SHARES (Inception Date - 12/10/01) Beginning AUV.............................................. (a)$11.150 (a)$5.588 (a)$9.117 (a)$10.736 (b)$10.938 (b)$5.468 (b)$8.899 (b)$10.453 Ending AUV................................................. (a)$5.588 (a)$9.117 (a)$10.736 (a)$9.898 (b)$5.468 (b)$8.889 (b)$10.453 (b)$9.613 Ending Number of AUs....................................... (a)133,147 (a)165,945 (a)136,804 (a)107,029 (b)11,216 (b)12,997 (b)20,631 (b)10,578 ------------------------------------------------------------- INVESCO V.I. COMSTOCK FUND, SERIES II SHARES (Inception Date - 12/10/01) Beginning AUV.............................................. (a)$13.601 (a)$8.600 (a)$10.877 (a)$12.394 (b)$13.404 (b)$8.454 (b)$10.665 (b)$12.122 Ending AUV................................................. (a)$8.600 (a)$10.877 (a)$12.394 (a)$11.949 (b)$8.454 (b)$10.665 (b)$12.122 (b)$11.658 Ending Number of AUs....................................... (a)1,905,107 (a)1,694,718 (a)1,466,814 (a)1,262,338 (b)95,171 (b)78,545 (b)43,323 (b)38,076 ------------------------------------------------------------- INVESCO V.I. GROWTH AND INCOME FUND, SERIES II SHARES (Inception Date - 1/25/02) Beginning AUV.............................................. (a)$15.605 (a)$10.419 (a)$12.736 (a)$14.073 (b)$15.370 (b)$10.236 (b)$12.481 (b)$13.757 Ending AUV................................................. (a)$10.419 (a)$12.736 (a)$14.073 (a)$13.547 (b)$10.236 (b)$12.481 (b)$13.757 (b)$13.210 Ending Number of AUs....................................... (a)1,576,347 (a)1,444,504 (a)1,287,003 (a)1,126,421 (b)44,688 (b)39,232 (b)29,801 (b)27,053 ------------------------------------------------------------- LORD ABBETT SERIES FUND GROWTH AND INCOME - LASF Class VC Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$14.016 (a)$8.777 (a)$10.278 (a)$11.885 (b)$13.806 (b)$8.624 (b)$10.074 (b)$11.620 Ending AUV................................................. (a)$8.777 (a)$10.278 (a)$11.885 (a)$10.994 (b)$8.624 (b)$10.074 (b)$11.620 (b)$10.722 Ending Number of AUs....................................... (a)1,953,530 (a)1,784,061 (a)1,529,859 (a)1,315,152 (b)54,308 (b)42,066 (b)38,315 (b)33,612 ------------------------------------------------------------- MID-CAP GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$12.541 (a)$6.996 (a)$9.814 (a)$12.126 (b)$12.323 (b)$6.857 (b)$9.594 (b)$11.825 Ending AUV................................................. (a)$6.996 (a)$9.814 (a)$12.126 (a)$11.234 (b)$6.857 (b)$9.594 (b)$11.825 (b)$10.929 Ending Number of AUs....................................... (a)276,844 (a)260,386 (a)217,006 (a)188,548 (b)13,654 (b)10,764 (b)8,716 (b)6,509 ------------------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/12 12/31/13 12/31/14 ============================================================ ================ ============= ============= INTERNATIONAL DIVERSIFIED EQUITIES - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$11.275 (a)$13.031 (a)$15.483 (b)$10.971 (b)$12.648 (b)$14.990 Ending AUV................................................. (a)$13.031 (a)$15.483 (a)$13.960 (b)$12.648 (b)$14.990 (b)$13.482 Ending Number of AUs....................................... (a)495,679 (a)438,264 (a)387,076 (b)0 (b)725 (b)4,337 ------------------------------------------------------------- INTERNATIONAL DIVERSIFIED EQUITIES - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$11.113 (a)$12.825 (a)$15.214 (b)$10.821 (b)$12.456 (b)$14.741 Ending AUV................................................. (a)$12.825 (a)$15.214 (a)$13.697 (b)$12.456 (b)$14.741 (b)$13.238 Ending Number of AUs....................................... (a)90,318 (a)86,357 (a)96,160 (b)7,343 (b)2,397 (b)2,476 ------------------------------------------------------------- INTERNATIONAL GROWTH & INCOME - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$11.988 (a)$14.320 (a)$17.214 (b)$11.659 (b)$13.892 (b)$16.657 Ending AUV................................................. (a)$14.320 (a)$17.214 (a)$15.351 (b)$13.892 (b)$16.657 (b)$14.818 Ending Number of AUs....................................... (a)188,254 (a)169,641 (a)151,376 (b)3,901 (b)12,708 (b)3,281 ------------------------------------------------------------- INTERNATIONAL GROWTH & INCOME - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$11.823 (a)$14.102 (a)$16.926 (b)$11.531 (b)$13.719 (b)$16.425 Ending AUV................................................. (a)$14.102 (a)$16.926 (a)$15.072 (b)$13.719 (b)$16.425 (b)$14.590 Ending Number of AUs....................................... (a)66,789 (a)57,393 (a)55,399 (b)7,637 (b)7,458 (b)7,359 ------------------------------------------------------------- INVESCO V.I. AMERICAN FRANCHISE FUND, SERIES II SHARES (Inception Date - 12/10/01) Beginning AUV.............................................. (a)$9.898 (a)$11.055 (a)$15.222 (b)$9.613 (b)$10.709 (b)$14.710 Ending AUV................................................. (a)$11.055 (a)$15.222 (a)$16.217 (b)$10.709 (b)$14.710 (b)$15.632 Ending Number of AUs....................................... (a)102,193 (a)94,772 (a)20,492 (b)12,392 (b)7,234 (b)11,399 ------------------------------------------------------------- INVESCO V.I. COMSTOCK FUND, SERIES II SHARES (Inception Date - 12/10/01) Beginning AUV.............................................. (a)$11.949 (a)$13.996 (a)$18.701 (b)$11.658 (b)$13.621 (b)$18.155 Ending AUV................................................. (a)$13.996 (a)$18.701 (a)$20.095 (b)$13.621 (b)$18.155 (b)$19.459 Ending Number of AUs....................................... (a)1,061,029 (a)904,380 (a)105,715 (b)33,596 (b)33,449 (b)9,163 ------------------------------------------------------------- INVESCO V.I. GROWTH AND INCOME FUND, SERIES II SHARES (Inception Date - 1/25/02) Beginning AUV.............................................. (a)$13.547 (a)$15.256 (a)$20.102 (b)$13.210 (b)$14.840 (b)$19.504 Ending AUV................................................. (a)$15.256 (a)$20.102 (a)$21.772 (b)$14.840 (b)$19.504 (b)$21.072 Ending Number of AUs....................................... (a)969,983 (a)910,286 (a)157,285 (b)18,368 (b)14,041 (b)3,510 ------------------------------------------------------------- LORD ABBETT SERIES FUND GROWTH AND INCOME - LASF Class VC Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$10.994 (a)$12.137 (a)$16.246 (b)$10.722 (b)$11.806 (b)$15.765 Ending AUV................................................. (a)$12.137 (a)$16.246 (a)$17.226 (b)$11.806 (b)$15.765 (b)$16.674 Ending Number of AUs....................................... (a)1,121,108 (a)931,261 (a)663,930 (b)31,645 (b)28,357 (b)18,735 ------------------------------------------------------------- MID-CAP GROWTH - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$11.234 (a)$12.841 (a)$18.013 (b)$10.929 (b)$12.461 (b)$17.436 Ending AUV................................................. (a)$12.841 (a)$18.013 (a)$19.740 (b)$12.461 (b)$17.436 (b)$19.060 Ending Number of AUs....................................... (a)151,840 (a)142,914 (a)129,844 (b)6,007 (b)6,107 (b)5,800 -------------------------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. A-6
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 12/31/08 ================================================== ================ ============= ============= ============= MID-CAP GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$10.549 (a)$10.704 (a)$10.798 (a)$12.419 (b)$10.460 (b)$10.588 (b)$10.653 (b)$12.221 Ending AUV....................................... (a)$10.704 (a)$10.798 (a)$12.419 (a)$6.917 (b)$10.588 (b)$10.653 (b)$12.221 (b)$6.790 Ending Number of AUs............................. (a)255,726 (a)198,369 (a)158,282 (a)134,604 (b)35,869 (b)20,988 (b)19,566 (b)16,226 --------------------------------------------------- NATURAL RESOURCES - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$27.405 (a)$39.440 (a)$48.529 (a)$67.013 (b)$27.133 (b)$38.951 (b)$47.807 (b)$65.852 Ending AUV....................................... (a)$39.440 (a)$48.529 (a)$67.013 (a)$33.134 (b)$38.951 (b)$47.807 (b)$65.852 (b)$32.479 Ending Number of AUs............................. (a)388,718 (a)315,257 (a)313,563 (a)182,471 (b)6,105 (b)7,693 (b)6,026 (b)6,042 --------------------------------------------------- NATURAL RESOURCES - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$27.327 (a)$39.268 (a)$48.246 (a)$66.523 (b)$27.042 (b)$38.763 (b)$47.506 (b)$65.340 Ending AUV....................................... (a)$39.268 (a)$48.246 (a)$66.523 (a)$32.842 (b)$38.763 (b)$47.506 (b)$65.340 (b)$32.177 Ending Number of AUs............................. (a)107,809 (a)99,499 (a)98,316 (a)90,770 (b)12,560 (b)7,642 (b)6,517 (b)5,225 --------------------------------------------------- SA AB GROWTH* - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$29.082 (a)$33.404 (a)$33.154 (a)$37.424 (b)$28.794 (b)$32.991 (b)$32.663 (b)$36.777 Ending AUV....................................... (a)$33.404 (a)$33.154 (a)$37.424 (a)$21.843 (b)$32.991 (b)$32.663 (b)$36.777 (b)$21.412 Ending Number of AUs............................. (a)1,272,463 (a)963,216 (a)732,729 (a)579,161 (b)8,754 (b)9,266 (b)8,332 (b)7,857 --------------------------------------------------- SA AB GROWTH* - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$28.811 (a)$33.044 (a)$32.748 (a)$36.909 (b)$28.536 (b)$32.647 (b)$32.274 (b)$36.284 Ending AUV....................................... (a)$33.044 (a)$32.748 (a)$36.909 (a)$21.510 (b)$32.647 (b)$32.274 (b)$36.284 (b)$21.093 Ending Number of AUs............................. (a)150,198 (a)119,922 (a)98,319 (a)87,458 (b)14,170 (b)10,643 (b)8,093 (b)7,619 --------------------------------------------------- SA JPMORGAN MFS CORE BOND** - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$18.754 (a)$19.822 (a)$21.404 (a)$22.251 (b)$18.604 (b)$19.615 (b)$21.128 (b)$21.909 Ending AUV....................................... (a)$19.822 (a)$21.404 (a)$22.251 (a)$23.027 (b)$19.615 (b)$21.128 (b)$21.909 (b)$22.616 Ending Number of AUs............................. (a)237,804 (a)235,107 (a)232,025 (a)415,921 (b)3,592 (b)2,692 (b)3,191 (b)8,851 --------------------------------------------------- SA JPMORGAN MFS CORE BOND** - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$18.658 (a)$19.691 (a)$21.232 (a)$22.039 (b)$18.499 (b)$19.474 (b)$20.945 (b)$21.687 Ending AUV....................................... (a)$19.691 (a)$21.232 (a)$22.039 (a)$22.773 (b)$19.474 (b)$20.945 (b)$21.687 (b)$22.354 Ending Number of AUs............................. (a)35,707 (a)34,026 (a)26,765 (a)40,655 (b)4,505 (b)3,417 (b)3,507 (b)11,211 --------------------------------------------------- SA MARSICO FOCUSED GROWTH*** - SAST Class 1 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$10.466 (a)$11.413 (a)$12.206 (a)$13.663 (b)$10.324 (b)$11.268 (b)$12.021 (b)$13.423 Ending AUV....................................... (a)$11.413 (a)$12.206 (a)$13.663 (a)$7.964 (b)$11.268 (b)$12.021 (b)$13.423 (b)$7.804 Ending Number of AUs............................. (a)216,259 (a)255,941 (a)220,876 (a)169,572 (b)0 (b)1,330 (b)0 (b)0 --------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 ================================================== ============= ============= ============= ============= ============= MID-CAP GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$6.917 (a)$9.689 (a)$11.953 (a)$11.058 (a)$12.621 (b)$6.790 (b)$9.487 (b)$11.676 (b)$10.774 (b)$12.266 Ending AUV....................................... (a)$9.689 (a)$11.953 (a)$11.058 (a)$12.621 (a)$17.678 (b)$9.487 (b)$11.676 (b)$10.774 (b)$12.266 (b)$17.138 Ending Number of AUs............................. (a)107,105 (a)111,638 (a)100,496 (a)85,813 (a)87,947 (b)12,263 (b)11,454 (b)11,388 (b)10,806 (b)5,011 --------------------------------------------------- NATURAL RESOURCES - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$33.134 (a)$51.584 (a)$59.037 (a)$46.364 (a)$47.271 (b)$32.479 (b)$50.438 (b)$57.580 (b)$45.107 (b)$45.875 Ending AUV....................................... (a)$51.584 (a)$59.037 (a)$46.364 (a)$47.271 (a)$49.260 (b)$50.438 (b)$57.580 (b)$45.107 (b)$45.875 (b)$47.686 Ending Number of AUs............................. (a)172,807 (a)157,640 (a)139,009 (a)111,956 (a)95,108 (b)6,092 (b)3,932 (b)3,604 (b)2,779 (b)2,881 --------------------------------------------------- NATURAL RESOURCES - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$32.842 (a)$51.053 (a)$58.340 (a)$45.748 (a)$46.574 (b)$32.177 (b)$49.895 (b)$56.875 (b)$44.488 (b)$45.178 Ending AUV....................................... (a)$51.053 (a)$58.340 (a)$45.748 (a)$46.574 (a)$48.461 (b)$49.895 (b)$56.875 (b)$44.488 (b)$45.178 (b)$46.891 Ending Number of AUs............................. (a)83,469 (a)71,043 (a)68,857 (a)69,291 (a)62,968 (b)4,714 (b)4,758 (b)4,643 (b)4,646 (b)4,522 --------------------------------------------------- SA AB GROWTH* - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$21.843 (a)$30.342 (a)$32.944 (a)$31.701 (a)$36.404 (b)$21.412 (b)$29.669 (b)$32.132 (b)$30.842 (b)$35.330 Ending AUV....................................... (a)$30.342 (a)$32.944 (a)$31.701 (a)$36.404 (a)$49.282 (b)$29.669 (b)$32.132 (b)$30.842 (b)$35.330 (b)$47.709 Ending Number of AUs............................. (a)482,705 (a)399,839 (a)343,886 (a)296,044 (a)248,081 (b)5,967 (b)5,211 (b)4,774 (b)4,317 (b)5,265 --------------------------------------------------- SA AB GROWTH* - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$21.510 (a)$29.834 (a)$32.345 (a)$31.077 (a)$35.635 (b)$21.093 (b)$29.183 (b)$31.560 (b)$30.247 (b)$34.596 Ending AUV....................................... (a)$29.834 (a)$32.345 (a)$31.077 (a)$35.635 (a)$48.168 (b)$29.183 (b)$31.560 (b)$30.247 (b)$34.596 (b)$46.648 Ending Number of AUs............................. (a)75,868 (a)68,490 (a)63,618 (a)46,189 (a)33,850 (b)6,764 (b)6,925 (b)6,450 (b)6,458 (b)3,307 --------------------------------------------------- SA JPMORGAN MFS CORE BOND** - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$23.027 (a)$25.309 (a)$26.507 (a)$27.770 (a)$29.340 (b)$22.616 (b)$24.795 (b)$25.904 (b)$27.070 (b)$28.530 Ending AUV....................................... (a)$25.309 (a)$26.507 (a)$27.770 (a)$29.340 (a)$27.861 (b)$24.795 (b)$25.904 (b)$27.070 (b)$28.530 (b)$27.024 Ending Number of AUs............................. (a)494,633 (a)545,285 (a)546,461 (a)522,949 (a)419,671 (b)23,089 (b)21,086 (b)24,942 (b)23,061 (b)15,557 --------------------------------------------------- SA JPMORGAN MFS CORE BOND** - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$22.773 (a)$24.991 (a)$26.136 (a)$27.340 (a)$28.841 (b)$22.354 (b)$24.470 (b)$25.527 (b)$26.636 (b)$28.028 Ending AUV....................................... (a)$24.991 (a)$26.136 (a)$27.340 (a)$28.841 (a)$27.346 (b)$24.470 (b)$25.527 (b)$26.636 (b)$28.028 (b)$26.510 Ending Number of AUs............................. (a)58,276 (a)102,418 (a)110,825 (a)146,473 (a)140,707 (b)11,182 (b)16,213 (b)15,952 (b)19,956 (b)10,676 --------------------------------------------------- SA MARSICO FOCUSED GROWTH*** - SAST Class 1 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$7.964 (a)$10.252 (a)$11.855 (a)$11.508 (a)$12.610 (b)$7.804 (b)$10.021 (b)$11.559 (b)$11.193 (b)$12.234 Ending AUV....................................... (a)$10.252 (a)$11.855 (a)$11.508 (a)$12.610 (a)$16.730 (b)$10.021 (b)$11.559 (b)$11.193 (b)$12.234 (b)$16.191 Ending Number of AUs............................. (a)167,303 (a)158,901 (a)120,208 (a)98,477 (a)78,516 (b)0 (b)0 (b)2,291 (b)2,191 (b)2,099 --------------------------------------------------- FISCAL YEAR ENDED VARIABLE PORTFOLIOS 12/31/14 ================================================== ============= MID-CAP GROWTH - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$17.678 (b)$17.138 Ending AUV....................................... (a)$19.344 (b)$18.707 Ending Number of AUs............................. (a)88,914 (b)9,720 --------------------------------------------------- NATURAL RESOURCES - AST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$49.260 (b)$47.686 Ending AUV....................................... (a)$39.526 (b)$38.167 Ending Number of AUs............................. (a)85,981 (b)3,060 --------------------------------------------------- NATURAL RESOURCES - AST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$48.461 (b)$46.891 Ending AUV....................................... (a)$38.828 (b)$37.476 Ending Number of AUs............................. (a)59,491 (b)4,577 --------------------------------------------------- SA AB GROWTH* - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$49.28 (b)$47.709 Ending AUV....................................... (a)$55.414 (b)$53.511 Ending Number of AUs............................. (a)214,923 (b)6,943 --------------------------------------------------- SA AB GROWTH* - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$48.168 (b)$46.648 Ending AUV....................................... (a)$54.081 (b)$52.243 Ending Number of AUs............................. (a)30,887 (b)3,303 --------------------------------------------------- SA JPMORGAN MFS CORE BOND** - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$27.861 (b)$27.024 Ending AUV....................................... (a)$28.761 (b)$27.827 Ending Number of AUs............................. (a)355,510 (b)18,813 --------------------------------------------------- SA JPMORGAN MFS CORE BOND** - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.................................... (a)$27.346 (b)$26.510 Ending AUV....................................... (a)$28.187 (b)$27.257 Ending Number of AUs............................. (a)102,797 (b)8,256 --------------------------------------------------- SA MARSICO FOCUSED GROWTH*** - SAST Class 1 Shares (Inception Date - 7/28/03) Beginning AUV.................................... (a)$16.730 (b)$16.191 Ending AUV....................................... (a)$18.328 (b)$17.694 Ending Number of AUs............................. (a)73,378 (b)1,999 ---------------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. * On May 1, 2015, the Alliance Growth Portfolio was renamed SA AB Growth Portfolio. ** On January 16, 2015, the Total Return Bond Portfolio was renamed SA JPMorgan MFS Core Bond Portfolio. *** On May 1, 2015, the Marsico Focused Growth Portfolio was renamed SA Marsico Focused Growth Portfolio. A-7
FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 ============================================================ ============= ================ ================ SA MARSICO FOCUSED GROWTH*** - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.............................................. (a)$10.391 (a)$11.302 (a)$12.058 (b)$10.324 (b)$11.202 (b)$11.920 Ending AUV................................................. (a)$11.302 (a)$12.058 (a)$13.463 (b)$11.202 (b)$11.920 (b)$13.277 Ending Number of AUs....................................... (a)151,352 (a)124,781 (a)109,459 (b)23,447 (b)18,561 (b)21,676 ------------------------------------------------------------- SA MFS MASSACHUSETTS INVESTORS TRUST**** - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$19.863 (a)$21.074 (a)$23.492 (b)$19.669 (b)$20.816 (b)$23.147 Ending AUV................................................. (a)$21.074 (a)$23.492 (a)$25.584 (b)$20.816 (b)$23.147 (b)$25.145 Ending Number of AUs....................................... (a)214,714 (a)175,764 (a)137,193 (b)7,945 (b)7,665 (b)6,953 ------------------------------------------------------------- SA MFS MASSACHUSETTS INVESTORS TRUST**** - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$19.788 (a)$20.963 (a)$23.334 (b)$19.627 (b)$20.741 (b)$23.029 Ending AUV................................................. (a)$20.963 (a)$23.334 (a)$25.373 (b)$20.741 (b)$23.029 (b)$24.979 Ending Number of AUs....................................... (a)108,103 (a)88,990 (a)72,932 (b)13,671 (b)9,121 (b)8,539 ------------------------------------------------------------- SA MFS TOTAL RETURN***** - SAST Class 1 Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$25.099 (a)$25.473 (a)$28.098 (b)$24.861 (b)$25.169 (b)$27.694 Ending AUV................................................. (a)$25.473 (a)$28.098 (a)$28.848 (b)$25.169 (b)$27.694 (b)$28.362 Ending Number of AUs....................................... (a)816,078 (a)1,145,362 (a)1,263,235 (b)67,325 (b)46,271 (b)47,934 ------------------------------------------------------------- SA MFS TOTAL RETURN***** - SAST Class 3 Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$24.931 (a)$25.240 (a)$27.772 (b)$24.759 (b)$25.004 (b)$27.443 Ending AUV................................................. (a)$25.240 (a)$27.772 (a)$28.439 (b)$25.004 (b)$27.443 (b)$28.032 Ending Number of AUs....................................... (a)154,678 (a)193,403 (a)189,943 (b)30,015 (b)30,281 (b)29,955 ------------------------------------------------------------- SMALL & MID CAP VALUE - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.............................................. (a)$15.770 (a)$16.432 (a)$18.363 (b)$15.657 (b)$16.273 (b)$18.140 Ending AUV................................................. (a)$16.432 (a)$18.363 (a)$18.366 (b)$16.273 (b)$18.140 (b)$18.098 Ending Number of AUs....................................... (a)765,432 (a)785,379 (a)755,810 (b)30,011 (b)26,095 (b)24,478 ------------------------------------------------------------- TECHNOLOGY - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$2.455 (a)$2.413 (a)$2.403 (b)$2.431 (b)$2.383 (b)$2.368 Ending AUV................................................. (a)$2.413 (a)$2.403 (a)$2.886 (b)$2.383 (b)$2.368 (b)$2.836 Ending Number of AUs....................................... (a)557,215 (a)357,900 (a)340,916 (b)5,068 (b)2,251 (b)1,504 ------------------------------------------------------------- TECHNOLOGY - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$2.442 (a)$2.397 (a)$2.384 (b)$2.425 (b)$2.374 (b)$2.355 Ending AUV................................................. (a)$2.397 (a)$2.384 (a)$2.858 (b)$2.374 (b)$2.355 (b)$2.817 Ending Number of AUs....................................... (a)141,004 (a)115,235 (a)104,248 (b)16,272 (b)13,228 (b)12,398 ------------------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/08 12/31/09 12/31/10 12/31/11 ============================================================ ================ ================ ================ ============= SA MARSICO FOCUSED GROWTH*** - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.............................................. (a)$13.463 (a)$7.827 (a)$10.052 (a)$11.594 (b)$13.277 (b)$7.700 (b)$9.863 (b)$11.348 Ending AUV................................................. (a)$7.827 (a)$10.052 (a)$11.594 (a)$11.227 (b)$7.700 (b)$9.863 (b)$11.348 (b)$10.961 Ending Number of AUs....................................... (a)107,603 (a)84,953 (a)50,467 (a)51,133 (b)13,218 (b)9,362 (b)9,297 (b)9,246 ------------------------------------------------------------- SA MFS MASSACHUSETTS INVESTORS TRUST**** - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$25.584 (a)$17.024 (a)$21.251 (a)$23.272 (b)$25.145 (b)$16.690 (b)$20.782 (b)$22.701 Ending AUV................................................. (a)$17.024 (a)$21.251 (a)$23.272 (a)$22.483 (b)$16.690 (b)$20.782 (b)$22.701 (b)$21.877 Ending Number of AUs....................................... (a)114,381 (a)96,853 (a)74,560 (a)65,574 (b)4,885 (b)4,781 (b)4,487 (b)4,188 ------------------------------------------------------------- SA MFS MASSACHUSETTS INVESTORS TRUST**** - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$25.373 (a)$16.858 (a)$21.011 (a)$22.975 (b)$24.979 (b)$16.554 (b)$20.582 (b)$22.449 Ending AUV................................................. (a)$16.858 (a)$21.011 (a)$22.975 (a)$22.163 (b)$16.554 (b)$20.582 (b)$22.449 (b)$21.601 Ending Number of AUs....................................... (a)45,779 (a)40,549 (a)28,925 (a)31,108 (b)7,753 (b)6,614 (b)6,562 (b)5,832 ------------------------------------------------------------- SA MFS TOTAL RETURN***** - SAST Class 1 Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$28.848 (a)$22.156 (a)$25.854 (a)$28.020 (b)$28.362 (b)$21.728 (b)$25.292 (b)$27.342 Ending AUV................................................. (a)$22.156 (a)$25.854 (a)$28.020 (a)$28.129 (b)$21.728 (b)$25.292 (b)$27.342 (b)$27.380 Ending Number of AUs....................................... (a)1,175,435 (a)1,120,206 (a)1,033,351 (a)919,077 (b)41,654 (b)43,640 (b)33,876 (b)38,179 ------------------------------------------------------------- SA MFS TOTAL RETURN***** - SAST Class 3 Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$28.439 (a)$21.787 (a)$25.360 (a)$27.416 (b)$28.032 (b)$21.421 (b)$24.872 (b)$26.822 Ending AUV................................................. (a)$21.787 (a)$25.360 (a)$27.416 (a)$27.454 (b)$21.421 (b)$24.872 (b)$26.822 (b)$26.792 Ending Number of AUs....................................... (a)162,243 (a)147,761 (a)133,286 (a)141,828 (b)25,301 (b)27,626 (b)27,592 (b)28,210 ------------------------------------------------------------- SMALL & MID CAP VALUE - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.............................................. (a)$18.366 (a)$11.728 (a)$16.419 (a)$20.299 (b)$18.098 (b)$11.528 (b)$16.099 (b)$19.853 Ending AUV................................................. (a)$11.728 (a)$16.419 (a)$20.299 (a)$18.349 (b)$11.528 (b)$16.099 (b)$19.853 (b)$17.901 Ending Number of AUs....................................... (a)696,195 (a)304,183 (a)312,980 (a)260,988 (b)17,698 (b)17,128 (b)35,549 (b)18,486 ------------------------------------------------------------- TECHNOLOGY - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$2.886 (a)$1.389 (a)$2.058 (a)$2.437 (b)$2.836 (b)$1.362 (b)$2.012 (b)$2.377 Ending AUV................................................. (a)$1.389 (a)$2.058 (a)$2.437 (a)$2.271 (b)$1.362 (b)$2,012 (b)$2.377 (b)$2.210 Ending Number of AUs....................................... (a)267,368 (a)394,223 (a)324,070 (a)286,227 (b)1,756 (b)1,551 (b)1,470 (b)31,115 ------------------------------------------------------------- TECHNOLOGY - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$2.858 (a)$1.374 (a)$2.032 (a)$2.403 (b)$2.817 (b)$1.350 (b)$1.992 (b)$2.350 Ending AUV................................................. (a)$1.374 (a)$2.032 (a)$2.403 (a)$2.236 (b)$1.350 (b)$1.992 (b)$2.350 (b)$2.181 Ending Number of AUs....................................... (a)85,936 (a)96,572 (a)100,308 (a)85,481 (b)10,895 (b)10,819 (b)10,754 (b)10,680 ------------------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/12 12/31/13 12/31/14 ============================================================ ============= ============= ============= SA MARSICO FOCUSED GROWTH*** - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.............................................. (a)$11.227 (a)$12.271 (a)$16.240 (b)$10.961 (b)$11.950 (b)$15.777 Ending AUV................................................. (a)$12.271 (a)$16.240 (a)$17.747 (b)$11.950 (b)$15.777 (b)$17.198 Ending Number of AUs....................................... (a)48,127 (a)46,294 (a)48,963 (b)9,263 (b)9,193 (b)9,136 ------------------------------------------------------------- SA MFS MASSACHUSETTS INVESTORS TRUST**** - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$22.483 (a)$26.384 (a)$34.256 (b)$21.877 (b)$25.609 (b)$33.167 Ending AUV................................................. (a)$26.384 (a)$34.256 (a)$37.408 (b)$25.609 (b)$33.167 (b)$36.129 Ending Number of AUs....................................... (a)55,066 (a)47,840 (a)39,394 (b)4,088 (b)2,557 (b)2,552 ------------------------------------------------------------- SA MFS MASSACHUSETTS INVESTORS TRUST**** - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$22.163 (a)$25.970 (a)$33.667 (b)$21.601 (b)$25.249 (b)$32.651 Ending AUV................................................. (a)$25.970 (a)$33.667 (a)$36.711 (b)$25.249 (b)$32.651 (b)$35.514 Ending Number of AUs....................................... (a)31,877 (a)28,032 (a)29,813 (b)4,054 (b)3,317 (b)3,256 ------------------------------------------------------------- SA MFS TOTAL RETURN***** - SAST Class 1 Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$28.129 (a)$30.839 (a)$36.148 (b)$27.380 (b)$29.943 (b)$35.010 Ending AUV................................................. (a)$30.839 (a)$36.148 (a)$38.611 (b)$29.943 (b)$35.010 (b)$37.302 Ending Number of AUs....................................... (a)769,468 (a)678,157 (a)593,322 (b)31,582 (b)27,338 (b)25,538 ------------------------------------------------------------- SA MFS TOTAL RETURN***** - SAST Class 3 Shares (Inception Date - 7/28/03) Beginning AUV.............................................. (a)$27.454 (a)$30.024 (a)$35.105 (b)$26.792 (b)$29.226 (b)$34.087 Ending AUV................................................. (a)$30.024 (a)$35.105 (a)$37.403 (b)$29.226 (b)$34.087 (b)$36.228 Ending Number of AUs....................................... (a)156,879 (a)164,171 (a)180,994 (b)17,803 (b)20,715 (b)21,020 ------------------------------------------------------------- SMALL & MID CAP VALUE - SAST Class 3 Shares (Inception Date - 7/28/03)* Beginning AUV.............................................. (a)$18.349 (a)$21.380 (a)$28.945 (b)$17.901 (b)$20.806 (b)$28.098 Ending AUV................................................. (a)$21.380 (a)$28.945 (a)$31.035 (b)$20.806 (b)$28.098 (b)$30.052 Ending Number of AUs....................................... (a)247,325 (a)255,917 (a)142,282 (b)35,664 (b)32,550 (b)11,361 ------------------------------------------------------------- TECHNOLOGY - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$2.271 (a)$2.410 (a)$2.989 (b)$2.210 (b)$2.339 (b)$2.894 Ending AUV................................................. (a)$2.410 (a)$2.989 (a)$3.675 (b)$2.339 (b)$2.894 (b)$3.549 Ending Number of AUs....................................... (a)238,284 (a)199,997 (a)188,600 (b)31,115 (b)-- (b)-- ------------------------------------------------------------- TECHNOLOGY - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV.............................................. (a)$2.236 (a)$2.369 (a)$2.934 (b)$2.181 (b)$2.306 (b)$2.848 Ending AUV................................................. (a)$2.369 (a)$2.934 (a)$3.602 (b)$2.306 (b)$2.848 (b)$3.488 Ending Number of AUs....................................... (a)105,360 (a)91,742 (a)84,280 (b)10,617 (b)931 (b)865 -------------------------------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. * Only available as Class 3 shares of SunAmerica Series Trust for all contracts. *** On May 1, 2015, the Marsico Focused Growth Portfolio was renamed SA Marsico Focused Growth Portfolio. **** On May 1, 2015, the MFS Massachusetts Investors Trust Portfolio was renamed SA MFS Massachusetts Investors Trust Portfolio. ***** On May 1, 2015, the MFS Total Return Portfolio was renamed SA MFS Total Return Portfolio. A-8
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/05 12/31/06 12/31/07 12/31/08 ===================================== ============= ============= ============= ============= TELECOM UTILITY - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV....................... (a)$11.621 (a)$12.192 (a)$15.191 (a)$18.091 (b)$11.508 (b)$12.044 (b)$14.969 (b)$17.782 Ending AUV.......................... (a)$12.192 (a)$15.191 (a)$18.091 (a)$11.146 (b)$12.044 (b)$14.969 (b)$17.782 (b)$10.928 Ending Number of AUs................ (a)323,245 (a)303,562 (a)272,670 (a)234,850 (b)231 (b)219 (b)62 (b)70 -------------------------------------- TELECOM UTILITY - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV....................... (a)$11.572 (a)$12.123 (a)$15.082 (a)$17.934 (b)$11.496 (b)$12.014 (b)$14.909 (b)$17.684 Ending AUV.......................... (a)$12.123 (a)$15.082 (a)$17.934 (a)$11.033 (b)$12.014 (b)$14.909 (b)$17.684 (b)$10.852 Ending Number of AUs................ (a)65,679 (a)71,962 (a)61,191 (a)71,451 (b)5,769 (b)5,511 (b)5,511 (b)1,195 -------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED ENDED VARIABLE PORTFOLIOS 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 ===================================== ============= ============= ============= ============= ============= ============= TELECOM UTILITY - SAST Class 1 Shares (Inception Date - 7/9/01) Beginning AUV....................... (a)$11.146 (a)$14.499 (a)$16.219 (a)$16.975 (a)$18.972 (a)$22.419 (b)$10.928 (b)$14.180 (b)$15.823 (b)$16.519 (b)$18.416 (b)$20.931 Ending AUV.......................... (a)$14.499 (a)$16.219 (a)$16.975 (a)$18.972 (a)$22.419 (a)$24.839 (b)$14.180 (b)$15.823 (b)$16.519 (b)$18.416 (b)$20.931 (b)$23.991 Ending Number of AUs................ (a)188,389 (a)161,272 (a)135,914 (a)116,984 (a)99,342 (a)91,508 (b)30 (b)29 (b)0 (b)0 (b)-- (b)368 -------------------------------------- TELECOM UTILITY - SAST Class 2 Shares (Inception Date - 7/9/01) Beginning AUV....................... (a)$11.033 (a)$14.330 (a)$16.006 (a)$16.727 (a)$18.667 (a)$22.026 (b)$10.852 (b)$14.060 (b)$15.665 (b)$16.330 (b)$18.178 (b)$21.396 Ending AUV.......................... (a)$14.330 (a)$16.006 (a)$16.727 (a)$18.667 (a)$22.026 (a)$24.366 (b)$14.060 (b)$15.665 (b)$16.330 (b)$18.178 (b)$21.396 (b)$23.610 Ending Number of AUs................ (a)59,631 (a)42,825 (a)38,685 (a)22,938 (a)20,835 (a)19,267 (b)931 (b)1,411 (b)1,851 (b)1,851 (b)1,851 (b)1,851 --------------------------------------
AUV - Accumulation Unit Value AU - Accumulation Unit (a) Reflecting minimum Separate Account expenses. (b) Reflecting maximum Separate Account expenses, with election of the optional EstatePlus feature. A-9 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- APPENDIX B - DEATH BENEFITS FOLLOWING SPOUSAL CONTINUATION -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The following details the death benefit options payable upon the Continuing Spouse's death. The death benefit we will pay to the new Beneficiary chosen by the Continuing Spouse varies depending on the death benefit option elected by the original Owner of the contract, the age of the Continuing Spouse as of the Continuation Date and the Continuing Spouse's date of death. Capitalized terms used in this Appendix have the same meaning as they have in the prospectus. We define "Continuation Net Purchase Payments" as Net Purchase Payments made on or after the Continuation Date. For the purpose of calculating Continuation Net Purchase Payments, the amount that equals the contract value on the Continuation Date, including the Continuation Contribution, is considered a Purchase Payment. If the Continuing Spouse makes no additional Purchase Payments or withdrawals, the Continuation Net Purchase Payments equals the contract value on the Continuation Date, including the Continuation Contribution, if any. The term "withdrawals" as used in describing the death benefits is defined as withdrawals and the fees and charges applicable to those withdrawals. THE COMPANY WILL NOT ACCEPT PURCHASE PAYMENTS FROM ANYONE AGE 86 OR OLDER. THEREFORE, THE DEATH BENEFIT CALCULATIONS DESCRIBED BELOW ASSUME THAT NO PURCHASE PAYMENTS ARE RECEIVED ON OR AFTER THE CONTINUING SPOUSE'S 86TH BIRTHDAY. If the Continuing Spouse is below age 90 at the time of death, and: If a Continuation Contribution is added on the Continuation Date, the death benefit is the greatest of: a. The contract value; or b. Continuation Net Purchase Payments; or c. The Maximum Anniversary Value on any contract anniversary occurring after the Continuation Date and prior to the Continuing Spouse's 81st birthday. The anniversary value equals the contract value on a contract anniversary plus any Purchase Payments made since that contract anniversary; and reduced for any Withdrawals recorded since the contract anniversary in the same proportion that each Withdrawal reduced the contract value on the date of the Withdrawal. Contract anniversary is defined as any anniversary following the full 12 month period after the original contract issue date. If a Continuation Contribution is not added on the Continuation Date, the death benefit is the greatest of: a. The contract value; or b. Net Purchase Payments received since the original issue date; or c. The Maximum Anniversary Value on any contract anniversary from the original contract issue date prior to the Continuing Spouse's 81st birthday. The anniversary value equals the contract value on a contract anniversary plus any Purchase Payments since that contract anniversary; and reduced for any Withdrawals since the contract anniversary in the same proportion that the Withdrawal reduced each contract value on the date of the Withdrawal. Contract anniversary is defined as the full 12 month period after the original contract issue date. If the Continuing Spouse is age 90 or older at the time of death, under the Maximum Anniversary Value death benefit, their beneficiary will receive only the contract value at the time we receive all required paperwork and satisfactory proof of death. THE FOLLOWING IS A DESCRIPTION OF THE DEATH BENEFIT OPTIONS FOLLOWING SPOUSAL CONTINUATION FOR CONTRACTS ISSUED BETWEEN OCTOBER 24, 2001 AND APRIL 30, 2009. A. DEATH BENEFIT PAYABLE UPON CONTINUING SPOUSE'S DEATH: 1. PURCHASE PAYMENT ACCUMULATION OPTION If a Continuation Contribution is added on the Continuation Date, the death benefit is the greatest of: a. The contract value; or b. Continuation Net Purchase Payments compounded to the date of death at a 4% annual growth rate, (3% growth rate if the Continuing Spouse was age 70 or older on the Continuation Date or for any contracts issued in the State of Washington, regardless of age) plus any Purchase Payments recorded after the date of death; and reduced by any Withdrawals recorded after the date of death in the same proportion that the Withdrawal reduced the contract value on the date of each withdrawal; or c. The contract value on the seventh contract anniversary following the original issue date of the contract, plus any Purchase Payments since the seventh contract anniversary and reduced for any Withdrawals recorded after the seventh contract anniversary in the same proportion that the Withdrawal reduced the contract value on the date of the Withdrawal, all compounded at a 4% annual growth rate until the date of death (3% annual growth rate if the Continuing Spouse is age 70 or older on the Continuation Date) plus any Purchase Payments; and reduced for any withdrawals recorded after the date of death in B-1 the same proportion that each withdrawal reduced the contract value on the date of the withdrawal. If a Continuation Contribution is not added on the Continuation Date, the death benefit is the greater of: a. The contract value; or b. Purchase Payments made from the original contract issue date compounded to the date of death at a 4% annual growth rate, (3% growth rate if the Continuing Spouse was age 70 or older on the original contract issue date) plus any Purchase Payments recorded after the date of death; and reduced for any Gross Withdrawals recorded after the date of death in the same proportion that each Gross Withdrawal reduced the contract value on the date of the withdrawal; or c. The contract value on the seventh contract anniversary following the original issue date of the contract, plus any Purchase Payments since the seventh contract anniversary; and reduced for any Withdrawals since the seventh contract anniversary in the same proportion that each Withdrawal reduced the contract value on the date of the Withdrawal, all compounded at a 4% annual growth rate until the date of death (3% annual growth rate if the Continuing Spouse is age 70 or older on the contract issue date) plus any Purchase Payments; and reduced for any Withdrawals recorded after the date of death in the same proportion that each Withdrawal reduced the contract value on the date of the Withdrawal. 2. MAXIMUM ANNIVERSARY VALUE OPTION -- IF THE CONTINUING SPOUSE IS BELOW 90 AT THE TIME OF DEATH, AND: If a Continuation Contribution is not added on the Continuation Date, the death benefit is the greatest of: a. The contract value; or b. Continuation Net Purchase Payments; or c. The maximum anniversary value on any contract anniversary occurring after the Continuation Date and prior to the Continuing Spouse's 81st birthday. The anniversary value equals the contract value on a contract anniversary plus any Purchase Payments made since that contract anniversary; and reduced for any Withdrawals recorded since the contract anniversary in the same proportion that each Withdrawal reduced the contract value on the date of the Withdrawal. Contract anniversary is defined as any anniversary following the full 12 month period after the original contract issue date. If a Continuation Contribution is not added on the Continuation Date, the death benefit is the greatest of: a. The contract value; or b. Net Purchase Payments received since the original issue date; or c. The maximum anniversary value on any contract anniversary from the original contract issue date prior to the Continuing Spouse's 81st birthday. The anniversary value equals the contract value on a contract anniversary plus any Purchase Payments since that contract anniversary; and reduced for any Withdrawals since the contract anniversary in the same proportion that the Withdrawal reduced each contract value on the date of the Withdrawal. Contract anniversary is defined as the full 12 month period after the original contract issue date. If the Continuing Spouse is age 90 or older at the time of death, under the Maximum Anniversary death benefit, their beneficiary will receive only the contract value at the time we receive all required paperwork and satisfactory proof of death. The following is a description of the EstatePlus death benefit following Spousal Continuation, if elected, for contracts issued between March 30, 2001 and April 30, 2009: B. THE ESTATEPLUS BENEFIT PAYABLE UPON CONTINUING SPOUSE'S DEATH: The EstatePlus benefit is only available if the original owner elected EstatePlus and the Continuing Spouse is age 80 or younger on the Continuation Date. EstatePlus is not payable after the Latest Annuity Date. If the Continuing Spouse had earnings in the contract at the time of his/her death, we will add a percentage of those earnings (the "EstatePlus Percentage"), subject to a maximum dollar amount (the "Maximum EstatePlus Percentage"), to the death benefit payable. The contract year of death will determine the EstatePlus Percentage and the Maximum EstatePlus benefit. The EstatePlus benefit, if any, is added to the death benefit payable under the Purchase Payment Accumulation or the Maximum Anniversary Value option. B-2 On the Continuation Date, if the Continuing Spouse is 69 or younger, the table below shows the available EstatePlus benefit:
CONTRACT YEAR ESTATEPLUS MAXIMUM OF DEATH PERCENTAGE ESTATEPLUS BENEFIT Years 0-4 25% of Earnings 40% of Continuation Net Purchase Payments* Years 5-9 40% of Earnings 65% of Continuation Net Purchase Payments* Years 10+ 50% of Earnings 75% of Continuation Net Purchase Payments*
What is the Contract Year of Death? Contract Year of Death is the number of full 12-month periods starting on the Continuation Date and ending on the Continuing Spouse's date of death. The Contract Year of Death is used to determine the EstatePlus Percentage and Maximum EstatePlus benefit as indicated in the tables above. What is the EstatePlus benefit? We determine the EstatePlus benefit using the EstatePlus Percentage, as indicated in the tables above, which is a specified percentage of the earnings in the contract at the time of the Continuing Spouse's death. For the purpose of this calculation, earnings equals (1) minus (2) where (1) equals the contract value on the Continuing Spouse's date of death; (2) equals the Continuation Net Purchase Payment(s). What is the Maximum EstatePlus amount? The EstatePlus benefit is subject to a maximum dollar amount. The Maximum EstatePlus benefit is equal to a specified percentage of the Continuation Net Purchase Payments, as indicated in the tables above. WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE THE SPOUSAL CONTINUATION PROVISION (IN ITS ENTIRETY OR ANY COMPONENT) AT ANY TIME WITH RESPECT TO PROSPECTIVELY ISSUED CONTRACTS. THE FOLLOWING IS A DESCRIPTION OF THE DEATH BENEFIT OPTIONS FOLLOWING SPOUSAL CONTINUATION FOR CONTRACTS ISSUED PRIOR TO OCTOBER 24, 2001: DEATH BENEFIT PAYABLE UPON CONTINUING SPOUSE'S DEATH: OPTION 1 -- PURCHASE PAYMENT ACCUMULATION OPTION If a Continuation Contribution is added on the Continuation Date, the death benefit is the greater of: a. The contract value; or b. The contract value on the Continuation Date (including the Continuation Contribution) plus any Purchase Payments minus any withdrawals made since the Continuation Date compounded to the date of death at a 4% annual growth rate, (3% growth rate if the Continuing Spouse was age 70 or older on the Continuation Date) plus any Purchase Payments minus withdrawals recorded after the date of death; or c. The contract value on the seventh contract anniversary following the original issue date of the contract, plus any Purchase Payments and less any withdrawals, since the seventh contract anniversary, all compounded at a 4% annual growth rate until the date of death (3% growth rate if the Continuing Spouse is age 70 or older on the Continuation Date) plus any Purchase Payments less withdrawals recorded after the date of death. The Continuation Contribution is considered a Purchase Payment received on the Continuation Date. If a Continuation Contribution is not added on the Continuation Date, the death benefit is the greater of: a. The contract value; or b. Purchase Payments minus withdrawals made from the original contract issue date compounded to the date of death at a 4% annual growth rate, (3% growth rate if the Continuing Spouse was age 70 or older on the Contract Issue Date) plus any Purchase Payments minus withdrawals recorded after the date of death; or c. The contract value on the seventh contract anniversary following the original issue date of the contract, plus any Purchase Payments and less any withdrawals, since the seventh contract anniversary, all compounded at a 4% annual growth rate until the date of death (3% growth rate if the Continuing Spouse was age 70 or older on the Contract Issue Date) plus any Purchase Payments less withdrawals recorded after the date of death. OPTION 2 -- MAXIMUM ANNIVERSARY VALUE OPTION If the Continuing Spouse is below age 90 at the time of death, and if a Continuation Contribution is added on the Continuation Date, the death benefit is the greater of: a. The contract value; or b. Continuation Net Purchase Payments plus Purchase Payments made since the Continuation Date; and reduced for withdrawals in the same proportion that the contract value was reduced on the date of such withdrawal; or c. The maximum anniversary value on any contract anniversary occurring after the Continuation Date prior to the Continuing Spouse's 81st birthday. The anniversary value equals the contract value on a contract anniversary plus any Purchase Payments since that contract anniversary; and reduced for any withdrawals recorded since that contract anniversary in the same proportion that the withdrawal reduced the contract value on the date of the withdrawal. B-3 Contract anniversary is defined as any anniversary following the full 12 month period after the original contract issue date. If the Continuing Spouse is below age 90 at the time of death and if a Continuation Contribution is not added on the Continuation Date, the death benefit is the greater of: a. The contract value; or b. Net Purchase Payments received since the original issue date; or c. The maximum anniversary value on any contract anniversary from the original contract issue date prior to the Continuing Spouse's 81st birthday. The anniversary value equals the contract value on a contract anniversary plus any Purchase Payments since that contract anniversary; and reduced for any withdrawals recorded since that contract anniversary in the same proportion that the withdrawal reduced the contract value on the date of the withdrawal. Contract anniversary is defined as any anniversary following the full 12 month period after the original contract issue date. If the Continuing Spouse is age 90 or older at the time of death, under the Maximum Anniversary death benefit, their beneficiary will receive only the contract value at the time we receive all required paperwork and satisfactory proof of death. WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE THE SPOUSAL CONTINUATION PROVISION (IN ITS ENTIRETY OR ANY COMPONENT) AT ANY TIME WITH RESPECT TO PROSPECTIVELY ISSUED CONTRACTS. B-4 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- APPENDIX C - STATE CONTRACT AVAILABILITY AND/OR VARIABILITY -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
PROSPECTUS PROVISION AVAILABILITY OR VARIATION ISSUE STATE Transfer Privilege Any transfer over the limit of 15 will incur a $10 transfer Pennsylvania fee. Texas Free Look If you reside in Arizona and are age 65 or older on your Arizona Contract Date, the Free Look period is 30 days Free Look If you reside in California and are age 60 or older on your California Contract Date, the Free Look period is 30 days. 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 2.0% for Non-Qualified Maine contracts based on total Purchase Payments when you begin the Income Phase. Premium Tax We deduct premium tax charges of 3.5% for Non-Qualified Nevada contracts based on contract value when you begin the Income Phase. Premium Tax For the first $500,000 in the contract, we deduct premium South Dakota tax charges of 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 0.08% 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 Virginia contracts and 1.0% for Non-Qualified contracts based on contract value when you begin the Income Phase. Premium Tax We deduct premium tax charges of 1.0% for Non-Qualified Wyoming contracts based on total Purchase Payments when you begin the Income Phase.
C-1
Please forward a copy (without charge) of the Anchor Advisor Variable Annuity Statement of Additional Information to: (Please print or type and fill in all information.) ----------------------------------------------------------------------- Name ----------------------------------------------------------------------- Address ----------------------------------------------------------------------- City/State/Zip ----------------------------------------------------------------------- Contract Issue Date: Date: ------------------------------- Signed: ---------------------------- Return to: American General Life Insurance Company, Annuity Service Center, P.O. Box 15570, Amarillo, Texas 79105-5570
STATEMENT OF ADDITIONAL INFORMATION FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT ISSUED BY AMERICAN GENERAL LIFE INSURANCE COMPANY IN CONNECTION WITH VARIABLE ANNUITY ACCOUNT FOUR ANCHOR ADVISOR VARIABLE ANNUITY This Statement of Additional Information is not a prospectus; it should be read with the prospectus dated May 1, 2015 relating to the annuity contracts described above, a copy of which may be obtained without charge by calling (800) 445-7862 or by written request addressed to: American General Life Insurance Company Annuity Service Center P.O. Box 15570 Amarillo, Texas 79105-5570 May 1, 2015 TABLE OF CONTENTS
PAGE ---- Separate Account and the Company........................................... 3 General Account............................................................ 4 Performance Data .......................................................... 5 Annuity Income Payments.................................................... 8 Annuity Unit Values........................................................ 9 Taxes...................................................................... 12 Broker-Dealer Firms Receiving Revenue Sharing Payments..................... 24 Distribution of Contracts.................................................. 25 Financial Statements....................................................... 25
-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 Anchor Advisor contracts were issued by SunAmerica Annuity in all states except New York. Variable Annuity Account Four (the "Separate Account") was originally established by Anchor National Life Insurance Company ("Anchor National") on November 8, 1994, pursuant to the provisions of California law, as a segregated asset account of the Company. 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. 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 -3- 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 funds 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 4:00p.m. Eastern Time. American Home is a stock property-casualty insurance company incorporated under the laws of the State of New York on February 7, 1899. American Home's principal executive office is located at 175 Water Street, 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. 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 the one-year fixed investment option and/or the one year DCA fixed account available in connection with the general account, as elected by the owner at the time of purchasing a contract or upon making a subsequent payment. Assets supporting amounts allocated to the one-year fixed investment option and/or the one-year DCA account 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). 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 Variable Portfolios are computed in the manner described below. -5- CASH MANAGEMENT PORTFOLIO 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)/(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 The value of the Accumulation Unit at the end of the period (EV) is determined by (1) adding, to the value of the Accumulation Unit at the beginning of the period (SV), the investment income from the underlying fund attributed to the Accumulation Unit over the period, and (2) subtracting, from the result, the portion of the annual mortality and expense risk and distribution expense charges allocable to the 7 day period (obtained by multiplying the annually-based charges by the fraction 365/7). The current yield is then obtained by annualizing the Base Period Return: Current Yield = (Base Period Return) x (365/7) The Cash Management Portfolio 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 underlying fund. 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: 365/7 Effective Yield = [(Base Period Return + 1) - 1] The yield quoted should not be considered a representation of the yield of the Cash Management Portfolio in the future since the yield is not fixed. Actual yields will depend on the type, quality and maturities of the investments held by the underlying fund and changes in interest rates on such investments. Yield information may be useful in reviewing the performance of the Cash Management Portfolio and for providing a basis for comparison with other investment alternatives. However, the Cash Management Portfolio's yield fluctuates, unlike bank deposits or other investments that typically pay a fixed yield for a stated period of time. In periods of very low short-term interest rates, the Portfolio's yield may become negative, which may result in a decline in value of your investment. OTHER VARIABLE PORTFOLIOS The Variable Portfolios of the Separate Account other than the Cash Management Portfolio compute their performance data as "total return". These rates of return do not reflect election of optional features. The rates of return would be lower if these features were included in the calculations. The total return figures are based on historical data and are not intended to indicate future performance. These rates of return reflect the currently applicable 12b-1 service fee on the Trusts. If you purchased your contract before July 9, 2001, the variable portfolio shares of the Anchor Series and SunAmerica Series Trusts are not subject to the 12b-1 service fee, and therefore, the performance figures would be slightly higher. Total return for a Variable Portfolio represents a single computed annual rate of return that, when compounded annually over a specified time period (one, five, and ten years, or since inception) and applied to a hypothetical initial investment in a contract funded by that Variable Portfolio made at the -6- 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: n P (1 + T) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5, or 10 year period as of the end of the period (or fractional portion thereof). The total return figures reflect the effect of recurring charges, as discussed herein. Total return figures are derived from historical data and are not intended to be a projection of future performance. POLARIS PORTFOLIO ALLOCATOR MODELS PERFORMANCE The Separate Account also computes "total return" data for each of the Polaris Portfolio Allocator models. Each model is comprised of a combination of Variable Portfolios available under the contract using various asset classes based on historical asset class performance. Total return for a Polaris Portfolio Allocator model represents a single computed annual rate of return that, when compounded annually over a specified time period (one, five, and ten years, or since inception) and applied to a hypothetical investment in a contract, will produce the same contract value at the end of the period that the hypothetical investment would have produced over the same period. It is assumed that the initial hypothetical investment is made on the model inception date and rebalanced in accordance with the model on each reevaluation date. The model inception date is the date when the model was first offered for investment. -7- 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. -8- 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. 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 -9- 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 ILLUSTRATIVE EXAMPLE The change in Annuity Unit value for a Variable Portfolio from one month to the next is determined in part by multiplying the Annuity Unit value at the prior month end by the NIF for that Variable Portfolio for the new month. In addition, however, the result of that computation must also be multiplied by an additional factor that takes into account, and neutralizes, the assumed investment rate of 3.5 percent per annum upon which the Income Payment tables are based. For example, if the net investment rate for a Variable Portfolio (reflected in the NIF) were equal to the assumed investment rate, the variable Income Payments should remain constant (i.e., the Annuity Unit value should not change). The monthly factor that neutralizes the assumed investment rate of 3.5 percent per annum is: (1/12 1/[(1.035) )] = 0.99713732 In the example given above, if the Annuity Unit value for the Variable Portfolio was $10.103523 on the last business day in August, the Annuity Unit value on the last business day in September would have been: $10.103523 x 1.00174825 x 0.99713732 = $10.092213 VARIABLE INCOME PAYMENTS ILLUSTRATIVE EXAMPLE Assume that a male owner, P, owns a contract in connection with which P has allocated all of his contract value to a single Variable Portfolio. P is also the sole Annuitant and, at age 60, has elected to annuitize his contract under Option 4, a Life Annuity With 120 Monthly Payments Guaranteed. As of the last valuation preceding the Annuity Date, P's Account was credited with 7543.2456 Accumulation Units each having a value of $15.432655, (i.e., P's account value is equal to 7543.2456 x $15.432655 = $116,412.31). Assume also that the Annuity Unit value for the Variable Portfolio on that same date is $13.256932, and that the Annuity Unit value on the day immediately prior to the second Income Payment date is $13.327695. P's first variable Income Payment is determined from the annuity rate tables in P's contract, using the information assumed above. From the tables, which supply monthly Income Payments for each $1,000 of applied contract value, P's first variable Income Payment is determined by multiplying the monthly installment of $5.42 (Option 4v table, male Annuitant age 60 at the Annuity Date) by the result of dividing P's account value by $1,000: First Payment = $5.42 x ($116,412.31/$1,000) = $630.95 -10- The number of P's Annuity Units (which will be fixed; i.e., it will not change unless he transfers his Annuity Units to Annuity Units of another Variable Portfolio) is also determined at this time and is equal to the amount of the first variable Income Payment divided by the value of an Annuity Unit on the day immediately prior to annuitization: Annuity Units = $630.95/$13.256932 = 47.593968 P's second variable Income Payment is determined by multiplying the number of Annuity Units by the Annuity Unit value as of the day immediately prior to the second payment due date: Second Payment = 47.593968 x $13.327695 = $634.32 The third and subsequent variable Income Payments are computed in a manner similar to the second variable Income Payment. Note that the amount of the first variable Income Payment depends on the contract value in the relevant Variable Portfolio on the Annuity Date and thus reflects the investment performance of the Variable Portfolio net of fees and charges during the Accumulation Phase. The amount of that payment determines the number of Annuity Units, which will remain constant during the Annuity Phase (assuming no transfers from the Variable Portfolio). The net investment performance of the Variable Portfolio during the Annuity Phase is reflected in continuing changes during this phase in the Annuity Unit value, which determines the amounts of the second and subsequent variable Income Payments. -11- TAXES ----- GENERAL Note: DISCUSSIONS REGARDING THE TAX TREATMENT OF ANY ANNUITY CONTRACT OR RETIREMENT PLAN AND PROGRAM ARE INTENDED FOR GENERAL PURPOSES ONLY AND ARE NOT INTENDED AS TAX ADVICE, EITHER GENERAL OR INDIVIDUALIZED, NOR SHOULD THEY BE INTERPRETED TO PROVIDE ANY PREDICTIONS OR GUARANTEES OF A PARTICULAR TAX TREATMENT. SUCH DISCUSSIONS GENERALLY ARE BASED UPON THE COMPANY'S UNDERSTANDING OF CURRENT TAX RULES AND INTERPRETATIONS, AND MAY INCLUDE AREAS OF THOSE RULES THAT ARE MORE OR LESS CLEAR OR CERTAIN. TAX LAWS ARE SUBJECT TO LEGISLATIVE MODIFICATION, AND WHILE MANY SUCH MODIFICATIONS WILL HAVE ONLY A PROSPECTIVE APPLICATION, IT IS IMPORTANT TO RECOGNIZE THAT A CHANGE COULD HAVE RETROACTIVE EFFECT AS WELL. YOU SHOULD SEEK COMPETENT TAX OR LEGAL ADVICE, AS YOU DEEM NECESSARY OR APPROPRIATE, REGARDING YOUR OWN CIRCUMSTANCES. WE DO NOT GUARANTEE THE TAX STATUS OR TREATMENT OF YOUR ANNUITY. 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. -12- 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 Contracts should seek competent financial advice about the tax consequences of any distributions. 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. TAX TREATMENT OF DISTRIBUTIONS - NON-QUALIFIED CONTRACTS If you make partial or total withdrawals from a non-qualified contract, the Code 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 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 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 591/2; - when paid to your beneficiary after you die; - after you become disabled (as defined in the Code); - 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 expectancies) of you and your designated beneficiary for a period of 5 years or attainment of age 591/2, whichever is later; -13- - under an immediate annuity contract; - which are 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 went 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. TAX TREATMENT OF DISTRIBUTIONS - QUALIFIED CONTRACTS 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 and 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 and 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. -14- 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; - 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 certain 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; - payments to certain reservists called up for active duty after September 11, 2001; or - payments up to $3,000 per year for health, life and accident insurance by certain retired public safety officers. -15- 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 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; (3) minimum distributions required to be made under the Code; and (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 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). 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. -16- 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. The American Taxpayer Relief Act of 2013 ("ATRA") expanded the ability for such in-Plan Roth conversions by permitting eligible plans that include an in-plan Roth contribution feature to offer participants the option of converting any amounts held in the plan to after-tax Roth, regardless of whether those amounts are currently distributable. 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." -17- 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. -18- FOREIGN ACCOUNT TAX COMPLIANCE ("FATCA") A Contract Owner who is not a "United States person" which is defined under the Internal Revenue Code section to mean: . a citizen or resident of the United States . a partnership or corporation created or organized in the United States or under the law of the United States or of any state, or the District of Columbia . any estate or trust other than a foreign estate or foreign trust (see Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust) . a person that meets the substantial presence test . any other person that is not a foreign person should be aware that FATCA, enacted in 2010, provides that a 30% withholding tax will be imposed on certain gross payments (which could include distributions from cash value life insurance or annuity products) made to a foreign entity if such entity fails to provide applicable certifications under a Form W-9, Form W-8-BEN-E, Form W-8-IMY, or other applicable form, each of which is effective for three years from date of signature unless a change in circumstances makes any information on the form incorrect. Notwithstanding the preceding sentence, certain withholding certifications will remain effective until a change in circumstances makes any information on the form incorrect. The Contract Owner must inform the Company within 30 days of any change in circumstances that makes any information on the form incorrect by furnishing a new IRS Form W-8 or acceptable substitute form. An entity, for this purpose, will be considered a foreign entity unless it provides an applicable certification to the contrary. OTHER WITHHOLDING TAX A Contract Owner that is not exempt from United States federal withholding tax should consult its tax advisor as to the availability of an exemption from, or reduction of, such tax under an applicable income tax treaty, if any. 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 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. -19- 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. However, Revenue Procedure 2011-38 provides that a direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract, regardless of whether the two annuity contracts are issued by the same or different companies, will be treated as a tax-free exchange under Code section 1035 if no amounts, other than amounts received an annuity for a period of 10 years or more or during one or more lives, are received under the original contract or the new contract during the 180 days beginning on the date of the transfer (in the case of a new contract, on the date the contract is placed in-force). 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, certain contractual withdrawal penalties and restrictions may apply to surrender from Qualified contracts. -20- (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 2015 is the lesser of 100% of includible compensation or $18,000. 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 $6,000 in 2015 for employees age 50 or older, provided that other applicable requirements are satisfied. Total combined employer and employee contributions for 2015 may not exceed the lesser of $53,000 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. On July 26, 2007, the Department of the Treasury published final 403(b) regulations that largely became effective on January 1, 2009. These comprehensive regulations include several 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. -21- 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 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. The foregoing discussion is intended as a general discussion only, and you may wish to discuss the 403(b) regulations and/or the general information above with your tax advisor. (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 2015 is the lesser of $5,500 or 100% of compensation. Individuals age 50 or older may be able to contribute an additional $1,000 in 2015. 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 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 nor 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 2015 of less than $98,000, your contribution may be fully deductible; if your income is between $98,000 and $118,000, your contribution may be partially deductible and if your income is $118,000 or more, your contribution may not be deductible. If you are single and your income in 2015 is less than $61,000, your contribution may be fully deductible; if your income is between $61,000 and $71,000, your contribution may be partially deductible and if your income is $71,000 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 2015 is between $183,000 and $193,000, your contribution may be partially deductible. -22- (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 2015 is the lesser of $5,500 or 100% of compensation. Individuals age 50 or older may be able to contribute an additional $1,000 in 2015. 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 2015 is less than: $183,000 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 $116,000 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. (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, or in some cases made available under the plan. Funds in a non-governmental 457(b) plan remain assets of the employer and are subject to claims by the creditors of the employer. 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. -23- BROKER-DEALER FIRMS RECEIVING REVENUE SHARING PAYMENTS ------------------------------------------------------ The following list includes the names of member firms of 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, 2014, from American General Life Insurance Company and The United States Life Insurance Company in the City of New York, both affiliated companies. Your registered representative can provide you with more information about the compensation arrangements that apply upon the sale of the Contract. Ameriprise Financial Services, Inc. BancWest Investment Services, Inc. CCO Investment Services Corporation Cetera Advisor Network LLC Cetera Advisors LLC Cetera Financial Specialists LLC Cetera Investment Services LLC cfd Investments, Inc Citigroup Global Markets Inc. CUSO Financial Services, L.P. Edward D. Jones & Co., L.P. Fifth Third Securities, Inc. FSC Securities Corp. Infinex Investments, Inc. Investacorp, Inc Investment Professionals, Inc. J.J.B. Hilliard, W.L. Lyons, Inc. James Borello & Co Janney Montgomery Scott LLC. Lincoln Financial Advisor Lincoln Financial Securities LPL Financial Corporation M&T Securities, Inc. Morgan Stanley & Co., Incorporated NEXT Financial Group, Inc. Raymond James & Associates Raymond James Financial RBC Capital Markets Corporation Royal Alliance Associates, Inc. SagePoint Financial, Inc. Santander Securities LLC Securities America, Inc. Signator Financial Services, Inc. Signator Investors/John Hancock Financial Network Triad Advisors, Inc U.S. Bancorp Investments, Inc. UBS Financial Services Inc. UnionBanc Investment Services United Planners Financial Services of America BBVA Compass Investment Solutions, Inc. Voya Financial Advisors, Inc. Wells Fargo Advisor, LLC Wescom Financial Services Woodbury Financial Services, Inc. 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. -24- DISTRIBUTION OF CONTRACTS The contracts are offered on a continuous basis through AIG Capital Services, Inc., located at Harborside Financial Center, 3200 Plaza 5, Jersey City, NJ 07311-4992. AIG 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 AIG 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 1000 Louisiana Street, Suite 5800, Houston, TX 77002, serves as the independent registered public accounting firm for Variable Annuity Account Four, American General Life Insurance Company ("AGL"), and American Home Assurance Company. 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 Four of American General Life Insurance Company for the year ended December 31, 2014 and the results of its operations and the changes in its net assets for each of the periods indicated - Audited Consolidated Financial Statements of American General Life Insurance Company for the years ended December 31, 2014, 2013 and 2012 - Audited Statutory Financial Statements of American Home Assurance Company for the years ended December 31, 2014, 2013 and 2012 The financial statements of AGL should be considered only as bearing on the ability of 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. -25- AMERICAN GENERAL Life Companies Variable Annuity Account Four American General Life Insurance Company 2014 Annual Report December 31, 2014 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of American General Life Insurance Company and the Contractholders of its separate account, Variable Annuity Account Four: 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 Four (the "Separate Account"), a separate account of American General Life Insurance Company, at December 31, 2014, the results of their operations for the year then ended, the changes in 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 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, 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, 2014 by correspondence with the mutual fund companies and transfer agents, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Houston, Texas April 27, 2015 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2014
Due from (to) American Contract Contract Net assets Investment General Life owners - owners - attributable to securities - Insurance annuity accumulation contract owner Sub-accounts at fair value Company Net Assets reserves reserves reserves ------------ ------------- ------------- ----------- ---------- ------------ --------------- Growth and Income Portfolio Class VC $13,263,925 $-- $13,263,925 $ 182,280 $13,081,645 $13,263,925 Growth-Income Fund Class 2 59,504,455 -- 59,504,455 431,030 59,073,425 59,504,455 Growth Fund Class 2 32,697,858 -- 32,697,858 280,503 32,417,355 32,697,858 Global Growth Fund Class 2 26,397,996 -- 26,397,996 409,990 25,988,006 26,397,996 Invesco VI American Franchise Fund Series II 1,437,261 -- 1,437,261 -- 1,437,261 1,437,261 Invesco VI Comstock Fund Series II 16,023,899 -- 16,023,899 76,325 15,947,574 16,023,899 Invesco VI Growth and Income Fund Series II 17,973,295 -- 17,973,295 288,578 17,684,717 17,973,295 Growth Portfolio Class 1 6,468,941 -- 6,468,941 439,311 6,029,630 6,468,941 Growth Portfolio Class 2 1,809,404 -- 1,809,404 51,023 1,758,381 1,809,404 Government and Quality Bond Portfolio Class 1 12,723,459 -- 12,723,459 402,152 12,321,307 12,723,459 Government and Quality Bond Portfolio Class 2 7,114,463 -- 7,114,463 290,676 6,823,787 7,114,463 Capital Appreciation Portfolio Class 1 29,566,510 -- 29,566,510 1,417,659 28,148,851 29,566,510 Capital Appreciation Portfolio Class 2 5,994,872 -- 5,994,872 152,077 5,842,795 5,994,872 Natural Resources Portfolio Class 1 3,515,274 -- 3,515,274 -- 3,515,274 3,515,274 Natural Resources Portfolio Class 2 2,481,476 -- 2,481,476 -- 2,481,476 2,481,476 Mid-Cap Growth Portfolio Class 1 2,673,725 -- 2,673,725 4,413 2,669,312 2,673,725 Mid-Cap Growth Portfolio Class 2 1,901,785 -- 1,901,785 92,358 1,809,427 1,901,785 Capital Growth Portfolio Class 1 706,081 -- 706,081 5,632 700,449 706,081 Capital Growth Portfolio Class 2 374,553 -- 374,553 -- 374,553 374,553 Blue Chip Growth Portfolio Class 1 827,823 -- 827,823 -- 827,823 827,823 Blue Chip Growth Portfolio Class 2 941,040 -- 941,040 -- 941,040 941,040 Growth Opportunities Portfolio Class 1 603,110 (1) 603,109 -- 603,109 603,109 Growth Opportunities Portfolio Class 2 278,353 -- 278,353 -- 278,353 278,353 Technology Portfolio Class 1 693,188 -- 693,188 -- 693,188 693,188 Technology Portfolio Class 2 306,592 -- 306,592 -- 306,592 306,592 Marsico Focused Growth Portfolio Class 1 1,380,261 -- 1,380,261 352 1,379,909 1,380,261 Marsico Focused Growth Portfolio Class 3 1,026,071 -- 1,026,071 1,007 1,025,064 1,026,071 Small & Mid Cap Value Portfolio Class 3 7,248,018 -- 7,248,018 75,215 7,172,803 7,248,018 Foreign Value Portfolio Class 3 7,320,918 -- 7,320,918 41,031 7,279,887 7,320,918 Cash Management Portfolio Class 1 6,555,036 -- 6,555,036 886,449 5,668,587 6,555,036 Cash Management Portfolio Class 2 3,956,967 -- 3,956,967 768,655 3,188,312 3,956,967 Corporate Bond Portfolio Class 1 15,062,503 -- 15,062,503 287,066 14,775,437 15,062,503 Corporate Bond Portfolio Class 2 7,760,170 1 7,760,171 344,991 7,415,180 7,760,171 Global Bond Portfolio Class 1 5,518,158 -- 5,518,158 22,245 5,495,913 5,518,158 Global Bond Portfolio Class 2 2,092,260 -- 2,092,260 117,495 1,974,765 2,092,260 High-Yield Bond Portfolio Class 1 6,467,457 -- 6,467,457 289,500 6,177,957 6,467,457 High-Yield Bond Portfolio Class 2 2,161,416 -- 2,161,416 145,717 2,015,699 2,161,416 Asset Allocation Portfolio Class 1 18,571,467 1 18,571,468 871,429 17,700,039 18,571,468 Asset Allocation Portfolio Class 2 9,003,913 -- 9,003,913 32,882 8,971,031 9,003,913 Growth-Income Portfolio Class 1 14,321,684 -- 14,321,684 315,512 14,006,172 14,321,684 Growth-Income Portfolio Class 2 2,285,720 -- 2,285,720 37,587 2,248,133 2,285,720 Global Equities Portfolio Class 1 2,562,263 -- 2,562,263 99,757 2,462,506 2,562,263 Global Equities Portfolio Class 2 541,577 -- 541,577 6,964 534,613 541,577 Alliance Growth Portfolio Class 1 12,281,313 -- 12,281,313 400,067 11,881,246 12,281,313 Alliance Growth Portfolio Class 2 1,842,961 -- 1,842,961 21,296 1,821,665 1,842,961 MFS Massachusetts Investors Trust Portfolio Class 1 1,565,855 -- 1,565,855 -- 1,565,855 1,565,855 MFS Massachusetts Investors Trust Portfolio Class 2 1,210,097 -- 1,210,097 4,565 1,205,532 1,210,097 Fundamental Growth Portfolio Class 1 337,078 -- 337,078 -- 337,078 337,078 Fundamental Growth Portfolio Class 2 324,101 -- 324,101 -- 324,101 324,101 International Diversified Equities Portfolio Class 1 5,461,996 -- 5,461,996 42,726 5,419,270 5,461,996 International Diversified Equities Portfolio Class 2 1,349,899 -- 1,349,899 16,423 1,333,476 1,349,899 Davis Venture Value Portfolio Class 1 32,800,317 -- 32,800,317 295,779 32,504,538 32,800,317 Davis Venture Value Portfolio Class 2 9,209,420 -- 9,209,420 124,019 9,085,401 9,209,420 MFS Total Return Portfolio Class 1 23,861,186 -- 23,861,186 2,575 23,858,611 23,861,186 MFS Total Return Portfolio Class 3 7,531,158 -- 7,531,158 118,041 7,413,117 7,531,158 Total Return Bond Portfolio Class 1 10,748,324 -- 10,748,324 -- 10,748,324 10,748,324 Total Return Bond Portfolio Class 2 3,122,605 -- 3,122,605 238,460 2,884,145 3,122,605 Telecom Utility Portfolio Class 1 2,281,804 -- 2,281,804 -- 2,281,804 2,281,804 Telecom Utility Portfolio Class 2 513,165 -- 513,165 -- 513,165 513,165 Equity Opportunities Portfolio Class 1 3,751,176 -- 3,751,176 213,029 3,538,147 3,751,176 Equity Opportunities Portfolio Class 2 1,015,114 -- 1,015,114 11,041 1,004,073 1,015,114 Aggressive Growth Portfolio Class 1 3,317,789 -- 3,317,789 160,475 3,157,314 3,317,789 Aggressive Growth Portfolio Class 2 178,289 -- 178,289 -- 178,289 178,289 International Growth and Income Portfolio Class 1 2,372,450 -- 2,372,450 134,189 2,238,261 2,372,450 International Growth and Income Portfolio Class 2 942,353 -- 942,353 1,046 941,307 942,353 Dogs of Wall Street Portfolio Class 1 2,295,949 -- 2,295,949 148,539 2,147,410 2,295,949 Dogs of Wall Street Portfolio Class 2 873,290 -- 873,290 -- 873,290 873,290 Balanced Portfolio Class 1 11,185,838 -- 11,185,838 188,345 10,997,493 11,185,838 Balanced Portfolio Class 2 2,797,504 1 2,797,505 20,461 2,777,044 2,797,505
See accompanying notes. 2 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014
A B A+B=C D E F C+D+E+F Increase Mortality and Net change in (decrease) Dividends expense risk Net Capital gain unrealized in net assets from and investment Net realized distributions appreciation resulting mutual administrative income gain (loss) on from mutual (depreciation) from Sub-accounts funds charges (loss) investments funds of investments operations ------------ --------- -------------- ---------- -------------- ------------- -------------- ------------- Growth and Income Portfolio Class VC $ 91,615 $(218,572) $(126,957) $ 954,954 $ -- $ (37,849) $ 790,148 Growth-Income Fund Class 2 759,478 (928,885) (169,407) 3,388,784 2,925,560 (950,020) 5,194,917 Growth Fund Class 2 256,562 (513,227) (256,665) 2,045,267 1,640,338 (1,232,923) 2,196,017 Global Growth Fund Class 2 311,743 (428,332) (116,589) 1,563,169 2,782,977 (4,025,747) 203,810 Invesco VI American Franchise Fund Series II -- (22,758) (22,758) 269,907 -- (149,128) 98,021 Invesco VI Comstock Fund Series II 178,953 (257,385) (78,432) 1,266,198 -- 9,073 1,196,839 Invesco VI Growth and Income Fund Series II 269,995 (278,681) (8,686) 896,737 2,109,590 (1,544,868) 1,452,773 Growth Portfolio Class 1 38,283 (105,525) (67,242) 446,627 -- (11,432) 367,953 Growth Portfolio Class 2 7,629 (29,858) (22,229) 160,843 -- (36,070) 102,544 Government and Quality Bond Portfolio Class 1 244,985 (205,357) 39,628 26,432 -- 414,797 480,857 Government and Quality Bond Portfolio Class 2 111,161 (104,052) 7,109 (5,166) -- 226,121 228,064 Capital Appreciation Portfolio Class 1 -- (449,580) (449,580) 1,531,871 4,949,112 (2,320,738) 3,710,665 Capital Appreciation Portfolio Class 2 -- (88,387) (88,387) 361,326 1,008,617 (560,136) 721,420 Natural Resources Portfolio Class 1 48,038 (70,348) (22,310) (274,179) -- (541,559) (838,048) Natural Resources Portfolio Class 2 28,283 (48,650) (20,367) (177,973) -- (397,088) (595,428) Mid-Cap Growth Portfolio Class 1 -- (40,624) (40,624) 203,915 214,903 (138,931) 239,263 Mid-Cap Growth Portfolio Class 2 -- (27,170) (27,170) 164,658 160,952 (136,134) 162,306 Capital Growth Portfolio Class 1 634 (11,850) (11,216) 71,475 -- (9,758) 50,501 Capital Growth Portfolio Class 2 -- (5,544) (5,544) 17,791 -- 11,167 23,414 Blue Chip Growth Portfolio Class 1 319 (11,887) (11,568) 73,841 32,731 (18,820) 76,184 Blue Chip Growth Portfolio Class 2 -- (11,707) (11,707) 16,354 35,728 30,330 70,705 Growth Opportunities Portfolio Class 1 -- (10,018) (10,018) 55,660 81,908 (111,889) 15,661 Growth Opportunities Portfolio Class 2 -- (4,377) (4,377) 27,310 38,449 (55,298) 6,084 Technology Portfolio Class 1 -- (9,574) (9,574) 32,268 -- 108,467 131,161 Technology Portfolio Class 2 -- (4,566) (4,566) 25,619 -- 42,455 63,508 Marsico Focused Growth Portfolio Class 1 108 (20,997) (20,889) 97,112 83,942 (31,614) 128,551 Marsico Focused Growth Portfolio Class 3 -- (14,573) (14,573) 38,008 60,464 (126) 83,773 Small & Mid Cap Value Portfolio Class 3 44,624 (123,034) (78,410) 758,815 1,146,767 (1,326,573) 500,599 Foreign Value Portfolio Class 3 78,191 (123,158) (44,967) 210,793 -- (832,612) (666,786) Cash Management Portfolio Class 1 -- (87,350) (87,350) (16,804) -- 752 (103,402) Cash Management Portfolio Class 2 -- (53,246) (53,246) (12,613) -- (2,343) (68,202) Corporate Bond Portfolio Class 1 556,551 (250,782) 305,769 465,706 42,101 (102,566) 711,010 Corporate Bond Portfolio Class 2 269,108 (121,898) 147,210 76,892 21,384 66,435 311,921 Global Bond Portfolio Class 1 -- (100,042) (100,042) (136,674) -- 154,580 (82,136) Global Bond Portfolio Class 2 -- (33,010) (33,010) (70,852) -- 55,010 (48,852) High-Yield Bond Portfolio Class 1 374,244 (137,282) 236,962 571,592 -- (771,616) 36,938 High-Yield Bond Portfolio Class 2 122,194 (46,607) 75,587 60,813 -- (143,588) (7,188) Asset Allocation Portfolio Class 1 452,360 (299,064) 153,296 885,452 509,029 (405,874) 1,141,903 Asset Allocation Portfolio Class 2 194,567 (133,622) 60,945 262,997 235,168 (62,306) 496,804 Growth-Income Portfolio Class 1 172,867 (221,091) (48,224) 906,758 513,471 304,045 1,676,050 Growth-Income Portfolio Class 2 24,473 (34,632) (10,159) 113,562 83,088 69,943 256,434 Global Equities Portfolio Class 1 18,545 (41,103) (22,558) 114,901 -- (24,002) 68,341 Global Equities Portfolio Class 2 2,868 (8,943) (6,075) 42,795 -- (20,180) 16,540 Alliance Growth Portfolio Class 1 -- (185,860) (185,860) 839,929 -- 753,536 1,407,605 Alliance Growth Portfolio Class 2 -- (27,317) (27,317) 214,714 -- 24,951 212,348 MFS Massachusetts Investors Trust Portfolio Class 1 8,947 (24,648) (15,701) 226,539 60,265 (132,240) 138,863 MFS Massachusetts Investors Trust Portfolio Class 2 4,765 (17,264) (12,499) 52,256 44,184 14,409 98,350 Fundamental Growth Portfolio Class 1 -- (5,939) (5,939) 68,461 -- (43,091) 19,431 Fundamental Growth Portfolio Class 2 -- (4,328) (4,328) 28,716 -- (225) 24,163 International Diversified Equities Portfolio Class 1 96,449 (94,085) 2,364 196,418 -- (799,947) (601,165) International Diversified Equities Portfolio Class 2 18,003 (20,220) (2,217) 32,526 -- (161,330) (131,021) Davis Venture Value Portfolio Class 1 208,836 (527,685) (318,849) 1,423,631 2,958,524 (2,388,731) 1,674,575 Davis Venture Value Portfolio Class 2 42,879 (142,710) (99,831) 358,299 819,712 (640,293) 437,887 MFS Total Return Portfolio Class 1 504,442 (372,719) 131,723 797,330 -- 661,207 1,590,260 MFS Total Return Portfolio Class 3 128,927 (104,366) 24,561 219,177 -- 184,611 428,349 Total Return Bond Portfolio Class 1 140,419 (177,728) (37,309) 69,876 -- 345,318 377,885 Total Return Bond Portfolio Class 2 39,136 (55,901) (16,765) (23,723) -- 154,114 113,626 Telecom Utility Portfolio Class 1 64,273 (36,070) 28,203 109,666 -- 104,110 241,979 Telecom Utility Portfolio Class 2 12,674 (7,897) 4,777 21,768 -- 22,499 49,044 Equity Opportunities Portfolio Class 1 14,948 (58,643) (43,695) 309,855 -- 52,305 318,465 Equity Opportunities Portfolio Class 2 2,709 (15,939) (13,230) 56,806 -- 37,632 81,208 Aggressive Growth Portfolio Class 1 -- (52,453) (52,453) 162,527 -- (163,944) (53,870) Aggressive Growth Portfolio Class 2 -- (2,758) (2,758) 12,416 -- (10,591) (933) International Growth and Income Portfolio Class 1 47,402 (41,574) 5,828 56,502 -- (349,474) (287,144) International Growth and Income Portfolio Class 2 16,852 (15,875) 977 36,546 -- (151,574) (114,051) Dogs of Wall Street Portfolio Class 1 33,823 (36,695) (2,872) 265,158 95,650 (147,178) 210,758 Dogs of Wall Street Portfolio Class 2 11,430 (13,466) (2,036) 73,331 36,345 (31,792) 75,848 Balanced Portfolio Class 1 154,840 (178,343) (23,503) 699,519 -- 404,085 1,080,101 Balanced Portfolio Class 2 35,213 (39,797) (4,584) 155,471 -- 92,621 243,508
See accompanying notes. 3 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY SCHEDULES OF PORTFOLIO INVESTMENTS DECEMBER 31, 2014
Net Asset Value of Value Shares at Cost of Sub-accounts Shares Per Share Fair Value Shares Held Level /(1)/ ------------ --------- --------- ----------- ----------- ---------- Lord Abbett Growth and Income Portfolio Class VC 373,211 $35.54 $13,263,925 $ 9,835,218 1 American Funds Growth-Income Fund Class 2 1,135,365 52.41 59,504,455 44,471,633 1 American Funds Growth Fund Class 2 409,542 79.84 32,697,858 24,056,684 1 American Funds Global Growth Fund Class 2 966,960 27.30 26,397,996 21,746,975 1 Invesco VI American Franchise Fund Series II 26,800 53.63 1,437,261 848,774 1 Invesco VI Comstock Fund Series II 839,827 19.08 16,023,899 10,872,769 1 Invesco VI Growth and Income Fund Series II 716,353 25.09 17,973,295 14,688,293 1 Growth Portfolio Class 1 206,296 31.36 6,468,941 4,434,702 1 Growth Portfolio Class 2 57,696 31.36 1,809,404 1,184,609 1 Government and Quality Bond Portfolio Class 1 838,069 15.18 12,723,459 12,622,638 1 Government and Quality Bond Portfolio Class 2 468,332 15.19 7,114,463 7,096,634 1 Capital Appreciation Portfolio Class 1 624,086 47.38 29,566,510 23,867,109 1 Capital Appreciation Portfolio Class 2 129,631 46.25 5,994,872 5,021,972 1 Natural Resources Portfolio Class 1 184,059 19.10 3,515,274 5,374,147 1 Natural Resources Portfolio Class 2 130,363 19.04 2,481,476 3,770,437 1 Mid-Cap Growth Portfolio Class 1 149,475 17.89 2,673,725 1,702,278 1 Mid-Cap Growth Portfolio Class 2 108,575 17.52 1,901,785 1,376,598 1 Capital Growth Portfolio Class 1 52,678 13.40 706,081 440,280 1 Capital Growth Portfolio Class 2 28,299 13.24 374,553 243,547 1 Blue Chip Growth Portfolio Class 1 81,631 10.14 827,823 620,994 1 Blue Chip Growth Portfolio Class 2 93,107 10.11 941,040 722,778 1 Growth Opportunities Portfolio Class 1 65,797 9.17 603,110 518,149 1 Growth Opportunities Portfolio Class 2 31,169 8.93 278,353 240,522 1 Technology Portfolio Class 1 151,384 4.58 693,188 415,295 1 Technology Portfolio Class 2 68,245 4.49 306,592 201,274 1 Marsico Focused Growth Portfolio Class 1 104,729 13.18 1,380,261 953,406 1 Marsico Focused Growth Portfolio Class 3 79,619 12.89 1,026,071 724,386 1 Small & Mid Cap Value Portfolio Class 3 366,161 19.79 7,248,018 6,567,566 1 Foreign Value Portfolio Class 3 467,139 15.67 7,320,918 6,590,814 1 Cash Management Portfolio Class 1 620,845 10.56 6,555,036 6,559,675 1 Cash Management Portfolio Class 2 378,262 10.46 3,956,967 3,962,062 1 Corporate Bond Portfolio Class 1 1,112,758 13.54 15,062,503 13,895,590 1 Corporate Bond Portfolio Class 2 573,901 13.52 7,760,170 7,417,581 1 Global Bond Portfolio Class 1 498,107 11.08 5,518,158 6,001,586 1 Global Bond Portfolio Class 2 190,276 11.00 2,092,260 2,265,224 1 High-Yield Bond Portfolio Class 1 1,125,819 5.74 6,467,457 6,822,800 1 High-Yield Bond Portfolio Class 2 376,738 5.74 2,161,416 2,250,582 1 Asset Allocation Portfolio Class 1 1,122,512 16.54 18,571,467 15,338,492 1 Asset Allocation Portfolio Class 2 544,961 16.52 9,003,913 7,405,538 1 Growth-Income Portfolio Class 1 442,913 32.34 14,321,684 9,764,019 1 Growth-Income Portfolio Class 2 70,774 32.30 2,285,720 1,490,844 1 Global Equities Portfolio Class 1 136,200 18.81 2,562,263 1,797,785 1 Global Equities Portfolio Class 2 28,861 18.77 541,577 392,458 1 Alliance Growth Portfolio Class 1 303,639 40.45 12,281,313 7,302,692 1 Alliance Growth Portfolio Class 2 45,711 40.32 1,842,961 1,116,113 1 MFS Massachusetts Investors Trust Portfolio Class 1 71,556 21.88 1,565,855 1,035,653 1 MFS Massachusetts Investors Trust Portfolio Class 2 55,313 21.88 1,210,097 850,511 1 Fundamental Growth Portfolio Class 1 12,635 26.68 337,078 213,038 1 Fundamental Growth Portfolio Class 2 12,322 26.30 324,101 244,721 1 International Diversified Equities Portfolio Class 1 587,409 9.30 5,461,996 5,075,471 1 International Diversified Equities Portfolio Class 2 145,863 9.25 1,349,899 1,256,819 1 Davis Venture Value Portfolio Class 1 1,190,622 27.55 32,800,317 27,584,409 1 Davis Venture Value Portfolio Class 2 334,484 27.53 9,209,420 7,982,320 1 MFS Total Return Portfolio Class 1 1,234,403 19.33 23,861,186 19,148,944 1 MFS Total Return Portfolio Class 3 390,511 19.29 7,531,158 6,234,530 1 Total Return Bond Portfolio Class 1 1,189,723 9.03 10,748,324 10,631,406 1 Total Return Bond Portfolio Class 2 347,234 8.99 3,122,605 3,132,141 1 Telecom Utility Portfolio Class 1 146,761 15.55 2,281,804 1,673,370 1 Telecom Utility Portfolio Class 2 32,965 15.57 513,165 351,387 1 Equity Opportunities Portfolio Class 1 195,978 19.14 3,751,176 2,035,967 1 Equity Opportunities Portfolio Class 2 53,090 19.12 1,015,114 671,179 1 Aggressive Growth Portfolio Class 1 204,729 16.21 3,317,789 2,271,063 1 Aggressive Growth Portfolio Class 2 11,132 16.02 178,289 104,401 1 International Growth and Income Portfolio Class 1 247,907 9.57 2,372,450 2,291,817 1 International Growth and Income Portfolio Class 2 98,078 9.61 942,353 744,850 1 Dogs of Wall Street Portfolio Class 1 171,725 13.37 2,295,949 1,476,063 1 Dogs of Wall Street Portfolio Class 2 65,426 13.35 873,290 634,357 1 Balanced Portfolio Class 1 537,321 20.82 11,185,838 8,425,937 1 Balanced Portfolio Class 2 134,599 20.78 2,797,504 2,205,020 1
(1) Represents the level within the fair value hierarchy under which the portfolio is classified as defined in ASC 820 and described in Note 3 to the financial statements. See accompanying notes. 4 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts ---------------------------------------------------------------------------------------- Invesco VI Growth and American Invesco VI Invesco VI Income Growth- Global Franchise Comstock Growth and Portfolio Income Fund Growth Fund Growth Fund Fund Fund Income Fund Class VC Class 2 Class 2 Class 2 Series II Series II Series II FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ (126,957) $ (169,407) $ (256,665) (116,589) $ (22,758) $ (78,432) $ (8,686) Net realized gain (losses) 954,954 3,388,784 2,045,267 1,563,169 269,907 1,266,198 896,737 Capital gain distribution from mutual funds -- 2,925,560 1,640,338 2,782,977 -- -- 2,109,590 Change in net unrealized appreciation (depreciation) of investments (37,849) (950,020) (1,232,923) (4,025,747) (149,128) 9,073 (1,544,868) ----------- ----------- ----------- ----------- ---------- ----------- ----------- Increase (decrease) in net assets resulting from operations 790,148 5,194,917 2,196,017 203,810 98,021 1,196,839 1,452,773 ----------- ----------- ----------- ----------- ---------- ----------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 511,673 2,547,088 1,884,436 1,094,348 81,611 444,329 326,605 Cost of units redeemed (2,873,334) (9,576,039) (5,599,764) (4,648,832) (408,723) (3,050,440) (2,535,971) Net transfers (741,388) (837,383) (736,569) (106,827) 117,298 (87,044) 157,913 Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 92 (121) 129 335 -- 118 (545) ----------- ----------- ----------- ----------- ---------- ----------- ----------- Increase (decrease) in net assets resulting from principal transactions (3,102,957) (7,866,455) (4,451,768) (3,660,976) (209,814) (2,693,037) (2,051,998) ----------- ----------- ----------- ----------- ---------- ----------- ----------- Increase (decrease) in net assets (2,312,809) (2,671,538) (2,255,751) (3,457,166) (111,793) (1,496,198) (599,225) Net assets at beginning of period 15,576,734 62,175,993 34,953,609 29,855,162 1,549,054 17,520,097 18,572,520 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Net assets at end of period $13,263,925 $59,504,455 $32,697,858 $26,397,996 $1,437,261 $16,023,899 $17,973,295 =========== =========== =========== =========== ========== =========== =========== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ (149,939) $ (107,763) $ (190,772) (81,443) $ (17,664) $ (13,787) $ (40,618) Net realized gain (losses) 462,887 1,570,093 911,180 931,972 103,365 837,858 657,123 Capital gain distribution from mutual funds -- -- -- -- -- -- 155,527 Change in net unrealized appreciation (depreciation) of investments 4,072,708 14,309,109 7,306,194 5,885,886 358,529 4,024,226 3,945,606 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Increase (decrease) in net assets resulting from operations 4,385,656 15,771,439 8,026,602 6,736,415 444,230 4,848,297 4,717,638 ----------- ----------- ----------- ----------- ---------- ----------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 252,420 1,248,456 912,097 669,099 284 425,769 341,535 Cost of units redeemed (2,429,257) (7,281,510) (3,457,498) (3,672,414) (218,154) (2,455,439) (2,327,577) Net transfers (615,025) (907,525) (422,548) (284,299) 60,260 (607,822) 768,038 Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 387 1,300 1,152 994 -- 264 571 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Increase (decrease) in net assets resulting from principal transactions (2,791,475) (6,939,279) (2,966,797) (3,286,620) (157,610) (2,637,228) (1,217,433) ----------- ----------- ----------- ----------- ---------- ----------- ----------- Increase (decrease) in net assets 1,594,181 8,832,160 5,059,805 3,449,795 286,620 2,211,069 3,500,205 Net assets at beginning of period 13,982,553 53,343,833 29,893,804 26,405,367 1,262,434 15,309,028 15,072,315 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Net assets at end of period $15,576,734 $62,175,993 $34,953,609 $29,855,162 $1,549,054 $17,520,097 $18,572,520 =========== =========== =========== =========== ========== =========== ===========
See accompanying notes. 5 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts -------------------------------------------------------------------------------------------- Government Government Capital Capital Natural Growth Growth and Quality and Quality Appreciation Appreciation Resources Portfolio Portfolio Bond Portfolio Bond Portfolio Portfolio Portfolio Portfolio Class 1 Class 2 Class 1 Class 2 Class 1 Class 2 Class 1 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ (67,242) $ (22,229) $ 39,628 $ 7,109 $ (449,580) $ (88,387) $ (22,310) Net realized gain (losses) 446,627 160,843 26,432 (5,166) 1,531,871 361,326 (274,179) Capital gain distribution from mutual funds -- -- -- -- 4,949,112 1,008,617 -- Change in net unrealized appreciation (depreciation) of investments (11,432) (36,070) 414,797 226,121 (2,320,738) (560,136) (541,559) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from operations 367,953 102,544 480,857 228,064 3,710,665 721,420 (838,048) ----------- ---------- ----------- ----------- ----------- ---------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 19,360 70,655 12,798 908,477 266,642 532,490 57,843 Cost of units redeemed (733,359) (340,308) (2,540,844) (1,187,532) (3,526,275) (811,230) (428,767) Net transfers (423,523) (20,938) 585,426 340,800 (633,018) (20,389) (98,181) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 362 1,040 69 (28) 8,192 (949) 10 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (1,137,160) (289,551) (1,942,551) 61,717 (3,884,459) (300,078) (469,095) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets (769,207) (187,007) (1,461,694) 289,781 (173,794) 421,342 (1,307,143) Net assets at beginning of period 7,238,148 1,996,411 14,185,153 6,824,682 29,740,304 5,573,530 4,822,417 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Net assets at end of period $ 6,468,941 $1,809,404 $12,723,459 $ 7,114,463 $29,566,510 $5,994,872 $ 3,515,274 =========== ========== =========== =========== =========== ========== =========== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ (51,253) $ (17,452) $ 132,455 $ 45,093 $ (423,957) $ (77,958) $ (28,863) Net realized gain (losses) 268,444 110,833 81,806 14,869 1,214,161 255,148 (471,895) Capital gain distribution from mutual funds -- -- 144,790 69,113 3,080,295 583,720 -- Change in net unrealized appreciation (depreciation) of investments 1,760,439 437,378 (952,712) (433,265) 4,248,708 685,739 687,028 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from operations 1,977,630 530,759 (593,661) (304,190) 8,119,207 1,446,649 186,270 ----------- ---------- ----------- ----------- ----------- ---------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 35,203 392,342 74,135 244,523 151,204 539,315 21,614 Cost of units redeemed (974,509) (446,593) (3,050,468) (1,434,633) (3,260,328) (697,496) (550,072) Net transfers (557,991) (58,430) (369,712) (479,318) (1,405,439) (62,771) (254,966) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 3,912 (3,507) (135) (414) (2,672) 150 59 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (1,493,385) (116,188) (3,346,180) (1,669,842) (4,517,235) (220,802) (783,365) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets 484,245 414,571 (3,939,841) (1,974,032) 3,601,972 1,225,847 (597,095) Net assets at beginning of period 6,753,903 1,581,840 18,124,994 8,798,714 26,138,332 4,347,683 5,419,512 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Net assets at end of period $ 7,238,148 $1,996,411 $14,185,153 $ 6,824,682 $29,740,304 $5,573,530 $ 4,822,417 =========== ========== =========== =========== =========== ========== ===========
See accompanying notes. 6 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts ----------------------------------------------------------------------------- Natural Mid-Cap Mid-Cap Capital Capital Blue Chip Blue Chip Resources Growth Growth Growth Growth Growth Growth Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class 2 Class 1 Class 2 Class 1 Class 2 Class 1 Class 2 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ (20,367) $ (40,624) $ (27,170) $ (11,216) $ (5,544) $ (11,568) $ (11,707) Net realized gain (losses) (177,973) 203,915 164,658 71,475 17,791 73,841 16,354 Capital gain distribution from mutual funds -- 214,903 160,952 -- -- 32,731 35,728 Change in net unrealized appreciation (depreciation) of investments (397,088) (138,931) (136,134) (9,758) 11,167 (18,820) 30,330 ---------- ---------- ---------- --------- -------- --------- --------- Increase (decrease) in net assets resulting from operations (595,428) 239,263 162,306 50,501 23,414 76,184 70,705 ---------- ---------- ---------- --------- -------- --------- --------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 21,520 4,656 114,729 -- 11,989 550 78,252 Cost of units redeemed (247,110) (319,665) (121,582) (145,396) (43,439) (144,707) (11,989) Net transfers 38,982 68,680 105,706 (53,078) 7,134 91,796 115,929 Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period -- -- 46 71 -- -- -- ---------- ---------- ---------- --------- -------- --------- --------- Increase (decrease) in net assets resulting from principal transactions (186,608) (246,329) 98,899 (198,403) (24,316) (52,361) 182,192 ---------- ---------- ---------- --------- -------- --------- --------- Increase (decrease) in net assets (782,036) (7,066) 261,205 (147,902) (902) 23,823 252,897 Net assets at beginning of period 3,263,512 2,680,791 1,640,580 853,983 375,455 804,000 688,143 ---------- ---------- ---------- --------- -------- --------- --------- Net assets at end of period $2,481,476 $2,673,725 $1,901,785 $ 706,081 $374,553 $ 827,823 $ 941,040 ========== ========== ========== ========= ======== ========= ========= FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ (24,271) $ (36,633) $ (21,170) $ (5,715) $ (2,984) $ (8,073) $ (9,206) Net realized gain (losses) (316,419) 145,903 135,104 15,215 10,008 33,787 33,443 Capital gain distribution from mutual funds -- -- -- -- -- 53,164 49,843 Change in net unrealized appreciation (depreciation) of investments 458,167 696,925 351,273 179,193 76,495 114,437 109,837 ---------- ---------- ---------- --------- -------- --------- --------- Increase (decrease) in net assets resulting from operations 117,477 806,195 465,207 188,693 83,519 193,315 183,917 ---------- ---------- ---------- --------- -------- --------- --------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 133,059 8,822 43,439 304 -- 515 5,270 Cost of units redeemed (255,172) (249,558) (285,811) (45,797) (17,929) (37,138) (97,068) Net transfers (169,038) 90,584 202,445 (8,400) (17,711) (16,283) (51,908) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 141 -- (289) 101 -- -- -- ---------- ---------- ---------- --------- -------- --------- --------- Increase (decrease) in net assets resulting from principal transactions (291,010) (150,152) (40,216) (53,792) (35,640) (52,906) (143,706) ---------- ---------- ---------- --------- -------- --------- --------- Increase (decrease) in net assets (173,533) 656,043 424,991 134,901 47,879 140,409 40,211 Net assets at beginning of period 3,437,045 2,024,748 1,215,589 719,082 327,576 663,591 647,932 ---------- ---------- ---------- --------- -------- --------- --------- Net assets at end of period $3,263,512 $2,680,791 $1,640,580 $ 853,983 $375,455 $ 804,000 $ 688,143 ========== ========== ========== ========= ======== ========= =========
See accompanying notes. 7 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts ------------------------------------------------------------------------------------- Marsico Marsico Small & Growth Growth Focused Focused Mid Cap Opportunities Opportunities Technology Technology Growth Growth Value Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class 1 Class 2 Class 1 Class 2 Class 1 Class 3 Class 3 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ (10,018) $ (4,377) $ (9,574) $ (4,566) $ (20,889) $ (14,573) $ (78,410) Net realized gain (losses) 55,660 27,310 32,268 25,619 97,112 38,008 758,815 Capital gain distribution from mutual funds 81,908 38,449 -- -- 83,942 60,464 1,146,767 Change in net unrealized appreciation (depreciation) of investments (111,889) (55,298) 108,467 42,455 (31,614) (126) (1,326,573) --------- -------- --------- -------- ---------- ---------- ----------- Increase (decrease) in net assets resulting from operations 15,661 6,084 131,161 63,508 128,551 83,773 500,599 --------- -------- --------- -------- ---------- ---------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 785 12,748 -- 3,000 -- 79,670 164,051 Cost of units redeemed (60,183) (39,713) (13,878) (19,500) (219,154) (74,039) (934,727) Net transfers (39,600) (18,670) (21,944) (12,228) 123,306 39,819 (803,884) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period -- -- 14 -- -- -- (141) --------- -------- --------- -------- ---------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (98,998) (45,635) (35,808) (28,728) (95,848) 45,450 (1,574,701) --------- -------- --------- -------- ---------- ---------- ----------- Increase (decrease) in net assets (83,337) (39,551) 95,353 34,780 32,703 129,223 (1,074,102) Net assets at beginning of period 686,446 317,904 597,835 271,812 1,347,558 896,848 8,322,120 --------- -------- --------- -------- ---------- ---------- ----------- Net assets at end of period $ 603,109 $278,353 $ 693,188 $306,592 $1,380,261 $1,026,071 $ 7,248,018 ========= ======== ========= ======== ========== ========== =========== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ (10,315) $ (4,357) $ (9,383) $ (4,289) $ (17,165) $ (12,172) $ (93,439) Net realized gain (losses) 61,086 8,811 49,042 12,260 87,543 33,398 362,731 Capital gain distribution from mutual funds 38,289 17,259 -- -- 36,304 22,933 561,833 Change in net unrealized appreciation (depreciation) of investments 115,192 64,523 91,515 51,276 261,905 176,625 1,317,548 --------- -------- --------- -------- ---------- ---------- ----------- Increase (decrease) in net assets resulting from operations 204,252 86,236 131,174 59,247 368,587 220,784 2,148,673 --------- -------- --------- -------- ---------- ---------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 7,690 8,119 2,416 1,722 -- 52,634 148,476 Cost of units redeemed (123,832) (20,407) (103,999) (42,303) (229,595) (63,646) (578,168) Net transfers (17,554) 9,107 (79,182) (21,146) (60,290) (14,290) 573,004 Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period -- 123 38 -- (7) (4) (7) --------- -------- --------- -------- ---------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (133,696) (3,058) (180,727) (61,727) (289,892) (25,306) 143,305 --------- -------- --------- -------- ---------- ---------- ----------- Increase (decrease) in net assets 70,556 83,178 (49,553) (2,480) 78,695 195,478 2,291,978 Net assets at beginning of period 615,890 234,726 647,388 274,292 1,268,863 701,370 6,030,142 --------- -------- --------- -------- ---------- ---------- ----------- Net assets at end of period $ 686,446 $317,904 $ 597,835 $271,812 $1,347,558 $ 896,848 $ 8,322,120 ========= ======== ========= ======== ========== ========== ===========
See accompanying notes. 8 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts ------------------------------------------------------------------------------------------ Cash Cash Corporate Corporate Foreign Value Management Management Bond Bond Global Global Bond Portfolio Portfolio Portfolio Portfolio Portfolio Bond Portfolio Portfolio Class 3 Class 1 Class 2 Class 1 Class 2 Class 1 Class 2 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ (44,967) $ (87,350) $ (53,246) $ 305,769 $ 147,210 $ (100,042) $ (33,010) Net realized gain (losses) 210,793 (16,804) (12,613) 465,706 76,892 (136,674) (70,852) Capital gain distribution from mutual funds -- -- -- 42,101 21,384 -- -- Change in net unrealized appreciation (depreciation) of investments (832,612) 752 (2,343) (102,566) 66,435 154,580 55,010 ----------- ----------- ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets resulting from operations (666,786) (103,402) (68,202) 711,010 311,921 (82,136) (48,852) ----------- ----------- ----------- ----------- ---------- ----------- ---------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 96,770 1,163,169 3,134,177 123,005 380,845 3,610 536,210 Cost of units redeemed (753,485) (4,410,628) (2,981,785) (2,596,871) (528,509) (949,894) (294,464) Net transfers (68,225) 4,125,111 956,790 (422,830) (196,421) (503,135) (295,725) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 3 (8,760) (5,562) 478 -- 2 105 ----------- ----------- ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets resulting from principal transactions (724,937) 868,892 1,103,620 (2,896,218) (344,085) (1,449,417) (53,874) ----------- ----------- ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets (1,391,723) 765,490 1,035,418 (2,185,208) (32,164) (1,531,553) (102,726) Net assets at beginning of period 8,712,641 5,789,546 2,921,549 17,247,711 7,792,335 7,049,711 2,194,986 ----------- ----------- ----------- ----------- ---------- ----------- ---------- Net assets at end of period $ 7,320,918 $ 6,555,036 $ 3,956,967 $15,062,503 $7,760,171 $ 5,518,158 $2,092,260 =========== =========== =========== =========== ========== =========== ========== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ 17,570 $ (97,595) $ (40,491) $ 492,749 $ 211,316 $ (27,560) $ (12,371) Net realized gain (losses) 73,847 (17,480) (16,495) 525,517 127,514 (211,190) (40,143) Capital gain distribution from mutual funds -- -- -- 212,772 96,945 62,969 20,211 Change in net unrealized appreciation (depreciation) of investments 1,444,611 495 5,562 (1,267,535) (465,388) (240,395) (92,620) ----------- ----------- ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets resulting from operations 1,536,028 (114,580) (51,424) (36,497) (29,613) (416,176) (124,923) ----------- ----------- ----------- ----------- ---------- ----------- ---------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 108,231 1,018,319 2,490,487 71,559 319,538 18,402 132,424 Cost of units redeemed (807,164) (4,900,323) (2,373,358) (2,527,714) (924,407) (913,240) (268,582) Net transfers 469,953 4,558,923 160,262 (515,357) (326,316) (279,841) (51,854) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 2,222 917 (208) 26 (441) 643 78 ----------- ----------- ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets resulting from principal transactions (226,758) 677,836 277,183 (2,971,486) (931,626) (1,174,036) (187,934) ----------- ----------- ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets 1,309,270 563,256 225,759 (3,007,983) (961,239) (1,590,212) (312,857) Net assets at beginning of period 7,403,371 5,226,290 2,695,790 20,255,694 8,753,574 8,639,923 2,507,843 ----------- ----------- ----------- ----------- ---------- ----------- ---------- Net assets at end of period $ 8,712,641 $ 5,789,546 $ 2,921,549 $17,247,711 $7,792,335 $ 7,049,711 $2,194,986 =========== =========== =========== =========== ========== =========== ==========
See accompanying notes. 9 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts -------------------------------------------------------------------------------------- High-Yield High-Yield Asset Asset Growth- Growth- Global Bond Bond Allocation Allocation Income Income Equities Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class 1 Class 2 Class 1 Class 2 Class 1 Class 2 Class 1 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ 236,962 $ 75,587 $ 153,296 $ 60,945 $ (48,224) $ (10,159) $ (22,558) Net realized gain (losses) 571,592 60,813 885,452 262,997 906,758 113,562 114,901 Capital gain distribution from mutual funds -- -- 509,029 235,168 513,471 83,088 -- Change in net unrealized appreciation (depreciation) of investments (771,616) (143,588) (405,874) (62,306) 304,045 69,943 (24,002) ----------- ----------- ----------- ---------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from operations 36,938 (7,188) 1,141,903 496,804 1,676,050 256,434 68,341 ----------- ----------- ----------- ---------- ----------- ---------- ---------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 18,084 212,736 43,087 882,662 28,314 84,851 2,422 Cost of units redeemed (1,556,732) (375,452) (3,543,180) (981,070) (2,192,571) (257,293) (236,739) Net transfers (1,977,701) (970,518) 152,214 67,217 (430,101) 41,495 (14,998) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period (124) 2 2,249 (447) 4,568 (89) 365 ----------- ----------- ----------- ---------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from principal transactions (3,516,473) (1,133,232) (3,345,630) (31,638) (2,589,790) (131,036) (248,950) ----------- ----------- ----------- ---------- ----------- ---------- ---------- Increase (decrease) in net assets (3,479,535) (1,140,420) (2,203,727) 465,166 (913,740) 125,398 (180,609) Net assets at beginning of period 9,946,992 3,301,836 20,775,195 8,538,747 15,235,424 2,160,322 2,742,872 ----------- ----------- ----------- ---------- ----------- ---------- ---------- Net assets at end of period $ 6,467,457 $ 2,161,416 $18,571,468 $9,003,913 $14,321,684 $2,285,720 $2,562,263 =========== =========== =========== ========== =========== ========== ========== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ 400,199 $ 126,840 $ 260,402 $ 94,152 $ (5,906) $ (3,256) $ (25,887) Net realized gain (losses) 358,032 199,649 511,665 178,371 598,735 114,118 97,261 Capital gain distribution from mutual funds -- -- -- -- 264,534 38,655 -- Change in net unrealized appreciation (depreciation) of investments (111,091) (123,571) 2,337,355 909,264 2,930,121 374,266 502,864 ----------- ----------- ----------- ---------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from operations 647,140 202,918 3,109,422 1,181,787 3,787,484 523,783 574,238 ----------- ----------- ----------- ---------- ----------- ---------- ---------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 59,200 162,989 133,352 498,353 102,800 134,276 6,537 Cost of units redeemed (1,089,282) (521,140) (3,193,327) (855,855) (1,687,281) (329,688) (356,758) Net transfers (695,458) (41,416) (114,979) 331,962 (903,366) (3,736) (54,463) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period (5,639) (149) 4,183 246 (1,252) (658) (3,335) ----------- ----------- ----------- ---------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from principal transactions (1,731,179) (399,716) (3,170,771) (25,294) (2,489,099) (199,806) (408,019) ----------- ----------- ----------- ---------- ----------- ---------- ---------- Increase (decrease) in net assets (1,084,039) (196,798) (61,349) 1,156,493 1,298,385 323,977 166,219 Net assets at beginning of period 11,031,031 3,498,634 20,836,544 7,382,254 13,937,039 1,836,345 2,576,653 ----------- ----------- ----------- ---------- ----------- ---------- ---------- Net assets at end of period $ 9,946,992 $ 3,301,836 $20,775,195 $8,538,747 $15,235,424 $2,160,322 $2,742,872 =========== =========== =========== ========== =========== ========== ==========
See accompanying notes. 10 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts -------------------------------------------------------------------------------------- MFS MFS Massachusetts Massachusetts Global Alliance Alliance Investors Investors Fundamental Fundamental Equities Growth Growth Trust Trust Growth Growth Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class 2 Class 1 Class 2 Class 1 Class 2 Class 1 Class 2 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ (6,075) $ (185,860) $ (27,317) $ (15,701) $ (12,499) $ (5,939) $ (4,328) Net realized gain (losses) 42,795 839,929 214,714 226,539 52,256 68,461 28,716 Capital gain distribution from mutual funds -- -- -- 60,265 44,184 -- -- Change in net unrealized appreciation (depreciation) of investments (20,180) 753,536 24,951 (132,240) 14,409 (43,091) (225) --------- ----------- ---------- ---------- ---------- --------- -------- Increase (decrease) in net assets resulting from operations 16,540 1,407,605 212,348 138,863 98,350 19,431 24,163 --------- ----------- ---------- ---------- ---------- --------- -------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 22,115 47,170 219,469 36,827 113,933 362 90,155 Cost of units redeemed (76,782) (1,457,551) (275,562) (408,579) (69,569) (103,230) (24,811) Net transfers (51,852) (198,236) (98,922) 75,150 15,151 (38,716) (48,760) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period (31) 5,184 855 -- 175 -- -- --------- ----------- ---------- ---------- ---------- --------- -------- Increase (decrease) in net assets resulting from principal transactions (106,550) (1,603,433) (154,160) (296,602) 59,690 (141,584) 16,584 --------- ----------- ---------- ---------- ---------- --------- -------- Increase (decrease) in net assets (90,010) (195,828) 58,188 (157,739) 158,040 (122,153) 40,747 Net assets at beginning of period 631,587 12,477,141 1,784,773 1,723,594 1,052,057 459,231 283,354 --------- ----------- ---------- ---------- ---------- --------- -------- Net assets at end of period $ 541,577 $12,281,313 $1,842,961 $1,565,855 $1,210,097 $ 337,078 $324,101 ========= =========== ========== ========== ========== ========= ======== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ (6,031) $ (143,316) $ (28,096) $ (15,428) $ (10,863) $ (6,815) $ (3,459) Net realized gain (losses) 12,720 569,582 280,996 211,838 81,800 85,108 3,300 Capital gain distribution from mutual funds -- -- -- 32,576 20,501 -- -- Change in net unrealized appreciation (depreciation) of investments 110,223 3,100,000 337,558 207,991 170,054 59,159 68,284 --------- ----------- ---------- ---------- ---------- --------- -------- Increase (decrease) in net assets resulting from operations 116,912 3,526,266 590,458 436,977 261,492 137,452 68,125 --------- ----------- ---------- ---------- ---------- --------- -------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 73,930 136,948 45,322 12,420 49,661 148 24,820 Cost of units redeemed (74,243) (1,399,381) (329,148) (366,123) (135,774) (286,955) (11,656) Net transfers 73,995 (731,308) (389,892) 82,734 (53,210) 39,896 48,728 Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period -- 784 (1,289) 110 (277) -- -- --------- ----------- ---------- ---------- ---------- --------- -------- Increase (decrease) in net assets resulting from principal transactions 73,682 (1,992,957) (675,007) (270,859) (139,600) (246,911) 61,892 --------- ----------- ---------- ---------- ---------- --------- -------- Increase (decrease) in net assets 190,594 1,533,309 (84,549) 166,118 121,892 (109,459) 130,017 Net assets at beginning of period 440,993 10,943,832 1,869,322 1,557,476 930,165 568,690 153,337 --------- ----------- ---------- ---------- ---------- --------- -------- Net assets at end of period $ 631,587 $12,477,141 $1,784,773 $1,723,594 $1,052,057 $ 459,231 $283,354 ========= =========== ========== ========== ========== ========= ========
See accompanying notes. 11 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts -------------------------------------------------------------------------------------------- International International Diversified Diversified Davis Davis Venture MFS Total MFS Total Total Equities Equities Venture Value Value Return Return Return Bond Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class 1 Class 2 Class 1 Class 2 Class 1 Class 3 Class 1 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ 2,364 $ (2,217) $ (318,849) $ (99,831) $ 131,723 $ 24,561 $ (37,309) Net realized gain (losses) 196,418 32,526 1,423,631 358,299 797,330 219,177 69,876 Capital gain distribution from mutual funds -- -- 2,958,524 819,712 -- -- -- Change in net unrealized appreciation (depreciation) of investments (799,947) (161,330) (2,388,731) (640,293) 661,207 184,611 345,318 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from operations (601,165) (131,021) 1,674,575 437,887 1,590,260 428,349 377,885 ----------- ---------- ----------- ----------- ----------- ---------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 6,136 163,629 95,960 603,893 91,515 745,147 22,599 Cost of units redeemed (901,984) (125,866) (4,802,909) (1,043,259) (3,368,508) (858,234) (1,432,855) Net transfers 162,517 93,475 (893,641) (451,817) 76,668 746,462 (332,275) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 3 469 33 1,920 -- 92 -- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (733,328) 131,707 (5,600,557) (889,263) (3,200,325) 633,467 (1,742,531) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets (1,334,493) 686 (3,925,982) (451,376) (1,610,065) 1,061,816 (1,364,646) Net assets at beginning of period 6,796,489 1,349,213 36,726,299 9,660,796 25,471,251 6,469,342 12,112,970 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Net assets at end of period $ 5,461,996 $1,349,899 $32,800,317 $ 9,209,420 $23,861,186 $7,531,158 $10,748,324 =========== ========== =========== =========== =========== ========== =========== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ 75,654 $ 12,832 $ (124,054) $ (50,900) $ 201,946 $ 40,817 $ (32,187) Net realized gain (losses) 132,199 23,968 958,389 352,611 448,050 93,770 171,527 Capital gain distribution from mutual funds -- -- 2,012,450 526,357 -- -- 162,340 Change in net unrealized appreciation (depreciation) of investments 923,976 183,413 6,719,154 1,689,413 3,306,291 769,395 (1,047,881) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from operations 1,131,829 220,213 9,565,939 2,517,481 3,956,287 903,982 (746,201) ----------- ---------- ----------- ----------- ----------- ---------- ----------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 54,643 60,572 216,444 630,872 26,165 662,504 4,274 Cost of units redeemed (592,625) (194,413) (3,908,446) (1,141,594) (3,323,046) (565,568) (1,472,761) Net transfers (254,761) 13,480 (2,056,775) (1,159,864) 135,166 237,741 (1,666,844) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 66 231 (2,386) (1,170) (34) (47) (13,354) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (792,677) (120,130) (5,751,163) (1,671,756) (3,161,749) 334,630 (3,148,685) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Increase (decrease) in net assets 339,152 100,083 3,814,776 845,725 794,538 1,238,612 (3,894,886) Net assets at beginning of period 6,457,337 1,249,130 32,911,523 8,815,071 24,676,713 5,230,730 16,007,856 ----------- ---------- ----------- ----------- ----------- ---------- ----------- Net assets at end of period $ 6,796,489 $1,349,213 $36,726,299 $ 9,660,796 $25,471,251 $6,469,342 $12,112,970 =========== ========== =========== =========== =========== ========== ===========
See accompanying notes. 12 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts ------------------------------------------------------------------------------------ Total Return Telecom Telecom Equity Equity Aggressive Aggressive Bond Utility Utility Opportunities Opportunities Growth Growth Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class 2 Class 1 Class 2 Class 1 Class 2 Class 1 Class 2 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ (16,765) $ 28,203 $ 4,777 $ (43,695) $ (13,230) $ (52,453) $ (2,758) Net realized gain (losses) (23,723) 109,666 21,768 309,855 56,806 162,527 12,416 Capital gain distribution from mutual funds -- -- -- -- -- -- -- Change in net unrealized appreciation (depreciation) of investments 154,114 104,110 22,499 52,305 37,632 (163,944) (10,591) ----------- ---------- -------- ---------- ---------- ---------- -------- Increase (decrease) in net assets resulting from operations 113,626 241,979 49,044 318,465 81,208 (53,870) (933) ----------- ---------- -------- ---------- ---------- ---------- -------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 293,999 44,815 17,518 240 75,533 18,238 23,245 Cost of units redeemed (345,558) (202,331) (34,912) (572,124) (119,564) (350,609) (15,592) Net transfers (1,068,937) (29,848) (16,995) (22,602) 1,072 (75,925) (12,654) Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period (1,380) 17 -- 500 (42) 130 -- ----------- ---------- -------- ---------- ---------- ---------- -------- Increase (decrease) in net assets resulting from principal transactions (1,121,876) (187,347) (34,389) (593,986) (43,001) (408,166) (5,001) ----------- ---------- -------- ---------- ---------- ---------- -------- Increase (decrease) in net assets (1,008,250) 54,632 14,655 (275,521) 38,207 (462,036) (5,934) Net assets at beginning of period 4,130,855 2,227,172 498,510 4,026,697 976,907 3,779,825 184,223 ----------- ---------- -------- ---------- ---------- ---------- -------- Net assets at end of period $ 3,122,605 $2,281,804 $513,165 $3,751,176 $1,015,114 $3,317,789 $178,289 =========== ========== ======== ========== ========== ========== ======== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ (15,927) $ 17,536 $ 3,221 $ (38,080) $ (10,414) $ (50,532) $ (3,185) Net realized gain (losses) 26,109 89,445 19,275 326,015 56,642 151,709 35,724 Capital gain distribution from mutual funds 49,329 -- -- -- -- -- -- Change in net unrealized appreciation (depreciation) of investments (276,698) 268,336 58,044 727,115 183,302 1,023,754 38,024 ----------- ---------- -------- ---------- ---------- ---------- -------- Increase (decrease) in net assets resulting from operations (217,187) 375,317 80,540 1,015,050 229,530 1,124,931 70,563 ----------- ---------- -------- ---------- ---------- ---------- -------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 304,651 16,597 31,657 50,182 74,463 42,691 -- Cost of units redeemed (494,200) (258,060) (36,387) (774,837) (149,400) (251,419) (84,957) Net transfers (247,492) (125,761) (39,037) (172,231) (30,439) (120,958) 2,881 Contract maintenance charge -- -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 527 (34) -- 1,453 -- 1,861 (15) ----------- ---------- -------- ---------- ---------- ---------- -------- Increase (decrease) in net assets resulting from principal transactions (436,514) (367,258) (43,767) (895,433) (105,376) (327,825) (82,091) ----------- ---------- -------- ---------- ---------- ---------- -------- Increase (decrease) in net assets (653,701) 8,059 36,773 119,617 124,154 797,106 (11,528) Net assets at beginning of period 4,784,556 2,219,113 461,737 3,907,080 852,753 2,982,719 195,751 ----------- ---------- -------- ---------- ---------- ---------- -------- Net assets at end of period $ 4,130,855 $2,227,172 $498,510 $4,026,697 $ 976,907 $3,779,825 $184,223 =========== ========== ======== ========== ========== ========== ========
See accompanying notes. 13 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Sub-accounts ---------------------------------------------------------------------------- International International Growth and Growth and Dogs of Wall Dogs of Income Income Street Wall Street Balanced Balanced Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class 1 Class 2 Class 1 Class 2 Class 1 Class 2 FOR THE YEAR ENDED DECEMBER 31, 2014 FROM OPERATIONS: Net investment income (loss) $ 5,828 $ 977 $ (2,872) $ (2,036) $ (23,503) $ (4,584) Net realized gain (losses) 56,502 36,546 265,158 73,331 699,519 155,471 Capital gain distribution from mutual funds -- -- 95,650 36,345 -- -- Change in net unrealized appreciation (depreciation) of investments (349,474) (151,574) (147,178) (31,792) 404,085 92,621 ---------- ---------- ---------- --------- ----------- ---------- Increase (decrease) in net assets resulting from operations (287,144) (114,051) 210,758 75,848 1,080,101 243,508 ---------- ---------- ---------- --------- ----------- ---------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 14,059 39,370 6,545 59,294 23,408 517,531 Cost of units redeemed (290,260) (117,269) (276,705) (74,749) (2,246,243) (491,119) Net transfers (196,030) 40,370 (133,208) (64,338) 470,725 139,895 Contract maintenance charge -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period 8 3 400 1,783 931 1 ---------- ---------- ---------- --------- ----------- ---------- Increase (decrease) in net assets resulting from principal transactions (472,223) (37,526) (402,968) (78,010) (1,751,179) 166,308 ---------- ---------- ---------- --------- ----------- ---------- Increase (decrease) in net assets (759,367) (151,577) (192,210) (2,162) (671,078) 409,816 Net assets at beginning of period 3,131,817 1,093,930 2,488,159 875,452 11,856,916 2,387,689 ---------- ---------- ---------- --------- ----------- ---------- Net assets at end of period $2,372,450 $ 942,353 $2,295,949 $ 873,290 $11,185,838 $2,797,505 ========== ========== ========== ========= =========== ========== FOR THE YEAR ENDED DECEMBER 31, 2013 FROM OPERATIONS: Net investment income (loss) $ 17,273 $ 3,907 $ (217) $ (1,478) $ 3,473 $ (1,710) Net realized gain (losses) 5,258 24,232 238,119 64,986 334,832 87,542 Capital gain distribution from mutual funds -- -- -- -- -- -- Change in net unrealized appreciation (depreciation) of investments 500,379 165,788 419,339 160,641 1,452,940 257,932 ---------- ---------- ---------- --------- ----------- ---------- Increase (decrease) in net assets resulting from operations 522,910 193,927 657,241 224,149 1,791,245 343,764 ---------- ---------- ---------- --------- ----------- ---------- FROM CAPITAL TRANSACTIONS Net proceeds from units sold 14,846 11,911 13,073 194,522 82,208 424,882 Cost of units redeemed (260,549) (143,407) (509,566) (213,078) (1,477,798) (384,264) Net transfers 105,612 (15,014) 319,018 35,777 1,858,188 58,702 Contract maintenance charge -- -- -- -- -- -- Adjustments to net assets allocated to contracts in payout period (2,239) 99 235 (1,492) 380 121 ---------- ---------- ---------- --------- ----------- ---------- Increase (decrease) in net assets resulting from principal transactions (142,330) (146,411) (177,240) 15,729 462,978 99,441 ---------- ---------- ---------- --------- ----------- ---------- Increase (decrease) in net assets 380,580 47,516 480,001 239,878 2,254,223 443,205 Net assets at beginning of period 2,751,237 1,046,414 2,008,158 635,574 9,602,693 1,944,484 ---------- ---------- ---------- --------- ----------- ---------- Net assets at end of period $3,131,817 $1,093,930 $2,488,159 $ 875,452 $11,856,916 $2,387,689 ========== ========== ========== ========= =========== ==========
See accompanying notes. 14 VARIABLE ANNUITY ACCOUNT FOUR OF AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Variable Annuity Account Four of American General Life Insurance Company (the "Separate Account") is a separate account of American General Life Insurance Company (the "Company"). The Company is a direct wholly owned subsidiary of AGC Life Insurance Company ("AGC"), a wholly owned, indirect subsidiary of American International Group, Inc. ("AIG"). AIG 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. The Separate Account is registered as a unit investment trust pursuant to the provisions of the Investment Company Act of 1940, as amended. On December 31, 2012, SunAmerica Annuity and Life Assurance Company merged into the Company. As a result of the merger, the Company became the depositor of the Separate Account. The Company is now responsible for all annuity and life insurance contracts funded through the Separate Account. The rights of the contract owners were not affected by the merger. 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 AIG Capital Services, Inc., a wholly owned, indirect subsidiary of the Company. No underwriting fees are paid in connection with the distribution of these contracts. The Separate Account offers the Advisor Variable Annuity product. The Separate Account is composed of 69 variable portfolios of different classes (the "Variable Accounts"). Each of the Variable Accounts in invested solely in the shares of one of the following: (1) the ten Class 1 and Class 2 currently available portfolios of the Anchor Series Trust (the "Anchor Trust"), (2) the fifty-two Class 1, 2, and 3 currently available investment portfolios of the SunAmerica Series Trust (the "SunAmerica Trust"), (3) the three currently available Series II investment portfolios of the AIM Variable Insurance Funds (the "Invesco Funds"), (4) the three currently available Class 2 investment portfolios of the American Funds Insurance Series (the "American Series"), or (5) the one Class VC currently available investment portfolio in the Lord Abbett Series Fund Inc. (the "Lord Abbett Fund"). The primary difference between the classes of the Variable Accounts is that the Class 2 shares of the Anchor Trust and the SunAmerica Trust are subject to 12b-1 fees of 0.15% of the class' average daily net assets, and the 15 VARIABLE ANNUITY ACCOUNT FOUR OF AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION (continued) Class 3 shares of the SunAmerica Trust, the Class II shares of the Invesco Funds, and the Class 2 shares of the American Series are subject to 12b-1 fees of 0.25% of each class' average daily net assets. The Class 1 shares are not subject to 12b-1 fees. The Class VC shares of the Lord Abbett Fund are also not subject to 12b-1 fees. The Anchor Trust, the SunAmerica Trust, the Invesco Funds, the American Series, and the Lord Abbett Fund (collectively referred to as the "Trusts") are diversified, open-end investment companies, which retain investment advisers to assist in the investment activities of the Trusts. The Anchor Trust and SunAmerica Trust are affiliated investment companies. The contract holder may elect to have investments allocated to one of the offered guaranteed-interest funds of the Company (the "General Account"), which are not part of the Separate Account. The financial statements include balances allocated by the participants to the Variable Accounts and do not include balances allocated to the General Account. The assets of the Account are segregated from the Company's other assets. The operations of the Account are part of the Company. Net purchases from the contracts are allocated to the Sub-accounts and invested in the Funds in accordance with contract owner instructions. The purchases are recorded as principal transactions in the Statements of Changes in Net Assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Separate Account have been prepared in conformity with accounting principles generally accepted in the United States of America. The following is a summary of significant accounting policies consistently followed by the Separate Account in the preparation of its financial statements. INVESTMENT ACCOUNTING AND VALUATION: The investments are stated at the net asset value of each of the portfolios of the Trusts 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 Trusts are recognized at the date of sale and are determined on a first-in, first-out basis. ACCUMULATION UNIT: This is a measuring unit used to calculate the contract owner's interest. Such units are valued on each day that the New York Stock Exchange ("NYSE") is open for business to reflect investment performance and the prorated daily deduction for mortality and expense risk charges. 16 VARIABLE ANNUITY ACCOUNT FOUR OF AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 ANNUITY CONTRACTS IN PAYOUT (ANNUITIZATION) PERIOD: Net assets allocated to contracts in the payout period are based on the Annuity 2000 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. At each reporting period, the assumptions must be evaluated based on current experience, and the reserves must be adjusted accordingly. To the extent additional reserves are the established due to mortality risk experience, the Company makes payments to the Account. If there are excess reserves remaining at the time annuity payments cease, the assets supporting those reserves are transferred from the Separate Account to the Company. If there are transfers between the Company and the Separate Account they will be disclosed as adjustments to net assets allocated to contracts in payout period 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" 17 VARIABLE ANNUITY ACCOUNT FOUR OF AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 3. FAIR VALUE MEASUREMENTS (continued) 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 cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Separate Account's assessment of the significance of a particular input to the fair value measurement in its entirety requirements 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 certain fixed income securities and equities. The Separate Account assets measured at fair value as of December 31, 2014 consist of investments in trusts, 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, 2014 and for the year then ended. 18 VARIABLE ANNUITY ACCOUNT FOUR OF AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 3. FAIR VALUE MEASUREMENTS (continued) The Separate Account had no liabilities as of December 31, 2014. See the Schedule of Portfolio Investments for the table presenting information about assets measured at fair value on a recurring basis at December 31, 2014, and respective hierarchy levels. As all assets of the Account are classified as Level 1, no reconciliation of Level 3 assets and change in unrealized gains (losses) for Level 3 assets still held as of December 31, 2014 is presented. 4. CHARGES AND DEDUCTIONS There are no withdrawal charges and no contract maintenance changes. Other charges and deductions are applied against the current value of the Separate Account and are paid as follows: 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. Separate Account annual charges are recorded as a charge in the Statement of Operations. The total annual rate of the net asset value of each portfolio is 1.52% or 1.77%, depending on whether the optional enhanced death benefit is chosen. 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 of administering the contract. The distribution expense charge 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. This 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 loss. 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 cost of units redeemed in the accompanying Statement of Changes in Net Assets. 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. 19 VARIABLE ANNUITY ACCOUNT FOUR OF AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 4. CHARGES AND DEDUCTIONS 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 Statement of Change 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. 20 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 5 - PURCHASES AND SALES OF INVESTMENTS For the year ended December 31, 2014, the aggregate cost of purchases and proceeds from the sales of investments were:
Cost of Sub-accounts Purchases Proceeds from Sales ------------ ---------- ------------------- Growth and Income Portfolio Class VC $ 628,975 $ 3,858,889 Growth-Income Fund Class 2 6,934,565 12,044,866 Growth Fund Class 2 3,907,655 6,975,750 Global Growth Fund Class 2 4,945,381 5,939,969 Invesco VI American Franchise Fund Series II 285,106 517,677 Invesco VI Comstock Fund Series II 1,046,359 3,817,828 Invesco VI Growth and Income Fund Series II 3,225,075 3,176,170 Growth Portfolio Class 1 320,168 1,524,570 Growth Portfolio Class 2 107,276 419,056 Government and Quality Bond Portfolio Class 1 1,767,595 3,670,518 Government and Quality Bond Portfolio Class 2 1,556,789 1,487,963 Capital Appreciation Portfolio Class 1 5,776,075 5,161,002 Capital Appreciation Portfolio Class 2 1,632,054 1,011,902 Natural Resources Portfolio Class 1 252,679 744,084 Natural Resources Portfolio Class 2 201,585 408,561 Mid-Cap Growth Portfolio Class 1 372,439 444,488 Mid-Cap Growth Portfolio Class 2 572,885 340,203 Capital Growth Portfolio Class 1 1,699 211,318 Capital Growth Portfolio Class 2 20,323 50,184 Blue Chip Growth Portfolio Class 1 178,960 210,158 Blue Chip Growth Portfolio Class 2 262,039 55,826 Growth Opportunities Portfolio Class 1 146,878 173,985 Growth Opportunities Portfolio Class 2 74,172 85,735 Technology Portfolio Class 1 33,496 78,878 Technology Portfolio Class 2 38,764 72,058 Marsico Focused Growth Portfolio Class 1 217,597 250,393 Marsico Focused Growth Portfolio Class 3 184,536 93,194 Small & Mid Cap Value Portfolio Class 3 2,159,334 2,665,678 Foreign Value Portfolio Class 3 667,924 1,437,828 Cash Management Portfolio Class 1 7,488,893 6,707,350 Cash Management Portfolio Class 2 5,325,001 4,274,627 Corporate Bond Portfolio Class 1 1,051,367 3,599,714 Corporate Bond Portfolio Class 2 714,980 890,472 Global Bond Portfolio Class 1 358,369 1,907,827 Global Bond Portfolio Class 2 588,483 675,368 High-Yield Bond Portfolio Class 1 2,795,303 6,074,814 High-Yield Bond Portfolio Class 2 2,043,919 3,101,564 Asset Allocation Portfolio Class 1 1,682,631 4,365,936 Asset Allocation Portfolio Class 2 1,409,482 1,145,006 Growth-Income Portfolio Class 1 773,435 2,897,978 Growth-Income Portfolio Class 2 240,726 298,835 Global Equities Portfolio Class 1 88,789 360,297 Global Equities Portfolio Class 2 27,357 139,982 Alliance Growth Portfolio Class 1 483,604 2,272,897 Alliance Growth Portfolio Class 2 297,377 478,854 MFS Massachusetts Investors Trust Portfolio Class 1 215,698 467,737 MFS Massachusetts Investors Trust Portfolio Class 2 225,562 134,187 Fundamental Growth Portfolio Class 1 17,917 165,440 Fundamental Growth Portfolio Class 2 100,791 88,535 International Diversified Equities Portfolio Class 1 363,721 1,094,686 International Diversified Equities Portfolio Class 2 323,255 193,764 Davis Venture Value Portfolio Class 1 3,559,725 6,520,607 Davis Venture Value Portfolio Class 2 1,488,446 1,657,829 MFS Total Return Portfolio Class 1 1,289,444 4,358,046 MFS Total Return Portfolio Class 3 1,674,995 1,016,967 Total Return Bond Portfolio Class 1 936,957 2,716,797 Total Return Bond Portfolio Class 2 344,448 1,483,090 Telecom Utility Portfolio Class 1 192,726 351,871 Telecom Utility Portfolio Class 2 48,878 78,490 Equity Opportunities Portfolio Class 1 103,838 741,518 Equity Opportunities Portfolio Class 2 82,051 138,282 Aggressive Growth Portfolio Class 1 78,350 538,969 Aggressive Growth Portfolio Class 2 23,202 30,960 International Growth and Income Portfolio Class 1 173,898 640,293 International Growth and Income Portfolio Class 2 167,520 204,068 Dogs of Wall Street Portfolio Class 1 234,790 544,980 Dogs of Wall Street Portfolio Class 2 147,508 191,209 Balanced Portfolio Class 1 848,417 2,623,098 Balanced Portfolio Class 2 683,398 521,675
21 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 6 - SUMMARY OF CHANGES IN UNITS Summary of Changes in Units for the year ended December 31, 2014.
Contracts with Accumulation Annuity Annuity Net a Total Accumulation Units Units Units Increase Sub-accounts Expense of Units Issued Redeemed Issued Redeemed (Decrease) ------------ -------------- ------------ ------------ ------- -------- ---------- Growth and Income Portfolio Class VC 1.52% 36,787 (228,336) 3,943 -- (187,606) Growth and Income Portfolio Class VC 1.77% 418 (1,557) -- -- (1,139) Growth-Income Fund Class 2 1.52% 142,309 (468,396) 8,188 (2,209) (320,108) Growth-Income Fund Class 2 1.77% 10,650 (3,803) -- -- 6,847 Growth Fund Class 2 1.52% 79,216 (237,175) 4,281 (1,622) (155,300) Growth Fund Class 2 1.77% 1,883 (3,550) -- -- (1,667) Global Growth Fund Class 2 1.52% 63,991 (184,626) 4,310 -- (116,325) Global Growth Fund Class 2 1.77% 2,335 (1,255) -- -- 1,080 Invesco VI American Franchise Fund Series II 1.52% 12,714 (31,369) -- -- (18,655) Invesco VI American Franchise Fund Series II 1.77% 6,149 (407) -- -- 5,742 Invesco VI Comstock Fund Series II 1.52% 41,314 (185,728) 1,044 (11) (143,381) Invesco VI Comstock Fund Series II 1.77% 8,469 (4,328) -- -- 4,141 Invesco VI Growth and Income Fund Series II 1.52% 39,076 (146,940) 8,679 -- (99,185) Invesco VI Growth and Income Fund Series II 1.77% 2,133 (1,267) -- -- 866 Growth Portfolio Class 1 1.52% 615 (29,242) 4,380 -- (24,247) Growth Portfolio Class 1 1.77% 2,261 (2,363) -- -- (102) Growth Portfolio Class 2 1.52% 2,684 (4,568) -- (3,363) (5,247) Growth Portfolio Class 2 1.77% -- (1,019) -- -- (1,019) Government and Quality Bond Portfolio Class 1 1.52% 51,934 (170,380) 15,218 -- (103,228) Government and Quality Bond Portfolio Class 1 1.77% 12,999 (1,015) -- -- 11,984 Government and Quality Bond Portfolio Class 2 1.52% 73,522 (70,710) 6,191 -- 9,003 Government and Quality Bond Portfolio Class 2 1.77% 36 (6,507) -- -- (6,471) Capital Appreciation Portfolio Class 1 1.52% (1,619) (59,112) 12,402 -- (48,329) Capital Appreciation Portfolio Class 1 1.77% 4,237 (2,962) -- -- 1,275 Capital Appreciation Portfolio Class 2 1.52% 8,472 (11,890) 112 -- (3,306) Capital Appreciation Portfolio Class 2 1.77% 115 (484) -- -- (369) Natural Resources Portfolio Class 1 1.52% 4,672 (13,549) -- (250) (9,127) Natural Resources Portfolio Class 1 1.77% 345 (166) -- -- 179 Natural Resources Portfolio Class 2 1.52% 4,080 (7,557) -- -- (3,477) Natural Resources Portfolio Class 2 1.77% 71 (16) -- -- 55 Mid-Cap Growth Portfolio Class 1 1.52% 9,963 (23,244) 211 -- (13,070) Mid-Cap Growth Portfolio Class 1 1.77% -- (307) -- -- (307) Mid-Cap Growth Portfolio Class 2 1.52% 19,112 (19,899) 1,754 -- 967 Mid-Cap Growth Portfolio Class 2 1.77% 5,041 (332) -- -- 4,709 Capital Growth Portfolio Class 1 1.52% (37) (18,750) 222 -- (18,565) Capital Growth Portfolio Class 1 1.77% -- -- -- -- -- Capital Growth Portfolio Class 2 1.52% 1,953 (4,333) -- -- (2,380) Capital Growth Portfolio Class 2 1.77% 1 (33) -- -- (32) Blue Chip Growth Portfolio Class 1 1.52% 16,068 (22,139) -- -- (6,071) Blue Chip Growth Portfolio Class 1 1.77% -- (48) -- -- (48) Blue Chip Growth Portfolio Class 2 1.52% 24,776 (4,871) -- -- 19,905 Blue Chip Growth Portfolio Class 2 1.77% -- (250) -- -- (250) Growth Opportunities Portfolio Class 1 1.52% 7,969 (18,293) -- -- (10,324) Growth Opportunities Portfolio Class 1 1.77% 14 (86) -- -- (72) Growth Opportunities Portfolio Class 2 1.52% 3,172 (9,086) -- -- (5,914) Growth Opportunities Portfolio Class 2 1.77% 995 -- -- -- 995 Technology Portfolio Class 1 1.52% 9,671 (20,232) -- (836) (11,397) Technology Portfolio Class 1 1.77% -- -- -- -- -- Technology Portfolio Class 2 1.52% 12,601 (20,063) -- -- (7,462) Technology Portfolio Class 2 1.77% 1,169 (1,235) -- -- (66) Marsico Focused Growth Portfolio Class 1 1.52% 7,925 (13,071) 7 -- (5,139) Marsico Focused Growth Portfolio Class 1 1.77% -- (100) -- -- (100) Marsico Focused Growth Portfolio Class 3 1.52% 7,437 (4,770) 2 -- 2,669 Marsico Focused Growth Portfolio Class 3 1.77% 8 (65) -- -- (57) Small & Mid Cap Value Portfolio Class 3 1.52% 23,973 (70,685) 1,741 -- (44,971) Small & Mid Cap Value Portfolio Class 3 1.77% 9,567 (18,778) -- -- (9,211) Foreign Value Portfolio Class 3 1.52% 29,451 (57,322) 1,114 -- (26,757) Foreign Value Portfolio Class 3 1.77% 806 (8,905) -- -- (8,099) Cash Management Portfolio Class 1 1.52% 639,567 (637,559) 64,653 -- 66,661 Cash Management Portfolio Class 1 1.77% 27,737 (24,067) -- -- 3,670 Cash Management Portfolio Class 2 1.52% 526,872 (469,965) 32,849 -- 89,756 Cash Management Portfolio Class 2 1.77% 4,831 (4,641) -- -- 190 Corporate Bond Portfolio Class 1 1.52% 18,792 (128,879) 8,507 -- (101,580) Corporate Bond Portfolio Class 1 1.77% 25 (262) -- -- (237) Corporate Bond Portfolio Class 2 1.52% 15,289 (31,719) 6,169 -- (10,261) Corporate Bond Portfolio Class 2 1.77% 58 (2,206) -- -- (2,148) Global Bond Portfolio Class 1 1.52% 16,168 (65,746) 314 -- (49,264) Global Bond Portfolio Class 1 1.77% 2,517 (15,571) -- -- (13,054) Global Bond Portfolio Class 2 1.52% 23,831 (28,138) 2,427 -- (1,880) Global Bond Portfolio Class 2 1.77% 215 (1,015) -- -- (800) High-Yield Bond Portfolio Class 1 1.52% 83,709 (203,826) 4,667 -- (115,450) High-Yield Bond Portfolio Class 1 1.77% 2,180 (9,999) -- -- (7,819) High-Yield Bond Portfolio Class 2 1.52% 69,534 (112,760) 2,593 -- (40,633) High-Yield Bond Portfolio Class 2 1.77% 63 (357) -- -- (294) Asset Allocation Portfolio Class 1 1.52% 16,154 (117,341) 9,802 -- (91,385) Asset Allocation Portfolio Class 1 1.77% -- (284) -- -- (284) Asset Allocation Portfolio Class 2 1.52% 29,021 (30,097) 674 -- (402)
22 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 6 - SUMMARY OF CHANGES IN UNITS Summary of Changes in Units for the year ended December 31, 2014.
Contracts with Accumulation Annuity Annuity Net a Total Accumulation Units Units Units Increase Sub-accounts Expense of Units Issued Redeemed Issued Redeemed (Decrease) ------------ -------------- ------------ ------------ ------- -------- ---------- Asset Allocation Portfolio Class 2 1.77% 3 (131) -- -- (128) Growth-Income Portfolio Class 1 1.52% 2,387 (64,811) 3,051 -- (59,373) Growth-Income Portfolio Class 1 1.77% -- (86) -- -- (86) Growth-Income Portfolio Class 2 1.52% 4,032 (7,568) 570 -- (2,966) Growth-Income Portfolio Class 2 1.77% 1 (23) -- -- (22) Global Equities Portfolio Class 1 1.52% 1,441 (11,979) 1,422 -- (9,116) Global Equities Portfolio Class 1 1.77% 10 (80) -- -- (70) Global Equities Portfolio Class 2 1.52% 1,086 (5,254) 249 -- (3,919) Global Equities Portfolio Class 2 1.77% -- -- -- -- -- Alliance Growth Portfolio Class 1 1.52% 3,489 (40,520) 3,873 -- (33,158) Alliance Growth Portfolio Class 1 1.77% 3,928 (2,250) -- -- 1,678 Alliance Growth Portfolio Class 2 1.52% 6,186 (9,336) 187 -- (2,963) Alliance Growth Portfolio Class 2 1.77% 85 (89) -- -- (4) MFS Massachusetts Investors Trust Portfolio Class 1 1.52% 4,330 (12,776) -- -- (8,446) MFS Massachusetts Investors Trust Portfolio Class 1 1.77% 1 (6) -- -- (5) MFS Massachusetts Investors Trust Portfolio Class 2 1.52% 5,171 (3,374) -- (16) 1,781 MFS Massachusetts Investors Trust Portfolio Class 2 1.77% -- (61) -- -- (61) Fundamental Growth Portfolio Class 1 1.52% 691 (6,118) -- -- (5,427) Fundamental Growth Portfolio Class 1 1.77% 5 (5) -- -- -- Fundamental Growth Portfolio Class 2 1.52% 4,131 (3,225) -- -- 906 Fundamental Growth Portfolio Class 2 1.77% -- (5) -- -- (5) International Diversified Equities Portfolio Class 1 1.52% 15,478 (68,120) 1,454 -- (51,188) International Diversified Equities Portfolio Class 1 1.77% 3,642 (30) -- -- 3,612 International Diversified Equities Portfolio Class 2 1.52% 21,729 (12,811) 885 -- 9,803 International Diversified Equities Portfolio Class 2 1.77% 214 (135) -- -- 79 Davis Venture Value Portfolio Class 1 1.52% 7,431 (120,451) 2,291 -- (110,729) Davis Venture Value Portfolio Class 1 1.77% 3,380 (4,168) -- -- (788) Davis Venture Value Portfolio Class 2 1.52% 14,078 (30,405) 362 -- (15,965) Davis Venture Value Portfolio Class 2 1.77% 11 (2,317) -- -- (2,306) MFS Total Return Portfolio Class 1 1.52% 26,452 (111,321) 33 -- (84,836) MFS Total Return Portfolio Class 1 1.77% 179 (1,979) -- -- (1,800) MFS Total Return Portfolio Class 3 1.52% 43,005 (27,506) 1,323 -- 16,822 MFS Total Return Portfolio Class 3 1.77% 309 (4) -- -- 305 Total Return Bond Portfolio Class 1 1.52% 22,903 (86,947) -- (117) (64,161) Total Return Bond Portfolio Class 1 1.77% 10,133 (6,877) -- -- 3,256 Total Return Bond Portfolio Class 2 1.52% 8,847 (50,727) 3,970 -- (37,910) Total Return Bond Portfolio Class 2 1.77% 41 (2,461) -- -- (2,420) Telecom Utility Portfolio Class 1 1.52% 5,343 (12,776) -- (401) (7,834) Telecom Utility Portfolio Class 1 1.77% 368 -- -- -- 368 Telecom Utility Portfolio Class 2 1.52% 1,610 (3,178) -- -- (1,568) Telecom Utility Portfolio Class 2 1.77% -- -- -- -- -- Equity Opportunities Portfolio Class 1 1.52% (783) (24,320) 3,973 -- (21,130) Equity Opportunities Portfolio Class 1 1.77% 9 (1) -- -- 8 Equity Opportunities Portfolio Class 2 1.52% 2,773 (4,754) 368 -- (1,613) Equity Opportunities Portfolio Class 2 1.77% 144 (67) -- -- 77 Aggressive Growth Portfolio Class 1 1.52% 1,522 (26,415) 4,125 -- (20,768) Aggressive Growth Portfolio Class 1 1.77% 6 (12) -- -- (6) Aggressive Growth Portfolio Class 2 1.52% 1,265 (1,458) -- -- (193) Aggressive Growth Portfolio Class 2 1.77% -- -- -- -- -- International Growth and Income Portfolio Class 1 1.52% 5,324 (27,007) 3,418 -- (18,265) International Growth and Income Portfolio Class 1 1.77% -- (9,427) -- -- (9,427) International Growth and Income Portfolio Class 2 1.52% 8,254 (10,276) 28 -- (1,994) International Growth and Income Portfolio Class 2 1.77% 1,046 (1,145) -- -- (99) Dogs of Wall Street Portfolio Class 1 1.52% 2,022 (23,695) 3,230 -- (18,443) Dogs of Wall Street Portfolio Class 1 1.77% -- -- -- -- -- Dogs of Wall Street Portfolio Class 2 1.52% 5,157 (8,164) -- (556) (3,563) Dogs of Wall Street Portfolio Class 2 1.77% 1 (30) -- -- (29) Balanced Portfolio Class 1 1.52% 30,356 (108,774) 2,706 -- (75,712) Balanced Portfolio Class 1 1.77% 373 (72) -- -- 301 Balanced Portfolio Class 2 1.52% 29,462 (21,762) 346 -- 8,046 Balanced Portfolio Class 2 1.77% -- (446) -- -- (446)
23 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 6 - SUMMARY OF CHANGES IN UNITS Summary of Changes in Units for the year ended December 31, 2013.
Contracts with Accumulation Accumulation Annuity Annuity Net a Total Accumulation Units Units Units Units Increase Sub-accounts Expense of Units Issued Redeemed Redeemed Issued Redeemed (Decrease) ------------ -------------- ------------ ------------ ------------ ------- -------- ---------- Growth and Income Portfolio Class VC 1.52% 33,375 (225,685) (225,686) 2,622 (160) (189,849) Growth and Income Portfolio Class VC 1.77% 10,685 (13,973) (13,973) -- -- (3,288) Growth-Income Fund Class 2 1.52% 125,414 (447,097) (447,095) 3,095 (4,357) (322,944) Growth-Income Fund Class 2 1.77% 2,905 (9,907) (9,907) -- -- (7,002) Growth Fund Class 2 1.52% 62,323 (178,283) (178,283) 2,331 (781) (114,410) Growth Fund Class 2 1.77% 158 (6,602) (6,602) -- -- (6,443) Global Growth Fund Class 2 1.52% 44,734 (161,295) (161,296) 347 -- (116,216) Global Growth Fund Class 2 1.77% 280 (1,866) (1,866) -- -- (1,586) Invesco VI American Franchise Fund Series II 1.52% 6,137 (13,557) (13,557) -- -- (7,421) Invesco VI American Franchise Fund Series II 1.77% 170 (5,329) (5,329) -- -- (5,158) Invesco VI Comstock Fund Series II 1.52% 49,599 (206,474) (206,474) 376 (151) (156,649) Invesco VI Comstock Fund Series II 1.77% 12,273 (12,419) (12,419) -- -- (147) Invesco VI Growth and Income Fund Series II 1.52% 118,095 (180,406) (180,406) 2,613 -- (59,698) Invesco VI Growth and Income Fund Series II 1.77% 6 (4,333) (4,333) -- -- (4,327) Growth Portfolio Class 1 1.52% 4,427 (41,456) (41,457) -- (297) (37,327) Growth Portfolio Class 1 1.77% 1,276 (1,379) (1,379) -- -- (103) Growth Portfolio Class 2 1.52% 11,718 (16,562) (16,563) 3,831 -- (1,014) Growth Portfolio Class 2 1.77% 1 (1,362) (1,362) -- -- (1,362) Government and Quality Bond Portfolio Class 1 1.52% 86,484 (230,691) (230,692) -- (676) (144,884) Government and Quality Bond Portfolio Class 1 1.77% 1,338 (15,834) (15,834) -- -- (14,496) Government and Quality Bond Portfolio Class 2 1.52% 35,258 (113,714) (113,714) 1,404 -- (77,052) Government and Quality Bond Portfolio Class 2 1.77% 2,811 (6,705) (6,705) -- -- (3,894) Capital Appreciation Portfolio Class 1 1.52% 7,279 (73,534) (73,534) 156 -- (66,100) Capital Appreciation Portfolio Class 1 1.77% 1,438 (1,956) (1,956) -- -- (518) Capital Appreciation Portfolio Class 2 1.52% 10,016 (13,008) (13,008) 835 -- (2,156) Capital Appreciation Portfolio Class 2 1.77% 117 (985) (985) -- -- (868) Natural Resources Portfolio Class 1 1.52% 4,474 (21,324) (21,325) 3 -- (16,848) Natural Resources Portfolio Class 1 1.77% 143 (41) (41) -- -- 102 Natural Resources Portfolio Class 2 1.52% 5,393 (11,717) (11,717) -- -- (6,324) Natural Resources Portfolio Class 2 1.77% 38 (161) (161) -- -- (123) Mid-Cap Growth Portfolio Class 1 1.52% 14,080 (23,006) (23,006) -- -- (8,926) Mid-Cap Growth Portfolio Class 1 1.77% 127 (27) (27) -- -- 100 Mid-Cap Growth Portfolio Class 2 1.52% 21,896 (21,247) (21,247) 1,485 -- 2,135 Mid-Cap Growth Portfolio Class 2 1.77% 1 (5,796) (5,796) -- -- (5,795) Capital Growth Portfolio Class 1 1.52% 473 (6,292) (6,292) -- (20) (5,839) Capital Growth Portfolio Class 1 1.77% 1 (1) (1) -- -- -- Capital Growth Portfolio Class 2 1.52% 21 (3,982) (3,981) -- -- (3,960) Capital Growth Portfolio Class 2 1.77% -- (28) (28) -- -- (28) Blue Chip Growth Portfolio Class 1 1.52% 11,044 (19,251) (19,251) -- -- (8,207) Blue Chip Growth Portfolio Class 1 1.77% -- (56) (56) -- -- (56) Blue Chip Growth Portfolio Class 2 1.52% 1,134 (18,711) (18,711) -- -- (17,577) Blue Chip Growth Portfolio Class 2 1.77% 8 (1,913) (1,913) -- -- (1,905) Growth Opportunities Portfolio Class 1 1.52% 8,104 (24,363) (24,363) -- -- (16,259) Growth Opportunities Portfolio Class 1 1.77% 101 (0) -- -- -- 101 Growth Opportunities Portfolio Class 2 1.52% 3,811 (3,848) (3,848) -- -- (36) Growth Opportunities Portfolio Class 2 1.77% -- (0) -- -- -- -- Technology Portfolio Class 1 1.52% 20,218 (59,341) (59,342) 836 -- (38,287) Technology Portfolio Class 1 1.77% 2 (31,117) (31,117) -- -- (31,115) Technology Portfolio Class 2 1.52% 5,081 (18,699) (18,700) -- -- (13,619) Technology Portfolio Class 2 1.77% 1 (9,686) (9,686) -- -- (9,685) Marsico Focused Growth Portfolio Class 1 1.52% 670 (20,629) (20,628) -- (2) (19,960) Marsico Focused Growth Portfolio Class 1 1.77% -- (92) (92) -- -- (92) Marsico Focused Growth Portfolio Class 3 1.52% 4,265 (6,075) (6,075) -- (22) (1,832) Marsico Focused Growth Portfolio Class 3 1.77% 3 (74) (74) -- -- (71) Small & Mid Cap Value Portfolio Class 3 1.52% 56,196 (47,796) (47,796) 255 (63) 8,592 Small & Mid Cap Value Portfolio Class 3 1.77% 8,086 (11,200) (11,200) -- -- (3,114) Foreign Value Portfolio Class 3 1.52% 54,879 (76,019) (76,018) 951 (81) (20,269) Foreign Value Portfolio Class 3 1.77% 18,783 (11,137) (11,137) -- -- 7,646 Cash Management Portfolio Class 1 1.52% 680,158 (647,570) (647,571) -- (1,283) 31,304 Cash Management Portfolio Class 1 1.77% 64,266 (43,042) (43,042) -- -- 21,224 Cash Management Portfolio Class 2 1.52% 473,921 (478,486) (478,486) 27,688 -- 23,123 Cash Management Portfolio Class 2 1.77% 23,506 (24,180) (24,180) -- -- (674) Corporate Bond Portfolio Class 1 1.52% 41,824 (146,380) (146,380) -- (538) (105,094) Corporate Bond Portfolio Class 1 1.77% 306 (4,042) (4,041) -- -- (3,735) Corporate Bond Portfolio Class 2 1.52% 24,035 (55,097) (55,097) 1,235 -- (29,827) Corporate Bond Portfolio Class 2 1.77% 852 (5,854) (5,854) -- -- (5,001) Global Bond Portfolio Class 1 1.52% 37,422 (91,960) (91,960) -- (337) (54,875) Global Bond Portfolio Class 1 1.77% 13,965 (9,191) (9,191) -- -- 4,774 Global Bond Portfolio Class 2 1.52% 9,369 (16,461) (16,461) -- (236) (7,328) Global Bond Portfolio Class 2 1.77% 293 (1,109.92) (1,110) -- -- (817) High-Yield Bond Portfolio Class 1 1.52% 83,248 (145,690.46) (145,690) -- (1,299) (63,741) High-Yield Bond Portfolio Class 1 1.77% 10,127 (9,905.64) (9,906) -- -- 222 High-Yield Bond Portfolio Class 2 1.52% 73,332 (86,326.79) (86,327) 713 -- (12,282) High-Yield Bond Portfolio Class 2 1.77% 207 (2,941.79) (2,942) -- -- (2,735) Asset Allocation Portfolio Class 1 1.52% 24,912 (122,464.31) (122,464) 2,436 -- (95,116) Asset Allocation Portfolio Class 1 1.77% 327 (1,304.65) (1,305) -- -- (978) Asset Allocation Portfolio Class 2 1.52% 31,788 (28,088.89) (28,090) -- (217) 3,481 Asset Allocation Portfolio Class 2 1.77% 10 (4,173.93) (4,174) -- -- (4,164) Growth-Income Portfolio Class 1 1.52% 16,365 (76,488.86) (76,489) -- (1,093) (61,216) Growth-Income Portfolio Class 1 1.77% 143 (6,979.17) (6,979) -- -- (6,837) Growth-Income Portfolio Class 2 1.52% 4,548 (8,675.66) (8,676) -- (175) (4,303) Growth-Income Portfolio Class 2 1.77% 25 (1,090.01) (1,090) -- -- (1,065) Global Equities Portfolio Class 1 1.52% 2,894 (19,509.34) (19,509) -- (429) (17,045)
24 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 6 - SUMMARY OF CHANGES IN UNITS Summary of Changes in Units for the year ended December 31, 2013.
Contracts with Accumulation Accumulation Annuity Annuity Net a Total Accumulation Units Units Units Units Increase Sub-accounts Expense of Units Issued Redeemed Redeemed Issued Redeemed (Decrease) ------------ -------------- ------------ ------------ ------------ ------- -------- ---------- Global Equities Portfolio Class 1 1.77% 11 (65.25) (65) -- -- (55) Global Equities Portfolio Class 2 1.52% 6,508 (3,305.11) (3,305) -- -- 3,203 Global Equities Portfolio Class 2 1.77% -- 0.00 -- -- -- -- Alliance Growth Portfolio Class 1 1.52% 8,911 (56,237.66) (56,238) -- (637) (47,963) Alliance Growth Portfolio Class 1 1.77% 2,326 (1,377.45) (1,377) -- -- 948 Alliance Growth Portfolio Class 2 1.52% 2,175 (14,353.61) (14,354) -- (160) (12,338) Alliance Growth Portfolio Class 2 1.77% 91 (3,242.19) (3,242) -- -- (3,151) MFS Massachusetts Investors Trust Portfolio Class 1 1.52% 7,828 (14,836.38) (14,836) -- (217) (7,225) MFS Massachusetts Investors Trust Portfolio Class 1 1.77% 79 (1,610.08) (1,610) -- -- (1,531) MFS Massachusetts Investors Trust Portfolio Class 2 1.52% 3,881 (7,643.78) (7,644) -- (83) (3,845) MFS Massachusetts Investors Trust Portfolio Class 2 1.77% 79 (815.64) (816) -- -- (737) Fundamental Growth Portfolio Class 1 1.52% 2,383 (13,022.31) (13,022) -- -- (10,640) Fundamental Growth Portfolio Class 1 1.77% 6 (1,264.77) (1,265) -- -- (1,259) Fundamental Growth Portfolio Class 2 1.52% 3,577 (498.50) (498) -- -- 3,079 Fundamental Growth Portfolio Class 2 1.77% -- (75.02) (75) -- -- (75) International Diversified Equities Portfolio Class 1 1.52% 19,322 (76,289.39) (76,289) -- (447) (57,415) International Diversified Equities Portfolio Class 1 1.77% 751 (26.12) (26) -- -- 725 International Diversified Equities Portfolio Class 2 1.52% 6,393 (10,221.02) (10,221) -- (133) (3,961) International Diversified Equities Portfolio Class 2 1.77% 81 (5,026.80) (5,027) -- -- (4,946) Davis Venture Value Portfolio Class 1 1.52% 18,075 (148,935.22) (148,935) -- (572) (131,432) Davis Venture Value Portfolio Class 1 1.77% 1 (1,814.65) (1,815) -- -- (1,814) Davis Venture Value Portfolio Class 2 1.52% 19,015 (54,543.56) (54,543) -- (77) (35,604) Davis Venture Value Portfolio Class 2 1.77% 32 (4,143.17) (4,143) -- -- (4,111) MFS Total Return Portfolio Class 1 1.52% 39,170 (130,453.62) (130,454) -- (27) (91,311) MFS Total Return Portfolio Class 1 1.77% 3,729 (7,972.30) (7,972) -- -- (4,243) MFS Total Return Portfolio Class 3 1.52% 26,830 (19,934.86) (19,935) 397 -- 7,292 MFS Total Return Portfolio Class 3 1.77% 3,939 (1,026.59) (1,027) -- -- 2,912 Total Return Bond Portfolio Class 1 1.52% 50,970 (153,547.19) (153,547) -- (702) (103,279) Total Return Bond Portfolio Class 1 1.77% 4,068 (11,571.37) (11,571) -- -- (7,503) Total Return Bond Portfolio Class 2 1.52% 41,389 (47,610.51) (47,611) 456 -- (5,766) Total Return Bond Portfolio Class 2 1.77% 263 (9,542.93) (9,543) -- -- (9,280) Telecom Utility Portfolio Class 1 1.52% 3,065 (20,648.58) (20,649) -- (59) (17,642) Telecom Utility Portfolio Class 1 1.77% -- 0.00 -- -- -- -- Telecom Utility Portfolio Class 2 1.52% 2,089 (4,192.74) (4,193) -- -- (2,103) Telecom Utility Portfolio Class 2 1.77% -- (0.10) -- -- -- -- Equity Opportunities Portfolio Class 1 1.52% 7,486 (41,599.93) (41,601) -- (1,405) (35,520) Equity Opportunities Portfolio Class 1 1.77% 11 (2,003.05) (2,003) -- -- (1,992) Equity Opportunities Portfolio Class 2 1.52% 2,952 (6,970.05) (6,970) -- -- (4,018) Equity Opportunities Portfolio Class 2 1.77% 161 (722.50) (722) -- -- (562) Aggressive Growth Portfolio Class 1 1.52% 19,524 (39,040.89) (39,041) -- (281) (19,798) Aggressive Growth Portfolio Class 1 1.77% 7 (11.73) (12) -- -- (4) Aggressive Growth Portfolio Class 2 1.52% 283 (1,209.59) (1,210) -- -- (926) Aggressive Growth Portfolio Class 2 1.77% -- (3,663.69) (3,664) -- -- (3,664) International Growth and Income Portfolio Class 1 1.52% 41,853 (59,786.21) (59,786) -- (679) (18,613) International Growth and Income Portfolio Class 1 1.77% 22,524 (13,718.00) (13,718) -- -- 8,806 International Growth and Income Portfolio Class 2 1.52% 3,235 (12,667.98) (12,668) 38 -- (9,395) International Growth and Income Portfolio Class 2 1.77% 179 (358.90) (359) -- -- (179) Dogs of Wall Street Portfolio Class 1 1.52% 22,905 (32,737.22) (32,737) -- (444) (10,277) Dogs of Wall Street Portfolio Class 1 1.77% -- (0.06) -- -- -- -- Dogs of Wall Street Portfolio Class 2 1.52% 14,864 (13,696.31) (13,696) -- (435) 733 Dogs of Wall Street Portfolio Class 2 1.77% 594 (295.67) (296) -- -- 298 Balanced Portfolio Class 1 1.52% 117,668 (92,172.33) (92,172) 915 -- 26,411 Balanced Portfolio Class 1 1.77% -- (1,019.52) (1,020) -- -- (1,020) Balanced Portfolio Class 2 1.52% 24,452 (17,981.09) (17,981) -- (68) 6,403 Balanced Portfolio Class 2 1.77% 97 (1,807.90) (1,808) -- -- (1,711)
25 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 ----------------------------------------- ---------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ --------- ---------------- -------------- ----------------- ---------- ----------------- Growth and Income Portfolio Class VC 2014 770,872 $16.67 to $17.23 13,263,925 1.52% to 1.77% 0.64% 5.76% to 6.03% 2013 959,617 15.76 to 16.25 15,576,734 1.52% to 1.77% 0.56% 33.52% to 33.86% 2012 1,152,753 11.81 to 12.14 13,981,577 1.52% to 1.77% 0.93% 10.12% to 10.39% 2011 1,348,764 10.72 to 10.99 14,820,655 1.52% to 1.77% 0.68% -7.73% to -7.50% 2010 1,568,174 11.62 to 11.89 18,629,482 1.52% to 1.77% 0.54% 15.35% to 15.64% Growth-Income Fund Class 2 2014 2,266,278 $25.49 to $26.29 59,504,455 1.52% to 1.77% 1.25% 8.69% to 8.97% 2013 2,579,539 23.45 to 24.13 62,175,993 1.52% to 1.77% 1.33% 31.17% to 31.49% 2012 2,909,485 17.88 to 18.35 53,340,487 1.52% to 1.77% 1.59% 15.42% to 15.71% 2011 3,250,183 15.49 to 15.86 51,505,611 1.52% to 1.77% 1.48% -3.55% to -3.31% 2010 3,750,785 16.06 to 16.40 61,482,101 1.52% to 1.77% 1.46% 9.47% to 9.75% Growth Fund Class 2 2014 1,103,328 $28.77 to $29.67 32,697,858 1.52% to 1.77% 0.76% 6.61% to 6.87% 2013 1,260,295 26.99 to 27.76 34,953,609 1.52% to 1.77% 0.93% 27.83% to 28.15% 2012 1,381,148 21.11 to 21.66 29,893,663 1.52% to 1.77% 0.77% 15.82% to 16.11% 2011 1,563,840 18.23 to 18.66 29,152,529 1.52% to 1.77% 0.59% -5.96% to -5.72% 2010 1,751,559 19.38 to 19.79 34,640,612 1.52% to 1.77% 0.71% 16.60% to 16.89% Global Growth Fund Class 2 2014 826,736 $30.98 to $31.96 26,397,996 1.52% to 1.77% 1.11% 0.52% to 0.77% 2013 941,981 30.82 to 31.72 29,855,162 1.52% to 1.77% 1.21% 26.92% to 27.24% 2012 1,059,783 24.29 to 24.93 26,402,526 1.52% to 1.77% 0.87% 20.41% to 20.71% 2011 1,226,160 20.17 to 20.65 25,308,202 1.52% to 1.77% 1.25% -10.48% to -10.26% 2010 1,398,648 22.53 to 23.01 32,167,206 1.52% to 1.77% 1.48% 9.78% to 10.06% Invesco VI American Franchise Fund Series II 2014 89,093 $15.63 to $16.22 1,437,261 1.52% to 1.77% 0.00% 6.27% to 6.54% 2013 102,006 14.71 to 15.22 1,549,054 1.52% to 1.77% 0.24% 37.35% to 37.69% 2012 114,585 10.71 to 11.06 1,262,434 1.52% to 1.77% 0.00% 11.40% to 11.68% 2011 117,607 9.61 to 9.90 1,161,107 1.52% to 1.77% 0.00% -8.03% to -7.80% 2010 157,435 10.45 to 10.74 1,684,419 1.52% to 1.77% 0.00% 17.47% to 17.76% Invesco VI Comstock Fund Series II 2014 798,589 $19.46 to $20.10 16,023,899 1.52% to 1.77% 1.07% 7.19% to 7.45% 2013 937,829 18.15 to 18.70 17,520,097 1.52% to 1.77% 1.49% 33.28% to 33.61% 2012 1,094,625 13.62 to 14.00 15,308,482 1.52% to 1.77% 1.45% 12.34% to 12.62% 2011 1,300,414 11.66 to 11.95 15,528,828 1.52% to 1.77% 1.37% -3.98% to -3.74% 2010 1,510,137 12.12 to 12.39 18,705,242 1.52% to 1.77% 0.14% 10.22% to 10.50% Invesco VI Growth and Income Fund Series II 2014 826,007 $21.07 to $21.77 17,973,295 1.52% to 1.77% 1.48% 8.04% to 8.31% 2013 924,326 19.50 to 20.10 18,572,520 1.52% to 1.77% 1.34% 31.43% to 31.76% 2012 988,351 14.84 to 15.26 15,071,875 1.52% to 1.77% 1.27% 12.34% to 12.62% 2011 1,153,474 13.21 to 13.55 15,617,727 1.52% to 1.77% 1.01% -3.98% to -3.74% 2010 1,316,804 13.76 to 14.07 18,522,503 1.52% to 1.77% 0.11% 10.22% to 10.50% Growth Portfolio Class 1 2014 132,505 $47.22 to $48.89 6,468,941 1.52% to 1.77% 0.56% 5.56% to 5.83% 2013 156,854 44.73 to 46.20 7,238,148 1.52% to 1.77% 0.77% 32.81% to 33.14% 2012 194,284 33.68 to 34.70 6,735,856 1.52% to 1.77% 0.56% 11.96% to 12.24% 2011 225,176 30.08 to 30.92 6,956,502 1.52% to 1.77% 0.71% -7.90% to -7.67% 2010 274,004 32.66 to 33.48 9,167,997 1.52% to 1.77% 0.68% 12.14% to 12.42%
26 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 ----------------------------------------- ---------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ --------- ---------------- -------------- ----------------- ---------- ----------------- Growth Portfolio Class 2 2014 37,981 $46.43 to $48.00 1,809,404 1.52% to 1.77% 0.40% 5.41% to 5.67% 2013 44,247 44.05 to 45.42 1,996,411 1.52% to 1.77% 0.67% 32.61% to 32.94% 2012 46,622 33.22 to 34.17 1,582,165 1.52% to 1.77% 0.40% 11.80% to 12.08% 2011 53,903 29.71 to 30.48 1,633,281 1.52% to 1.77% 0.55% -8.04% to -7.81% 2010 62,077 32.31 to 33.07 2,043,018 1.52% to 1.77% 0.57% 11.97% to 12.26% Government and Quality Bond Portfolio Class 1 2014 593,464 $20.74 to $21.48 $12,723,459 1.52% to 1.77% 1.82% 3.32% to 3.58% 2013 684,708 20.07 to 20.73 14,185,153 1.52% to 1.77% 2.33% -3.81% to -3.56% 2012 844,088 20.87 to 21.50 18,125,419 1.52% to 1.77% 2.22% 1.97% to 2.23% 2011 984,972 20.46 to 21.03 20,696,216 1.52% to 1.77% 3.07% 5.21% to 5.47% 2010 1,302,915 19.45 to 19.94 25,960,866 1.52% to 1.77% 3.88% 3.15% to 3.41% Government and Quality Bond Portfolio Class 2 2014 338,968 $20.37 to $21.05 $ 7,114,463 1.52% to 1.77% 1.59% 3.17% to 3.43% 2013 336,436 19.75 to 20.35 6,824,682 1.52% to 1.77% 2.12% -3.95% to -3.71% 2012 417,381 20.56 to 21.14 8,798,259 1.52% to 1.77% 2.10% 1.82% to 2.07% 2011 448,296 20.19 to 20.71 9,263,493 1.52% to 1.77% 2.83% 5.05% to 5.31% 2010 496,465 19.22 to 19.66 9,742,746 1.52% to 1.77% 3.81% 2.99% to 3.25% Capital Appreciation Portfolio Class 1 2014 332,769 $85.86 to $88.93 $29,566,510 1.52% to 1.77% 0.00% 13.22% to 13.50% 2013 379,823 75.83 to 78.35 29,740,304 1.52% to 1.77% 0.00% 33.44% to 33.78% 2012 446,441 56.83 to 58.57 26,132,738 1.52% to 1.77% 0.00% 21.72% to 22.02% 2011 546,481 46.69 to 48.00 26,207,757 1.52% to 1.77% 0.00% -8.68% to -8.45% 2010 622,823 51.13 to 52.43 32,630,070 1.52% to 1.77% 0.13% 20.58% to 20.88% Capital Appreciation Portfolio Class 2 2014 68,937 $84.50 to $87.33 $ 5,994,872 1.52% to 1.77% 0.00% 13.05% to 13.34% 2013 72,612 74.75 to 77.06 5,573,530 1.52% to 1.77% 0.00% 33.24% to 33.58% 2012 75,636 56.10 to 57.69 4,346,616 1.52% to 1.77% 0.00% 21.54% to 21.84% 2011 80,034 46.16 to 47.35 3,775,296 1.52% to 1.77% 0.00% -8.82% to -8.59% 2010 97,385 50.62 to 51.80 5,029,177 1.52% to 1.77% 0.02% 20.40% to 20.70% Natural Resources Portfolio Class 1 2014 89,041 $38.17 to $39.53 $ 3,515,274 1.52% to 1.77% 1.15% -19.96% to -19.76% 2013 97,989 47.69 to 49.26 4,822,417 1.52% to 1.77% 0.92% 3.95% to 4.21% 2012 114,735 45.88 to 47.27 5,419,968 1.52% to 1.77% 1.05% 1.70% to 1.96% 2011 142,613 45.11 to 46.36 6,607,764 1.52% to 1.77% 0.68% -21.66% to -21.47% 2010 161,572 57.58 to 59.04 9,533,193 1.52% to 1.77% 0.90% 14.16% to 14.45% Natural Resources Portfolio Class 2 2014 64,068 $37.48 to $38.83 $ 2,481,476 1.52% to 1.77% 0.98% -20.08% to -19.88% 2013 67,490 46.89 to 48.46 3,263,512 1.52% to 1.77% 0.77% 3.79% to 4.05% 2012 73,937 45.18 to 46.57 3,437,045 1.52% to 1.77% 0.84% 1.55% to 1.81% 2011 73,500 44.49 to 45.75 3,356,636 1.52% to 1.77% 0.53% -21.78% to -21.58% 2010 75,801 56.88 to 58.34 4,415,206 1.52% to 1.77% 0.77% 13.99% to 14.27% Mid-Cap Growth Portfolio Class 1 2014 135,644 $19.06 to $19.74 $ 2,673,725 1.52% to 1.77% 0.00% 9.32% to 9.59% 2013 149,021 17.44 to 18.01 2,680,791 1.52% to 1.77% 0.00% 39.92% to 40.27% 2012 157,847 12.46 to 12.84 2,024,748 1.52% to 1.77% 0.00% 14.02% to 14.30% 2011 195,057 10.93 to 11.23 2,190,329 1.52% to 1.77% 0.00% -7.58% to -7.35% 2010 225,722 11.83 to 12.13 2,735,454 1.52% to 1.77% 0.00% 23.26% to 23.56%
27 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 --------------------------------------- ----------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ ------- ---------------- -------------- ----------------- ---------- ------------------ Mid-Cap Growth Portfolio Class 2 2014 98,634 $18.71 to $19.34 $1,901,785 1.52% to 1.77% 0.00% 9.15% to 9.43% 2013 92,958 17.14 to 17.68 1,640,580 1.52% to 1.77% 0.00% 39.71% to 40.06% 2012 96,619 12.27 to 12.62 1,215,468 1.52% to 1.77% 0.00% 13.85% to 14.13% 2011 111,884 10.77 to 11.06 1,233,907 1.52% to 1.77% 0.00% -7.72% to -7.49% 2010 123,092 11.68 to 11.95 1,468,078 1.52% to 1.77% 0.00% 23.07% to 23.38% Capital Growth Portfolio Class 1 2014 63,623 $10.77 to $11.15 $ 706,081 1.52% to 1.77% 0.08% 6.69% to 6.95% 2013 82,188 10.09 to 10.43 853,983 1.52% to 1.77% 0.79% 26.99% to 27.31% 2012 88,027 7.95 to 8.19 718,769 1.52% to 1.77% 0.41% 11.92% to 12.20% 2011 98,920 7.10 to 7.30 720,269 1.52% to 1.77% 0.00% -3.05% to -2.80% 2010 113,038 7.32 to 7.51 847,143 1.52% to 1.77% 0.00% 7.32% to 7.59% Capital Growth Portfolio Class 2 2014 34,305 $10.58 to $10.94 $ 374,553 1.52% to 1.77% 0.00% 6.53% to 6.79% 2013 36,717 9.93 to 10.24 375,455 1.52% to 1.77% 0.66% 26.80% to 27.12% 2012 40,705 7.83 to 8.06 327,576 1.52% to 1.77% 0.32% 11.76% to 12.04% 2011 37,196 7.01 to 7.19 267,177 1.52% to 1.77% 0.00% -3.19% to -2.95% 2010 34,938 7.24 to 7.41 258,625 1.52% to 1.77% 0.00% 7.16% to 7.43% Blue Chip Growth Portfolio Class 1 2014 87,174 $ 9.20 to $ 9.52 $ 827,823 1.52% to 1.77% 0.04% 9.96% to 10.23% 2013 93,293 8.36 to 8.64 804,000 1.52% to 1.77% 0.33% 31.62% to 31.95% 2012 101,555 6.35 to 6.55 663,591 1.52% to 1.77% 0.00% 9.62% to 9.89% 2011 136,389 5.80 to 5.96 811,521 1.52% to 1.77% 0.22% -7.25% to -7.01% 2010 153,606 6.25 to 6.41 982,638 1.52% to 1.77% 0.27% 10.54% to 10.82% Blue Chip Growth Portfolio Class 2 2014 101,091 $ 9.05 to $ 9.36 $ 941,040 1.52% to 1.77% 0.00% 9.79% to 10.07% 2013 81,436 8.24 to 8.50 688,143 1.52% to 1.77% 0.18% 31.43% to 31.75% 2012 100,918 6.27 to 6.45 647,932 1.52% to 1.77% 0.00% 9.45% to 9.73% 2011 111,577 5.73 to 5.88 653,016 1.52% to 1.77% 0.09% -7.38% to -7.15% 2010 102,054 6.19 to 6.33 643,198 1.52% to 1.77% 0.15% 10.38% to 10.66% Growth Opportunities Portfolio Class 1 2014 63,992 $ 9.12 to $ 9.44 $ 603,109 1.52% to 1.77% 0.00% 1.91% to 2.16% 2013 74,388 8.95 to 9.24 686,446 1.52% to 1.77% 0.00% 35.38% to 35.72% 2012 90,546 6.61 to 6.81 615,890 1.52% to 1.77% 0.00% 15.50% to 15.79% 2011 108,221 5.73 to 5.88 635,698 1.52% to 1.77% 0.00% -4.08% to -3.84% 2010 92,589 5.97 to 6.12 565,226 1.52% to 1.77% 0.00% 22.16% to 22.46% Growth Opportunities Portfolio Class 2 2014 30,087 $ 8.96 to $ 9.27 $ 278,353 1.52% to 1.77% 0.00% 1.76% to 2.01% 2013 35,006 8.80 to 9.09 317,904 1.52% to 1.77% 0.00% 35.18% to 35.51% 2012 35,042 6.51 to 6.71 234,726 1.52% to 1.77% 0.00% 15.33% to 15.62% 2011 36,666 5.65 to 5.80 212,451 1.52% to 1.77% 0.00% -4.22% to -3.98% 2010 25,733 5.89 to 6.04 155,222 1.52% to 1.77% 0.00% 21.97% to 22.28% Technology Portfolio Class 1 2014 188,600 $ 3.68 $ 693,188 1.52% 0.00% 22.96% 2013 199,997 2.99 to 2.99 597,835 1.52% to 1.77% 0.00% 23.99% to 23.99% 2012 269,399 2.34 to 2.41 647,388 1.52% to 1.77% 0.00% 5.87% to 6.14% 2011 317,342 2.21 to 2.27 719,005 1.52% to 1.77% 0.00% -7.04% to -6.81% 2010 325,541 2.38 to 2.44 793,492 1.52% to 1.77% 0.00% 18.16% to 18.45%
28 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 --------------------------------------- ---------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ ------- ---------------- -------------- ----------------- ---------- ----------------- Technology Portfolio Class 2 2014 85,145 $ 3.49 to $ 3.60 $ 306,592 1.52% to 1.77% 0.00% 22.47% to 22.77% 2013 92,673 2.85 to 2.93 271,812 1.52% to 1.77% 0.00% 23.50% to 23.80% 2012 115,977 2.31 to 2.37 274,292 1.52% to 1.77% 0.00% 5.72% to 5.98% 2011 96,161 2.18 to 2.24 214,558 1.52% to 1.77% 0.00% -7.18% to -6.95% 2010 111,062 2.35 to 2.40 266,450 1.52% to 1.77% 0.00% 17.98% to 18.28% Marsico Focused Growth Portfolio Class 1 2014 75,377 $17.69 to $18.33 $ 1,380,261 1.52% to 1.77% 0.01% 9.28% to 9.55% 2013 80,616 16.19 to 16.73 1,347,558 1.52% to 1.77% 0.20% 32.34% to 32.67% 2012 100,668 12.23 to 12.61 1,268,862 1.52% to 1.77% 0.29% 9.30% to 9.57% 2011 122,499 11.19 to 11.51 1,409,285 1.52% to 1.77% 0.31% -3.17% to -2.92% 2010 158,901 11.86 1,884,022 1.52% 0.36% 15.64% Marsico Focused Growth Portfolio Class 3 2014 58,099 $17.20 to $17.75 $ 1,026,071 1.52% to 1.77% 0.00% 9.01% to 9.28% 2013 55,487 15.78 to 16.24 896,848 1.52% to 1.77% 0.01% 32.01% to 32.34% 2012 57,390 11.95 to 12.27 701,391 1.52% to 1.77% 0.10% 9.02% to 9.30% 2011 60,379 10.96 to 11.23 675,547 1.52% to 1.77% 0.11% -3.41% to -3.17% 2010 59,764 11.35 to 11.59 690,749 1.52% to 1.77% 0.20% 15.06% to 15.35% Small & Mid Cap Value Portfolio Class 3 2014 234,285 $30.05 to $31.03 $ 7,248,018 1.52% to 1.77% 0.57% 6.95% to 7.22% 2013 288,467 28.10 to 28.95 8,322,120 1.52% to 1.77% 0.27% 35.05% to 35.38% 2012 282,989 20.81 to 21.38 6,030,252 1.52% to 1.77% 0.37% 16.23% to 16.52% 2011 279,474 17.90 to 18.35 5,120,165 1.52% to 1.77% 0.10% -9.83% to -9.61% 2010 348,529 19.85 to 20.30 7,059,277 1.52% to 1.77% 0.20% 23.33% to 23.63% Foreign Value Portfolio Class 3 2014 383,534 $18.51 to $19.11 $ 7,320,918 1.52% to 1.77% 0.98% -8.60% to -8.37% 2013 418,390 20.25 to 20.85 8,712,641 1.52% to 1.77% 1.73% 20.93% to 21.23% 2012 431,014 16.75 to 17.20 7,408,797 1.52% to 1.77% 1.84% 17.19% to 17.49% 2011 498,250 14.29 to 14.64 7,288,619 1.52% to 1.77% 1.36% -13.40% to -13.18% 2010 536,349 16.50 to 16.87 9,041,400 1.52% to 1.77% 1.83% 1.13% to 1.38% Cash Management Portfolio Class 1 2014 530,208 $11.96 to $12.39 $ 6,555,036 1.52% to 1.77% 0.00% -2.03% to -1.79% 2013 459,877 12.21 to 12.61 5,789,546 1.52% to 1.77% 0.00% -2.01% to -1.76% 2012 407,348 12.46 to 12.84 5,227,972 1.52% to 1.77% 0.00% -2.00% to -1.75% 2011 598,611 12.71 to 13.07 7,818,030 1.52% to 1.77% 0.00% -2.02% to -1.78% 2010 690,483 12.98 to 13.30 9,179,029 1.52% to 1.77% 0.00% -1.98% to -1.74% Cash Management Portfolio Class 2 2014 326,156 $11.76 to $12.14 $ 3,956,967 1.52% to 1.77% 0.00% -2.18% to -1.93% 2013 236,210 12.02 to 12.38 2,921,549 1.52% to 1.77% 0.00% -2.16% to -1.91% 2012 213,762 12.29 to 12.62 2,695,167 1.52% to 1.77% 0.00% -2.14% to -1.90% 2011 275,208 12.56 to 12.87 3,538,353 1.52% to 1.77% 0.00% -2.17% to -1.93% 2010 195,867 12.84 to 13.12 2,567,085 1.52% to 1.77% 0.00% -2.13% to -1.89% Corporate Bond Portfolio Class 1 2014 527,387 $27.59 to $28.58 $15,062,503 1.52% to 1.77% 3.45% 3.95% to 4.21% 2013 629,204 26.54 to 27.43 17,247,711 1.52% to 1.77% 4.14% -0.38% to -0.13% 2012 738,033 26.64 to 27.47 20,256,600 1.52% to 1.77% 5.17% 9.46% to 9.73% 2011 845,650 24.34 to 25.03 21,152,921 1.52% to 1.77% 6.26% 4.54% to 4.81% 2010 995,245 23.28 to 23.88 23,755,075 1.52% to 1.77% 6.23% 9.02% to 9.30%
29 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 --------------------------------------- ----------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ ------- ---------------- -------------- ----------------- ---------- ------------------ Corporate Bond Portfolio Class 2 2014 277,770 $27.10 to $28.03 $ 7,760,171 1.52% to 1.77% 3.46% 3.79% to 4.05% 2013 290,179 26.11 to 26.94 7,792,335 1.52% to 1.77% 4.10% -0.53% to -0.28% 2012 325,008 26.25 to 27.02 8,753,056 1.52% to 1.77% 5.22% 9.29% to 9.57% 2011 327,234 24.01 to 24.66 8,046,234 1.52% to 1.77% 6.08% 4.39% to 4.65% 2010 342,776 23.00 to 23.56 8,057,317 1.52% to 1.77% 6.22% 8.86% to 9.13% Global Bond Portfolio Class 1 2014 243,844 $21.86 to $22.64 $ 5,518,158 1.52% to 1.77% 0.00% -2.09% to -1.84% 2013 306,162 22.33 to 23.07 7,049,711 1.52% to 1.77% 1.09% -5.23% to -5.00% 2012 356,263 23.56 to 24.28 8,641,242 1.52% to 1.77% 8.83% 2.06% to 2.32% 2011 364,080 23.09 to 23.73 8,632,442 1.52% to 1.77% 2.29% 3.90% to 4.16% 2010 414,897 22.22 to 22.78 9,445,977 1.52% to 1.77% 4.19% 4.42% to 4.68% Global Bond Portfolio Class 2 2014 94,419 $21.45 to $22.18 $ 2,092,260 1.52% to 1.77% 0.00% -2.23% to -1.99% 2013 97,099 21.94 to 22.63 2,194,986 1.52% to 1.77% 0.98% -5.37% to -5.14% 2012 105,244 23.19 to 23.86 2,507,874 1.52% to 1.77% 8.79% 1.91% to 2.16% 2011 102,468 22.76 to 23.36 2,390,235 1.52% to 1.77% 2.15% 3.74% to 4.00% 2010 103,478 21.94 to 22.46 2,320,805 1.52% to 1.77% 4.15% 4.26% to 4.52% High-Yield Bond Portfolio Class 1 2014 233,564 $26.81 to $27.73 $ 6,467,457 1.52% to 1.77% 4.56% -0.92% to -0.67% 2013 356,833 27.06 to 27.92 9,946,992 1.52% to 1.77% 5.35% 6.02% to 6.28% 2012 420,352 25.53 to 26.27 11,029,151 1.52% to 1.77% 6.33% 14.93% to 15.22% 2011 449,980 22.21 to 22.80 10,253,195 1.52% to 1.77% 7.77% 2.45% to 2.71% 2010 503,977 21.68 to 22.20 11,180,270 1.52% to 1.77% 9.35% 12.59% to 12.88% High-Yield Bond Portfolio Class 2 2014 79,949 $26.29 to $27.19 $ 2,161,416 1.52% to 1.77% 4.47% -1.07% to -0.82% 2013 120,876 26.58 to 27.41 3,301,836 1.52% to 1.77% 5.27% 5.86% to 6.12% 2012 135,892 25.11 to 25.83 3,498,433 1.52% to 1.77% 6.37% 14.76% to 15.05% 2011 134,215 21.88 to 22.45 3,003,693 1.52% to 1.77% 7.81% 2.30% to 2.55% 2010 137,536 21.39 to 21.89 3,001,787 1.52% to 1.77% 8.88% 12.42% to 12.70% Asset Allocation Portfolio Class 1 2014 498,457 $36.02 to $37.27 $18,571,468 1.52% to 1.77% 2.30% 5.58% to 5.84% 2013 590,126 34.12 to 35.22 20,775,195 1.52% to 1.77% 2.77% 15.82% to 16.11% 2012 686,220 29.46 to 30.33 20,807,364 1.52% to 1.77% 2.99% 9.98% to 10.25% 2011 813,427 26.79 to 27.51 22,370,809 1.52% to 1.77% 2.65% -0.84% to -0.60% 2010 956,202 27.01 to 27.67 26,455,346 1.52% to 1.77% 2.62% 11.86% to 12.14% Asset Allocation Portfolio Class 2 2014 246,676 $35.37 to $36.54 $ 9,003,913 1.52% to 1.77% 2.22% 5.42% to 5.68% 2013 247,206 33.55 to 34.57 8,538,747 1.52% to 1.77% 2.73% 15.65% to 15.94% 2012 247,889 29.01 to 29.82 7,382,392 1.52% to 1.77% 2.72% 9.81% to 10.09% 2011 315,865 26.42 to 27.09 8,546,046 1.52% to 1.77% 2.57% -0.99% to -0.74% 2010 309,605 26.68 to 27.29 8,439,310 1.52% to 1.77% 2.40% 11.69% to 11.97% Growth-Income Portfolio Class 1 2014 304,218 $45.49 to $47.10 $14,321,684 1.52% to 1.77% 1.17% 12.11% to 12.39% 2013 363,677 40.57 to 41.91 15,235,424 1.52% to 1.77% 1.48% 29.45% to 29.77% 2012 431,730 31.34 to 32.29 13,932,195 1.52% to 1.77% 1.73% 11.75% to 12.03% 2011 496,324 28.05 to 28.83 14,300,189 1.52% to 1.77% 0.92% 6.44% to 6.71% 2010 569,925 26.35 to 27.02 15,391,559 1.52% to 1.77% 0.93% 9.55% to 9.82%
30 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 --------------------------------------- ---------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ ------- ---------------- -------------- ----------------- ---------- ----------------- Growth-Income Portfolio Class 2 2014 49,797 $44.63 to $46.11 $ 2,285,720 1.52% to 1.77% 1.10% 11.94% to 12.22% 2013 52,785 39.87 to 41.09 2,160,322 1.52% to 1.77% 1.43% 29.26% to 29.58% 2012 58,153 30.84 to 31.71 1,836,788 1.52% to 1.77% 1.53% 11.58% to 11.86% 2011 67,645 27.64 to 28.35 1,911,706 1.52% to 1.77% 0.77% 6.28% to 6.55% 2010 65,786 26.01 to 26.61 1,745,050 1.52% to 1.77% 0.76% 9.38% to 9.66% Global Equities Portfolio Class 1 2014 93,289 $26.53 to $27.48 $ 2,562,263 1.52% to 1.77% 0.70% 2.37% to 2.62% 2013 102,475 25.92 to 26.78 2,742,872 1.52% to 1.77% 0.53% 23.99% to 24.30% 2012 119,575 20.91 to 21.55 2,575,692 1.52% to 1.77% 0.73% 14.83% to 15.12% 2011 141,025 18.21 to 18.72 2,638,733 1.52% to 1.77% 0.94% -11.96% to -11.74% 2010 160,922 20.68 to 21.20 3,412,129 1.52% to 1.77% 1.74% 12.34% to 12.62% Global Equities Portfolio Class 2 2014 20,097 $26.95 $ 541,577 1.52% 0.49% 2.47% 2013 24,016 26.30 631,587 1.52% to 1.77% 0.41% 24.11% 2012 20,813 20.58 to 21.19 440,993 1.52% to 1.77% 0.58% 14.66% to 14.95% 2011 26,275 17.95 to 18.43 484,292 1.52% to 1.77% 0.77% -12.09% to -11.87% 2010 25,585 20.42 to 20.92 535,053 1.52% to 1.77% 1.51% 12.17% to 12.45% Alliance Growth Portfolio Class 1 2014 221,866 $53.51 to $55.41 $12,281,313 1.52% to 1.77% 0.00% 12.16% to 12.44% 2013 253,346 47.71 to 49.28 12,477,141 1.52% to 1.77% 0.27% 35.04% to 35.37% 2012 300,361 35.33 to 36.40 10,930,897 1.52% to 1.77% 0.48% 14.55% to 14.84% 2011 348,660 30.84 to 31.70 11,049,759 1.52% to 1.77% 0.49% -4.01% to -3.77% 2010 405,050 32.13 to 32.94 13,340,956 1.52% to 1.77% 0.82% 8.31% to 8.58% Alliance Growth Portfolio Class 2 2014 34,190 $52.24 to $54.08 $ 1,842,961 1.52% to 1.77% 0.00% 11.99% to 12.27% 2013 37,157 46.65 to 48.17 1,784,773 1.52% to 1.77% 0.12% 34.83% to 35.17% 2012 52,647 34.60 to 35.64 1,869,313 1.52% to 1.77% 0.32% 14.38% to 14.66% 2011 70,068 30.25 to 31.08 2,172,168 1.52% to 1.77% 0.32% -4.16% to -3.92% 2010 75,416 31.56 to 32.35 2,433,857 1.52% to 1.77% 0.71% 8.14% to 8.41% MFS Massachusetts Investors Trust Portfolio Class 1 2014 41,946 $36.13 to $37.41 $ 1,565,855 1.52% to 1.77% 0.54% 8.93% to 9.20% 2013 50,397 33.17 to 34.26 1,723,594 1.52% to 1.77% 0.63% 29.51% to 29.83% 2012 59,154 25.61 to 26.38 1,557,844 1.52% to 1.77% 0.74% 17.06% to 17.35% 2011 69,762 21.88 to 22.48 1,566,165 1.52% to 1.77% 0.67% -3.63% to -3.39% 2010 79,047 22.70 to 23.27 1,837,272 1.52% to 1.77% 0.94% 9.24% to 9.51% MFS Massachusetts Investors Trust Portfolio Class 2 2014 33,069 $35.51 to $36.71 $ 1,210,097 1.52% to 1.77% 0.42% 8.77% to 9.04% 2013 31,349 32.65 to 33.67 1,052,057 1.52% to 1.77% 0.50% 29.31% to 29.64% 2012 35,931 25.25 to 25.97 930,071 1.52% to 1.77% 0.58% 16.88% to 17.18% 2011 36,940 21.60 to 22.16 815,297 1.52% to 1.77% 0.54% -3.78% to -3.54% 2010 35,487 22.45 to 22.98 811,741 1.52% to 1.77% 0.79% 9.08% to 9.35% Fundamental Growth Portfolio Class 1 2014 12,240 $26.61 to $27.56 $ 337,078 1.52% to 1.77% 0.00% 5.70% to 5.97% 2013 17,667 25.17 to 26.00 459,231 1.52% to 1.77% 0.00% 34.66% to 35.00% 2012 29,566 18.69 to 19.26 568,690 1.52% to 1.77% 0.00% 14.12% to 14.40% 2011 32,137 16.38 to 16.84 540,439 1.52% to 1.77% 0.00% -7.14% to -6.91% 2010 42,394 17.64 to 18.09 766,121 1.52% to 1.77% 0.00% 14.95% to 15.24%
31 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 ----------------------------------------- ---------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ --------- ---------------- -------------- ----------------- ---------- ----------------- Fundamental Growth Portfolio Class 2 2014 12,033 $26.13 to $27.00 $ 324,101 1.52% to 1.77% 0.00% 5.55% to 5.81% 2013 11,132 24.76 to 25.52 283,354 1.52% to 1.77% 0.00% 34.46% to 34.80% 2012 8,128 18.41 to 18.93 153,337 1.52% to 1.77% 0.00% 13.95% to 14.23% 2011 13,173 16.16 to 16.57 217,889 1.52% to 1.77% 0.00% -7.28% to -7.05% 2010 13,517 17.43 to 17.83 240,564 1.52% to 1.77% 0.00% 14.78% to 15.07% International Diversified Equities Portfolio Class 1 2014 391,413 $13.48 to $13.96 $ 5,461,996 1.52% to 1.77% 1.57% -10.06% to -9.84% 2013 438,989 14.99 to 15.48 6,796,489 1.52% to 1.77% 2.65% 18.51% to 18.81% 2012 495,679 12.65 to 13.03 6,458,002 1.52% to 1.77% 0.99% 15.29% to 15.58% 2011 555,265 10.97 to 11.28 6,259,491 1.52% to 1.77% 2.04% -16.10% to -15.89% 2010 697,100 13.08 to 13.41 9,340,586 1.52% to 1.77% 4.03% 6.59% to 6.86% International Diversified Equities Portfolio Class 2 2014 98,636 $13.24 to $13.70 $ 1,349,899 1.52% to 1.77% 1.33% -10.20% to -9.97% 2013 88,754 14.74 to 15.21 1,349,213 1.52% to 1.77% 2.47% 18.33% to 18.63% 2012 97,661 12.46 to 12.83 1,249,292 1.52% to 1.77% 0.80% 15.12% to 15.40% 2011 123,665 10.82 to 11.11 1,371,640 1.52% to 1.77% 1.75% -16.23% to -16.02% 2010 174,281 12.92 to 13.23 2,302,974 1.52% to 1.77% 3.93% 6.43% to 6.70% Davis Venture Value Portfolio Class 1 2014 630,027 $50.30 to $52.10 $32,800,317 1.52% to 1.77% 0.60% 4.87% to 5.13% 2013 741,544 47.97 to 49.55 36,726,299 1.52% to 1.77% 1.16% 31.34% to 31.67% 2012 874,790 36.52 to 37.64 32,908,751 1.52% to 1.77% 0.77% 10.73% to 11.01% 2011 1,010,588 32.98 to 33.90 34,247,980 1.52% to 1.77% 1.27% -5.91% to -5.67% 2010 1,209,889 35.05 to 35.94 43,471,612 1.52% to 1.77% 0.74% 10.22% to 10.49% Davis Venture Value Portfolio Class 2 2014 181,362 $49.33 to $51.02 $ 9,209,420 1.52% to 1.77% 0.45% 4.71% to 4.97% 2013 199,633 47.11 to 48.60 9,660,796 1.52% to 1.77% 1.00% 31.14% to 31.47% 2012 239,349 35.92 to 36.97 8,814,356 1.52% to 1.77% 0.62% 10.57% to 10.85% 2011 265,802 32.49 to 33.35 8,836,369 1.52% to 1.77% 1.12% -6.05% to -5.82% 2010 284,225 34.58 to 35.41 10,036,024 1.52% to 1.77% 0.62% 10.05% to 10.33% MFS Total Return Portfolio Class 1 2014 618,860 $37.30 to $38.61 $23,861,186 1.52% to 1.77% 2.05% 6.55% to 6.81% 2013 705,496 35.01 to 36.15 25,471,251 1.52% to 1.77% 2.32% 16.92% to 17.21% 2012 801,050 29.94 to 30.84 24,676,687 1.52% to 1.77% 2.68% 9.36% to 9.63% 2011 957,256 27.38 to 28.13 26,899,277 1.52% to 1.77% 2.67% 0.14% to 0.39% 2010 1,067,227 27.34 to 28.02 29,882,068 1.52% to 1.77% 2.89% 8.11% to 8.38% MFS Total Return Portfolio Class 3 2014 202,014 $36.23 to $37.40 $ 7,531,158 1.52% to 1.77% 1.84% 6.28% to 6.55% 2013 184,887 34.09 to 35.10 6,469,342 1.52% to 1.77% 2.25% 16.63% to 16.92% 2012 174,682 29.23 to 30.02 5,230,694 1.52% to 1.77% 2.62% 9.09% to 9.36% 2011 170,038 26.79 to 27.45 4,649,762 1.52% to 1.77% 2.50% -0.11% to 0.14% 2010 160,878 26.82 to 27.42 4,394,472 1.52% to 1.77% 2.69% 7.84% to 8.11% Total Return Bond Portfolio Class 1 2014 374,323 $27.83 to $28.76 $10,748,324 1.52% to 1.77% 1.23% 2.97% to 3.23% 2013 435,228 27.02 to 27.86 12,112,970 1.52% to 1.77% 1.29% -5.28% to -5.04% 2012 546,010 28.53 to 29.34 16,001,507 1.52% to 1.77% 3.10% 5.39% to 5.65% 2011 571,403 27.07 to 27.77 15,850,975 1.52% to 1.77% 1.54% 4.50% to 4.76% 2010 566,371 25.90 to 26.51 15,000,815 1.52% to 1.77% 2.86% 4.48% to 4.74%
32 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 --------------------------------------- ---------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ ------- ---------------- -------------- ----------------- ---------- ----------------- Total Return Bond Portfolio Class 2 2014 111,053 $27.26 to $28.19 $3,122,605 1.52% to 1.77% 1.08% 2.82% to 3.07% 2013 151,383 26.51 to 27.35 4,130,855 1.52% to 1.77% 1.08% -5.42% to -5.18% 2012 166,429 28.03 to 28.84 4,783,936 1.52% to 1.77% 3.41% 5.23% to 5.49% 2011 126,777 26.64 to 27.34 3,454,971 1.52% to 1.77% 1.38% 4.35% to 4.61% 2010 118,632 25.53 to 26.14 3,090,787 1.52% to 1.77% 2.83% 4.32% to 4.58% Telecom Utility Portfolio Class 1 2014 91,876 $23.99 to $24.84 $2,281,804 1.52% to 1.77% 2.85% 10.52% to 10.79% 2013 99,342 22.42 to 22.42 2,227,172 1.52% to 1.77% 2.33% 18.17% to 18.17% 2012 116,984 18.42 to 18.97 2,219,501 1.52% to 1.77% 3.42% 11.48% to 11.76% 2011 135,914 16.52 to 16.98 2,307,243 1.52% to 1.77% 2.29% 4.40% to 4.66% 2010 161,301 15.82 to 16.22 2,616,201 1.52% to 1.77% 2.93% 11.59% to 11.87% Telecom Utility Portfolio Class 2 2014 21,118 $23.61 to $24.37 $ 513,165 1.52% to 1.77% 2.51% 10.35% to 10.63% 2013 22,686 21.40 to 22.03 498,510 1.52% to 1.77% 2.28% 17.70% to 17.99% 2012 24,789 18.18 to 18.67 461,737 1.52% to 1.77% 3.44% 11.32% to 11.60% 2011 40,536 16.33 to 16.73 677,243 1.52% to 1.77% 2.20% 4.24% to 4.51% 2010 44,236 15.67 to 16.01 707,493 1.52% to 1.77% 2.44% 11.42% to 11.70% Equity Opportunities Portfolio Class 1 2014 126,084 $28.74 to $29.77 $3,751,176 1.52% to 1.77% 0.38% 8.50% to 8.78% 2013 147,206 26.48 to 27.37 4,026,697 1.52% to 1.77% 0.55% 28.92% to 29.25% 2012 184,718 20.54 to 21.17 3,908,102 1.52% to 1.77% 0.94% 14.80% to 15.09% 2011 209,383 17.89 to 18.40 3,849,759 1.52% to 1.77% 0.56% -1.86% to -1.61% 2010 263,080 18.23 to 18.70 4,915,773 1.52% to 1.77% 0.71% 15.04% to 15.32% Equity Opportunities Portfolio Class 2 2014 35,243 $28.25 to $29.19 $1,015,114 1.52% to 1.77% 0.27% 8.34% to 8.61% 2013 36,779 26.08 to 26.88 976,907 1.52% to 1.77% 0.45% 28.73% to 29.05% 2012 41,359 20.26 to 20.83 852,753 1.52% to 1.77% 0.81% 14.63% to 14.91% 2011 50,135 17.67 to 18.12 901,841 1.52% to 1.77% 0.42% -2.01% to -1.76% 2010 75,648 18.03 to 18.45 1,388,656 1.52% to 1.77% 0.59% 14.86% to 15.15% Aggressive Growth Portfolio Class 1 2014 162,142 $19.78 to $20.48 $3,317,789 1.52% to 1.77% 0.00% -1.21% to -0.97% 2013 182,916 20.02 to 20.67 3,779,825 1.52% to 1.77% 0.00% 40.44% to 40.79% 2012 202,718 14.26 to 14.69 2,976,755 1.52% to 1.77% 0.00% 14.18% to 14.46% 2011 225,816 12.49 to 12.83 2,896,509 1.52% to 1.77% 0.00% -3.70% to -3.46% 2010 258,588 12.97 to 13.29 3,435,825 1.52% to 1.77% 0.00% 19.04% to 19.34% Aggressive Growth Portfolio Class 2 2014 8,896 $19.40 to $20.05 $ 178,289 1.52% to 1.77% 0.00% -1.36% to -1.12% 2013 9,089 19.67 to 20.28 184,223 1.52% to 1.77% 0.00% 40.23% to 40.58% 2012 13,679 14.03 to 14.42 195,751 1.52% to 1.77% 0.00% 14.01% to 14.29% 2011 18,868 12.30 to 12.62 236,864 1.52% to 1.77% 0.00% -3.84% to -3.60% 2010 21,396 12.79 to 13.09 278,999 1.52% to 1.77% 0.00% 18.86% to 19.16% International Growth and Income Portfolio Class 1 2014 154,657 $14.82 to $15.35 $2,372,450 1.52% to 1.77% 1.72% -11.04% to -10.82% 2013 182,349 16.66 to 17.21 3,131,817 1.52% to 1.77% 2.09% 19.90% to 20.20% 2012 192,155 13.89 to 14.32 2,749,690 1.52% to 1.77% 2.34% 19.16% to 19.46% 2011 231,458 11.66 to 11.99 2,770,820 1.52% to 1.77% 3.02% -15.30% to -15.09% 2010 260,373 13.77 to 14.12 3,673,507 1.52% to 1.77% 4.15% 5.22% to 5.48%
33 VARIABLE ANNUITY ACCOUNT FOUR OF THE AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7 - FINANCIAL HIGHLIGHTS 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, 2014, 2013, 2012, 2011, and 2010, follows:
At December 31 For the year ended December 31 --------------------------------------- ---------------------------------------------- Investment Unit Value Income Total Return Lowest Units Lowest to Highest Net Assets/(4)/ Expense Ratio/(1)/ Ratio/(2)/ to Highest/(3)/ ------- ---------------- -------------- ----------------- ---------- ----------------- International Growth and Income Portfolio Class 2 2014 62,758 $14.59 to $15.07 $ 942,353 1.52% to 1.77% 1.66% -11.17% to -10.95% 2013 64,851 16.43 to 16.93 1,093,930 1.52% to 1.77% 1.89% 19.72% to 20.02% 2012 74,426 13.72 to 14.10 1,046,414 1.52% to 1.77% 2.21% 18.98% to 19.28% 2011 93,496 11.53 to 11.82 1,102,217 1.52% to 1.77% 2.84% -15.43% to -15.22% 2010 94,612 13.64 to 13.95 1,316,079 1.52% to 1.77% 3.85% 5.06% to 5.32% Dogs of Wall Street Portfolio Class 1 2014 101,296 $21.89 to $22.67 $ 2,295,949 1.52% to 1.77% 1.41% 8.81% to 9.08% 2013 119,739 20.12 to 20.79 2,488,159 1.52% to 1.77% 1.52% 34.22% to 34.56% 2012 130,016 14.99 to 15.45 2,007,988 1.52% to 1.77% 2.07% 11.82% to 12.10% 2011 143,614 13.41 to 13.78 1,978,609 1.52% to 1.77% 2.13% 10.71% to 10.98% 2010 150,673 12.11 to 12.42 1,870,475 1.52% to 1.77% 2.73% 14.69% to 14.98% Dogs of Wall Street Portfolio Class 2 2014 39,415 $21.51 to $22.26 $ 873,290 1.52% to 1.77% 1.31% 8.65% to 8.92% 2013 43,007 19.79 to 20.44 875,452 1.52% to 1.77% 1.43% 34.02% to 34.36% 2012 41,976 14.77 to 15.21 636,223 1.52% to 1.77% 1.96% 11.65% to 11.94% 2011 44,268 13.23 to 13.59 598,628 1.52% to 1.77% 2.10% 10.54% to 10.82% 2010 46,069 11.97 to 12.26 562,644 1.52% to 1.77% 2.67% 14.52% to 14.81% Balanced Portfolio Class 1 2014 461,764 $23.41 to $24.24 $11,185,838 1.52% to 1.77% 1.34% 9.49% to 9.76% 2013 537,175 21.38 to 22.08 11,856,916 1.52% to 1.77% 1.60% 17.39% to 17.68% 2012 511,783 18.22 to 18.77 9,599,755 1.52% to 1.77% 1.37% 11.14% to 11.42% 2011 583,265 16.39 to 16.84 9,819,951 1.52% to 1.77% 1.77% 0.48% to 0.73% 2010 653,667 16.31 to 16.72 10,927,744 1.52% to 1.77% 1.90% 9.88% to 10.15% Balanced Portfolio Class 2 2014 117,887 $22.99 to $23.75 $ 2,797,505 1.52% to 1.77% 1.36% 9.32% to 9.60% 2013 110,287 21.03 to 21.67 2,387,689 1.52% to 1.77% 1.42% 17.21% to 17.50% 2012 105,594 17.94 to 18.44 1,944,460 1.52% to 1.77% 1.17% 10.97% to 11.25% 2011 125,763 16.17 to 16.58 2,082,247 1.52% to 1.77% 1.76% 0.33% to 0.58% 2010 110,003 16.11 to 16.48 1,810,519 1.52% to 1.77% 1.69% 9.71% to 9.99%
(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. The minimum and maximum ratios shown include subaccounts that may not have net assets. (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) These amounts represent the net asset value before the adjustments allocated to the contracts in payout period. 34 VARIABLE ANNUITY ACCOUNT FOUR OF AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 8. SUBSEQUENT EVENTS Management has evaluated Account related events and transactions that occurred during the period from the date of the Statement of Assets and Liabilities through April 27, 2015. There were no events or transactions that occurred during the period that materially impacted the amounts or disclosures in the Account's financial statements. 35 American General Life Insurance Company Audited GAAP Financial Statements At December 31, 2014 and 2013 and for the three years ended December 31, 2014 AMERICAN GENERAL LIFE INSURANCE COMPANY INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Registered Public Accounting Firm 2 Consolidated Balance Sheets at December 31, 2014 and 2013 3 Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012 4 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012 5 Consolidated Statements of Equity for the years ended December 31, 2014, 2013 and 2012 6 Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 7 Notes to Consolidated Financial Statements 8
1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of American General Life Insurance Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income (loss), equity and cash flows present fairly, in all material respects, the financial position of American General Life Insurance Company and its subsidiaries (the "Company"), an indirect, wholly owned subsidiary of American International Group, Inc., at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Houston, TX April 27, 2015 2 AMERICAN GENERAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS
December 31, ------------------ (in millions, except for share data) 2014 2013 ------------------------------------ -------- --------- (Revised) Assets: Investments: Fixed maturity securities: Bonds available for sale, at fair value (amortized cost: 2014 - $94,559; 2013 - $94,201) $102,743 $ 98,148 Other bond securities, at fair value 2,934 2,452 Equity securities: Common and preferred stock, available for sale, at fair value (cost: 2014 - $19; 2013 - $23) 26 29 Other common and preferred stock, at fair value -- 538 Mortgage and other loans receivable, net of allowance 11,812 10,085 Other invested assets (portion measured at fair value: 2014 - $3,176; 2013 - $3,223) 7,082 7,512 Flight equipment (net of accumulated depreciation and impairment: 2014 - $0; 2013 - $1,034) -- 762 Short-term investments (portion measured at fair value: 2014 - $558; 2013 - $2,735) 1,381 3,896 -------- --------- Total investments 125,978 123,422 Cash 277 202 Investment in AIG (cost: 2014 - $9; 2013 - $9) 6 5 Accrued investment income 1,042 1,074 Amounts due from related parties 82 138 Premiums and other receivables, net of allowance 602 488 Reinsurance assets, net of allowance 1,616 1,675 Derivative assets, at fair value 729 507 Deferred policy acquisition costs 5,643 5,444 Deferred sales inducements 442 502 Current income tax receivable 558 748 Deferred income taxes -- 328 Other assets (including restricted cash of $396 in 2014 and $183 in 2013) 1,153 1,081 Separate account assets, at fair value 40,627 35,701 -------- --------- Total assets $178,755 $ 171,315 ======== ========= Liabilities: Future policy benefits for life and accident and health insurance contracts $ 30,854 $ 29,277 Policyholder contract deposits (portion measured at fair value: 2014 - $1,341; 2013 - $367) 72,898 70,397 Policy claims and benefits payable 646 615 Other policyholder funds 2,079 1,986 Income taxes payable to parent 11 -- Deferred income taxes 255 -- Notes payable - to affiliates, net (portion measured at fair value: 2014 - $291; 2013 - $211) 658 260 Notes payable - to third parties, net 627 378 Amounts due to related parties 1,745 298 Securities lending payable -- 2,514 Derivative liabilities, at fair value 458 534 Other liabilities 3,450 3,627 Separate account liabilities 40,627 35,701 -------- --------- Total liabilities 154,308 145,587 -------- --------- Commitments and contingencies (see Note 13) American General Life Insurance Company (AGL) shareholder's equity: Preferred stock, $100 par value; 8,500 shares authorized, issued and outstanding 1 1 Common stock, $10 par value; 600,000 shares authorized, issued and outstanding 6 6 Additional paid-in capital 18,514 23,163 Retained earnings (accumulated deficit) -- (337) Accumulated other comprehensive income 5,926 2,731 -------- --------- Total AGL shareholder's equity 24,447 25,564 Noncontrolling interests -- 164 -------- --------- Total equity 24,447 25,728 -------- --------- Total liabilities and equity $178,755 $ 171,315 ======== =========
See accompanying Notes to Consolidated Financial Statements. 3 AMERICAN GENERAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------- (in millions) 2014 2013 2012 ------------- ------- ------- ------- Revenues: Premiums $ 1,666 $ 1,783 $ 1,616 Policy fees 1,976 1,766 1,837 Net investment income 6,942 6,692 7,001 Net realized capital gains (losses): Total other-than-temporary impairments on available for sale securities (81) (74) (127) Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in other comprehensive income (loss) (23) (1) (170) ------- ------- ------- Net other-than-temporary impairments on available for sale securities recognized in net income (104) (75) (297) Other realized capital gains 37 2,092 968 ------- ------- ------- Total net realized capital (losses) gains (67) 2,017 671 Other income 2,580 2,878 1,681 ------- ------- ------- Total revenues 13,097 15,136 12,806 ------- ------- ------- Benefits and expenses: Policyholder benefits 4,228 4,864 4,247 Interest credited to policyholder account balances 2,210 2,277 2,934 Amortization of deferred policy acquisition costs 623 535 665 General and administrative expenses 1,372 1,455 1,400 Commissions 341 345 321 Other expenses 1,310 1,166 839 ------- ------- ------- Total benefits and expenses 10,084 10,642 10,406 ------- ------- ------- Income before income tax expense (benefit) 3,013 4,494 2,400 Income tax expense (benefit): Current 401 95 (21) Deferred 727 (543) (601) ------- ------- ------- Income tax expense (benefit) 1,128 (448) (622) ------- ------- ------- Net income 1,885 4,942 3,022 Less: Net income attributable to noncontrolling interests -- 1 7 ------- ------- ------- Net income attributable to AGL $ 1,885 $ 4,941 $ 3,015 ======= ======= =======
See accompanying Notes to Consolidated Financial Statements. 4 AMERICAN GENERAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, - ----------------------- (in millions) 2014 2013 2012 ------------- ------ ------- ------ Net income $1,885 $ 4,942 $3,022 ------ ------- ------ Other comprehensive income (loss), net of tax Change in unrealized appreciation of fixed maturity investments on which other-than-temporary credit impairments were taken 48 242 907 Change in unrealized appreciation (depreciation) of all other investments 3,866 (5,265) 2,128 Adjustments to deferred policy acquisition costs, value of business acquired and deferred sales inducements (152) 542 (459) Change in insurance loss recognition (556) 1,325 (217) Change in foreign currency translation adjustments (11) (6) (2) ------ ------- ------ Other comprehensive income (loss) 3,195 (3,162) 2,357 ------ ------- ------ Comprehensive income 5,080 1,780 5,379 Comprehensive income attributable to noncontrolling interest -- 1 7 ------ ------- ------ Comprehensive income attributable to AGL $5,080 $ 1,779 $5,372 ====== ======= ======
See accompanying Notes to Consolidated Financial Statements. 5 AMERICAN GENERAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF EQUITY
Total Retained Accumulated AGL Additional Earnings Other Share- Non- Preferred Common Paid-in (Accumulated Comprehensive holder's controlling Total (in millions) Stock Stock Capital Deficit) Income Equity Interests Equity ------------- --------- ------ ---------- ------------ ------------- -------- ----------- ------- Balance, January 1, 2012 $ 1 $ 6 $27,245 $(8,296) $ 3,536 $22,492 $ 160 $22,652 --- --- ------- ------- ------- ------- ----- ------- Net income attributable to AGL or other noncontrolling interests -- -- -- 3,015 -- 3,015 7 3,022 Other comprehensive income -- -- -- -- 2,357 2,357 -- 2,357 Return of capital -- -- (1,882) -- -- (1,882) -- (1,882) Other -- -- -- (2) -- (2) -- (2) --- --- ------- ------- ------- ------- ----- ------- Balance, December 31, 2012 $ 1 $ 6 $25,363 $(5,283) $ 5,893 $25,980 $ 167 $26,147 === === ======= ======= ======= ======= ===== ======= Net income attributable to AGL or other noncontrolling interests -- -- -- 4,941 -- 4,941 1 4,942 Other comprehensive loss -- -- -- -- (3,162) (3,162) -- (3,162) Capital contributions from Parent -- -- 368 -- -- 368 -- 368 Return of capital -- -- (2,553) -- -- (2,553) -- (2,553) Other -- -- (15) 5 -- (10) (4) (14) --- --- ------- ------- ------- ------- ----- ------- Balance, December 31, 2013 $ 1 $ 6 $23,163 $ (337) $ 2,731 $25,564 $ 164 $25,728 === === ======= ======= ======= ======= ===== ======= Net income attributable to AGL or other noncontrolling interests -- -- -- 1,885 -- 1,885 -- 1,885 Dividends -- -- -- (1,548) -- (1,548) -- (1,548) Other comprehensive income -- -- -- -- 3,195 3,195 -- 3,195 Capital contributions from Parent -- -- 58 -- -- 58 -- 58 Return of capital -- -- (4,707) -- -- (4,707) -- (4,707) Deconsolidation of VIEs -- -- -- -- -- -- (167) (167) Other -- -- -- -- -- -- 3 3 --- --- ------- ------- ------- ------- ----- ------- Balance, December 31, 2014 $ 1 $ 6 $18,514 $ -- $ 5,926 $24,447 $ -- $24,447 === === ======= ======= ======= ======= ===== =======
See accompanying Notes to Consolidated Financial Statements. 6 AMERICAN GENERAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------ (in millions) 2014 2013 2012 ------------- -------- --------- --------- (Revised) (Revised) Cash flows from operating activities: Net income $ 1,885 $ 4,942 $ 3,022 -------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 2,210 2,277 2,934 Amortization of deferred policy acquisition costs and value of business acquired 623 535 665 Depreciation and amortization 25 175 131 Fees charged for policyholder contract deposits (1,163) (946) (1,011) Net realized capital losses (gains) 67 (2,017) (671) Unrealized losses (gains) in earnings, net (280) 153 102 Equity in income of partnerships and other invested assets (476) (124) (314) Accretion of net premium/discount on investments (760) (631) (774) Capitalized interest (82) (531) (36) Provision for deferred income taxes 727 (543) (601) Changes in operating assets and liabilities: Accrued investment income 32 43 20 Amounts due to/from related parties 473 533 (125) Reinsurance assets 58 83 84 Deferred policy acquisition costs (877) (790) (604) Deferred sales inducements (13) (23) (5) Current income tax receivable/payable 200 38 (499) Future policy benefits 746 1,548 922 Other policyholders' funds (67) (21) (19) Other, net 165 (278) 340 -------- --------- --------- Total adjustments 1,608 (519) 539 -------- --------- --------- Net cash provided by operating activities 3,493 4,423 3,561 ======== ========= ========= Cash flows from investing activities: Proceeds from (payments for) Sales or distribution of: Available for sale investments 5,852 22,532 15,422 Flight equipment -- 71 7 Divested businesses, net -- -- 35 Other investments, excluding short-term investments 1,320 655 2,167 Redemption and maturities of fixed maturity securities available for sale 7,833 9,093 6,043 Principal payments received on sales and maturities of mortgage and other loans receivable 1,747 1,411 1,272 Redemption and maturities of other investments, excluding short-term investments 178 178 598 Purchase of: Available for sale investments (13,290) (30,112) (19,464) Mortgage and other loans receivable (3,572) (1,899) (961) Flight equipment -- (8) (11) Acquired businesses, net -- -- (48) Other investments, excluding short-term investments (930) (2,396) (4,215) Net change in restricted cash (213) (111) 23 Net change in short-term investments 2,515 884 (1,580) Other, net (60) (23) 31 -------- --------- --------- Net cash provided by (used in) investing activities 1,380 275 (681) ======== ========= ========= Cash flows from financing activities: Policyholder contract deposits 9,524 7,334 5,011 Policyholder contract withdrawals (7,006) (9,018) (7,402) Net exchanges to/from separate accounts (1,525) (1,291) (756) Change in repurchase agreements 225 -- 857 Repayment of notes payable -- (259) (202) Issuance of notes payable 494 230 -- Federal Home Loan Bank borrowings -- (28) 60 Security deposits on flight equipment -- (58) (12) Change in securities lending payable (2,514) 1,048 1,466 Cash overdrafts 21 (142) 67 Dividends and return of capital paid to Parent Company, net of cash contributions (4,017) (2,532) (1,882) -------- --------- --------- Net cash used in financing activities (4,798) (4,716) (2,793) ======== ========= ========= Net increase (decrease) in cash 75 (18) 87 Cash at beginning of year 202 220 133 -------- --------- --------- Cash at end of year $ 277 $ 202 $ 220 ======== ========= ========= Supplementary Disclosure of Consolidated Cash Flow Information Cash paid during the period for: Interest $ 7 $ 32 $ 25 Taxes 194 161 132 Non-cash activities: Sales inducements credited to policyholder contract deposits 20 39 66 Non-cash dividends declared 2,238 -- -- Non-cash contributions from Parent 58 348 -- ======== ========= =========
See accompanying Notes to Consolidated Financial Statements. 7 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION American General Life Insurance Company (AGL), including its wholly owned subsidiaries, is a wholly owned subsidiary of AGC Life Insurance Company (AGC Life or the Parent), which is in turn an indirect, wholly owned subsidiary of American International Group, Inc. (AIG Parent). Unless the context indicates otherwise, the terms "AGL," "the Company," "we," "us" or "our" mean American General Life Insurance Company and its consolidated entities, and the term "AIG Parent" means American International Group, Inc. and not any of AIG Parent's consolidated subsidiaries. We are a leading provider of individual term and universal life insurance solutions to middle-income and high net worth customers, as well as a leading provider of fixed and variable annuities. Our primary products include term life insurance, universal, variable universal and whole life insurance, accident and health insurance, single- and flexible-premium deferred fixed and variable annuities, fixed index deferred annuities, single-premium immediate and delayed-income annuities, private placement variable annuities, structured settlements, corporate- and bank-owned life insurance, terminal funding annuities, guaranteed investment contracts (GICs) and funding agreements, stable value wrap products and group benefits. We distribute our products through independent marketing organizations, independent and career insurance agents and financial advisors, banks, broker dealers, structured settlement brokers and benefit consultants, and direct-to-consumer through AIG Direct. We also provide support services to certain affiliated insurance companies through our subsidiaries, AIG Enterprise Services LLC (AIGES) and SunAmerica Asset Management LLC (SAAMCo). SAAMCo and its wholly owned distributor, AIG Capital Services, Inc. (AIGCS), and its wholly owned servicing agent, SunAmerica Fund Services, Inc. (SFS), represent our asset management operations. These companies earn fee income by managing, distributing and administering a diversified family of mutual funds and variable subaccounts offered within our variable annuity and variable universal life products, and by distributing retail mutual funds and providing professional management of individual, corporate and pension plan portfolios. Our operations are influenced by many factors, including general economic conditions, financial condition of AIG, monetary and fiscal policies of the United States federal government and policies of state and other regulatory authorities. The level of sales of our insurance and financial products is influenced by many factors, including general market rates of interest, the strength, weakness and volatility of equity markets and terms and conditions of competing products. We are exposed to the risks normally associated with a portfolio of fixed income securities, which include interest rate, option, liquidity and credit risks. We control our exposure to these risks by, among other things, closely monitoring and managing the duration and cash flows of our assets and liabilities, monitoring and limiting prepayments and extension risk in our portfolio, maintaining a large percentage of our portfolio in highly liquid securities, engaging in a disciplined process of underwriting, and reviewing and monitoring credit risk. We are also exposed to market risk, policyholder behavior risk and mortality/longevity risk. Market volatility and other equity market conditions may affect our exposure to risks related to guaranteed death benefits and guaranteed living benefits on variable annuity products, and may reduce fee income on variable product assets held in separate accounts. Such guaranteed benefits are sensitive to equity and interest rate market conditions. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). All significant intercompany accounts and transactions have been eliminated. Certain prior period items have been reclassified to conform to the current period's presentation. The consolidated financial statements include the accounts of the Company, our controlled subsidiaries (generally through a greater than 50 percent ownership of voting rights of a voting interest entity), and variable interest entities (VIEs) for which we are the primary beneficiary. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence, and partnership and partnership-like entities in which we have more than minor influence over operating and financial policies, are accounted for under the equity method unless we have elected the fair value option. Unless the context indicates otherwise, the terms "financial statements," "Balance Sheets," "Statements of Income," "Statements of Comprehensive Income," "Statements of Equity," "Statements of Cash Flows," "Notes to Financial Statements," "financial position," and "results of operations" refer to the applicable consolidated disclosure. 8 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Presentation Changes Policy fees related to features accounted for as embedded derivatives in variable annuity products, including guaranteed minimum withdrawal benefits and guaranteed minimum account value benefits, are included in the fair value measurement of embedded derivatives. Effective December 31, 2014, we reclassified fees related to these embedded derivatives to net realized capital gains, with no effect to the fair value measurement of the embedded derivatives, net income or shareholder's equity. Accordingly, a portion of prior period policy fees have been reclassified to net realized capital gains to conform to the current period presentation. See Note 11 for information on variable annuity guaranteed benefit features and Note 3 for discussion of the fair value measurement of embedded policy derivatives, including our policy on classification of fees. The effect of the change in presentation of these policy fees on the prior period financial statements was as follows:
As Previously Effect of As (in millions) Reported Change Reclassified ------------- ---------- --------- ------------ Statement of Income for the year ended December 31, 2013: Revenues: Policy fees $ 1,924 $(158) $ 1,766 Other net realized capital gains (losses) 1,934 158 2,092 Statement of Cash Flows for the year ended December 31, 2013: Cash flows from operating activities: Adjustments to reconcile net income to net cash provided by operating activities: Fees charged for policyholder contract deposits (1,104) 158 (946) Net realized capital (gains) losses (1,859) (158) (2,017) Statement of Income for the year ended December 31, 2012: Revenues: Policy fees 1,963 (126) 1,837 Other net realized capital gains (losses) 842 126 968 Statement of Cash Flows for the year ended December 31, 2012: Cash flows from operating activities: Adjustments to reconcile net income to net cash provided by operating activities: Fees charged for policyholder contract deposits (1,137) 126 (1,011) Net realized capital (gains) losses (545) (126) (671)
Out of Period Adjustments In 2014, we recorded out of period adjustments to correct errors related to prior periods, which resulted in a $20 million decrease to pre-tax income and an $8 million decrease to net income and comprehensive income. The most significant pre-tax item was to reverse interest that had incorrectly been accrued in prior years on mortgage loans that are troubled debt restructurings. In 2013, we recorded out of period adjustments to correct errors related to prior periods, which resulted in a $63 million decrease to pre-tax income and a $167 million increase to net income and comprehensive income. In 2012, we recorded out of period adjustments which decreased pre-tax income by $109 million and decreased net income and comprehensive income by $83 million. We have evaluated the effect of the errors on prior years and on the respective years in which they were corrected, taking into account both qualitative and quantitative factors. Management believes these errors and their corrections are not material to any previously issued financial statements. Revision of Prior Period Financial Statements The Balance Sheet at December 31, 2013 and the Statements of Cash Flows for the years ended December 31, 2013 and 2012 have been revised to correct the classification of certain items that had been reported in cash and short-term investments. These revisions had no impact on total assets, total liabilities or shareholder's equity in the prior periods that were revised. We evaluated the impact of these items on the respective balance sheet line items and on the categories within the statement of cash flows. The reclassifications included: 9 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) . Correction of the classification of cash held within consolidated VIEs from cash to restricted cash, which is reported within other assets; . Correction of the classification of certain collateral margin accounts related to derivative transactions from short-term investments to premiums and other receivables; and . Correction of the classification of certain accounts between cash and short-term investments to correctly reflect the nature of the related account as either a non-interest bearing depository account or an interest-bearing account. After evaluating the quantitative and qualitative aspects of these corrections, the revisions were not considered to be material, individually or in aggregate, to the previously issued 2013 and 2012 financial statements. The net effects on the financial statements resulting from these revisions were as follows:
As Effect Previously of As (in millions) Reported Change Revised ------------- ---------- ------ ------- Balance Sheet at December 31, 2013: Short-term investments $ 3,964 $ (68) $ 3,896 Cash 362 (160) 202 Premiums and other receivables, net of allowance 408 80 488 Other assets 933 148 1,081 Statement of Cash Flows for the year ended December 31, 2013: Cash flows from investing activities: Net change in restricted cash 37 (148) (111) Net change in short-term investments 819 65 884 Other, net (51) 28 (23) Net cash provided by (used in) investing activities 330 (55) 275 Net increase (decrease) in cash 37 (55) (18) Cash at beginning of year 325 (105) 220 Cash at end of year 362 (160) 202 Statement of Cash Flows for the year ended December 31, 2012: Cash flows from investing activities: Net change in short-term investments (1,583) 3 (1,580) Other, net (21) 52 31 Net cash provided by (used in) investing activities (736) 55 (681) Net increase (decrease) in cash 32 55 87 Cash at beginning of year 293 (160) 133 Cash at end of year 325 (105) 220
Use of Estimates The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and assumptions are considered our critical accounting estimates and are related to the determination of: . income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset; . valuation of future policy benefit liabilities and timing and extent of loss recognition; . valuation of liabilities for guaranteed benefit features of variable annuity products; . recoverability of assets, including deferred policy acquisition costs (DAC) and reinsurance; . estimated gross profits (EGP) to value DAC for investment-oriented products; . impairment charges, including other-than-temporary impairments on available for sale securities; and 10 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) . fair value measurements of certain financial assets and liabilities. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations and cash flows could be materially affected. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following table identifies our significant accounting policies presented in other Notes to these Financial Statements, with a reference to the Note where a detailed description can be found: Note 4. Investments . Fixed maturity and equity securities . Other invested assets . Short-term investments . Net investment income . Net realized capital gains (losses) . Other-than-temporary impairments Note 5. Lending Activities . Mortgage and other loans receivable - net of allowance Note 6. Reinsurance . Reinsurance assets, net of allowance Note 7. Derivatives and Hedge Accounting . Derivative assets and liabilities, at fair value Note 8. Deferred Policy Acquisition Costs . Deferred policy acquisition costs . Amortization of deferred policy acquisition costs . Deferred sales inducements Note 10. Insurance Liabilities . Future policy benefits . Policyholder contract deposits . Other policyholder funds Note 11. Variable Life and Annuity Contracts Note 12. Debt . Long-term debt Note 13. Commitments and contingencies . Legal contingencies Note 16. Income Taxes Other significant accounting policies Premiums for long-duration life insurance products and life contingent annuities are recognized as revenues when due. Estimates for premiums due but not yet collected are accrued. For limited-payment contracts, net premiums are recorded as revenue. The difference between the gross premium received and the net premium is deferred and recognized in policyholder benefits in the Statements of Income. Premiums on accident and health policies are earned primarily on a pro rata basis over the term of the related coverage. The reserves for unearned premiums includes the portion of premiums written relating to the unexpired terms of coverage. Reinsurance premiums ceded are recognized as a reduction in revenues over the period the reinsurance coverage is provided in proportion to the risks to which the premiums relate. 11 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Policy fees represent fees recognized from universal life and investment-type products consisting of policy charges for cost of insurance, policy administration charges, surrender charges and amortization of unearned revenue reserves. Other income primarily includes advisory fees and commissions from the broker dealer business and income from legal settlements. Aircraft leasing revenue from flight equipment under operating lease was recognized over the life of the leases as rental payments became receivable under the provision of the lease or, in case of leases with varying payments, under the straight-line method over the non-cancelable terms of the lease. In certain cases, leases provided for certain payments contingent on usage. In those cases, rental revenue was recognized at the time such usage occurred, net of estimated contractual aircraft maintenance reimbursements. Gains on sales of flight equipment were recognized when flight equipment was sold and the risk of ownership of the equipment passed to the new owner. Cash represents cash on hand and non-interest bearing demand deposits. Other assets consist of prepaid expenses, deposits, other deferred charges, real estate, other fixed assets, capitalized software costs and restricted cash. We offer sales inducements, which include enhanced crediting rates or bonus payments to contract holders (bonus interest) on certain annuity and investment contract products. Sales inducements provided to the contract holder are recognized as part of the liability for policyholder contract deposits on the Balance Sheets. Such amounts are deferred and amortized over the life of the contract using the same methodology and assumptions used to amortize DAC. To qualify for such accounting treatment, the bonus interest must be explicitly identified in the contract at inception, and we must demonstrate that such amounts are incremental to amounts we credit on similar contracts without bonus interest, and are higher than the contracts expected ongoing crediting rates for periods after the bonus period. The amortization expense associated with these assets is reported within interest credited to policyholder account balances in the Statements of Income. See Note 8 for additional information on deferred sales inducements. Separate accounts represent funds for which investment income and investment gains and losses accrue directly to the contract holders who bear the investment risk. Each account has specific investment objectives and the assets are carried at fair value. The assets of each account are legally segregated and are not subject to claims that arise from any of our other businesses. The liabilities for these accounts are equal to the account assets. Separate accounts may also include deposits for funds held under stable value wrap funding agreements, although the majority of stable value wrap sales are measured based on the notional amount included in assets under management and do not include the receipt of funds. For additional discussion of separate accounts, see Note 11. Other liabilities include other funds on deposit, other payables, and securities sold under agreements to repurchase. Accounting Standards Adopted During 2014 Presentation of Unrecognized Tax Benefits In July 2013, the FASB issued an accounting standard that requires a liability related to unrecognized tax benefits to be presented as a reduction to the related deferred tax asset for a net operating loss carryforward or a tax credit carryforward. When the carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. We adopted the standard on its required effective date of January 1, 2014 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows. 12 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Future Application of Accounting Standards Accounting for Investments in Qualified Affordable Housing Projects In January 2014, the FASB issued an accounting standard that revises the accounting and expands the disclosure requirements for investments in qualified affordable housing projects. The standard is effective for annual periods beginning after December 15, 2014, but early adoption is permitted. We plan to adopt the standard prospectively on its required effective date of January 1, 2015 and do not expect adoption of the standard to have a material effect on our financial condition, results of operations or cash flows. Revenue Recognition In May 2014, the FASB issued an accounting standard that supersedes most existing revenue recognition guidance. The new standard excludes from its scope the accounting for insurance contracts, leases, financial instruments, and other agreements that are governed under other GAAP guidance, but affects the revenue recognition for certain of our other activities. The standard is effective for interim and annual reporting periods beginning after December 15, 2016 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. Early adoption is not permitted. We plan to adopt the standard with an effective date of January 1, 2018, which reflects proposed one-year deferral by the FASB and are assessing the impact of the standard on our financial condition, results of operations and cash flows. Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity In August 2014, the FASB issued an accounting standard that allows a reporting entity to measure the financial assets and financial liabilities of a qualifying consolidated collateralized financing entity using the fair value of either its financial assets or financial liabilities, whichever is more observable. The standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The standard may be applied retrospectively to all relevant prior periods presented starting with January 1, 2010 or through a cumulative effect adjustment to retained earnings at the date of adoption. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our financial condition, results of operations or cash flows. Consolidation: Amendments to the Consolidation Analysis In February 2015, the FASB issued an accounting standard that affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; eliminate the presumption that a general partner should consolidate a limited partnership; affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The standard may be applied retrospectively or through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. We plan to adopt the standard on its required effective date of January 1, 2016 and are assessing the impact of the standard on our financial condition, results of operations and cash flows. 13 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS Fair Value Measurements on a Recurring Basis We carry certain financial instruments at fair value. We define the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions. The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions. Fair Value Hierarchy Assets and liabilities recorded at fair value in the Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three levels based on the observability of valuation inputs: . Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments. . Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. . Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In those cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the levels discussed above, and it is the observability of the inputs used that determines the appropriate level in the fair value hierarchy for the respective asset or liability. Valuation Methodologies of Financial Instruments Measured at Fair Value Incorporation of Credit Risk in Fair Value Measurements . Our Own Credit Risk. Fair value measurements for certain freestanding derivatives incorporate our own credit risk by determining the explicit cost for each counterparty to protect against its net credit exposure to us at the balance sheet date by reference to observable AIG credit default swap (CDS) or cash bond spreads. A derivative counterparty's net credit exposure to us is determined based on master netting agreements, when applicable, which 14 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) take into consideration all derivative positions with us, as well as collateral we posted with the counterparty at the balance sheet date. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates. . Counterparty Credit Risk. Fair value measurements for freestanding derivatives incorporate counterparty credit risk by determining the explicit cost for us to protect against our net credit exposure to each counterparty at the balance sheet date by reference to observable counterparty CDS spreads, when available. When not available, other directly or indirectly observable credit spreads will be used to derive the best estimates of the counterparty spreads. Our net credit exposure to a counterparty is determined based on master netting agreements, which take into consideration all derivative positions with the counterparty, as well as collateral posted by the counterparty at the balance sheet date. Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly incorporate counterparty credit risk. Fair values for fixed maturity securities based on internal models incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information. The cost of credit protection is determined under a discounted present value approach considering the market levels for single name CDS spreads for each specific counterparty, the mid-market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to us by an independent third party. We utilize an interest rate based on the benchmark London Inter-Bank Offered Rate (LIBOR) curve to derive our discount rates. While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, management believes this approach provides a reasonable estimate of the fair value of the assets and liabilities, including consideration of the impact of non-performance risk. Fixed Maturity Securities Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure fixed maturity securities at fair value. Market price data is generally obtained from dealer markets. We employ independent third-party valuation service providers to gather, analyze, and interpret market information to derive fair value estimates for individual investments based upon market-accepted methodologies and assumptions. The methodologies used by these independent third-party valuation services are reviewed and understood by management, through periodic discussion with, and information provided by, the valuation services. In addition, as discussed further below, control processes are applied to the fair values received from third-party valuation services to ensure the accuracy of these values. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation methodologies, which may utilize matrix pricing, financial models, accompanying model inputs and various assumptions, provide a single fair value measurement for individual securities. The inputs used by the valuation service providers include, but are not limited to, market prices from completed transactions for identical securities and transactions of comparable securities, benchmark yields, interest rate yield curves, credit spreads, currency rates, quoted prices for similar securities and other market- observable information, as applicable. If fair value is determined using financial models, these models generally take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We have control processes designed to ensure that the fair values received from third party valuation services are accurately recorded, that their data inputs and valuation techniques are appropriate and consistently applied and that the assumptions used appear reasonable and consistent with the objective of determining fair value. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques, and have procedures to escalate related questions internally and to the third party valuation services for 15 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) resolution. To assess the degree of pricing consensus among various valuation services for specific asset types, we have conducted comparisons of prices received from available sources. We have used these comparisons to establish a hierarchy for the fair values received from third party valuations services to be used for particular security classes. We also validate prices for selected securities through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions. When our third-party valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a price quote, which is generally non-binding, or by employing widely accepted valuation models. Broker prices may be based on an income approach, which converts expected future cash flows to a single present value amount, with specific consideration of inputs relevant to particular security types. For structured securities, such inputs may include ratings, collateral types, geographic concentrations, underlying loan vintages, loan delinquencies, and weighted average coupons and maturities. When the volume or level of market activity for a security is limited, certain inputs used to determine fair value may not be observable in the market. Broker prices may also be based on a market approach that considers recent transactions involving identical or similar securities. Fair values provided by brokers are subject to similar control processes to those noted above for fair values from third party valuation services, including management reviews. For those corporate debt instruments (for example, private placements) that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and non-transferability, and such adjustments generally are based on available market evidence. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of comparable securities, adjusted for illiquidity and structure. Fair values determined internally are also subject to management review in order to ensure that valuation models and related inputs are reasonable. The methodology above is relevant for all fixed maturity securities including residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDO), other asset-backed securities (ABS) and fixed maturity securities issued by government sponsored entities and corporate entities. Equity Securities Traded in Active Markets Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure equity securities at fair value. Market price data is generally obtained from exchange or dealer markets. Other Invested Assets We initially estimate the fair value of investments in certain hedge funds, private equity funds and other investment partnerships by reference to the transaction price. Subsequently, we generally obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are generally audited annually. We consider observable market data and perform certain control procedures to validate the appropriateness of using the net asset value as a fair value measurement. The fair values of other investments carried at fair value, such as direct private equity holdings, are initially determined based on transaction price and are subsequently estimated based on available evidence such as market transactions in similar instruments, other financing transactions of the issuer and other available financial information for the issuer, with adjustments made to reflect illiquidity as appropriate. Short-term Investments For short-term investments that are measured at fair value, the carrying values of these assets approximate fair values because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk. 16 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Separate Account Assets Separate account assets are composed primarily of registered and unregistered open-end mutual funds that generally trade daily and are measured at fair value in the manner discussed above for equity securities traded in active markets. Freestanding Derivatives Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). We generally value exchange-traded derivatives using quoted prices in active markets for identical derivatives at the balance sheet date. OTC derivatives are valued using market transactions and other observable market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. We generally use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment. For certain OTC derivatives that trade in less liquid markets, where we generally do not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, the transaction price may provide the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so the model value at inception equals the transaction price. We will update valuation inputs in these models only when corroborated by evidence such as similar market transactions, independent third-party valuation service providers and/or broker or dealer quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. Embedded Policy Derivatives Certain variable annuity and equity index annuity and life contracts contain embedded policy derivatives that we bifurcate from the host contracts and account for separately at fair value, with changes in fair value recognized in earnings. These embedded derivatives are classified within policyholder contract deposits. We have concluded these contracts contain (i) written option guarantees on minimum accumulation value, (ii) a series of written options that guarantee withdrawals from the highest anniversary value within a specific period or for life, or (iii) equity-indexed written options that meet the criteria of derivatives that must be bifurcated. The fair value of embedded policy derivatives contained in certain variable annuity and equity index annuity and life contracts is measured based on actuarial and capital market assumptions related to projected cash flows over the expected lives of the contracts. These cash flow estimates primarily include benefits and related fees assessed, when applicable, and incorporate expectations about policyholder behavior. Estimates of future policyholder behavior are subjective and based primarily on our historical experience. With respect to embedded policy derivatives in our variable annuity contracts, because of the dynamic and complex nature of the expected cash flows, risk-neutral valuations are used. Estimating the underlying cash flows for these products involves judgments regarding expected market rates of return, market volatility, correlations of market variables to funds, fund performance, discount rates and policyholder behavior. The portion of fees attributable to the fair value of expected benefit payments are included within the fair value measurement of these embedded policy derivatives and related fees are classified in net realized gains (losses) as collected, consistent with other changes in the fair value of these embedded policy derivatives. Any additional fees not attributed to the embedded derivative are excluded from the fair value measurement and classified in policy fees as collected. 17 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) With respect to embedded policy derivatives in our equity index annuity and life contracts, option pricing models are used to estimate fair value, taking into account assumptions for future equity index growth rates, volatility of the equity index, future interest rates, and determinations on adjusting the participation rate and the cap on equity-indexed credited rates in light of market conditions and policyholder behavior assumptions. These methodologies incorporate an explicit risk margin to take into consideration market participant estimates of projected cash flows and policyholder behavior. We also incorporate our own risk of non-performance in the valuation of the embedded policy derivatives associated with variable annuity and equity index annuity and life contracts. Expected cash flows are discounted using the interest rate swap curve (swap curve), which is commonly viewed as being consistent with the credit spreads for highly-rated financial institutions (S&P AA-rated or above). A swap curve shows the fixed-rate leg of a non-complex swap against the floating rate (for example, LIBOR) leg of a related tenor. The non-performance risk adjustment reflects a market participant's view of our claims-paying ability by incorporating an additional spread to the swap curve used to value embedded policy derivatives. Notes Payable Certain VIEs that we consolidate have each elected the fair value option for a tranche of their structured securities (the Class X notes), which are included in notes payable - to affiliates, net. The fair value of the Class X notes is determined using a mark-to-model approach, discounting cash flows produced by an internally validated model. Cash flows are discounted based on current market spreads for U.S. collateralized loan obligations (CLOs), adjusted for structural specific attributes. The market spreads for U.S. CLOs include a spread premium to compensate for the complexity and perceived illiquidity of the Class X notes. The spread premium was derived on the respective issuance dates of the Class X notes, with reference to the issuance spread on tranches of structured securities issued by the same entities that were purchased by independent, non-affiliated third parties. 18 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents information about assets and liabilities measured at fair value on a recurring basis, and indicates the level of the fair value measurement based on the observability of the inputs used:
December 31, 2014 Counterparty Cash (in millions) Level 1 Level 2 Level 3 Netting/(a)/ Collateral Total ------------- ------- ------- ------- ------------ ---------- -------- Assets: Bonds available for sale: U.S. government and government sponsored entities $ -- $ 395 $ -- $ -- $ -- $ 395 Obligations of states, municipalities and political subdivisions -- 2,068 951 -- -- 3,019 Non-U.S. governments -- 2,887 -- -- -- 2,887 Corporate debt -- 69,416 959 -- -- 70,375 RMBS -- 8,218 7,240 -- -- 15,458 CMBS -- 3,411 1,294 -- -- 4,705 CDO/ABS -- 2,329 3,575 -- -- 5,904 ------- ------- ------- ----- ----- -------- Total bonds available for sale -- 88,724 14,019 -- -- 102,743 ------- ------- ------- ----- ----- -------- Other bond securities: U.S. government and government sponsored entities -- 1,135 -- -- -- 1,135 RMBS -- 109 275 -- -- 384 CMBS -- 105 48 -- -- 153 CDO/ABS -- 31 1,231 -- -- 1,262 ------- ------- ------- ----- ----- -------- Total other bond securities -- 1,380 1,554 -- -- 2,934 ------- ------- ------- ----- ----- -------- Equity securities available for sale: Common stock 4 2 1 -- -- 7 Preferred stock 19 -- -- -- -- 19 ------- ------- ------- ----- ----- -------- Total equity securities available for sale 23 2 1 -- -- 26 ------- ------- ------- ----- ----- -------- Other invested assets/(b)/ 2 1,372 1,802 -- -- 3,176 Short-term investments/(c)/ 298 260 -- -- -- 558 Investment in AIG 6 -- -- -- -- 6 Derivative assets: Interest rate contracts 2 568 -- -- -- 570 Foreign exchange contracts/(d)/ -- 523 -- -- -- 523 Equity contracts 53 4 51 -- -- 108 Other contracts -- -- 13 -- -- 13 Counterparty netting and cash collateral -- -- -- (198) (287) (485) ------- ------- ------- ----- ----- -------- Total derivative assets 55 1,095 64 (198) (287) 729 ------- ------- ------- ----- ----- -------- Separate account assets 38,369 2,258 -- -- -- 40,627 ------- ------- ------- ----- ----- -------- Total $38,753 $95,091 $17,440 $(198) $(287) $150,799 ======= ======= ======= ===== ===== ======== Liabilities: Policyholder contract deposits/(e)/ $ -- $ 125 $ 1,216 $ -- $ -- $ 1,341 Notes payable - to affiliates, net -- -- 291 -- -- 291 Derivative liabilities: Interest rate contracts -- 224 -- -- -- 224 Foreign exchange contracts -- 439 -- -- -- 439 Other contracts -- -- 7 -- -- 7 Counterparty netting and cash collateral -- -- -- (198) (14) (212) ------- ------- ------- ----- ----- -------- Total derivative liabilities -- 663 7 (198) (14) 458 ------- ------- ------- ----- ----- -------- Total $ -- $ 788 $ 1,514 $(198) $ (14) $ 2,090 ======= ======= ======= ===== ===== ========
19 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013 Counterparty Cash (in millions) Level 1 Level 2 Level 3 Netting/(a)/ Collateral Total ----------------- ------- ------- ------- ------------ ---------- -------- Assets: Bonds available for sale: U.S. government and government sponsored entities $ -- $ 374 $ -- $ -- $ -- $ 374 Obligations of states, municipalities and political subdivisions -- 1,575 754 -- -- 2,329 Non-U.S. governments -- 2,347 -- -- -- 2,347 Corporate debt -- 68,335 724 -- -- 69,059 RMBS -- 8,338 6,587 -- -- 14,925 CMBS -- 1,668 2,448 -- -- 4,116 CDO/ABS -- 1,593 3,405 -- -- 4,998 ------- ------- ------- ----- ----- -------- Total bonds available for sale -- 84,230 13,918 -- -- 98,148 ------- ------- ------- ----- ----- -------- Other bond securities: U.S. government and government sponsored entities -- 903 -- -- -- 903 RMBS -- 119 213 -- -- 332 CMBS -- 30 126 -- -- 156 CDO/ABS -- 30 1,031 -- -- 1,061 ------- ------- ------- ----- ----- -------- Total other bond securities -- 1,082 1,370 -- -- 2,452 ------- ------- ------- ----- ----- -------- Equity securities available for sale: Common stock 7 -- -- -- -- 7 Preferred stock -- 22 -- -- -- 22 ------- ------- ------- ----- ----- -------- Total equity securities available for sale 7 22 -- -- -- 29 ------- ------- ------- ----- ----- -------- Other common and preferred stock 538 -- -- -- -- 538 Other invested assets/(b)/ 1 917 2,305 -- -- 3,223 Short-term investments/(c)/ 215 2,520 -- -- -- 2,735 Investment in AIG 5 -- -- -- -- 5 Derivative assets: Interest rate contracts 9 768 19 -- -- 796 Equity contracts 107 33 47 -- -- 187 Other contracts -- -- 10 -- -- 10 Counterparty netting and cash collateral -- -- -- (108) (378) (486) ------- ------- ------- ----- ----- -------- Total derivative assets 116 801 76 (108) (378) 507 ------- ------- ------- ----- ----- -------- Separate account assets 34,018 1,683 -- -- -- 35,701 ------- ------- ------- ----- ----- -------- Total $34,900 $91,255 $17,669 $(108) $(378) $143,338 ======= ======= ======= ===== ===== ======== Liabilities: Policyholder contract deposits/(e)/ $ -- $ 120 $ 247 $ -- $ -- $ 367 Notes payable - to affiliates, net -- -- 211 -- -- 211 Derivative liabilities: Interest rate contracts -- 652 13 -- -- 665 Counterparty netting and cash collateral -- -- -- (108) (23) (131) ------- ------- ------- ----- ----- -------- Total derivative liabilities -- 652 13 (108) (23) 534 ------- ------- ------- ----- ----- -------- Total $ -- $ 772 $ 471 $(108) $ (23) $ 1,112 ======= ======= ======= ===== ===== ========
(a)Represents netting of derivative exposures covered by qualifying master netting agreements. (b)Amounts exclude other invested assets not carried at fair value on a recurring basis. (c)Amounts exclude short-term investments that are carried at cost. (d)In 2014, we reclassified cross-currency swaps from interest rate contracts to foreign exchange contracts. This change was applied prospectively. (e)Amounts presented for policyholder contract deposits in the tables exclude those not measured at fair value on a recurring basis. At December 31, 2014 and 2013, Level 3 assets were 9.8 percent and 10.3 percent of total assets, respectively, and Level 3 liabilities were 1.0 percent and 0.3 percent of total liabilities, respectively. Transfers of Level 1 and Level 2 Assets and Liabilities Our policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. In 2014, we transferred $13 million of preferred stock from Level 2 to Level 1. In 2013, we transferred $93 million of securities issued by the U.S. government and government-sponsored entities from Level 1 to Level 2. We had no significant transfers from Level 1 to Level 2 during 2014 and from Level 2 to Level 1 during 2013. 20 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Changes in Level 3 Recurring Fair Value Measurements The following tables present changes during 2014 and 2013 in Level 3 assets (liabilities) measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets (liabilities) in the Balance Sheets at December 31, 2014 and 2013:
Changes in Unrealized Net Gains Realized (Losses) and Purchases, Included in Unrealized Sales, Income on Fair Gains Issuances Fair Instruments Value (Losses) Other and Gross Gross Value Held at Beginning Included Comprehensive Settlements, Transfers Transfers End of End of (in millions) of Year in Income Income (Loss) Net In Out Year Year ------------- --------- ---------- ------------- ------------ --------- --------- ------- ----------- December 31, 2014 Assets: Bonds available for sale: Obligations of states, municipalities and political subdivisions $ 754 $ (1) $ 171 $ 183 $ -- $ (156) $ 951 $ -- Corporate debt 724 3 35 (236) 720 (287) 959 -- RMBS 6,587 422 78 197 11 (55) 7,240 -- CMBS 2,448 94 63 (69) 31 (1,273) 1,294 -- CDO/ABS 3,405 79 (2) 602 998 (1,507) 3,575 -- ------- ----- ----- ------ ------ ------- ------- ---- Total bonds available for sale 13,918 597 345 677 1,760 (3,278) 14,019 -- ------- ----- ----- ------ ------ ------- ------- ---- Other bond securities: RMBS 213 15 -- 47 -- -- 275 11 CMBS 126 (2) -- (1) -- (75) 48 1 CDO/ABS 1,031 56 -- 144 -- -- 1,231 29 ------- ----- ----- ------ ------ ------- ------- ---- Total other bond securities 1,370 69 -- 190 -- (75) 1,554 41 ------- ----- ----- ------ ------ ------- ------- ---- Equity securities available for sale: Common stock -- -- -- -- 1 -- 1 -- ------- ----- ----- ------ ------ ------- ------- ---- Total equity securities available for sale -- -- -- -- 1 -- 1 -- ------- ----- ----- ------ ------ ------- ------- ---- Other invested assets 2,305 25 (36) (132) 49 (409) 1,802 -- ------- ----- ----- ------ ------ ------- ------- ---- Total $17,593 $ 691 $ 309 $ 735 $1,810 $(3,762) $17,376 $ 41 ======= ===== ===== ====== ====== ======= ======= ==== Liabilities: Policyholder contract deposits $ (247) $(946) $ -- $ (23) $ -- $ -- $(1,216) $ -- Notes payable - to affiliates, net (211) (13) -- (67) -- -- (291) -- Derivative assets (liabilities), net: Interest rate contracts 6 1 -- (7) -- -- -- -- Equity contracts 47 14 -- (10) -- -- 51 9 Other contracts 10 58 -- (62) -- -- 6 56 ------- ----- ----- ------ ------ ------- ------- ---- Total $ (395) $(886) $ -- $ (169) $ -- $ -- $(1,450) $ 65 ======= ===== ===== ====== ====== ======= ======= ==== December 31, 2013 Assets: Bonds available for sale: Obligations of states, municipalities and political subdivisions $ 633 $ 11 $(123) $ 280 $ -- $ (47) $ 754 $ -- Corporate debt 1,058 2 2 (321) 266 (283) 724 -- RMBS 4,957 355 258 997 20 -- 6,587 -- CMBS 2,205 89 (21) 125 50 -- 2,448 -- CDO/ABS 2,654 86 32 365 569 (301) 3,405 -- ------- ----- ----- ------ ------ ------- ------- ---- Total bonds available for sale 11,507 543 148 1,446 905 (631) 13,918 -- ------- ----- ----- ------ ------ ------- ------- ---- Other bond securities: RMBS 127 10 -- 76 -- -- 213 14 CMBS 41 (1) -- 86 -- -- 126 3 CDO/ABS 113 68 -- 850 -- -- 1,031 48 ------- ----- ----- ------ ------ ------- ------- ---- Total other bond securities 281 77 -- 1,012 -- -- 1,370 65 ------- ----- ----- ------ ------ ------- ------- ---- Equity securities available for sale: Common stock 9 -- -- (9) -- -- -- -- Preferred stock 26 -- 2 (28) -- -- -- -- ------- ----- ----- ------ ------ ------- ------- ---- Total equity securities available for sale 35 -- 2 (37) -- -- -- -- ------- ----- ----- ------ ------ ------- ------- ---- Other invested assets 1,905 101 50 107 268 (126) 2,305 -- ------- ----- ----- ------ ------ ------- ------- ---- Total $13,728 $ 721 $ 200 $2,528 $1,173 $ (757) $17,593 $ 65 ======= ===== ===== ====== ====== ======= ======= ==== Liabilities: Policyholder contract deposits $(1,040) $ 609 $ (1) $ 185 $ -- $ -- $ (247) $ -- Notes payable - to affiliates, net -- (12) 9 (208) -- -- (211) (12) Derivative assets (liabilities), net: Interest rate contracts (2) 7 -- 1 -- -- 6 -- Equity contracts 21 33 -- (7) -- -- 47 -- Other contracts 2 39 -- (31) -- -- 10 -- ------- ----- ----- ------ ------ ------- ------- ---- Total $(1,019) $ 676 $ 8 $ (60) $ -- $ -- $ (395) $(12) ======= ===== ===== ====== ====== ======= ======= ====
21 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above were reported in the Statements of Income as follows:
Net Realized Net Capital Policy Investment Gains Other (in millions) Fees Income (Losses) Income Total ------------- ------ ---------- -------- ------ ----- December 31, 2014 Bonds available for sale $-- $610 $ (13) $ -- $ 597 Other bond securities -- 69 -- -- 69 Other invested assets -- 37 (12) -- 25 Policyholder contract deposits -- -- (946) -- (946) Notes payable - to affiliates, net -- -- -- (13) (13) Derivative assets/liabilities, net 62 -- 10 -- 72 --- ---- ----- ---- ----- December 31, 2013 Bonds available for sale $-- $491 $ 52 $ -- $ 543 Other bond securities -- 77 -- -- 77 Other invested assets -- 122 (21) -- 101 Policyholder contract deposits -- -- 617 -- 617 Notes payable - to affiliates, net -- -- -- (12) (12) Derivative assets/liabilities, net -- 39 40 -- 79
The following table presents the gross components of purchases, sales, issues and settlements, net, shown above:
Purchases, Sales, Issuances and Settlements, (in millions) Purchases Sales Issuances Settlements Net ------------- --------- ----- --------- ----------- ------------ December 31, 2014 Assets: Bonds available for sale: Obligations of states, municipalities and political subdivisions $ 189 $ (4) $ -- $ (2) $ 183 Corporate debt 53 (3) -- (286) (236) RMBS 1,350 (105) -- (1,048) 197 CMBS 146 (100) -- (115) (69) CDO/ABS 1,709 (38) -- (1,069) 602 ------ ----- ---- ------- ----- Total bonds available for sale 3,447 (250) -- (2,520) 677 ------ ----- ---- ------- ----- Other bond securities: RMBS 66 -- -- (19) 47 CMBS -- (5) -- 4 (1) CDO/ABS -- -- -- 144 144 ------ ----- ---- ------- ----- Total other bond securities 66 (5) -- 129 190 ------ ----- ---- ------- ----- Other invested assets 242 -- -- (374) (132) ------ ----- ---- ------- ----- Total assets $3,755 $(255) $ -- $(2,765) $ 735 ====== ===== ==== ======= ===== Liabilities: Policyholder contract deposits $ -- $(145) $ -- $ 122 $ (23) Notes payable - to affiliates, net -- -- (67) -- (67) Derivative liabilities, net: Interest rate contracts -- -- -- (7) (7) Equity contracts -- -- -- (10) (10) Other contracts -- -- -- (62) (62) ------ ----- ---- ------- ----- Total liabilities $ -- $(145) $(67) $ 43 $(169) ====== ===== ==== ======= =====
22 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchases, Sales, Issuances and Settlements, (in millions) Purchases Sales Issuances Settlements Net ------------- --------- ----- --------- ----------- ------------ December 31, 2013 Assets: Bonds available for sale: U.S government and government Obligations of states, municipalities and political subdivisions $ 402 $(122) $ -- $ -- $ 280 Corporate debt 139 -- -- (460) (321) RMBS 2,123 (167) -- (959) 997 CMBS 495 (203) -- (167) 125 CDO/ABS 1,310 (121) -- (824) 365 ------ ----- ----- ------- ------ Total bonds available for sale 4,469 (613) -- (2,410) 1,446 ------ ----- ----- ------- ------ Other bond securities: RMBS 110 -- -- (34) 76 CMBS 98 (8) -- (4) 86 CDO/ABS 962 -- -- (112) 850 ------ ----- ----- ------- ------ Total other bond securities 1,170 (8) -- (150) 1,012 ------ ----- ----- ------- ------ Equity securities available for sale: Common stock -- -- -- (9) (9) Preferred stock -- -- -- (28) (28) ------ ----- ----- ------- ------ Total equity securities available for sale -- -- -- (37) (37) ------ ----- ----- ------- ------ Other invested assets 318 -- -- (211) 107 Derivative assets: ------ ----- ----- ------- ------ Total assets $5,957 $(621) $ -- $(2,808) $2,528 ====== ===== ===== ======= ====== Liabilities: Policyholder contract deposits $ -- $ (25) $ -- $ 210 $ 185 Notes payable - to affiliates, net -- -- (208) -- (208) Derivative liabilities, net: Interest rate contracts -- -- -- 1 1 Equity contracts 10 -- -- (17) (7) Other contracts -- -- -- (31) (31) ------ ----- ----- ------- ------ Total liabilities $ 10 $ (25) $(208) $ 163 $ (60) ====== ===== ===== ======= ======
Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at December 31, 2014 and 2013 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs. Transfers of Level 3 Assets and Liabilities We record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. During 2014 and 2013, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS, CDO/ABS, and investments in hedge funds and private equity funds. . The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to decreases in market transparency and liquidity for individual security types. . Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity. . Certain investments in hedge funds were transferred into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions. . Certain private equity fund investments were transferred into Level 3 due to these investments being carried at fair value and no longer being accounted for using the equity method of accounting. Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one 23 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) or more significant input(s) becoming observable or a long-term interest rate significant to a valuation becoming short-term and thus observable. In addition, transfers out of Level 3 assets also occur when investments are no longer carried at fair value as the result of a change in the applicable accounting methodology, given changes in the nature and extent of our ownership interest. During 2014 and 2013, transfers out of Level 3 assets primarily related to certain investments in municipal securities, private placement corporate debt, CMBS, CDO/ABS and investments in hedge funds. . Transfers of certain investments in municipal securities, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments. . Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market. . The removal or easing of fund-imposed redemption restrictions, as well as certain fund investments becoming subject to the equity method of accounting, resulted in the transfer of certain hedge fund and private equity investments out of Level 3 assets. There were no significant transfers of derivative or other liabilities into or out of Level 3 during 2014 or 2013. Quantitative Information about Level 3 Fair Value Measurements The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:
Fair Value at December 31, (in millions) 2014 Valuation Technique Unobservable Input/(a)/ Range (Weighted Average )/(a)/ ------------- ------------- ---------------------- ------------------------------ ----------------------------- Assets: Corporate debt $ 923 Discounted cash flow Yield 3.96% - 4.61% (4.28%) RMBS 7,295 Discounted cash flow Constant prepayment rate/(b)/ 0.64% - 9.69% (5.16%) Loss severity/(b)/ 47.82% - 79.71% (63.77%) Constant default rate/(b)/ 4.06% - 9.86% (6.96%) Yield/(b)/ 3.22% - 6.46% (4.84%) CMBS 1,280 Discounted cash flow Yield/(b)/ 0.13% - 9.61% (4.87%) CDO/ABS 1,151 Discounted cash flow Yield 2.61% - 4.09% (3.35%) ----------------------------------------------------------------------------------------------------------------------------- Liabilities: Policyholder contract deposits: GMWB $ 696 Discounted cash flows Equity implied volatility 6.00% - 39.00% Base lapse rate 1.00% - 40.00% Dynamic lapse rate 0.20% - 60.00% Mortality rate 0.10% - 35.00% Utilization rate 0.50% - 30.00% Index annuities 250 Discounted cash flows Mortality rate 0.10% - 35.00% Lapse rate 1.00% - 40.00% Index life 255 Discounted cash flows Equity implied volatility 10.00% - 25.00% Base lapse rate 2.00% - 19.00% Mortality rate 0.00% - 20.00% -----------------------------------------------------------------------------------------------------------------------------
24 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value at December 31, (in millions) 2013 Valuation Technique Unobservable Input/(a)/ Range (Weighted Average )/(a)/ ------------- ------------- ---------------------- ------------------------------ ----------------------------- Assets: Corporate debt $ 360 Discounted cash flow Yield 3.48% - 9.44 (6.46%) RMBS 6,170 Discounted cash flow Constant prepayment rate/(b)/ 0.00% - 11.10% (5.37%) Loss severity/(b)/ 44.40% 80.07% (62.24%) Constant default rate/(b)/ 4.26% - 12.00% (8.13%) Yield/(b)/ 2.89% - 7.55% (5.22%) CMBS 2,396 Discounted cash flow Yield/(b)/ 0.00% - 11.23% (5.39%) -------------------------------------------------------------------------------------------------------------------------- Liabilities: Policyholder contract deposits: GMWB $ (89) Discounted cash flows Equity implied volatility 6.00% - 39.00% Base lapse rate 1.00% - 40.00% Dynamic lapse rate 0.20% - 60.00% Mortality rate 0.10% - 35.00% Utilization rate 0.50% - 30.00% Index annuities 125 Discounted cash flows Mortality rate 0.10% - 35.00% Lapse rate 1.00% - 40.00% Index life 196 Discounted cash flows Equity implied volatility 10.00% - 25.00% Base lapse rate 2.00% - 19.00% Mortality rate 0.00% - 20.00% -------------------------------------------------------------------------------------------------------------------------- Option budget --------------------------------------------------------------------------------------------------------------------------
(a)The unobservable inputs and ranges for the constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us because there are other factors relevant to the specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points. (b)Information received from independent third-party valuation service providers. The ranges of reported inputs for Corporate debt, RMBS, CMBS and CDO/ABS valued using a discounted cash flow technique consist of plus/minus one standard deviation in either direction from the value-weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these investments. Sensitivity to Changes in Unobservable Inputs We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following is a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. Corporate Debt Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value 25 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the securities. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt. RMBS and Certain CDO/ABS The significant unobservable inputs used in fair value measurements of RMBS and certain CDO/ABS valued by third-party valuation service providers are constant prepayment rates (CPR), loss severity, constant default rates (CDR), and yield. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in CPR, loss severity, CDR, and yield, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear. CMBS The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS. Policyholder contract deposits Embedded policy derivatives within policyholder contract deposits relate to guaranteed minimum withdrawal benefits (GMWB) within variable annuity products and certain enhancements to interest crediting rates based on market indices within equity index annuities and guaranteed investment contracts (GIC). GMWB represents our largest exposure of these embedded policy derivatives, although the carrying value of the liability fluctuates based on the performance of the equity markets and therefore, at a point in time, can be low relative to the exposure. The principal unobservable input used for GMWBs and embedded derivatives in equity-indexed annuities measured at fair value is equity implied volatility. For GMWBs, other significant unobservable inputs include base and dynamic lapse rates, mortality rates, and utilization rates. Lapse, mortality, and utilization rates may vary significantly depending upon age groups and duration. In general, increases in volatility and utilization rates will increase the fair value of the liability associated with GMWB, while increases in lapse rates and mortality rates will decrease the fair value of the liability. Significant unobservable inputs used in valuing embedded derivatives within GICs include long-term forward interest rates and foreign exchange rates. Generally, the embedded derivative liability for GICs will increase as interest rates decrease or if the U.S. dollar weakens compared to the euro. 26 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Investments in Certain Entities Carried at Fair Value Using Net Asset Value per Share The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share as a practical expedient to measure fair value.
December 31, 2014 December 31, 2013 ----------------------- ----------------------- Fair Value Fair Value Using Net Using Net Asset Asset Value Per Value Per Share (or Share (or its Unfunded its Unfunded (in millions) Investment Category Includes equivalent) Commitments equivalent) Commitments ------------- --------------------------------------------- ----------- ----------- ----------- ----------- Investment Category Private equity funds: Leveraged buyout Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage $ 983 $155 $1,178 $185 Real Estate / Investments in real estate properties and Infrastructure infrastructure positions, including power plants and other energy generating facilities 100 5 93 9 Venture capital Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company 35 3 40 6 Distressed Securities of companies that are in default, under bankruptcy protection, or troubled 78 28 91 16 Other Includes multi-strategy and mezzanine strategies 11 35 9 12 ------ ---- ------ ---- Total private equity funds 1,207 226 1,411 228 ------ ---- ------ ---- Hedge funds: Event-driven Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations 416 -- 500 2 Long-short Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk 951 1 713 11 Distressed Securities of companies that are in default, under bankruptcy protection or troubled 413 3 405 11 Emerging markets Investments in the financial markets of developing countries 56 -- 64 -- Other Includes multi-strategy and other strategies 119 -- 77 -- ------ ---- ------ ---- Total hedge funds 1,955 4 1,759 24 ------ ---- ------ ---- Total $3,162 $230 $3,170 $252 ====== ==== ====== ====
Private equity fund investments included above are not redeemable, as distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager's discretion, typically in one or two-year increments. The hedge fund investments included above may be redeemable monthly, quarterly, semi-annually and annually, as shown below, with redemption notices ranging from one day to 180 days. Certain hedge fund investments are currently not redeemable, either in whole or in part, because such investments include various contractual restrictions. The majority of these contractual restrictions, which may have been put in place at a fund's inception or thereafter, have pre-defined end dates and are generally expected to be lifted by the end of 2015. The fund investments for which redemption is restricted only in part generally relate to certain hedge funds that hold at least one investment that the fund manager deems to be illiquid. 27 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents information regarding the expected remaining lives of our investments in private equity funds, assuming average original expected lives of 10 years for the funds, and information regarding redemptions and contractual restrictions related to our hedge fund investments:
December 31, 2014 ------------ ---- Percentage of private equity fund investments with remaining lives of: Less than three years 82% Three to seven years 15 Seven to 10 years 3 --- Total 100% === Percentage of hedge fund investments redeemable: Monthly 9% Quarterly 38 Semi-annually 11 Annually 42 --- Total 100% === Percentage of hedge fund investments' fair value subject to contractual restrictions 40% ===
Fair Value Option Under the fair value option, we may elect to measure at fair value financial assets and financial liabilities that are not otherwise required to be measured at fair value. Subsequent changes in fair value for designated items are reported in earnings. We elect the fair value option for certain hybrid securities given the complexity of bifurcating the economic components associated with the embedded derivatives. Additionally, beginning in the third quarter of 2012, we elected the fair value option for investments in certain private equity funds, hedge funds and other alternative investments when such investments are eligible for this election. We believe this measurement basis is consistent with the applicable accounting guidance used by the respective investment company funds themselves. See Note 4 for additional information. Certain VIEs, which are securitization vehicles that we consolidate, have elected the fair value option for a tranche of their structured securities, referred to herein as the Class X notes, which are included in notes payable - to affiliates, net. See Notes 9 and 17 for additional information on these VIEs, which are securitization vehicles. The following table presents the difference between fair values and the aggregate contractual principal amounts of notes payable for which the fair value option was elected:
December 31, 2014 December 31, 2013 -------------------------------- -------------------------------- Outstanding Outstanding Principal Principal (in millions) Fair Value Amount Difference Fair Value Amount Difference ------------- ---------- ----------- ---------- ---------- ----------- ---------- Liabilities: Notes payable - to affiliates, net $291 $760 $(469) $211 $580 $(369)
In 2011, we assumed GIC liabilities, which are reported in policyholder contract deposits on the Balance Sheets, from an affiliate, AIG Matched Funding Corp. (AIGMFC). AIGMFC had elected the fair value option for these GIC liabilities and we have maintained this election. The change in the value of each of the GIC liabilities is partially offset by a swap used to economically hedge the changes in the fair value of the GICs. See Note 17 for additional information on the GIC assumption and the related swaps. 28 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the gains or losses recorded related to the eligible instruments for which the fair value option was elected:
Gain (Loss) Years Ended December 31, ---------------- (in millions) 2014 2013 2012 ------------- ---- ---- ---- Assets: Other bond securities - certain hybrid securities $368 $(58) $206 Other bond securities - ML II interest -- -- 177 Other invested assets 100 194 5 ---- ---- ---- Liabilities: Policyholder contract deposits 15 (17) (3) Notes payable - to affiliates, net (13) (12) -- ---- ---- ---- Total gain $470 $107 $385 ==== ==== ====
Interest income, dividend income and net unrealized gains (losses) on assets measured under the fair value option are recognized and included in net investment income in the Statements of Income. Interest on liabilities measured under the fair value option is recognized in other income in the Statements of Income. See Note 4 herein for additional information about our policies for recognition, measurement, and disclosure of interest, dividend and other income. FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS We measure the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include cost and equity-method investments and mortgage and other loans. See Note 4 herein for additional information about how we test various asset classes for impairment. The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:
Assets at Fair Value Impairment Charges ----------------------------- ------------------ Non-Recurring Basis December 31, ----------------------------- ------------------ (in millions) Level 1 Level 2 Level 3 Total 2014 2013 2012 ------------- ------- ------- ------- ----- ---- ---- ---- December 31, 2014 Other invested assets $-- $-- $ 2 $ 2 $2 $19 $-- December 31, 2013 Other invested assets $-- $-- $435 $435
FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding insurance contracts) is discussed below. . Mortgage and other loans receivable: Fair values of loans on real estate and other loans receivable were estimated for disclosure purposes using discounted cash flow calculations based on discount rates that we believe market participants would use in determining the price that they would pay for such assets. For certain loans, our current incremental lending rates for similar types of loans are used as the discount rates, because we believe this rate approximates the rates market participants would use. The fair values of policy loans are generally estimated based on unpaid principal amount as of each reporting date or, in some cases, based on the present value of the loans using a discounted cash flow model. No consideration is given to credit risk because policy loans are effectively collateralized by the cash surrender value of the policies. 29 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) . Other invested assets: The majority of other invested assets that are not measured at fair value represent investments in hedge funds, private equity funds and other investment partnerships for which we use the equity method of accounting. The fair value of our investment in these funds is measured based on our share of the funds' reported net asset value. . Cash and short-term investments: The carrying amounts of these assets approximate fair values because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk. . Policyholder contract deposits associated with investment-type contracts: Fair values for policyholder contract deposits associated with investment-type contracts not accounted for at fair value were estimated using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those of the contracts being valued. When no similar contracts are being offered, the discount rate is the appropriate swap rate (if available) or current risk-free interest rate consistent with the currency in which the cash flows are denominated. To determine fair value, other factors include current policyholder account values and related surrender charges and other assumptions include expectations about policyholder behavior and an appropriate risk margin. . Notes Payable: Fair values of these obligations were estimated based on discounted cash flow calculations using a discount rate that is indicative of the current market for securities with similar risk characteristics. The following table presents the carrying values and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:
Estimated Fair Value ------------------------------- Carrying (in millions) Level 1 Level 2 Level 3 Total Value ------------- ------- ------- ------- ------- -------- December 31, 2014 Assets: Mortgage and other loans receivable $ -- $ -- $12,614 $12,614 $11,812 Other invested assets -- 14 -- 14 14 Short-term investments -- 823 -- 823 823 Cash 277 -- -- 277 277 Liabilities: Policyholder contract deposits/(a)/ -- 224 61,771 61,995 56,951 Note payable - to affiliates, net/(b)/ -- -- 363 363 367 Note payable - to third parties, net -- -- 626 626 627 ---- ------ ------- ------- ------- December 31, 2013 Assets: Mortgage and other loans receivable $ -- $ 75 $10,562 $10,637 $10,085 Other invested assets -- 22 -- 22 22 Short-term investments -- 1,161 -- 1,161 1,161 Cash 202 -- -- 202 202 Liabilities: Policyholder contract deposits/(a)/ -- 185 59,505 59,690 55,476 Note payable - to affiliates, net/(b)/ -- -- 46 46 49 Note payable - to third parties, net -- -- 377 377 378 ---- ------ ------- ------- -------
(a)Excludes embedded policy derivatives which are carried at fair value on a recurring basis. (b)Excludes notes for which the fair value option has been elected. 30 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. INVESTMENTS Fixed Maturity and Equity Securities Bonds held to maturity are carried at amortized cost when we have the ability and positive intent to hold these securities until maturity. When we do not have the ability or positive intent to hold bonds until maturity, these securities are classified as available for sale and are measured at fair value at our election. None of our fixed maturity securities met the criteria for held to maturity classification at December 31, 2014 or 2013. Fixed maturity and equity securities classified as available-for-sale are carried at fair value. Unrealized gains and losses from available for sale investments in fixed maturity and equity securities are reported as a separate component of accumulated other comprehensive income (AOCI), net of DAC, deferred sales inducements and deferred income taxes, in shareholder's equity. Realized and unrealized gains and losses from fixed maturity and equity securities that are measured at fair value under the fair value option are reflected in net investment income. Investments in fixed maturity and equity securities are recorded on a trade-date basis. Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certain RMBS, CMBS, CDO and ABS, (collectively, structured securities), recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For structured securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes in expected undiscounted future cash flows. For purchased credit impaired (PCI) securities, at acquisition, the difference between the undiscounted expected future cash flows and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over the securities' remaining lives on a level yield basis. Subsequently, effective yields recognized on PCI securities are recalculated and adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to reasons other than interest rate changes. Other Bond Securities and Other Common and Preferred Stock Securities for which we have elected the fair value option are carried at fair value and reported in other bond securities or other common and preferred stocks in the Balance Sheets. Changes in fair value of these assets are reported in net investment income. Interest income and dividend income on assets measured under the fair value option are recognized and included in net investment income. See Note 3 for additional information on financial assets designated under the fair value option. 31 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Securities Available for Sale The following table presents the amortized cost or cost and fair value of our available for sale securities:
Other-Than- Amortized Gross Gross Temporary Cost or Unrealized Unrealized Impairments (in millions) Cost Gains Losses Fair Value in AOCI/(a)/ ------------- --------- ---------- ---------- ---------- ----------- December 31, 2014 Bonds available for sale: U.S. government and government sponsored entities $ 333 $ 63 $ (1) $ 395 $ -- Obligations of states, municipalities and political subdivisions 2,699 325 (5) 3,019 2 Non-U.S. governments 2,782 167 (62) 2,887 -- Corporate debt 64,605 6,412 (642) 70,375 37 Mortgage-backed, asset-backed and collateralized: RMBS 14,169 1,433 (144) 15,458 739 CMBS 4,226 488 (9) 4,705 232 CDO/ABS 5,745 197 (38) 5,904 6 ------- ------ ------- -------- ------ Total mortgage-backed, asset-backed and collateralized 24,140 2,118 (191) 26,067 977 ------- ------ ------- -------- ------ Total bonds available for sale/(b)/ 94,559 9,085 (901) 102,743 1,016 ------- ------ ------- -------- ------ Equity securities available for sale: Common stock 3 4 -- 7 -- Preferred stock 16 3 -- 19 -- ------- ------ ------- -------- ------ Total equity securities available for sale 19 7 -- 26 -- ------- ------ ------- -------- ------ Investment in AIG 9 3 (6) 6 -- ------- ------ ------- -------- ------ Total $94,587 $9,095 $ (907) $102,775 $1,016 ======= ====== ======= ======== ====== December 31, 2013 Bonds available for sale: U.S. government and government sponsored entities $ 343 $ 46 $ (15) $ 374 $ -- Obligations of states, municipalities and political subdivisions 2,432 53 (156) 2,329 2 Non-U.S. governments 2,426 95 (174) 2,347 -- Corporate debt 66,412 4,459 (1,812) 69,059 44 Mortgage-backed, asset-backed and collateralized: RMBS 13,975 1,223 (273) 14,925 657 CMBS 3,760 419 (63) 4,116 235 CDO/ABS 4,853 188 (43) 4,998 16 ------- ------ ------- -------- ------ Total mortgage-backed, asset-backed and collateralized 22,588 1,830 (379) 24,039 908 ------- ------ ------- -------- ------ Total bonds available for sale/(b)/ 94,201 6,483 (2,536) 98,148 954 ------- ------ ------- -------- ------ Equity securities available for sale: Common stock 5 2 -- 7 -- Preferred stock 18 4 -- 22 -- ------- ------ ------- -------- ------ Total equity securities available for sale 23 6 -- 29 -- ------- ------ ------- -------- ------ Investment in AIG 9 2 (6) 5 -- ------- ------ ------- -------- ------ Total $94,233 $6,491 $(2,542) $ 98,182 $ 954 ======= ====== ======= ======== ======
(a)Represents the amount of other-than-temporary impairment losses recognized in accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date. (b)At December 31, 2014 and 2013, bonds available for sale held by us that were below investment grade or not rated totaled $15.3 billion and $14.5 billion, respectively. 32 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Securities Available for Sale in a Loss Position The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:
Less than 12 Months 12 Months or More Total - --------------------- --------------------- --------------------- Gross Gross Gross Unrealized Unrealized Unrealized (in millions) Fair Value Losses Fair Value Losses Fair Value Losses ------------- ---------- ---------- ---------- ---------- ---------- ---------- December 31, 2014 Bonds available for sale: U.S. government and government sponsored entities $ -- $ -- $ 24 $ 1 $ 24 $ 1 Obligations of states, municipalities and political subdivisions 47 1 171 4 218 5 Non-U.S. governments 357 14 607 48 964 62 Corporate debt 5,476 247 6,447 395 11,923 642 RMBS 1,664 42 1,879 102 3,543 144 CMBS 53 -- 331 9 384 9 CDO/ABS 1,742 16 399 22 2,141 38 ------- ------ ------ ---- ------- ------ Total bonds available for sale 9,339 320 9,858 581 19,197 901 ------- ------ ------ ---- ------- ------ Investment in AIG -- -- 6 6 6 6 ------- ------ ------ ---- ------- ------ Total $ 9,339 $ 320 $9,864 $587 $19,203 $ 907 ======= ====== ====== ==== ======= ====== December 31, 2013 Bonds available for sale: U.S. government and government sponsored entities $ 62 $ 13 $ 7 $ 2 $ 69 $ 15 Obligations of states, municipalities and political subdivisions 1,553 136 97 20 1,650 156 Non-U.S. governments 1,049 104 312 70 1,361 174 Corporate debt 20,214 1,368 3,119 444 23,333 1,812 RMBS 3,788 186 712 87 4,500 273 CMBS 827 38 167 25 994 63 CDO/ABS 1,016 18 373 25 1,389 43 ------- ------ ------ ---- ------- ------ Total bonds available for sale 28,509 1,863 4,787 673 33,296 2,536 ------- ------ ------ ---- ------- ------ Investment in AIG -- -- 5 6 5 6 ------- ------ ------ ---- ------- ------ Total $28,509 $1,863 $4,792 $679 $33,301 $2,542 ======= ====== ====== ==== ======= ======
As of December 31, 2014, we held 2,239 individual fixed maturity and equity securities that were in an unrealized loss position, of which 1,045 individual securities were in a continuous unrealized loss position for longer than 12 months. We did not recognize the unrealized losses in earnings on these fixed maturity securities at December 31, 2014, because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines in value, we performed fundamental credit analysis on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data. Contractual Maturities of Fixed Maturity Securities Available for Sale The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:
Total Fixed Maturity Securities Fixed Maturity Securities in a Loss Available for Sale Position Available for Sale - ------------------------------- ----------------------------------- (in millions) Amortized Cost Fair Value Amortized Cost Fair Value ------------- -------------- ---------- -------------- ---------- December 31, 2014 Due in one year or less $ 1,793 $ 1,843 $ 93 $ 91 Due after one year through five years 11,957 12,911 1,303 1,261 Due after five years through ten years 24,485 25,760 5,693 5,459 Due after ten years 32,184 36,162 6,750 6,318 Mortgage-backed, asset-backed and collateralized 24,140 26,067 6,259 6,068 ------- -------- ------- ------- Total $94,559 $102,743 $20,098 $19,197 ======= ======== ======= =======
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. 33 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Our investments at December 31, 2014 or 2013 did not include any investments in a single issuer that exceeded 10 percent of our shareholder's equity. The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:
Years Ended December 31, ----------------------------------------------------- 2014 2013 2012 ----------------- ----------------- ----------------- Gross Gross Gross Gross Gross Gross Realized Realized Realized Realized Realized Realized (in millions) Gains Losses Gains Losses Gains Losses ------------- -------- -------- -------- -------- -------- -------- Fixed maturity securities $259 $49 $1,863 $76 $1,598 $92 Equity securities 5 -- 28 -- 31 6 ---- --- ------ --- ------ --- Total $264 $49 $1,891 $76 $1,629 $98 ==== === ====== === ====== ===
In 2014, 2013, and 2012, the aggregate fair value of available for sale fixed maturity and equity securities sold was $6.1 billion, $22.5 billion and $11.8 billion, respectively. Other Securities Measured at Fair Value The following table presents the fair value of other securities measured at fair value at our election of the fair value option:
December 31, 2014 December 31, 2013 ---------------- ---------------- Percent Percent Fair of Fair of (in millions) Value Total Value Total ------------- ------ ------- ------ ------- U.S. government and government sponsored entities $1,135 39% $ 903 30% Mortgage-backed, asset-backed and collateralized: RMBS 384 13 332 11 CMBS 153 5 156 5 CDO/ABS 1,262 43 1,061 36 ------ --- ------ --- Total fixed maturities 2,934 100 2,452 82 Other common and preferred stock -- -- 538 18 ------ --- ------ --- Total $2,934 100% $2,990 100% ====== === ====== ===
Other Invested Assets The following table summarizes the carrying values of other invested assets:
December 31, ------------- (in millions) 2014 2013 ------------- ------ ------ Alternative investments/(a)/ $6,722 $7,047 Investment real estate/(b)/ 346 443 Federal Home Loan Bank (FHLB) common stock 14 22 ------ ------ Total $7,082 $7,512 ====== ======
(a)Includes hedge funds, private equity funds, affordable housing partnerships and other investment partnerships. (b)Net of accumulated depreciation of $148 million and $181 million at December 31, 2014 and 2013, respectively. Other Invested Assets Carried at Fair Value Certain hedge funds, private equity funds, affordable housing partnerships and other investment partnerships for which we have elected the fair value option are reported at fair value with changes in fair value recognized in net investment income. Other investments in hedge funds, private equity funds, affordable housing partnerships and other investment partnerships in which AIG's insurance operations do not hold aggregate interests sufficient to exercise more than minor influence over the respective partnerships are reported at fair value with changes in fair value recognized as a component of accumulated other comprehensive income. These investments are subject to other-than-temporary impairment evaluations (see discussion below on evaluating equity investments for other-than-temporary impairment). 34 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The gross unrealized loss recorded in Accumulated other comprehensive income on such investments was $26 million and $8 million at December 31, 2014 and 2013, respectively, the majority of which pertains to investments in private equity funds and hedge funds that have been in continuous unrealized loss positions for less than 12 months. Other Invested Assets - Equity Method Investments We account for hedge funds, private equity funds, affordable housing partnerships and other investment partnerships using the equity method of accounting unless AIG's interest is so minor that AIG may have virtually no influence over partnership operating and financial policies, or we have elected the fair value option. Under the equity method of accounting, the carrying value generally is our share of the net asset value of the funds or the partnerships, and changes in our share of the net asset values are recorded in net investment income. In applying the equity method of accounting, we consistently use the most recently available financial information provided by the general partner or manager of each of these investments, which is one to three months prior to the end of our reporting period. The financial statements of these investees are generally audited annually. Other Investments Real estate is classified as held for investment or held for sale, based on management's intent. Real estate held for investment is carried at cost, less accumulated depreciation and impairment write-downs. Properties acquired through foreclosure and held for sale are carried at the lower of carrying amount or fair value less estimated costs to sell the property. We are members of the FHLB of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value, and is included in other invested assets. Other invested assets also include mutual funds, which consist of seed money for mutual funds and investments in retail mutual funds used as investment vehicles for our variable annuity separate accounts, and are carried at market value. Aircraft Aircraft owned by the Aircraft Trusts were recorded at cost (adjusted for impairment charges), net of accumulated depreciation. Depreciation was generally computed on a straight-line to a residual value of approximately 15 percent of the cost of the asset over its estimated useful life of 25 years. Certain major additions and modifications to aircraft may have been capitalized. The residual value estimates were reviewed periodically to ensure continued appropriateness. Aircraft were periodically reviewed for impairment and impairment losses recorded when the estimate of undiscounted future cash flows expected to be generated by the aircraft was less than its carrying value. See Notes 9 for additional information. Short-Term Investments Short-term investments include interest-bearing money market funds, investment pools, and other investments with original maturities within one year from the date of purchase. Net Investment Income Net investment income represents income primarily from the following sources: . Interest income and related expenses, including amortization of premiums and accretion of discounts on bonds with changes in the timing and the amount of expected principal and interest cash flows reflected in the yield, as applicable. 35 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) . Dividend income from common and preferred stock and distributions from other investments, including distributions from private equity funds and hedge funds that are not accounted for under the equity method. . Realized and unrealized gains and losses from investments in other securities and investments for which we elected the fair value option. . Earnings from private equity funds and hedge fund investments accounted for under the equity method. . Interest income on mortgage, policy and other loans. The following table presents the components of net investment income:
Years Ended December 31, ---------------------- (in millions) 2014 2013 2012 ------------- ------ ------ ------ Fixed maturity securities, including short-term investments $5,686 $5,275 $5,792 Equity securities (51) (20) 67 Interest on mortgage and other loans 645 626 628 Investment real estate 61 79 73 Other invested assets 778 919 650 Securities lending 1 3 2 Other investments 69 52 12 ------ ------ ------ Total investment income 7,189 6,934 7,224 Investment expenses 247 242 223 ------ ------ ------ Net investment income $6,942 $6,692 $7,001 ====== ====== ======
The carrying value of investments that produced no investment income during 2014 was $109 million, which is less than less than 0.1 percent of total invested assets. The ultimate disposition of these investments is not expected to have a material effect on our results of operations and financial position. Net Realized Capital Gains and Losses Net realized capital gains and losses are determined by specific identification. The net realized capital gains and losses are generated primarily from the following sources: . Sales of available for sale fixed maturity and equity securities, real estate, investments in private equity funds and hedge funds and other types of investments. . Reductions to the cost basis of available for sale fixed maturity and equity securities and certain other invested assets for other-than-temporary impairments. . Changes in fair value of derivatives except for those instruments that are designated as hedging instruments when the change in the fair value of the hedged item is not reported in net realized capital gains and losses. . Exchange gains and losses resulting from foreign currency transactions. The following table presents the components of net realized capital gains (losses):
Years Ended December 31, --------------------- (in millions) 2014 2013 2012 ------------- ----- ------ ------ Sales of fixed maturity securities $ 210 $1,787 $1,506 Sales of equity securities 5 28 25 Mortgage and other loans (46) (57) 73 Investment real estate 116 73 12 Other invested assets 51 2 (12) Derivatives (432) 340 (509) Other 148 (30) (45) Other-than-temporary impairments (119) (127) (379) ----- ------ ------ Net realized capital (losses) gains $ (67) $2,016 $ 671 ===== ====== ======
36 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Evaluating Investments for Other-Than-Temporary Impairments Fixed Maturity Securities If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing. For fixed maturity securities for which a credit impairment has occurred, the amortized cost is written down to the estimated recovery value with a corresponding charge to realized capital losses. The estimated recovery value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not related to a credit impairment is recognized in unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken (a component of accumulated other comprehensive income). When estimating future cash flows for structured fixed maturity securities (e.g., RMBS, CMBS, CDO, ABS), management considers historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by asset class: . Current delinquency rates; . Expected default rates and the timing of such defaults; . Loss severity and the timing of any recovery; and . Expected prepayment speeds. For corporate, municipal and sovereign fixed maturity securities determined to be credit impaired, management considers the fair value as the recovery value when available information does not indicate that another value is more relevant or reliable. When management identifies information that supports a recovery value other than the fair value, the determination of a recovery value considers scenarios specific to the issuer and the security, and may be based upon estimates of outcomes of corporate restructurings, political and macroeconomic factors, stability and financial strength of the issuer, the value of any secondary sources of repayment and the disposition of assets. Management considers severe price declines in its assessment of potential credit impairments. We may also modify model inputs when management determines that price movements in certain sectors are indicative of factors not captured by the cash flow models. In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign exchange related, we prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recovery value over the remaining expected holding period of the security. 37 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Credit Impairments The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:
Years Ended December 31, ---------------------- (in millions) 2014 2013 2012 ------------- ------ ------ ------ Balance, beginning of year $1,585 $2,126 $2,775 Increases due to: Credit impairments on new securities subject to impairment losses 22 15 96 Additional credit impairments on previously impaired securities 40 31 194 Reductions due to: Credit impaired securities fully disposed for which there was no prior intent or requirement to sell (153) (184) (520) Credit impaired securities for which there is a current intent or anticipated requirement to sell (170) -- -- Accretion on securities previously impaired due to credit/*/ -- (403) (422) Other -- -- 3 ------ ------ ------ Balance, end of year $1,324 $1,585 $2,126 ====== ====== ======
* Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time. Equity Securities We evaluate our available for sale equity securities, equity method and cost method investments for impairment by considering such securities as candidates for other-than-temporary impairment if they meet any of the following criteria: . The security has traded at a significant (25 percent or more) discount to cost for an extended period of time (nine consecutive months or longer); . A discrete credit event has occurred resulting in (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking protection from creditors under the bankruptcy laws 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 . We have concluded that it may not realize a full recovery on its investment, regardless of the occurrence of one of the foregoing events. The determination that an equity security is other-than-temporarily impaired requires the judgment of management and consideration of the fundamental condition of the issuer, its near-term prospects and all the relevant facts and circumstances. In addition to the above criteria, management also considers circumstances of a rapid and severe market valuation decline (50 percent or more discounts to cost), in which we could not reasonably assert that the impairment period would be temporary (severity losses). Other Invested Assets Investments in private equity funds and hedge funds are evaluated for impairment in a manner similar to the evaluation of equity securities for impairments as discussed above. This evaluation considers market conditions, events and volatility that may impact the recoverability of the underlying investments within these private equity funds and hedge funds and is based on the nature of the underlying investments and specific inherent risks. Such risks may evolve based on the nature of the underlying investments. Investments in real estate are periodically evaluated for recoverability whenever changes in circumstances indicate the carrying amount of an asset may be impaired. When impairment indicators are present, we compare expected investment cash flows to carrying value. When the expected cash flows are less than the carrying value, the investments are written down to fair value with a corresponding charge to earnings. Purchased Credit Impaired Securities We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determined, based on our expectations as to the timing and amount of cash flows expected to be received, that it was 38 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) probable at the date of acquisition that we would not collect all contractually required payments for these PCI securities, including both principal and interest after considering the effects of prepayments. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security was determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over their remaining lives on a level-yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below. On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as an adjustment to the accretable yield. The following table presents information on our PCI securities, which are included in bonds available for sale:
At Date of (in millions) Acquisition ------------- ----------- Contractually required payments (principal and interest) $11,962 Cash flows expected to be collected/*/ 9,700 Recorded investment in acquired securities 6,457
* Represents undiscounted expected cash flows, including both principal and interest
December 31, ------------- (in millions) 2014 2013 ------------- ------ ------ Outstanding principal balance $6,934 $5,805 Amortized cost 5,020 3,969 Fair value 5,473 4,397
The following table presents activity for the accretable yield on PCI securities:
Years Ended December 31, -------------- (in millions) 2014 2013 ------------- ------ ------ Balance, beginning of year $2,677 $1,734 Newly purchased PCI securities 545 826 Disposals -- (39) Accretion (345) (258) Effect of changes in interest rate indices (226) 118 Net reclassification from non-accretable difference, including effects of prepayments 10 296 ------ ------ Balance, end of year $2,661 $2,677 ====== ======
Pledged Investments Secured Financing We enter into secured financing transactions whereby certain securities are sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. In the majority of these repurchase agreements, the securities transferred by us may be sold or repledged by the counterparties. Repurchase agreements are recorded at their contracted repurchase amounts plus accrued interest. 39 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 2013, our secured financing transactions also included those that involve the transfer of securities to financial institutions in exchange for cash or other liquid collateral. Securities transferred by us under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by us, counterparties transfer assets to us, such as cash or high quality fixed maturity securities. Collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the transferred securities during the life of the transactions. When we receive fixed maturity securities as collateral, we do not have the right to sell or repledge this collateral unless an event of default occurs by the counterparties. At the termination of the transactions, we and our counterparties are obligated to return the collateral provided and the securities transferred, respectively. The following table presents the fair value of securities pledged to counterparties under secured financing transactions:
December 31, ------------- (in millions) 2014 2013 ------------- ------ ------ Securities available for sale $ -- $2,425 Other securities 1,135 903
Insurance - Statutory and Other Deposits Total carrying values of cash and securities deposited by us under requirements of regulatory authorities were $72 million and $70 million at December 31, 2014 and 2013, respectively. Other Pledges We are members of FHLBs and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $14 million and $22 million of stock in FHLBs at December 31, 2014 and 2013, respectively. To the extent we borrow from an FHLB, our ownership interest in the stock of the FHLB will be pledged to the FHLB. In addition, we have pledged securities with a fair value of $330 million and $67 million at December 31, 2014 and 2013, respectively, associated with advances from the FHLBs. The increase in pledged securities in 2014 primarily reflects securities pledged to the FHLB prior to obtaining advances, pursuant to our plan to facilitate the ability to obtain cash advances on a same-day basis up to an internally approved limit, to more effectively manage short-term liquidity. As a result, we had $312 million of available FHLB borrowing capacity at December 31, 2014. 5. LENDING ACTIVITIES Mortgage and other loans receivable include commercial and residential mortgages, life insurance policy loans, commercial loans, and other loans and notes receivable. Commercial mortgages, commercial loans, and other loans and notes receivable are carried at unpaid principal balances less credit allowances and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned. Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to net investment income over the life of the related loan as an adjustment of the loan's yield using the interest method. Life insurance policy loans are carried at unpaid principal amount. There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy. 40 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the composition of mortgages and other loans receivable:
December 31, ---------------- (in millions) 2014 2013 ------------- ------- ------- Commercial mortgages/(a)/ $ 9,441 $ 8,167 Life insurance policy loans 1,501 1,554 Commercial loans, other loans and notes receivable/(b)/ 964 503 ------- ------- Total mortgage and other loans receivable 11,906 10,224 Allowance for losses (94) (139) ------- ------- Mortgage and other loans receivable, net $11,812 $10,085 ======= =======
(a)Commercial mortgages primarily represent loans for office, retail, apartments and industrial properties, with exposures in California and New York representing the largest geographic concentrations (both 15 percent at December 31, 2014 and 19 percent and 14 percent, respectively, at December 31, 2013). (b)Amount at December 31, 2014 also includes $110 million of residential mortgages. The following table presents the credit quality indicators for commercial mortgage loans:
Number Percent Class of ------------------------------------------------- of (dollars in millions) Loans Apartments Offices Retail Industrial Hotel Others Total/(c)/ Total $ --------------------- ------ ---------- ------- ------ ---------- ----- ------ --------- ------- December 31, 2014 Credit Quality Indicator: In good standing 609 $1,541 $3,164 $1,852 $863 $958 $ 833 $9,211 97% Restructured/(a)/ 9 -- 159 10 -- -- -- 169 2 90 days or less delinquent 3 -- -- -- -- -- -- -- -- >90 days delinquent or in process of foreclosure 3 -- 61 -- -- -- -- 61 1 --- ------ ------ ------ ---- ---- ------ ------ --- Total/(b)/ 624 $1,541 $3,384 $1,862 $863 $958 $ 833 $9,441 100% === ====== ====== ====== ==== ==== ====== ====== === Allowance for losses $ 2 $ 41 $ 16 $ 2 $ 3 $ 9 $ 73 1% ====== ====== ====== ==== ==== ====== ====== === December 31, 2013 Credit Quality Indicator: In good standing 623 $1,347 $2,427 $1,626 $839 $771 $ 952 $7,962 98% Restructured/(a)/ 11 13 90 -- -- -- 84 187 2 >90 days delinquent or in process of foreclosure 2 -- -- 18 -- -- -- 18 -- --- ------ ------ ------ ---- ---- ------ ------ --- Total/(b)/ 636 $1,360 $2,517 $1,644 $839 $771 $1,036 $8,167 100% === ====== ====== ====== ==== ==== ====== ====== === Allowance for losses $ 2 $ 61 $ 6 $ 1 $ 3 $ 33 $ 106 1% ====== ====== ====== ==== ==== ====== ====== ===
(a)Includes loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. See discussion of troubled debt restructurings below. (b)Does not reflect valuation allowances. (c)Over 99 percent of the commercial mortgages held at such respective dates were current as to payments of principal and interest. We hold mortgages with a carrying value of $71 million on certain properties that are owned by an affiliate, AIG Global Real Estate Investment Corporation, as of both December 31, 2014 and 2013. Methodology Used to Estimate the Allowance for Losses Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan's effective interest rate, ii) the loan's observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent. Impairment of commercial mortgages is typically determined using the fair value of collateral while impairment of other loans is typically determined using the present value of cash flows or the loan's observable market price. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on the analysis of internal risk ratings and current loan values. Internal risk ratings are assigned based on the consideration of risk factors including past due status, debt service coverage, loan-to-value ratio or the ratio of the loan balance to the estimated value of the property, property occupancy, profile of the borrower and of the major property tenants, economic trends in the market where the property is located, and condition of the property. These factors and the resulting risk ratings also provide a basis for determining the level of monitoring performed at both the individual loan and the portfolio level. When all or a portion of a commercial mortgage loan is deemed uncollectible, the uncollectible portion of the carrying value of the loan is charged off against the allowance. Interest income on impaired loans is recognized as cash is received. For impaired loans where it has been determined 41 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) that not all of the contractual principal due will be collected, any cash received is recorded as a reduction of the current carrying amount of the loan. A significant majority of commercial mortgage loans in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan. The following table presents a rollforward of the changes in the allowance for losses on mortgage and other loans receivable:
2014 2013 2012 --------------------- --------------------- --------------------- Years Ended December 31, Commercial Other Commercial Other Commercial Other (in millions) Mortgages Loans Total Mortgages Loans Total Mortgages Loans Total ------------- ---------- ----- ----- ---------- ----- ----- ---------- ----- ----- Allowance, beginning of year $106 $ 33 $139 $ 68 $ 87 $155 $149 $84 $233 Additions (reductions) to allowance (17) 11 (6) 49 10 59 (74) 11 (63) Charge-offs, net of recoveries (16) (23) (39) (11) (64) (75) (7) (8) (15) ---- ---- ---- ---- ---- ---- ---- --- ---- Allowance, end of year $ 73 $ 21 $ 94 $106 $ 33 $139 $ 68 $87 $155 ==== ==== ==== ==== ==== ==== ==== === ====
The following table presents information regarding impaired mortgage loans:
Years Ended December 31, ---------------- (in millions) 2014 2013 2012 ------------- ---- ---- ---- Impaired loans with valuation allowances $104 $137 $ 75 Impaired loans without valuation allowances -- -- 7 ---- ---- ---- Total impaired loans 104 137 82 Valuation allowances on impaired loans (26) (56) (27) ---- ---- ---- Impaired loans, net $ 78 $ 81 $ 55 ==== ==== ==== $ 5 $ 7 $ 4 Interest income on impaired loans ==== ==== ====
Troubled Debt Restructurings We modify loans to optimize their returns and improve their collectability, among other things. When such a modification is undertaken with a borrower that is experiencing financial difficulty and the modification involves us granting a concession to the troubled debtor, the modification is deemed to be a troubled debt restructuring (TDR). We assess whether a borrower is experiencing financial difficulty based on a variety of factors, including the borrower's current default on any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the modification, the insufficiency of the borrower's forecasted cash flows to service any of its outstanding debt (including both principal and interest), and the borrower's inability to access alternative third-party financing at an interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal forgiveness, payment deferrals and easing of loan covenants. We held $139 million and $67 million of commercial mortgage loans that had been modified in a TDR at December 31, 2014 and 2013, respectively. We have no other loans that had been modified in a TDR. At December 31, 2014 and 2013, these commercial mortgage loans had related total allowances for credit losses of $13 million and $11 million, respectively. The commercial mortgage loans modified in a TDR are included among the restructured loans in the credit quality indicators table above, if they are performing according to the restructured terms. 6. REINSURANCE In the ordinary course of business, we utilize internal and third-party reinsurance relationships to manage insurance risks and to facilitate capital management strategies. Long-duration reinsurance is effected principally under yearly renewable term treaties. Pools of highly-rated third party reinsurers are utilized to manage net amounts at risk in excess of retention limits. In addition, we assume reinsurance from other insurance companies. We generally limit our exposure to loss on any single life to $10 million by ceding additional risks through reinsurance contracts with other insurers. On an exception basis, we can increase our exposure to loss on any single life up to $15 million. 42 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented as a component of reinsurance assets. The premiums with respect to these treaties are earned over the contract period in proportion to the protection provided. The following table presents the effect of reinsurance on our premiums:
Years Ended December 31, ---------------------- (in millions) 2014 2013 2012 ------------- ------ ------ ------ Direct premiums $2,561 $2,661 $2,456 Assumed premiums 22 22 20 Ceded premiums (917) (900) (860) ------ ------ ------ Net $1,666 $1,783 $1,616 ====== ====== ======
Reinsurance recoveries, which reduced Policyholder benefits, were approximately $641 million, $658 million and $694 million during 2014, 2013 and 2012, respectively. The National Association of Insurance Commissioners (NAIC) Model Regulation "Valuation of Life Insurance Policies" (Regulation XXX) requires U.S. life insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). In addition, NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs. We manage the capital impact of statutory reserve requirements under Regulation XXX and Guideline AXXX through intercompany reinsurance transactions. Regulation XXX and Guideline AXXX reserves related to new and in-force business (term and universal life) are ceded to our Parent, AGC Life, under a coinsurance/modified coinsurance agreement effective January 1, 2011. This agreement does not meet the criteria for reinsurance accounting under GAAP; therefore, deposit accounting is applied. The agreement between us and AGC Life also provides for an experience refund of all profits, less a reinsurance risk charge. The main impact of the agreement on our results of operations during 2014, 2013 and 2012 was a pre-tax expense of approximately $81 million, $73 million and $66 million, respectively, which represented the risk charge associated with the reinsurance agreement. On October 1, 2003, we entered into a coinsurance/modified coinsurance agreement with AIG Life of Bermuda, Ltd. (AIGB). Under the agreement, AIGB reinsured 100 percent quota share of our liability on virtually all of our general account deferred annuity contracts with issue dates on or after January 1, 2003. The agreement was amended on September 25, 2007 to terminate the agreement for new business as of July 1, 2007. Under the agreement, we retain the assets supporting the reserves ceded to AIGB. The agreement also provides for an experience refund of all profits, less a reinsurance risk charge. This agreement does not meet the criteria for reinsurance accounting under GAAP, therefore, deposit accounting is applied. The main impact of the agreement on our results of operations during 2014, 2013 and 2012 was pre-tax expense of approximately $2 million in each year, which represented the risk charge associated with the reinsurance agreement. In 2003, we entered into two coinsurance/modified coinsurance agreements with AIGB. These agreements have an effective date of January 1, 2003. Under the agreements, AIGB reinsured a 100 percent quota share of our liability on selective level term products and universal life products issued by us. These agreements do not meet the criteria for reinsurance accounting under GAAP; therefore, deposit accounting is applied. These agreements were amended to terminate for new business issued on and after August 1, 2009. Effective July 1, 2013, we fully recaptured these agreements and simultaneously reinsured this in-force block to AGC Life, under the January 1, 2011 coinsurance/modified coinsurance agreement mentioned above. Management received approvals of the recapture and reinsurance transactions on our behalf and AGC Life from the Texas and Missouri Departments of Insurance, in July 2013, with July 1, 2013 effective dates. On the effective date of the recapture with AIGB and day one of the treaty with AGC Life, we recorded a net zero impact to pre-tax earnings. The agreements also provide for an experience refund of all profits, less a reinsurance risk charge. The main impact of the agreements on our results of operations during 2013 and 2012 was pre-tax expense of approximately $3 million and $4 million, respectively, representing the risk charge associated with the coinsurance agreement. 43 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Our third-party reinsurance arrangements do not relieve us from our direct obligations to our beneficiaries. Thus, a credit exposure exists with respect to reinsurance ceded, to the extent that any reinsurer fails to meet the obligations assumed under any reinsurance agreement. We believe that no exposure to a single reinsurer represents an inappropriate concentration of credit risk to the Company. Gross reinsurance assets with our three largest reinsurers aggregated to approximately $1.0 billion at both December 31, 2014 and 2013, of which approximately $198 million was secured by collateral at both December 31, 2014 and 2013. 7. DERIVATIVES AND HEDGE ACCOUNTING We use derivatives and other financial instruments as part of our financial risk management programs and our investment operations. Interest rate and cross-currency swaps, swaptions, options and forward transactions are accounted for as derivatives, recorded on a trade-date basis and carried at fair value. See Note 3 for discussion of fair value measurements. Unrealized gains and losses are reflected in income, when appropriate. Aggregate asset or liability positions are netted on the Balance Sheets only to the extent permitted by qualifying master netting arrangements in place with each respective counterparty. Cash collateral posted with counterparties in conjunction with transactions supported by qualifying master netting arrangements is reported as a reduction of the corresponding net derivative liability, while cash collateral received in conjunction with transactions supported by qualifying master netting arrangements is reported as a reduction of the corresponding net derivative asset. We are exposed to potential credit-related losses in the event of nonperformance by counterparties to derivative instruments. The credit exposure related to our derivative financial instruments is limited to the fair value of contracts that are favorable to us at the reporting date less collateral received from that counterparty. Derivatives, with the exception of bifurcated embedded derivatives, are reflected in the Balance Sheets in derivative assets, at fair value and derivative liabilities, at fair value. A bifurcated embedded derivative is measured at fair value and accounted for in the same manner as a free standing derivative contract. The corresponding host contract is accounted for according to the accounting guidance applicable to that instrument. A bifurcated embedded derivative is generally presented with the host contract. See Notes 3 and 11 for additional information on embedded policy derivatives. Our interest rate contracts ,which include interest rate swaps, swaptions, futures and options, are used to economically hedge interest rate exposures associated with embedded derivatives contained in insurance contract liabilities and fixed maturity securities, as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally forwards and swaps) are used to economically mitigate risk associated with foreign currency-denominated transactions, primarily investments and GICs denominated in foreign currencies. Effective April 1, 2014, we reclassified cross-currency swaps from interest rate contracts to foreign exchange contracts. This change was applied prospectively. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities. We purchase equity contracts, such as futures and call and put options, to economically hedge certain guarantees of specific equity index universal life and annuities and variable annuity products. Our exchange-traded index futures contracts have no recorded fair value as they are cash settled daily. We believe our economic hedging instruments have been and remain economically effective, but for the most part they have not been designated as hedges receiving hedge accounting treatment. Changes in the fair value of derivatives not designated as hedges are reported within net realized capital gains and losses. Certain swaps associated with GIC liabilities and available for sale investments have been designated as fair value hedges. Changes in fair value hedges of GIC liabilities and available for sale securities are reported in net policyholder benefits, along with changes in the hedged item. 44 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the notional amounts and fair values of our derivatives:
December 31, 2014 December 31, 2013 -------------------------------- -------------------------------- Gross Derivative Gross Derivative Gross Derivative Gross Derivative Assets Liabilities Assets Liabilities --------------- --------------- --------------- --------------- Notional Fair Notional Fair Notional Fair Notional Fair (in millions) Amount Value Amount Value Amount Value Amount Value ------------- -------- ------ -------- ------ -------- ------ -------- ------ Derivatives designated as hedging instruments: Interest rate contracts $ 243 $ 172 $ -- $ -- $ 161 $ 105 $ 133 $ 15 Foreign exchange contracts 182 11 99 29 -- -- -- -- Derivatives not designated as hedging instruments: Interest rate contracts 24,499 398 2,992 275 5,996 691 4,125 650 Foreign exchange contracts 2,654 512 2,068 410 -- -- -- -- Equity contracts/(a)/ 5,481 108 35,433 1,216 26,497 282 5,039 403 Other contracts/(b)/ 30,580 13 65 7 24,561 10 -- -- ------- ------ ------- ------ ------- ------ ------ ------ Total derivatives, gross $63,639 1,214 $40,657 1,937 $57,215 1,088 $9,297 1,068 ------- ------ ------- ------ ------- ------ ------ ------ Counterparty netting/(c)/ (198) (198) (108) (108) Cash collateral/(d)/ (287) (14) (378) (23) ------ ------ ------ ------ Total derivatives, net 729 1,725 602 937 Less: Bifurcated embedded derivatives -- 1,267 95 403 ------ ------ ------ ------ Total derivative on balance sheets $ 729 $ 458 $ 507 $ 534 ====== ====== ====== ======
(a)Includes bifurcated embedded policy derivatives, which are recorded in policyholder contract deposits. (b)Consists primarily of contacts with multiple underlying exposures and stable value wrap contracts. (c)Represents netting of derivative exposures covered by a qualifying master netting agreement. (d)Represents cash collateral posted and received that is eligible for netting. The following table presents gains (losses) from our derivatives recognized in the Statements of Income:
Years Ended December 31, ----------------------- (in millions) 2014 2013 2012 ------------- ----- ----- ----- Net effect of derivative instruments in fair value hedging relationships:/(a)/ Interest rate contracts $ (7) $ (1) $ -- Foreign exchange contracts (4) -- -- ----- ----- ----- Total $ (11) $ (1) $ -- ===== ===== ===== Derivatives not designated as hedging instruments By derivative type: Interest rate contracts $ 506 $(193) $ 13 Foreign exchange contracts (33) -- (48) Equity contracts/(b)/ (880) 525 (206) Other contracts 57 39 (243) ----- ----- ----- Total $(350) $ 371 $(484) ===== ===== ===== By classification: Policy fees $ 62 $ -- $ -- Net investment income -- 39 4 Net realized capital gains (losses) (432) 340 (509) Policyholder benefits 17 (5) 21 Interest credited to policyholder account balances (8) (4) -- ----- ----- ----- Total $(361) $ 370 $(484) ===== ===== =====
(a)The amounts presented do not include the periodic net coupon settlements of derivative contract or coupon income (expense) related to the hedged item. (b)Includes embedded derivative gains (losses) of $(643) million, $972 million and $(105) million during 2014, 2013 and 2012, respectively. 8. DEFERRED POLICY ACQUISITION COSTS AND DEFERRED SALES INDUCEMENTS Deferred Policy Acquisition Costs DAC represents those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such deferred policy acquisition costs generally include agent or broker commissions and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the insurance 45 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. We partially defer costs, including certain commissions, when we do not believe that the entire cost is directly related to the acquisition or renewal of insurance contracts. We also defer a portion of employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for each distribution channel and/or cost center from which the cost originates. Short-duration insurance contracts: Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally 12 months. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of DAC. We assess the recoverability of DAC on an annual basis or more frequently if circumstances indicate an impairment may have occurred. This assessment is performed by comparing recorded net unearned premiums and anticipated investment income on in-force business to the sum of expected claims, claims adjustment expenses, unamortized DAC and maintenance costs. If the sum of these costs exceeds the amount of recorded net unearned premiums and anticipated investment income, the excess is recognized as an offset against the asset established for DAC. This offset is referred to as a premium deficiency charge. Increases in expected claims and claims adjustment expenses can have a significant impact on the likelihood and amount of a premium deficiency charge. Long-duration insurance contracts: Policy acquisition costs for participating life, traditional life and accident and health insurance products are generally deferred and amortized, with interest, over the premium paying period. The assumptions used to calculate the benefit liabilities and DAC for these traditional products are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. These "locked-in" assumptions include mortality, morbidity, persistency, maintenance expenses and investment returns, and include margins for adverse deviation to reflect uncertainty given that actual experience might deviate from these assumptions. A loss recognition event occurs when there is a shortfall between the carrying amounts of future policy benefit liabilities, net of DAC, and the amount the future policy benefit liabilities, net of DAC, would be when applying updated current assumptions. When we determine that a loss recognition event has occurred, we first reduce any DAC related to that block of business through amortization of acquisition expense, and after DAC is depleted, we record additional liabilities through a charge to policyholder benefits and claims incurred. Groupings for loss recognition testing are consistent with the manner of acquiring and servicing the business and applied by product groupings. We perform separate loss recognition tests for traditional life products, payout annuities and long-term care products. Once loss recognition has been recorded for a block of business, the old assumption set is replaced and the assumption set used for the loss recognition would then be subject to the lock-in principle. Investment-oriented contracts: Policy acquisition costs and policy issuance costs related to universal life and investment-type products (collectively, investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of estimated gross profits (EGPs) to be realized over the estimated lives of the contracts. EGPs include net investment income and spreads, net realized investment gains and losses, fees, surrender charges, expenses, and mortality and morbidity gains and losses. In each reporting period, current period amortization expense is adjusted to reflect actual gross profits. If EGPs change significantly, DAC is recalculated using the new assumptions, and any resulting adjustment is included in income (unlocking). If the new assumptions indicate that future EGPs are higher than previously estimated, DAC will be increased resulting in a decrease in amortization expense and increase in income in the current period; if future EGPs are lower than previously estimated, DAC will be decreased resulting in an increase in amortization expense and decrease in income in the current period. Unlocking of assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the current and projected future profitability of the underlying insurance contracts. To estimate future EGPs for variable annuity products, a long-term annual asset growth assumption is applied to determine the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity markets is partially mitigated through the use of a "reversion to the mean" methodology whereby short-term asset growth above or below long-term annual rate assumptions impact the growth assumption applied to the five-year period subsequent to the current balance sheet date. The reversion to the mean 46 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) methodology allows us to maintain our long-term growth assumptions, while also giving consideration to the effect of actual investment performance. When actual performance significantly deviates from the annual long-term growth assumption, as evidenced by growth assumptions in the five-year reversion to the mean period falling below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or "unlock" the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption applied to subsequent periods. Shadow DAC and Shadow Loss Recognition: DAC held for investment-oriented products is also adjusted to reflect the effect of unrealized gains or losses on fixed maturity and equity securities available for sale on EGPs, with related changes recognized through other comprehensive income (shadow DAC). The adjustment is made at each balance sheet date, as if the securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. Similarly, for long-duration traditional insurance contracts, if the assets supporting the liabilities maintain a temporary net unrealized gain position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by reflecting the impact of reinvestment rates on future yields. If a future loss is anticipated under this basis, any additional shortfall indicated by loss recognition tests is recognized as a reduction in accumulated other comprehensive income (shadow loss recognition). Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in liabilities for future policy benefits. The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to other comprehensive income. Internal Replacements of Long-duration and Investment-Oriented Products: For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. If the modification does not substantially change the contract, we do not change the accounting and amortization of existing DAC and related reserves. If an internal replacement represents a substantial change, the original contract is considered to be extinguished and any related DAC or other policy balances are charged or credited to income, and any new deferrable costs associated with the replacement contract are deferred. The following table presents a rollforward of DAC:
Years Ended December 31, - ---------------------- (in millions) 2014 2013 2012 ------------- ------ ------ ------ Balance, beginning of year $5,096 $4,158 $4,704 Acquisition costs deferred 877 790 584 Accretion of interest/amortization (660) (581) (592) Effect of unlocking assumptions used in estimating future gross profits 96 105 45 Effect of realized gains/loss on securities (45) (37) (85) Effect of unrealized gains/loss on securities (204) 661 (498) Other/*/ 161 -- -- ------ ------ ------ Balance, end of year $5,321 $5,096 $4,158 ====== ====== ======
* The increase in the DAC asset, which principally reflected the impact of the change on periods prior to 2014, was substantially offset by a related increase in the unearned revenue reserves. Value of Business Acquired (VOBA): VOBA is determined at the time of acquisition and is reported in the Balance Sheets with DAC. This value is based on the present value of future pre-tax profits discounted at yields applicable at the time of purchase. For participating life, traditional life and accident and health insurance products, VOBA is amortized over the life of the business in a manner similar to that for DAC based on the assumptions at purchase. For investment-oriented products, VOBA is amortized in relation to EGPs and adjusted for the effect of unrealized gains or losses on fixed maturity and equity securities available for sale in a manner similar to DAC. 47 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents a rollforward of VOBA:
Years Ended December 31, - ---------------- (in millions) 2014 2013 2012 ------------- ---- ---- ---- Balance, beginning of year $348 $339 $391 Accretion of interest/amortization (24) (27) (15) Effect of unlocking assumptions used in estimating future gross profits 13 10 5 Effect of realized gains/loss on securities (3) (5) (23) Effect of unrealized gains/loss on securities (12) 31 (19) ---- ---- ---- Balance, end of year $322 $348 $339 ==== ==== ====
VOBA amortization, net of accretion of interest, expected to be recorded in each of the next five years is $30 million, $27 million, $25 million, $24 million and $23 million, respectively. The following table presents a rollforward of deferred sales inducements:
Years Ended December 31, - ------------------- (in millions) 2014 2013 2012 ------------- ----- ----- ----- Balance, beginning of year $ 502 $ 354 $ 555 Acquisition costs deferred 33 62 112 Accretion of interest/amortization (114) (109) (140) Effect of unlocking assumptions used in estimating future gross profits 60 65 27 Effect of realized gains/loss on securities (12) (13) (1) Effect of unrealized gains/loss on securities (27) 143 (199) ----- ----- ----- Balance, end of year $ 442 $ 502 $ 354 ===== ===== =====
The asset management operations defer distribution costs that are directly related to the sale of mutual funds that have a 12b-1 distribution plan and/or contingent deferred sales charge feature (collectively, Distribution Fee Revenue). We amortize these deferred distribution costs on a straight-line basis, adjusted for redemptions, over a period ranging from one year to eight years depending on share class. Amortization of these deferred distribution costs is increased if at any reporting period the value of the deferred amount exceeds the projected Distribution Fee Revenue. The projected Distribution Fee Revenue is impacted by estimated future withdrawal rates and the rates of market return. Management uses historical activity to estimate future withdrawal rates and average annual performance of the equity markets to estimate the rates of market return. 9. VARIABLE INTEREST ENTITIES A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity's operations through voting rights or do not substantively participate in the gains and losses of the entity. Consolidation of a VIE by its primary beneficiary is not based on majority voting interest, but is based on other criteria discussed below. We enter into various arrangements with VIEs in the normal course of business and consolidate the VIEs when we determine we are the primary beneficiary. This analysis includes a review of the VIE's capital structure, related contractual relationships and terms, nature of the VIE's operations and purpose, nature of the VIE's interests issued and our involvement with the entity. When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the variable interest holders are exposed to through the design of the entity. For VIEs with attributes consistent with that of an investment company or a money market fund, the primary beneficiary is the party or group of related parties that absorbs a majority of the expected losses of the VIE, receives the majority of the expected residual returns of the VIE, or both. For all other VIEs, the primary beneficiary is the entity that has both (i) the power to direct the activities of the VIE that most significantly affect the VIE's economic performance and (ii) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation 48 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) conclusion depends on the breadth of our decision-making ability and our ability to influence activities that significantly affect the economic performance of the VIE. The following table presents the total assets and total liabilities associated with our variable interests in consolidated VIEs, as classified in the Balance Sheets:
Real Estate and Affordable Investment Securitization Housing (in millions) Entities/(d)/ Vehicles Partnerships Total ------------- ------------ -------------- ------------ ------ December 31, 2014 Assets: Bonds available for sale $-- $6,705 $ -- $6,705 Mortgage and other loans receivable -- 1,753 -- 1,753 Other invested assets 1 -- 348 349 Other/(a)/ -- 481 171 652 --- ------ ---- ------ Total assets/(b)/ $ 1 $8,939 $519 $9,459 === ====== ==== ====== Liabilities: Notes payable - to affiliates, net $-- $ 660 $ -- $ 660 Notes payable - to third parties, net -- 488 10 498 Other/(c)/ -- -- 19 19 --- ------ ---- ------ Total liabilities $-- $1,148 $ 29 $1,177 === ====== ==== ====== December 31, 2013 Assets: Bonds available for sale $-- $6,884 $ -- $6,884 Mortgage and other loans receivable -- 1,015 -- 1,015 Other invested assets 1 19 434 454 Other/(a)/ -- 936 176 1,112 --- ------ ---- ------ Total assets/(b)/ $ 1 $8,854 $610 $9,465 === ====== ==== ====== Liabilities: Notes payable - to affiliates, net $-- $ 237 $ -- $ 237 Notes payable - to third parties, net -- 346 -- 346 Other/(c)/ -- 241 31 272 --- ------ ---- ------ Total liabilities $-- $ 824 $ 31 $ 855 === ====== ==== ======
(a)Comprised primarily of short-term investments and other assets at both December 31, 2014 and 2013. (b)The assets of each VIE can be used only to settle specific obligations of that VIE. (c)Comprised primarily of amounts due to related parties and other liabilities and derivative liabilities, at fair value, at both December 31, 2014 and 2013. (d)At December 31, 2014 and 2013, we had no significant off-balance sheet exposure associated with commitments to real estate and investment entities. We calculate our maximum exposure to loss to be the amount invested in the debt or equity of the VIE and other commitments to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to us. In limited circumstances, AIG Parent has provided guarantees to certain VIE interest holders. The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:
Maximum Exposure to Loss ---------------------------- Total VIE On-Balance Off-Balance (in millions) Assets Sheet/*/ Sheet Total ------------- ------ ---------- ----------- ----- December 31, 2014 Real estate and investment entities $4,180 $528 $85 $613 Affordable housing partnerships 1,055 288 -- 288 ------ ---- --- ---- Total $5,235 $816 $85 $901 ====== ==== === ==== December 31, 2013 Real estate and investment entities $4,130 $492 $50 $542 Affordable housing partnerships 1,125 191 -- 191 ------ ---- --- ---- Total $5,255 $683 $50 $733 ====== ==== === ====
* At December 31, 2014 and 2013, $816 million and $683 million, respectively, of our total unconsolidated VIE assets were recorded as other invested assets. 49 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Real Estate and Investment Entities and Affordable Housing Partnerships We participate as a passive investor in the equity issued primarily by third party-managed hedge and private equity funds, and certain real estate entities managed by AIG Asset Management (US), LLC (AIG Investments), an affiliate, and in limited partnerships that develop and operate affordable housing qualifying for tax credits, that are VIEs. We are typically not involved in the design or establishment of these VIEs, nor do we actively participate in the management of the VIEs. Securitization Vehicles Aircraft Trusts In 2003, AIG Parent created two VIEs, Castle 2003-1 Trust and Castle 2003-2 Trust (collectively, the Aircraft Trusts), for the purpose of acquiring, owning, leasing, maintaining, operating and selling aircraft. AGL and other AIG subsidiaries held beneficial interests in these entities, including passive investments in non-voting preferred equity and in debt issued by these entities. Debt of these entities is not an obligation of, or guaranteed by, AGL or by AIG Parent or any of AIG's subsidiaries. Effective June 30, 2014, AGL transferred its non-voting preferred equity interests in the Aircraft Trusts to AIG Parent though the distribution of a non-cash dividend and return of capital, which totaled $500 million. Prior to this distribution, AGL bore the obligation to absorb economic losses or receive economic benefits that could possibly be significant to the Aircraft Trusts and, as a result, we were deemed the primary beneficiary and fully consolidated the Aircraft Trusts. Subsequent to the distribution, AGL is no longer deemed the primary beneficiary of the Aircraft Trusts and, as a result, the accompanying financial statements exclude the financial position, operating results and cash flows of the Aircraft Trusts subsequent to the date of the distribution. Ambrose During 2013 and 2014, we entered into securitization transactions that involved the transfer of portfolios of our high grade corporate securities, along with a portfolio of structured securities acquired from AIG, to newly formed special purpose entities, Ambrose 2013-2 (Ambrose 2), Ambrose 2013-3 (Ambrose 3) Ambrose 2013-5 (Ambrose 5) and Ambrose 2014-6 (Ambrose 6) (collectively referred to as the Ambrose entities), which are VIEs. In each transaction, the Ambrose entities issued beneficial interests to us in consideration for the transferred securities. We own the majority of the beneficial interests issued by the Ambrose entities and we maintain the power to direct the activities of the VIEs that most significantly impact their economic performance and bear the obligation to absorb losses or receive benefits from the VIEs that could potentially be significant to the VIEs, accordingly, we consolidate the Ambrose entities. See Note 17 for additional information on these securitization transactions. Selkirk During 2013 and 2014, we entered into securitization transactions in which portfolios of our commercial mortgage loans were transferred to special purpose entities, with us retaining a significant beneficial interest in the securitized loans. As consideration for the transferred loans, we received beneficial interests in certain special purpose entities and cash proceeds from the securitized notes issued to third party investors by other special purpose entities. We determined that we control or we are the primary beneficiary of all of the special purpose entities in the securitization structures, and therefore we consolidate all of these entities, including those that are VIEs. See Note 17 for additional information on these securitization transactions. RMBS, CMBS, Other ABS and CDOs We are passive investors in RMBS, CMBS, other ABS and CDOs, the majority of which are issued by domestic special purpose entities. We generally do not sponsor or transfer assets to, or act as the servicer to these asset backed 50 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) structures, and were not involved in the design of these entities. Our maximum exposure in these types of structures is limited to our investment in securities issued by these entities. Based on the nature of our investments and our passive involvement in these types of structures, we have determined that we are not the primary beneficiary of these entities. We have not included these entities in the tables above, however, the fair values of our investments in these structures are reported in Note 3 and Note 4. 10.INSURANCE LIABILITIES Future Policy Benefits Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of the present value of future benefits less the present value of future net premiums. Included in future policy benefits are liabilities for annuities issued in structured settlement arrangements whereby a claimant has agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinable period of time with a life contingency feature. Future policy benefits also include certain guaranteed benefits of variable annuity products that are not considered embedded derivatives, primarily guaranteed minimum death benefits. See Note 11 for additional information on guaranteed minimum death benefits. The liability for long-duration future policy benefits has been established including assumptions for interest rates which vary by year of issuance and product, and range from approximately zero percent to 12.0 percent. Mortality and surrender rate assumptions are generally based on actual experience when the liability is established. For universal life policies with secondary guarantees, we recognize a future policy benefit reserve, in addition to policyholder contract deposits, based on a benefit ratio of (a) the present value of total expected payments, in excess of the account value, over the life of the contract, divided by (b) the present value of total expected assessments over the life of the contract. For universal life policies without secondary guarantees, for which profits followed by losses are first expected after contract inception, we establish future policy benefit reserves, in addition to policyholder contract deposits, so that expected future losses are recognized in proportion to the emergence of profits in the earlier (profitable) years. For long duration traditional business, a "lock-in" principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns. These assumptions are typically consistent with pricing inputs. These assumptions include margins for adverse deviation in the event that actual experience might deviate from these assumptions. A loss recognition event occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. To determine whether a loss recognition event has occurred, we determine whether a future loss is expected based on updated current assumptions. If a loss recognition event occurs, we recognize the loss by first reducing DAC through amortization expense, and, if DAC is depleted, record additional liabilities through a charge to policyholder benefit expense. See Note 8 for additional information on loss recognition. Sales of investment securities in connection with a program to utilize capital loss carryforwards, as well as other investment sales with subsequent reinvestment at lower yields, triggered loss recognition expense primarily on certain long-term payout annuity contracts of $21 million, $886 million and $807 million, in 2014, 2013 and 2012, respectively. We also recorded loss recognition expense of $87 million in 2014 and $61 million in 2012 to increase reserves for certain long-term care business. 51 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Policyholder Contract Deposits The liability for policyholder contract deposits is recorded at accumulated value (deposits received and net transfers from separate accounts, plus accrued interest credited at rates ranging from 0.3 percent to 8.4 percent, less withdrawals and assessed fees). Deposits collected on investment-oriented products are not reflected as revenues, as they are recorded directly to policyholder contract deposits upon receipt. Amounts assessed against the contract holders for mortality, administrative, and other services are included in revenues. In addition to liabilities for universal life, fixed annuities, fixed options with variable annuities, annuities without life contingencies, funding agreements and guaranteed investment contracts, policyholder contract deposits also include our liability for (i) certain guaranteed benefits and equity-indexed features accounted for as embedded derivatives at fair value, (ii) annuities issued in a structured settlement arrangement with no life contingency and (iii) certain contracts we have elected to account for at fair value. In addition, certain GIC contracts contain embedded derivatives that are bifurcated and carried at fair value in policyholder contract deposits with the change in fair value recorded in policyholder benefits. See Note 3 for discussion of the fair value measurement of embedded policy derivatives and Note 11 for additional discussions of guaranteed benefits accounted for as embedded derivatives. Under a funding agreement-backed note issuance program, an unaffiliated, non-consolidated statutory trust issues medium-term notes to investors, which are secured by GICs issued to the trust by the Company. In 2014, a $450 million GIC was issued in conjunction with the funding agreement-backed notes program. Policy Claims and Benefits Payable Policy claims and benefits payable include amounts representing: (i) the actual in-force amounts for reported life claims and an estimate of incurred but not reported (IBNR) claims; and (ii) an estimate, based upon prior experience, for accident and health reported and IBNR losses. The methods of making such estimates and establishing the resulting reserves are continually reviewed and updated and any adjustments are reflected in current period income. We are now taking enhanced measures to, among other things, routinely match policyholder records with the Social Security Administration Death Master File (SSDMF) to determine if insured parties, annuitants, or retained account holders have died and to locate beneficiaries when a claim is payable. If the beneficiary/account owner does not make contact with us within 120 days, we will conduct a "Thorough Search" to locate the beneficiary/account owner. A "Thorough Search" includes at least three attempts in writing to contact the beneficiary and if unsuccessful, at least one contact attempt using a phone number and/or email address in our records. Other Policyholder Funds Other policyholder funds include unearned revenue reserves (URR). URR consists of front-end loads on investment-oriented contracts, representing those policy loads that are non-level and typically higher in initial policy years than in later policy years. URR for investment-oriented contracts are generally deferred and amortized, with interest, in relation to the incidence of EGPs to be realized over the estimated lives of the contracts and are subject to the same adjustments due to changes in the assumptions underlying EGPs as DAC. Amortization of URR is recorded in policy fees. Other policyholder funds also include provisions for future dividends to participating policyholders, accrued in accordance with all applicable regulatory or contractual provisions. Participating policyholders are the policyholders who share in our earnings based on provisions within the policy contract. These dividends are declared annually by our Board of Directors and may be paid in cash, or they may be applied to reduce future premiums or purchase additional benefits, or they may be left to accumulate with interest until a later date. In addition, certain participating whole life insurance contracts are subject to unique participating policyholder dividend requirements that are imposed by state law. As such, we established an additional liability because it is required by statute to return 90 percent of the profits from the contracts to the policyholders in the form of policyholder dividends which will be paid in the future but are not yet payable. The profits used in the liability calculation consist of discrete components for operating income, realized 52 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) gains and losses and unrealized gains and losses pertaining to the policies and the assets supporting them. The impact of the unrealized gains and losses component is recorded through other comprehensive income. Participating life business represented approximately 1.0 percent of the gross insurance in force at December 31, 2014 and 6.0 percent of gross premiums in 2014. Policyholder dividends were $28 million, $28 million and $35 million in 2014, 2013 and 2012, respectively, and are included in policyholder benefits in the Statements of Income. Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts, accident and health insurance contracts/riders attached to life policies and, to a limited extent, reinsurance agreements with other direct insurers. Ultimate premiums from these contracts are estimated and recognized as revenue, and the unearned portions of the premiums recorded as liabilities. Experience adjustments vary according to the type of contract and the territory in which the policy is in force and are subject to local regulatory guidance. 11.VARIABLE LIFE AND ANNUITY CONTRACTS We report variable contracts within the separate accounts when investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder and the separate account meets additional accounting criteria to qualify for separate account treatment. The assets supporting the variable portion of variable annuity and variable universal life contracts that qualify for separate account treatment are carried at fair value and reported as separate account assets, with an equivalent summary total reported as separate account liabilities. Policy values for variable products and investment contracts are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. The current liability at any time is the sum of the current unit value of all investment units in the separate accounts, plus any liabilities for guaranteed minimum death or guaranteed minimum withdrawal benefits included in future policy benefits or policyholder contract deposits, respectively. Amounts assessed against the contract holders for mortality, administrative, and other services are included in revenue. Net investment income, net investment gains and losses, changes in fair value of assets, and policyholder account deposits and withdrawals related to separate accounts are excluded from the Statements of Income, Comprehensive Income and Cash Flows. Variable annuity contracts may include certain contractually guaranteed benefits to the contract holder. These guaranteed features include guaranteed minimum death benefits (GMDB) that are payable in the event of death, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits include guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB), and guaranteed minimum account value (GMAV). A variable annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder can only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the features are mutually exclusive. A policyholder cannot purchase more than one living benefit on one contract. The net amount at risk for each feature is calculated irrespective of the existence of other features; as a result, the net amount at risk for each feature is not additive to that of other features. 53 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:
December 31, --------------- (in millions) 2014 2013 ------------- ------- ------- Equity funds $14,844 $15,084 Bond funds 4,380 4,517 Balanced funds 16,856 11,777 Money market funds 295 320 ------- ------- Total $36,375 $31,698 ======= =======
GMDB and GMIB Depending on the contract, the GMDB feature may provide a death benefit of either (a) total deposits made to the contract less any partial withdrawals plus a minimum return or (b) the highest contract value attained, typically on any anniversary date minus any subsequent withdrawals following the contract anniversary. GMIB guarantees a minimum level of periodic income payments upon annuitization. GMDB is our most widely offered benefit; our variable annuity contracts may also include GMIB to a lesser extent. The liabilities for GMDB and GMIB, which are recorded in future policyholder benefits, represent the expected value of the guaranteed benefits in excess of the projected account value, with the excess recognized ratably over the accumulation period based on total expected assessments, through policyholder benefits. The net amount at risk for GMDB represents the amount of benefits in excess of account value if death claims were filed on all contracts on the balance sheet date. The following table presents details concerning our GMDB exposures, by benefit type:
December 31, 2014 December 31, 2013 ----------------------- ----------------------- Highest Highest Net Deposits Contract Net Deposits Contract Plus a Minimum Value Plus a Minimum Value (dollars in millions) Return Attained Return Attained --------------------- -------------- -------- -------------- -------- Account value $25,715 $14,373 $20,108 $14,428 Net amount at risk 586 496 635 620 Average attained age of contract holders 66 68 65 67 Range of guaranteed minimum return rates 0% -5% 0% -5%
The following table presents a rollforward of the GMDB and GMIB liabilities related to variable annuity contracts:
Years Ended December 31, ---------------- (in millions) 2014 2013 2012 ------------- ---- ---- ---- Balance, beginning of year $378 $401 $439 Reserve increase 68 32 30 Benefits paid (63) (55) (68) ---- ---- ---- Balance, end of year $383 $378 $401 ==== ==== ====
We regularly evaluate estimates used to determine the GMDB liability and adjust the additional liability balance, with a related charge or credit to policyholder benefits and losses incurred, if actual experience or other evidence suggests that earlier assumptions should be revised. The following assumptions and methodology were used to determine the reserve for GMDB at December 31, 2014: . Data used was up to 500 stochastically generated investment performance scenarios. . Mean investment performance assumption was 8.5 percent. . Volatility assumption was 16.0 percent. . Mortality was assumed to be 89.6 percent to 138.7 percent of the 2012 individual annuity mortality table. . Lapse rates vary by contract type and duration and range from zero percent to 37.0 percent. 54 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) . The discount rate ranged from 5.5 percent to 10.0 percent and is based on the growth rate assumptions for the underlying contracts in effect at the time of policy issuance. GMWB and GMAV Certain guaranteed benefit and equity index features, which are recorded in policyholder contract deposits, are bifurcated from the host contract and accounted for separately as embedded policy derivatives at fair value, with changes in fair value recognized in net realized capital gains (losses) in the Statements of Income. These include GMWB, GMAV as well as equity index annuities and equity index universal life contracts, which offer a guaranteed minimum interest rate plus a contingent return based on some internal or external equity index. Certain of our variable annuity contracts contain optional GMWB and, to a lesser extent, GMAV benefits, which are not currently offered. With a GMWB, the contract holder can monetize the excess of the guaranteed amount over the account value of the contract only through a series of withdrawals that do not exceed a specific percentage per year of the guaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder will receive a series of annuity payments equal to the remaining guaranteed amount, and, for lifetime GMWB products, the annuity payments continue as long as the covered person(s) are living. With a GMAV benefit, the contract holder can monetize the excess of the guarantee amount over the account value of the contract, provided the contract holder persists until the maturity date. The fair value of our GMWB and GMAV embedded policy derivatives was a net liability of $698 million and a net asset of $89 million at December 31, 2014 and 2013, respectively. We had account values subject to GMWB and GMAV that totaled $30.0 billion and $23.0 billion at December 31, 2014 and 2013, respectively. The net amount at risk for GMWB represents the present value of minimum guaranteed withdrawal payments, in accordance with contract terms, in excess of account value. The net amount at risk for GMAV represents the present value of minimum guaranteed account value in excess of the current account balance, assuming no lapses. The net amount at risk related to these guarantees was $269 million and $51 million at December 31, 2014 and 2013, respectively. We use derivative instruments and other financial instruments to mitigate a portion of the exposure that arises from GMWB and GMAV benefits. 12.DEBT Notes payable are carried at the principal amount borrowed, including unamortized discounts and fair value adjustments, when applicable, except for certain notes payable - to affiliates, for which we have elected the fair value option. The change in fair value of notes for which the fair value option has been elected is recorded in other income in the Statements of Income. See Note 3 for discussion of fair value measurements. The following table lists our total debt outstanding. The interest rates presented in the following table are the range of contractual rates in effect at December 31, 2014, including fixed and variable-rates:
Balance at December 31, Range of Maturity ----------- (in millions) Interest Rate(s) Date(s) 2014 2013 ------------- ---------------- ---------- ------ ---- Notes payable - to affiliates, net: Notes payable of consolidated VIEs 0.00% - 10.00% 2040-2061 $ 367 $ 26 Notes payable of consolidated VIEs, at fair value 3.06% - 3.26% 2041-2060 291 211 Debt of consolidated investments -- 23 ------ ---- Total notes payable - to affiliates, net 658 260 ------ ---- Notes payable - to third parties, net: Notes payable of consolidated VIEs 1.86% - 7.03% 2041-2060 470 346 FHLB borrowings 0.50% - 0.54% 2015 32 32 Debt of consolidated investments 5.35% - 7.68% 2016-2038 125 -- ------ ---- Total notes payable - to third parties, net 627 378 ------ ---- Total notes payable $1,285 $638 ====== ====
55 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents maturities of long-term debt, including fair value adjustments, when applicable:
Year Ending December 31, 2014 ----------------------------------- (in millions) Total 2015 2016 2017 2018 2019 Thereafter ------------- ------ ---- ---- ---- ---- ---- ---------- Notes payable - to affiliates, net: Notes payable of consolidated VIEs $ 367 $-- $-- $-- $-- $-- $ 367 Notes payable of consolidated VIEs, at fair value 291 -- -- -- -- -- 291 Debt of consolidated investments -- -- -- -- -- -- -- ------ --- --- --- --- --- ------ Total notes payable - to affiliates, net $ 658 $-- $-- $-- $-- $-- $ 658 ------ --- --- --- --- --- ------ Notes payable - to third parties, net: Notes payable of consolidated VIEs 470 -- -- -- -- -- 470 FHLB borrowings 32 32 -- -- -- -- -- Debt of consolidated investments 125 -- -- -- 7 -- 118 ------ --- --- --- --- --- ------ Total notes payable - to third parties, net 627 32 -- -- 7 -- 588 ------ --- --- --- --- --- ------ Total notes payable $1,285 $32 $-- $-- $ 7 $-- $1,246 ====== === === === === === ======
FHLB Borrowings Membership with the FHLB provides us with collateralized borrowing opportunities, primarily as an additional source of contingent liquidity. When a cash advance is obtained, we are required to pledge certain mortgage-backed securities, government and agency securities, other qualifying assets and our ownership interest in the FHLB to secure advances obtained from the FHLB. Upon any event of default, the FHLB's recovery would generally be limited to the amount of our liability under advances borrowed. See Note 4 for additional information. 13.COMMITMENTS AND CONTINGENCIES Commitments Leases We have various long-term, noncancelable operating leases, primarily for office space and equipment, which expire at various dates. The following table presents the future minimum lease payments under operating leases:
(in millions) ------------- 2015 $ 30 2016 26 2017 20 2018 14 2019 11 Remaining years after 2019 32 ---- Total $133 ====
Rent expense was $29 million, $32 million and $33 million in 2014, 2013 and 2012, respectively. Commitments to Fund Partnership Investments We had commitments totaling $580 million and $526 million at December 31, 2014 and 2013, respectively, to provide funding to various limited partnerships. The commitments to invest in limited partnerships and other funds are called at the discretion of each fund, as needed and subject to the provisions of such fund's governing documents, for funding new investments, follow-on investments and/or fees and other expenses of the fund. Of the total commitments at December 31, 2014, $549 million are currently expected to expire by 2015. 56 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Mortgage Loan Commitments We have $651 million and $99 million in commitments related to commercial and residential mortgage loans, respectively, at December 31, 2014. Other Commitments SAAMCo is the investment advisor of SunAmerica Money Market Fund (the Fund), a series of the SunAmerica Money Market Funds, Inc., which seeks to maintain a stable $1.00 net asset value (NAV) per share. The Fund's market value NAV was negatively impacted by a loss in 2008 on an asset-backed security (Cheyne). SAAMCo has provided certain commitments to the Board of Directors of the Fund to contribute capital to maintain a minimum market value per share up to the amount of the security loss. Management has also committed that should the realized loss carryforward from Cheyne eventually expire, SAAMCo will reimburse the Fund to the extent of the expiration. SAAMCo has recorded a contingent liability of $1 million for expected future capital contributions as of December 31, 2014. Contingencies Legal Matters Various lawsuits against us have arisen in the ordinary course of business. Except as discussed below, we believe it is unlikely that contingent liabilities arising from litigation, income taxes and other matters will have a material adverse effect on our financial position, results of operations or cash flows. Regulatory Matters All fifty states and the District of Columbia have laws requiring solvent life insurance companies, through participation in guaranty associations, to pay assessments to protect the interests of policyholders of insolvent life insurance companies. These state insurance guaranty associations generally levy assessments, up to prescribed limits, on member insurers in a particular state based on the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Such assessments are used to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. We accrue liabilities for guaranty fund assessments when an assessment is probable and can be reasonably estimated. We estimate the liability using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations. While we cannot predict the amount and timing of any future guaranty fund assessments, we have established reserves we believe are adequate for assessments relating to insurance companies that are currently subject to insolvency proceedings. We had accrued $12 million for these guaranty fund assessments at both December 31, 2014 and 2013, which was reported within other liabilities in the Balance Sheets. Policyholder benefit expense in 2014 included an increase of approximately $104 million to the estimated reserves for incurred but not reported (IBNR) death claims. The $104 million reserve increase was in addition to amounts previously provided for IBNR claims in 2011 and 2012, which totaled $237 million. We are continuing our efforts to identify deceased insureds and their beneficiaries who have not presented a valid claim, pursuant to the 2012 resolution of a multi-state audit and market conduct examination. The 2014 increase in the IBNR reserve was related primarily to a legacy block of in-force and lapsed small face amount policies, for which the personal data elements to effect a match against the Social Security Death Master File are unavailable or incomplete, such as full legal name, date of birth or Social Security number. In the process of reviewing these policies as required under the terms of the regulatory agreement, we have refined estimates of the ultimate cost of these claims. We believe the reserves for such claims are adequate; however, there can be no assurance that the ultimate cost will not vary from the current estimate. In addition, the state of West Virginia has two lawsuits pending against us relating to alleged violations of the West Virginia Uniform Unclaimed Property Act, in connection with policies issued by us and by American General Life and 57 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accident Insurance Company (AGLA, which merged into AGL on December 31, 2012). The State of West Virginia has also filed similar lawsuits against other insurers. Various federal, state and other regulatory agencies may from time to time review, examine or inquire into our operations, practices and procedures, such as through financial examinations, market conduct exams or regulatory inquiries. Based on the current status of pending regulatory examinations and inquiries involving us, we believe it is not likely that these regulatory examinations or inquiries will have a material adverse effect on our consolidated financial position, results of operations or cash flows. 14.EQUITY Accumulated Other Comprehensive Income The following table presents the components of accumulated other comprehensive income:
December 31, ---------------- (in millions) 2014 2013 ------------- ------- ------- Fixed maturity and equity securities, available for sale: Gross unrealized gains $ 9,096 $ 6,491 Gross unrealized losses (908) (2,542) Net unrealized gains on other invested assests 832 897 Adjustments to DAC, VOBA and deferred sales inducements (1,183) (940) Shadow loss recognition (872) (10) Foreign currency translation adjustments (13) 3 Deferred income tax (1,026) (1,168) ------- ------- Accumulated other comprehensive income $ 5,926 $ 2,731 ======= =======
The following table presents the other comprehensive income (loss) reclassification adjustments:
Unrealized Appreciation of Fixed Maturity Investments on Which Other-Than- Adjustments Temporary Unrealized to DAC, Credit Appreciation VOBA, and Foreign Impairments (Depreciation) Deferred Insurance Currency were of All Other Sales Loss Translation (in millions) Recognized Investments Inducements Recognition Adjustments Total ------------- ------------ -------------- ----------- ----------- ----------- ------- Year ended December 31, 2012 Unrealized change arising during period $1,682 $ 1,787 $(817) $(1,143) $ (4) $ 1,505 Less: Reclassification adjustments included in net income 230 (1,356) (101) (807) -- (2,034) ------ ------- ----- ------- ---- ------- Total other comprehensive income (loss), before income tax expense (benefit) 1,452 3,143 (716) (336) (4) 3,539 Less: Income tax expense (benefit) 545 1,015 (257) (119) (2) 1,182 ------ ------- ----- ------- ---- ------- Total other comprehensive income (loss), net of income tax expense (benefit) $ 907 $ 2,128 $(459) $ (217) $ (2) $ 2,357 ====== ======= ===== ======= ==== ======= Year ended December 31, 2013 Unrealized change arising during period $ 461 $(6,597) $ 885 $ 1,152 $ (9) $(4,108) Less: Reclassification adjustments included in net income 92 1,726 50 (886) -- 982 ------ ------- ----- ------- ---- ------- Total other comprehensive income (loss), before income tax expense (benefit) 369 (8,323) 835 2,038 (9) (5,090) Less: Income tax expense (benefit) 127 (3,058) 293 713 (3) (1,928) ------ ------- ----- ------- ---- ------- Total other comprehensive income (loss), net of income tax expense (benefit) $ 242 $(5,265) $ 542 $ 1,325 $ (6) $(3,162) ====== ======= ===== ======= ==== ======= Year ended December 31, 2014 Unrealized change arising during period $ 130 $ 4,261 $(183) $ (963) $(17) $ 3,228 Less: Reclassification adjustments included in net income 52 163 60 (101) -- 174 ------ ------- ----- ------- ---- ------- Total other comprehensive income (loss), before income tax expense (benefit) 78 4,098 (243) (862) (17) 3,054 Less: Income tax expense (benefit) 30 232 (91) (306) (6) (141) ------ ------- ----- ------- ---- ------- Total other comprehensive income (loss), net of income tax expense (benefit) $ 48 $ 3,866 $(152) $ (556) $(11) $ 3,195 ====== ======= ===== ======= ==== =======
58 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the effect of the reclassification of significant items out of accumulated other comprehensive income on the respective line items in the Statements of Income:
Amount Reclassified from Accumulated Other Comprehensive Income --------------- December 31, --------------- Affected Line Item in the (in millions) 2014 2013 Statements of Income ------------- ----- ------ ------------------------------------------------- Unrealized appreciation of fixed maturity investments on which other-than-temporary credit impairments were recognized $ 52 $ 92 Net realized capital gains (losses) Unrealized appreciation of all other investments 163 1,726 Net realized capital gains (losses) Adjustments to DAC, VOBA and deferred sales inducements 60 50 Amortization of deferred policy acquisition costs Shadow loss recognition (101) (886) Policyholder benefits ----- ------ Total reclassifications for the period $ 174 $ 982 ===== ======
Dividends Dividends that we may pay to the Parent in any year without prior approval of the Texas Department of Insurance (TDI) are limited by statute. The maximum amount of dividends which can be paid over a rolling twelve-month period to shareholders of insurance companies domiciled in the state of Texas without obtaining the prior approval of the TDI is limited to the greater of either 10 percent of the preceding year's statutory surplus or the preceding year's statutory net gain from operations. Additionally, unless prior approval of the TDI is obtained, dividends can only be paid out of our unassigned surplus. Subject to the TDI requirements, the maximum dividend payout that may be made in 2015 without prior approval of the TDI is $1.9 billion. Dividend payments in excess of positive retained earnings were classified and reported as a return of capital. Statutory Financial Data We are required to file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The principal differences between statutory financial statements and financial statements prepared in accordance with U.S. GAAP are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, investment impairments are determined in accordance with statutory accounting practices, assets and liabilities are presented net of reinsurance, policyholder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. In addition, state insurance regulatory authorities have the right to permit specific practices that deviate from prescribed statutory practices. The following table presents our statutory net income and capital and surplus:
(in millions) 2014 2013 2012 ------------- ------ ------- ------ Years Ended December 31, Statutory net income $1,862 $ 3,431 $3,641 At December 31, Statutory capital and surplus 9,167 12,656 Aggregate minimum required statutory capital and surplus 2,184 2,624
15.BENEFIT PLANS Effective January 1, 2002, our employees participate in various benefit plans sponsored by AIG, including a noncontributory qualified defined benefit retirement plan, various stock option and purchase plans, a 401(k) plan and a post retirement benefit program for medical care and life insurance (the U.S. Plans). AIG's U.S. Plans do not separately identify projected benefit obligations and plan assets attributable to employees of participating affiliates. We are jointly and severally responsible with AIG and other participating companies for funding obligations for the U.S. Plans, Employee Retirement Income Security Act (ERISA) qualified defined contribution plans and ERISA plans issued 59 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 us. Accordingly, we are contingently liable for such obligations. We believe that the likelihood of payment under any of these plans is remote. Accordingly, we have not established any liability for such contingencies. 16.INCOME TAXES The following table presents the income tax expense (benefit) attributable to pre-tax income (loss):
Years Ended December 31, (in millions) 2014 2013 2012 ------------- ------ ----- ----- Current $ 401 $ 95 $ (21) Deferred 727 (543) (601) ------ ----- ----- Total income tax expense (benefit) $1,128 $(448) $(622) ====== ===== =====
The U.S. statutory income tax rate is 35 percent for 2014, 2013 and 2012. Actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal income tax rate, due to the following:
Years Ended December 31, (in millions) 2014 2013 2012 ------------- ------ ------- ------- U.S federal income tax expense at statutory rate $1,055 $ 1,573 $ 845 Adjustments: Valuation allowance 68 (1,999) (1,457) State income tax (1) 8 (2) Capital loss carryover write-off 32 -- -- Dividends received deduction (25) (23) (24) Other credits, taxes and settlements (1) (7) 16 ------ ------- ------- Total income tax expense (benefit) $1,128 $ (448) $ (622) ====== ======= =======
Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment. State income taxes are included in income tax expense. The following table presents the components of the net deferred tax assets (liabilities):
Years Ended December 31, (in millions) 2014 2013 ------------- ------- ------- Deferred tax assets: Excess capital losses and other tax carryovers $ 258 $ 568 Basis differential of investments 1,865 2,043 Policy reserves 1,855 2,308 ------- ------- Total deferred tax assets 3,978 4,919 ------- ------- Deferred tax liabilities: Deferred policy acquisition costs (1,699) (1,973) Net unrealized gains on debt and equity securities available for sale (2,433) (1,365) State deferred tax liabilities (30) (21) Capitalized EDP (44) (33) Other (27) (26) ------- ------- Total deferred tax liabilities (4,233) (3,418) ------- ------- Net deferred tax (liability) asset before valuation allowance (255) 1,501 Valuation allowance -- (1,173) ------- ------- Net deferred tax (liability) asset $ (255) $ 328 ======= =======
60 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents our tax losses and credit carryforwards on a tax return basis.
December 31, 2014 Tax Expiration (in millions) Gross Effected Periods ------------- ----- -------- ------------ Net operating loss carryforwards $65 $ 23 2028 to 2032 Foreign tax credit carryforwards -- 43 2015 to 2023 Business credit carryforwards -- 192 2025 to 2033 ---- Total carryforwards $258 ====
We are included in the consolidated federal income tax return of our ultimate parent, AIG Parent. Under the tax sharing agreement with AIG Parent, taxes are recognized and computed on a separate company basis. To the extent that benefits for net operating losses, foreign tax credits or net capital losses are utilized on a consolidated basis, we will recognize tax benefits based upon the amount of the deduction and credits utilized in the consolidated federal income tax return. We calculate current and deferred state income taxes using the actual apportionment and statutory rates for states in which we are required to file on a separate basis. In states that have a unitary regime, AIG Parent accrues and pays the taxes owed and does not allocate the provision or cash settle the expense with the members of the unitary group. Unlike for federal income tax purposes, AIG does not have state tax sharing agreements. AIG has determined that because the unitary tax expense will never be borne by the subsidiaries, the state tax unitary liability is not included in this separate company expense. Assessment of Deferred Tax Asset Valuation Allowance The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. Our framework for assessing the recoverability of deferred tax assets requires us to consider all available evidence, including: . the nature, frequency and severity of cumulative financial reporting losses in recent years; . the predictability of future operating profitability of the character necessary to realize the net deferred tax asset; . the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and . prudent and feasible tax planning strategies that would be implemented, if necessary, to protect against the loss of deferred tax assets. As a result of sales in the ordinary course of business to manage the investment portfolio and the application of prudent and feasible tax planning strategies in 2014, we determined that an additional portion of the capital loss carryforwards will more-likely-than-not be realized prior to their expiration. Accordingly, in 2014, we released $1.2 billion of our deferred tax asset valuation associated with the capital loss carryforwards, of which $68 million was recognized as a reduction to income and the remainder was allocated to other comprehensive income. 61 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accounting For Uncertainty in Income Taxes The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:
Years Ended December 31, ------------ (in millions) 2014 2013 ------------- ---- ---- Gross unrecognized tax benefits at beginning of year $ 92 $85 Increases in tax position for prior years -- 7 Decreases in tax position for prior years (55) -- ---- --- Gross unrecognized tax benefits at end of year $ 37 $92 ==== ===
We regularly evaluate proposed adjustments by taxing authorities. At December 31, 2014, such proposed adjustments would not have resulted in a material change to our financial condition. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next twelve months, based on the information currently available, we do not expect any change to be material to our financial condition. At December 31, 2014 and 2013, our unrecognized tax benefits, excluding interest and penalties, were $27 million and $36 million, respectively. At December 31, 2014 and 2013, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $27 million for both years. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2014 and 2013, we had accrued $7 million and $16 million, respectively, for the payment of interest (net of the federal benefit) and penalties. In 2014, we recognized income of $10 million, while in 2013 and 2012, we recognized expense of $6 million and $11 million, respectively, of interest (net of the federal benefit) and penalties. We are currently under IRS examination for the taxable year 2006. Although the final outcome of possible issues raised in any future examination is uncertain, we believe that the ultimate liability, including interest, will not materially exceed amounts recorded in the financial statements. Taxable years 2001 to 2013 remain subject to examination by major tax jurisdictions. 17.RELATED PARTY TRANSACTIONS Events Related to AIG AIG Parent is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve) as a systemically important financial institution (SIFI) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. AIG Parent was subject to regulation by the Federal Reserve as a savings and loan holding company as of March 31, 2014. The Federal Reserve approved AIG Parent's application to deregister as a savings and loan holding company effective April 4, 2014. AIG Parent will continue to be supervised by the Federal Reserve due to its designation by the Financial Stability Oversight Council as a non-bank SIFI. On July 1, 2014, as a non-bank SIFI, AIG Parent submitted to its regulators its initial annual plan for rapid and orderly resolution in the event of material financial distress or failure, which must meet several specific standards, including requiring a detailed resolution strategy and analyses of material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements. The public section of the plan can be found on the websites of the Federal Reserve and the Federal Deposit Insurance Corporation. The Federal Reserve has yet to complete the regulatory framework that will be applicable to AIG Parent as a non-bank SIFI. On July 18, 2013, the Financial Stability Board (consisting of representatives of national financial authorities of the G20 nations), in consultation with the International Association of Insurance Supervisors and national authorities, identified an initial list of Global Systemically Important Insurers, which included AIG Parent. 62 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Additional information on AIG Parent is publicly available in AIG Parent's regulatory filings with the SEC, which can be found at www.sec.gov. Information regarding AIG Parent as described herein is qualified by regulatory filings AIG Parent files from time to time with the SEC. Operating Agreements Pursuant to a cost allocation agreement, we purchase administrative, investment management, accounting, marketing and data processing services from AIG Parent or its subsidiaries. The allocation of costs for investment management services is based on the level of assets under management. The allocation of costs for other services is based on estimated level of usage, transactions or time incurred in providing the respective services. We incurred approximately $305 million, $297 million and $198 million for such services in 2014, 2013 and 2012, respectively. Accounts payable for such services were $240 million and $190 million at December 31, 2014 and 2013, respectively. We rent facilities and provide services on an allocated cost basis to various affiliates. We also provide shared services, including technology, to a number of AIG's life insurance subsidiaries. Effective January 1, 2013, we became the service provider for additional affiliated companies. We earned approximately $813 million, $805 million and $282 million for such services and rent in 2014, 2013 and 2012, respectively. Accounts receivable for rent and services were $57 million and $91 million at December 31, 2014 and 2013, respectively. We pay commissions and fees, including support fees to defray marketing and training costs, to affiliated broker-dealers for distributing our annuity products and mutual funds. Amounts incurred related to the broker-dealer services totaled $55 million, $50 million and $39 million in 2014, 2013 and 2012, respectively. These broker-dealers distribute a significant portion of our variable annuity products, representing approximately 6.0 percent, 7.0 percent and 8.0 percent of premiums received in 2014, 2013 and 2012, respectively. These broker-dealers also distribute a significant portion of our mutual funds, representing approximately 15.0 percent, 16.0 percent and 16.0 percent of sales in 2014, 2013 and 2012, respectively. On February 1, 2004, SAAMCo entered into an administrative services agreement with our affiliate, The United States Life Insurance Company in the City of New York (USL) (as successor by merger of First SunAmerica Life Insurance Company (FSA) with and into USL) whereby SAAMCo will pay to USL a fee based on a percentage of all assets invested through FSA's variable annuity products in exchange for services performed. SAAMCo is the investment advisor for certain trusts that serve as investment options for USL's variable annuity products. Amounts we incurred under this agreement totaled $6 million, $4 million and $3 million in 2014, 2013 and 2012, respectively, and are included in other expenses in our Statements of Income. On October 1, 2001, SAAMCo entered into two administrative services agreements with business trusts established by our affiliate, The Variable Annuity Life Insurance Company (VALIC), whereby the trusts pay SAAMCo a fee based on a percentage of average daily net assets invested through VALIC's annuity products in exchange for services performed. Amounts earned by SAAMCo under this agreement were $18 million, $17 million and $15 million in 2014, 2013 and 2012, respectively, and are net of certain administrative costs incurred by VALIC of $5 million in each of 2014 and 2013 and $4 million in 2012. The net amounts earned by SAAMCo are included in other revenue in our Statements of Income. Notes of Affiliates In 2011, we invested $300 million in a 5.57 percent Senior Promissory Note due September 30, 2014, issued by AIG Life Holdings, Inc. (AIGLH) (formerly known as SunAmerica Financial Group, Inc.). We received principal payments of $100 million in each of 2014, 2013 and 2012. As of September 30, 2014, AIGLH had paid all outstanding principal and interest on this loan, thereby extinguishing this note. We recognized interest income of $4 million, $10 million and $16 million on this note during 2014, 2013 and 2012, respectively. 63 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Selkirk Transactions During 2013 and 2014, we transferred portfolios of commercial mortgage loans to newly formed special purpose entities, Selkirk No. 1 Investments (SPV1) and Selkirk No. 3A Investments (SPV1A), respectively. The transactions involved securitizations of the transferred loans and we retained significant beneficial interests in the securitized loans. As consideration for the transferred loans, we received beneficial interests in loan-backed and structured securities (Notes) issued by other newly formed special purpose entities, equity interests in SPV1 and SPV1A, and cash proceeds of $230 million and $144 million from notes issued to third party investors and an affiliate by other special purpose entities, Selkirk No. 1 Limited and Selkirk No. 3 Limited, respectively. The consideration received had an aggregate fair value of $973 million for the SPV1 transaction and $624 million for the SPV1A transaction. AIG Investments services the securitized commercial mortgage loans on behalf of SPV1 and SPV1A. We consolidate certain of the special purpose entities in the securitization structures, some of which are VIEs. See Note 9 for additional disclosures related to VIEs. As a result, certain of the Notes and our equity interests in SPV1 and SPV1A are eliminated in consolidation, while the securitized commercial mortgage loans remain on our Balance Sheets. On a consolidated basis, the net change in our Balance Sheets as a result of these transactions consisted of additional assets in the form of cash consideration received, which was subsequently invested, and the liabilities for notes payable to third party investors and to an affiliate, VALIC. Lighthouse VI During 2013, we, along with VALIC (collectively, the Insurers), executed three transactions in which a portfolio of securities (Transferred Portfolios) was, in each transaction, transferred into a newly established Common Trust Fund (CTF) in exchange for proportionate interests in all assets within each CTF as evidenced by specific securities controlled by and included within our representative security account. In each transaction, a portion of our securities (Exchange Assets) were transferred into the representative security account of VALIC in exchange for other VALIC securities. Only the transfers of the Exchange Assets between the Insurers qualify for derecognition treatment under ASC 860, "Transfers and Servicing," and thus were the only assets derecognized in the transfer of the Transferred Portfolios into the CTFs. The securities we received for the transfers of the Exchange Assets were initially recognized at fair value and will subsequently be carried at accreted value, based on cash flow projections. We transferred securities with an aggregate fair value of $7.7 billion into the CTFs for all three transactions and recognized gains totaling $250 million on the transfer of the Exchange Assets. AIG Investments manages the portfolio of assets included in the CTFs. Ambrose Transactions During 2013 and 2014, we acquired certain financial assets from AIG Parent and subsequently entered into four related securitization transactions with certain affiliates and third parties to enhance our statutory risk-based capital ratio, liquidity and net investment income. The financial assets acquired from AIG Parent in each transaction consisted of a structured security backed by a portfolio of structured securities (Repack Note) and were exchanged for an intraday Demand Note, which was subsequently extinguished. In each securitization transaction, we transferred a portfolio of high grade corporate securities and the Repack Note to one of the newly formed special purpose entities; Ambrose 2, Ambrose 3, Ambrose 5 and Ambrose 6 (the Ambrose entities). As consideration for the transferred securities, we received beneficial interests in three tranches of structured securities (Class A1, B, C and X) issued by each Ambrose entity. The Class A1, B and C Notes were designed to closely replicate the interest and principal amortization payments of the transferred securities. The Class X notes were subsequently transferred to AIG in exchange for cancellation of the Demand Notes described above, which resulted in capital contributions to us. Each Ambrose entity also issued a tranche of Class A2 notes to third party investors. Ambrose 6 also issued Class A1, B and C notes to an affiliate, VALIC, as consideration for similar transferred financial assets. Capital commitments from a non-U.S. subsidiary of AIG Parent, which are guaranteed by AIG Parent, were received by Ambrose 2, Ambrose 3, Ambrose 5 and Ambrose 6 in the amount of $300 million, $300 million, $400 million and $200 million, respectively, pursuant to which the promissor will contribute funds to the respective Ambrose entity upon demand. AIG Parent indirectly bears the first loss position in each transaction through its ownership of the Class X 64 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) notes and its guarantee of the capital commitments. AIG Investments manages the portfolio of assets on behalf of each Ambrose entity. Each of the Ambrose entities is a VIE and we consolidate all of the Ambrose entities. See Note 9 for additional disclosures related to VIEs. The Class A1, Class B and Class C structured securities we received are eliminated in consolidation. The notes issued by the Ambrose entities that are held by AIG Parent, third parties and an affiliate are classified as notes payable. The Ambrose entities each elected the fair value option for their Class X notes payable. On a consolidated basis, the Ambrose transactions resulted in an increase in our assets (Repack Note and cash), liabilities (notes payable) and AGL shareholder's equity (capital contribution from AIG Parent). The following table presents the details of the Ambrose transactions:
(in millions) Ambrose 2 Ambrose 3 Ambrose 5 Ambrose 6 ------------- ----------------- --------------- -------------- ----------------- Date of transaction February 6, 2013 April 10, 2013 July 25, 2013 October 10, 2014 Combined carrying value of transferred securities and Repack Note $ 1,985 $ 2,117 $ 2,618 $ 292 Fair value of Class A1 and Class B notes received 1,933 2,069 2,413 328 Fair value of Class X notes received 67 58 83 40
American Home and National Union Guarantees American Home Assurance Company (American Home) and National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), indirect wholly owned subsidiaries of AIG Parent, have terminated the General Guarantee Agreements (the Guarantees) with respect to our prospectively issued policies and contracts. The Guarantees terminated on December 29, 2006 (Point of Termination). Pursuant to their terms, the Guarantees do not apply to any group or individual policy, contract or certificate issued after the Point of Termination. The Guarantees will continue to cover policies, contracts and certificates with issue dates earlier than the Point of Termination until all insurance obligations under such policies, contracts and certificates are satisfied in full. American Home's and National Union's audited statutory financial statements are filed with the SEC in our registration statements for the variable products that we issued prior to the Point of Termination. Capital Maintenance Agreement In March 2011, we entered into a Capital Maintenance Agreement (CMA) with AIG Parent. Among other things, the CMA provided that AIG Parent would maintain our statutory-basis total adjusted capital at or above a specified minimum percentage of our projected Company Action Level Risk-Based Capital. AIG Parent did not make any capital contributions to us under the CMA in the three years ended December 31, 2014. As a result of managing capital through internal AIG Board-approved policies and guidelines, we and AIG agreed to terminate the CMA effective October 31, 2014. Financing Agreements On June 1, 2009, we amended and restated a short-term financing arrangement with SAFG Retirement Services, Inc. (SAFGRS), whereby we had the right to borrow up to $500 million from SAFGRS. There was no outstanding balance under this agreement at December 31, 2014 or 2013. This agreement was terminated as of December 31, 2014. On June 1, 2009, we amended and restated a short-term financing arrangement with SAFGRS, whereby SAFGRS had the right to borrow up to $500 million from us. There was no outstanding balance under this arrangement at December 31, 2014 or 2013. This agreement was terminated as of December 31, 2014. On September 15, 2006, we amended and restated a short-term financial arrangement with SA Affordable Housing, LLC (SAAH LLC), whereby SAAH LLC had the right to borrow up to $200 million from us. There was no outstanding 65 AMERICAN GENERAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) balance under this agreement at December 31, 2014 or 2013. This agreement was terminated as of December 31, 2014. GIC Assumption In 2011, we entered into three assignment and assumption agreements with AIGMFC, certain bank trustees, and three unaffiliated bond issuers (the Issuers), pursuant to which we assumed all of AIGMFC's obligations under certain GIC agreements previously entered into between AIGMFC and the bank trustees which related to certain bond obligations of the Issuers. As part of this assignment and assumption, we received from AIGMFC amounts that represented the then-outstanding principal amount of investments under the referenced GIC agreements, plus related accrued but unpaid interest. We also entered into a swap with AIG Markets, Inc. (AIG Markets) in connection with each of these transactions, which, among other things, provides a fee to us for assuming the obligations under the GIC agreements and economically hedges our interest rate risk associated with the assumed GICs. Obligations of AIG Markets under the swaps are guaranteed by AIG Parent. Other We engage in structured settlement transactions, certain of which involve affiliated property and casualty insurers that are subsidiaries of AIG Parent. In a structured settlement arrangement, a property and casualty insurance policy claimant has agreed to settle a casualty insurance claim in exchange for fixed payments over either a fixed determinable period of time or a life-contingent period. In such claim settlement arrangements, a casualty insurance claim payment provides the funding for the purchase of a single premium immediate annuity (SPIA) issued by us for the ultimate benefit of the claimant. The portion of our liabilities related to structured settlements involving life contingencies is reported in future policy benefits, while the portion not involving life contingencies is reported in policyholder contract deposits. In certain structured settlement arrangements, the property and casualty insurance company remains contingently liable for the payments to the claimant. We had liabilities of $1.4 billion at both December 31, 2014 and 2013 related to SPIAs issued by us in conjunction with structured settlement transactions involving affiliated property and casualty insurers where those members remained contingently liable for the payments to the claimant. In addition, we had liabilities for the structured settlement transactions where the affiliated property and casualty insurers were no longer contingently liable for the payments to the claimant. During 2014, we entered into a Share Purchase Agreement with AIG Parent by which we sold all of our interests in The People's Insurance Company (Group) of China Limited (PICC Group) to AIG Parent at fair market value, based on the closing price of the PICC Group shares as quoted on the Hong Kong Stock Exchange on August 13, 2014. The transaction closed on August 15, 2014 and we received $484 million as consideration for the sale. 18. SUBSEQUENT EVENTS We have evaluated subsequent events through April 27, 2015. 66 AMERICAN HOME ASSURANCE COMPANY AN AIG COMPANY NAIC Code: 19380 Statutory Basis Financial Statements As of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 [LOGO] AIG AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements As of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 TABLE OF CONTENTS Independent Auditor's Report 1 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 Flows 6 Note 1 Organization and Summary of Significant Statutory Basis Accounting Policies 7 Note 2 Accounting Adjustments to Statutory Basis Financial Statements 19 Note 3 Investments 22 Note 4 Fair Value of Financial Instruments 31 Note 5 Reserves for Losses and Loss Adjustment Expenses 33 Note 6 Related Party Transactions 35 Note 7 Reinsurance 45 Note 8 Income Taxes 47 Note 9 Capital and Surplus, Dividend Restrictions and Quasi-Reorganizations 53 Note 10 Contingencies 54 Note 11 Other Significant Matters 58 Note 12 Subsequent Events 60
INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of American Home Assurance Company We have audited the accompanying statutory basis financial statements of American Home Assurance Company (the "Company"), which comprise the statements of admitted assets, liabilities and capital and surplus as of December 31, 2014 and 2013, and the related statements of operations and changes in capital and surplus and of cash flows for each of the three years in the period ended December 31, 2014. MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting practices prescribed or permitted by the New York State Department of Financial Services. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR'S RESPONSIBILITY Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BASIS FOR ADVERSE OPINION ON U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES As described in Note 1B to the financial statements, the financial statements are prepared by the Company on the basis of the accounting practices prescribed or permitted by the New York State Department of Financial Services, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the statutory basis of accounting described in Note 1B and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. ADVERSE OPINION ON U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES In our opinion, because of the significance of the matter discussed in the "Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles" paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2014 and 2013, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 2014. OPINION ON STATUTORY BASIS OF ACCOUNTING In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and capital and surplus of the Company as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in accordance with the accounting practices prescribed or permitted by the New York State Department of Financial Services, as described in Note 1B. EMPHASIS OF MATTERS As discussed in Notes 1 and 6 to the accompanying financial statements, effective January 1, 2014, the National Union Admitted Lines Pooling Agreement and the AIG Property Casualty Surplus Lines Pooling Agreement were amended and replaced with a combined pooling agreement among the existing companies and AIU Insurance Company (the "Combined Pooling Agreement"). The Company's financial information as of and for the year ended December 31, 2014 has therefore been presented in accordance with the terms of the Combined Pooling Agreement. The comparative financial statements as of December 31, 2013 and for each of the years ended December 31, 2013 and 2012 are reflective of the National Union Admitted Lines Pooling Agreement participation percentage that was in place during those years. Our opinion is not modified with respect to this matter. As discussed in Notes 1, 5 and 6 to the accompanying financial statements, the Company has entered into significant transactions with certain affiliated entities. Our opinion is not modified with respect to this matter. /s/ PricewaterhouseCoopers LLP April 28, 2015 New York, New York AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- STATEMENTS OF ADMITTED ASSETS
------------------------------------------------------------------------------------ DECEMBER 31, DECEMBER 31, 2014 2013 ------------------------------------------------------------------------------------ Cash and invested assets: Bonds, primarily at amortized cost (fair value: 2014 - $19,061,711; 2013 - $17,496,763) $ 18,100,940 $ 16,780,357 Common stocks, at carrying value adjusted for nonadmitted assets (cost: 2014 - $86,761; 2013 - $126,081) 107,011 122,839 Preferred stocks, primarily at fair value (cost: 2014 - $18,412; 2013 - $0) 18,412 - Other invested assets (cost: 2014 - $2,482,642; 2013 - $1,642,346) 2,861,427 1,993,925 Mortgage loans 1,049,708 536,056 Derivative instruments 1,342 13,978 Short-term investments, at amortized cost (approximates fair value) 294,574 308,868 Cash and cash equivalents 432,496 185,319 Receivable for securities sold and other 2,821 9,116 ------------------------------------------------------------------------------------ TOTAL CASH AND INVESTED ASSETS $ 22,868,731 $ 19,950,458 ------------------------------------------------------------------------------------ Investment income due and accrued $ 161,436 $ 168,495 Agents' balances or uncollected premiums: Premiums in course of collection 710,959 770,420 Premiums and installments booked but deferred and not yet due 284,714 301,572 Accrued retrospective premiums 694,174 938,213 Amounts billed and receivable from high deductible policies 89,026 90,030 Reinsurance recoverable on loss payments 404,789 443,153 Funds held by or deposited with reinsurers 190,688 184,412 Net deferred tax assets 794,369 639,865 Equities in underwriting pools and associations 117,991 138,321 Receivables from parent, subsidiaries and affiliates 737 17,586 Other assets 140,861 149,983 Allowance provision (81,531) (121,029) ------------------------------------------------------------------------------------ TOTAL ADMITTED ASSETS $ 26,376,944 $ 23,671,479 ------------------------------------------------------------------------------------
SEE NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 3 STATEMENTS OF ADMITTED ASSETS - As of December 31, 2014 and 2013. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) -------------------------------------------------------------------------------- STATEMENTS OF LIABILITIES, CAPITAL AND SURPLUS
-------------------------------------------------------------------------------------- DECEMBER 31, DECEMBER 31, 2014 2013 -------------------------------------------------------------------------------------- LIABILITIES Reserves for losses and loss adjustment expenses $ 13,429,560 $ 12,445,415 Paid loss clearing contra liability (loss reserve offset) (172,490) (164,131) Unearned premium reserves 2,969,133 3,062,890 Commissions, premium taxes, and other expenses payable 247,430 330,831 Reinsurance payable on paid loss and loss adjustment expenses 163,373 316,486 Current federal taxes payable to parent 4,811 2,818 Funds held by company under reinsurance treaties 1,050,864 1,080,691 Provision for reinsurance 60,702 57,751 Ceded reinsurance premiums payable, net of ceding commissions 366,538 443,051 Collateral deposit liability 339,680 414,290 Payable for securities purchased 50,011 13,163 Payable to parent, subsidiaries and affiliates 250,332 16,642 Derivative instruments - 20,781 Other liabilities 369,096 539,114 -------------------------------------------------------------------------------------- TOTAL LIABILITIES $ 19,129,040 $ 18,579,792 -------------------------------------------------------------------------------------- CAPITAL AND SURPLUS Common capital stock, par value - 2014: $17, 2013: $11.5065; 1,758,158 shares authorized, 1,695,054 shares issued and outstanding $ 28,816 $ 19,504 Capital in excess of par value 5,363,191 4,048,510 Unassigned surplus 1,853,236 1,022,075 Special surplus funds from retroactive reinsurance 1,884 1,598 Special surplus funds from health insurance providers 777 - -------------------------------------------------------------------------------------- TOTAL CAPITAL AND SURPLUS $ 7,247,904 $ 5,091,687 -------------------------------------------------------------------------------------- TOTAL LIABILITIES, CAPITAL AND SURPLUS $ 26,376,944 $ 23,671,479 --------------------------------------------------------------------------------------
SEE NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 4 STATEMENTS OF LIABILITIES, CAPITAL and SURPLUS - As of December 31, 2014 and 2013. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
-------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 2014 2013 2012 -------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Underwriting Income: PREMIUMS EARNED $ 5,592,905 $ 5,426,625 $ 5,357,689 -------------------------------------------------------------------------------------------------- Underwriting deductions: Losses incurred 3,415,939 3,156,380 3,633,608 Loss adjustment expenses incurred 732,787 644,056 625,094 Other underwriting expenses incurred 1,673,831 2,156,743 1,765,943 -------------------------------------------------------------------------------------------------- TOTAL UNDERWRITING DEDUCTIONS 5,822,557 5,957,179 6,024,645 -------------------------------------------------------------------------------------------------- Loss portfolio transfer: Premiums from affiliated loss portfolio transfer - - (40,241) Losses recognized from affiliated loss portfolio transfer - - 40,241 -------------------------------------------------------------------------------------------------- NET UNDERWRITING LOSS (229,652) (530,554) (666,956) -------------------------------------------------------------------------------------------------- Investment gain: Net investment income earned 1,187,728 896,309 911,306 Net realized capital (losses) gains (net of capital gains tax expense (benefit): 2014 - $53,044; 2013 - $37,062; 2012 - $48,295) (160,836) 344,178 56,339 -------------------------------------------------------------------------------------------------- NET INVESTMENT GAIN 1,026,892 1,240,487 967,645 -------------------------------------------------------------------------------------------------- Net gain (loss) from agents' or premium balances charged-off (1,256) (24,262) (57,047) Other (expense) income (10,795) (8,825) 10,700 -------------------------------------------------------------------------------------------------- INCOME AFTER CAPITAL GAINS TAXES AND BEFORE FEDERAL INCOME TAXES 785,189 676,846 254,342 Federal and foreign income tax (benefit) expense (23,041) (26,144) (31,163) -------------------------------------------------------------------------------------------------- NET INCOME $ 808,230 $ 702,990 $ 285,505 -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- Changes in Capital and Surplus Capital and surplus, as of December 31, previous year $ 5,091,687 $ 6,004,343 $ 5,667,303 Adjustment to beginning surplus (Note 2) (6,366) (94,261) (29,278) -------------------------------------------------------------------------------------------------- Capital and surplus, as of January 1, 5,085,321 5,910,082 5,638,025 Other changes in capital and surplus: Net income 808,230 702,990 285,505 Change in net unrealized capital losses (net of capital gains tax expense (benefit) : 2014 - $8,243; 2013 - $(30,923); 2012 - $21,950) (46,716) (172,094) (40,778) Change in net deferred income tax (390,531) (27,917) (22,439) Change in nonadmitted assets 731,170 (210,064) 208,727 Change in provision for reinsurance (2,951) (8,640) 29,414 Capital contribution (distribution) 1,314,681 - (645,750) Quasi-reorganization - - 1,000,000 Change in par value of common stock 9,312 - - Dividends to stockholder (383,554) (1,214,959) (522,716) Foreign exchange translation 122,577 113,151 74,961 Other surplus adjustments 365 (862) (606) -------------------------------------------------------------------------------------------------- TOTAL CHANGES IN CAPITAL AND SURPLUS 2,162,583 (818,395) 366,318 -------------------------------------------------------------------------------------------------- Capital and Surplus, as of December 31, $ 7,247,904 $ 5,091,687 $ 6,004,343 --------------------------------------------------------------------------------------------------
SEE NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 5 STATEMENTS OF OPERATIONS and CHANGES IN CAPITAL AND SURPLUS - for the years ending December 31, 2014, 2013 and 2012 AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------ 2014 2013 2012 ------------------------------------------------------------------------------------------------ CASH FROM OPERATIONS Premiums collected, net of reinsurance $ 5,588,211 $ 5,894,743 $ 5,313,202 Net investment income 1,007,711 782,466 809,251 Miscellaneous expense (93,572) (75,119) (6,214) ------------------------------------------------------------------------------------------------ SUB-TOTAL $ 6,502,350 $ 6,602,090 $ 6,116,239 ------------------------------------------------------------------------------------------------ Benefit and loss related payments 3,768,172 3,564,863 3,593,294 Commission and other expense paid 2,427,080 2,706,806 2,502,676 Federal and foreign income taxes (recovered) paid (17,295) 6,848 1,012 ------------------------------------------------------------------------------------------------ NET CASH PROVIDED FROM OPERATIONS $ 324,393 $ 323,573 $ 19,257 ------------------------------------------------------------------------------------------------ CASH FROM INVESTMENTS PROCEEDS FROM INVESTMENTS SOLD, MATURED, OR REPAID Bonds 5,593,141 4,490,034 4,505,552 Stocks 16,579 4,875 2,833 Mortgage loans 42,692 1,447 149 Other 387,924 196,798 243,676 ------------------------------------------------------------------------------------------------ TOTAL PROCEEDS FROM INVESTMENTS SOLD, MATURED, OR REPAID $ 6,040,336 $ 4,693,154 $ 4,752,210 ------------------------------------------------------------------------------------------------ COST OF INVESTMENTS ACQUIRED Bonds 6,009,703 4,170,608 3,659,690 Stocks 360,248 39,032 2,736 Mortgage loans 583,079 464,025 59,296 Other 896,503 641,962 278,203 ------------------------------------------------------------------------------------------------ TOTAL COST OF INVESTMENTS ACQUIRED $ 7,849,533 $ 5,315,627 $ 3,999,925 ------------------------------------------------------------------------------------------------ NET CASH (USED IN) PROVIDED FROM INVESTING ACTIVITIES $ (1,809,197) $ (622,473) $ 752,285 ------------------------------------------------------------------------------------------------ CASH FROM FINANCING AND MISCELLANEOUS SOURCES Capital contributions 610 - 300,000 Dividends to stockholder (150,000) (820,000) (455,589) Intercompany receipts (payments) 1,991,197 91,276 (164,090) Net deposit activity on deposit-type contracts and other insurance (9,767) (23,833) (1,683) Equities in underwriting pools and associations 94,797 476,434 54,713 Collateral deposit liability (payments) receipts (74,610) 37,313 77,021 Other (payments) receipts (134,540) (102,417) 105,869 ------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING AND MISCELLANEOUS ACTIVITIES 1,717,687 (341,227) (83,759) ------------------------------------------------------------------------------------------------ NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS 232,883 (640,127) 687,783 CASH AND SHORT-TERM INVESTMENTS ------------------------------------------------------------------------------------------------ BEGINNING OF YEAR $ 494,187 $ 1,134,314 $ 446,531 ------------------------------------------------------------------------------------------------ END OF YEAR $ 727,070 $ 494,187 $ 1,134,314 ------------------------------------------------------------------------------------------------
Refer to Note 11 E for description of non-cash items. SEE NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 6 STATEMENTS OF CASH FLOW - for the years ended December 31, 2014, 2013 and 2012 AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT STATUTORY BASIS ACCOUNTING POLICIES -------------------------------------------------------------------------------- A. BASIS OF ORGANIZATION AND PRESENTATION -------------------------------------------------------------------------------- Organization -------------------------------------------------------------------------------- American Home Assurance Company ("the Company" or "American Home") is a direct wholly-owned subsidiary of AIG Property Casualty U.S., Inc. ("AIG PC US"), a Delaware corporation, which is in turn owned by AIG Property Casualty Inc. ("AIG PC"), a Delaware corporation. The Company's ultimate parent is American International Group, Inc. (the "Ultimate Parent" or "AIG"). AIG conducts its property and casualty operations through multiple line companies writing substantially all commercial (casualty, property, specialty and financial liability) and consumer (accident & health and personal lines) both domestically and abroad. During 2013, Chartis U.S., Inc., Chartis Inc., Chartis International, LLC, Chartis Property Casualty Company, Chartis Specialty Insurance Company and Chartis Casualty Company were renamed as AIG Property Casualty U.S., Inc., AIG Property Casualty Inc., AIG Property Casualty International, LLC, AIG Property Casualty Company, AIG Specialty Insurance Company and AIG Assurance Company, respectively. Effective January 1, 2014, the National Union Admitted Lines Pooling Agreement (the "Admitted Pooling Agreement") and the AIG Property Casualty Surplus Lines Pooling Agreement (the "Surplus Pooling Agreement") were amended and replaced with a combined pooling agreement among the existing companies and AIU Insurance Company (the "Combined Pooling Agreement"), as listed below (the "Combined Pool"). The member companies of the 2014 Combined Pool, their National Association of Insurance Commissioners ("NAIC") company codes, inter-company pooling percentages under the Combined Pooling Agreement, previous participation in the terminated pools, and states of domicile are as follows:
2014 COMBINED 2013 ADMITTED 2013 SURPLUS NAIC POOL PARTICIPATION PARTICIPATION 2014 STATE OF COMPANY COMPANY CODE PERCENTAGE PERCENTAGE PERCENTAGE DOMICILE --------------------------------------------------------------------------------------------------------------------------- National Union Fire Insurance Company of Pittsburgh, Pa. (National Union)* 19445 30% 38% N/A Pennsylvania American Home 19380 30% 36% N/A New York Lexington Insurance Company (Lexington) 19437 30% N/A 90% Delaware Commerce and Industry Insurance Company (C&I) 19410 5% 11% N/A New York AIG Property Casualty Company (APCC) 19402 5% 5% N/A Pennsylvania The Insurance Company of the State of Pennsylvania (ISOP) 19429 0% 5% N/A Pennsylvania New Hampshire Insurance Company (New Hampshire) 23841 0% 5% N/A Illinois/**/ AIG Specialty Insurance Company (Specialty) 26883 0% N/A 10% Illinois AIG Assurance Company (Assurance) 40258 0% 0% N/A Pennsylvania Granite State Insurance Company (Granite) 23809 0% 0% N/A Illinois/**/ Illinois National Insurance Co. (Illinois National) 23817 0% 0% N/A Illinois AIU Insurance Company (AIU) 19399 0% N/A N/A New York
*Lead Company of the Combined Pool **Companies were re-domesticated to Illinois from Pennsylvania in 2014 Refer to Note 6 for additional information on the Combined Pool and the effects of the changes in the intercompany pooling arrangements (the "2014 Pooling Restructure Transaction"). The Company accepts commercial business primarily through a network of independent retail and wholesale brokers and through an independent agency network. In addition, the Company accepts consumer business primarily through agents and brokers, as well as through direct marketing, partner organizations and the internet. There were no Managing Agents or Third party administrators who placed direct written premium with the Company in an account exceeding more than 5.0 percent of surplus of the Company for the years ending December 31, 2014 and 2013. -------------------------------------------------------------------------------- 7 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The Company is diversified in terms of classes of its business, distribution network and geographic locations. The Company has direct written premium concentrations of 5.0 percent or more in the following locations:
STATE/ LOCATION 2014 2013 2012 ------------------------------------------------------ Florida $ 69,724 $ 49,869 $ 36,719 New York 27,936 15,068 41,487 Foreign - Japan *(443,765) 785,232 1,022,151
*Includes impact of (726,095) reserve transfer due to the Japan Branch Conversion. Basis of Presentation -------------------------------------------------------------------------------- The accompanying financial statements of the Company have been prepared in conformity with accounting practices prescribed or permitted by the New York State Department of Financial Services ("NY SAP"). Certain balances relating to prior periods have been reclassified to conform to the current year's presentation. Additionally, the financial statements include the Company's U.S. operations, its Japan and Argentina branch operations and its participation in the American International Overseas Association (the "Association"), as described in Note 6. The Company's financial information as of and for the year ended December 31, 2014 has been presented in accordance with the terms of the Combined Pooling Agreement. The 2013 and 2012 financial information is reflective of the Company's Admitted Pooling Agreement participation percentage in place during those years. B. Permitted and Prescribed Practices -------------------------------------------------------------------------------- NY SAP recognizes only statutory accounting practices prescribed or permitted by the New York State Department of Financial Services ("NY DFS") for determining and reporting the financial position and results of operations of an insurance company and for the purpose of determining its solvency under the New York Insurance Code. The NAIC Statutory Accounting Principles included within the Accounting Practices and Procedures Manual ("NAIC SAP") have been adopted as a component of prescribed practices by the NY DFS. The Superintendent of the NY DFS (the "Superintendent") has the right to permit other specific practices that differ from prescribed practices. NY SAP has prescribed the practice of discounting workers' compensation known case loss reserves on a non-tabular basis. This practice is not prescribed under NAIC SAP. With the concurrence of the NY DFS, the Company has also discounted certain of its asbestos reserves, specifically, those for which future payments have been identified as fixed and determinable. NY SAP has prescribed the availability of certain offsets in the calculation of the Provision for reinsurance which are not prescribed by NAIC SAP. With the concurrence of NY DFS, the Company has reduced its Provision for reinsurance to reflect the transfer of the collection risk on certain of the Company's asbestos related reinsurance recoverables to an authorized third party reinsurer in connection with its participation in the Combined Pool. For 2013, the Company applied the specific NY SAP requirements in the determination of the Provision for reinsurance. In 2014, the Company received a permitted practice to present the consideration received in relation to loss reserves transferred as part of the updated and amended Combined Pooling Agreement transaction within paid losses rather than as premiums written and earned. For more information, see Note 6. Similarly, in 2013, the Company received a permitted practice to present the consideration received in relation to loss reserves transferred by novation as negative paid losses rather than premium written and earned, in relation to the withdrawal of a foreign affiliate from the Association, as described in Note 6. The Company requested such permitted practices as it believed the presentation within premiums would be distortive to the financial statements and not indicative of the economic substance of the respective transactions. The use of the aforementioned prescribed and permitted practices has not affected the Company's ability to comply with the NAIC's risk based capital and surplus requirements for the 2014, 2013 and 2012 reporting periods. -------------------------------------------------------------------------------- 8 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- A reconciliation of the net income and capital and surplus between NAIC SAP and practices prescribed or permitted by NY SAP is shown below:
----------------------------------------------------------------------------------------------------------------- 2014 2013 2012 ----------------------------------------------------------------------------------------------------------------- NET INCOME, NEW YORK BASIS $ 808,230 $ 702,990 $ 285,505 State Prescribed Practices - addition (charge) NAIC SAP: Change in non-tabular discounting 40,320 31,634 (70,542) ----------------------------------------------------------------------------------------------------------------- NET INCOME, NAIC SAP 848,550 734,624 214,963 ----------------------------------------------------------------------------------------------------------------- STATUTORY SURPLUS, NEW YORK BASIS 7,247,904 5,091,687 6,004,343 State Prescribed Practices - (charge) NAIC SAP: Non-tabular discounting (383,098) (423,418) (455,052) Credits for reinsurance (39,545) (27,834) (118,047) Credits for collection risk on certain asbestos reinsurance recoveries (81,048) (156,997) (88,189) ----------------------------------------------------------------------------------------------------------------- STATUTORY SURPLUS, NAIC SAP $6,744,213 $4,483,438 $5,343,055 -----------------------------------------------------------------------------------------------------------------
C. Use of Estimates in the Preparation of the Financial Statements -------------------------------------------------------------------------------- The preparation of statutory financial statements in accordance with NY SAP requires the application of accounting policies that often involve a significant degree of judgment. The Company's accounting policies that are most dependent on the application of estimates and assumptions are considered critical accounting estimates and are related to the determination of: . Reserves for losses and loss adjustment expenses ("LAE") including estimates and recoverability of the related reinsurance assets; . Legal contingencies, including those related to the settlement and adjudication of claims; . Other than temporary impairment ("OTTI") losses on investments; . Fair value of certain financial assets, impacting those investments measured at fair value in the Statements of Admitted Assets, Liabilities, Capital and Surplus, as well as unrealized gains (losses) included in capital and surplus; and . Income tax assets and liabilities, including the recoverability and admissibility of net deferred tax assets and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset. These accounting estimates require the use of assumptions about matters, including some that are highly uncertain at the time of estimation. It is reasonably possible that actual experience may materially differ from the assumptions used and therefore the Company's statutory financial condition, results of operations and cash flows could be materially affected. D. Accounting Policy Differences -------------------------------------------------------------------------------- NAIC SAP is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America ("US GAAP"). NAIC SAP varies from US GAAP in certain respects, including:
------------------------------------------------------------------------------------------------------------------ TRANSACTIONS NAIC SAP TREATMENT US GAAP TREATMENT ------------------------------------------------------------------------------------------------------------------ POLICY ACQUISITION COSTS Costs are immediately expensed and are Costs directly related to the successful Principally brokerage included in Other Underwriting Expenses, acquisition of new or renewal insurance commissions and premium except for reinsurance ceding commissions contracts are deferred and amortized over taxes arising from the received in excess of the cost to acquire the term of the related insurance issuance of insurance business which are recognized as a coverage. contracts. deferred liability and amortized over the period of the reinsurance agreement. ------------------------------------------------------------------------------------------------------------------ UNEARNED PREMIUMS, UNPAID Presented net of reinsurance recoverable. Presented gross of reinsurance with LOSSES AND LOSS EXPENSE corresponding reinsurance recoverable LIABILITIES assets for prepaid reinsurance and reinsurance recoverable on unpaid losses, respectively. ------------------------------------------------------------------------------------------------------------------ RETROACTIVE REINSURANCE Gains and losses are recognized in Gains are deferred and amortized over the CONTRACTS earnings and surplus is segregated to the settlement period of the ceded claim extent gains are recognized. Certain recoveries. Losses are immediately retroactive intercompany reinsurance recognized in the Statements of contracts are accounted for as Operations. prospective reinsurance if there is no gain in surplus as a result of the transaction.
-------------------------------------------------------------------------------- 9 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
TRANSACTIONS NAIC SAP TREATMENT US GAAP TREATMENT ------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN BONDS HELD Investment grade securities (rated by All available for sale investments are AS: NAIC as class 1 or 2) are carried at carried at fair value with changes in 1) AVAILABLE FOR SALE amortized cost. Non- investment grade fair value, net of applicable taxes, 2) FAIR VALUE OPTION securities (NAIC rated 3 to 6) are reported in accumulated other carried at the lower of amortized cost comprehensive income within shareholder's and fair value. equity. Fair value option investments are carried at fair value with changes in fair value, net of applicable projected income taxes, reported in net investment income. ------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN EQUITY Carried at fair value with unrealized Same treatment as available for sale SECURITIES CLASSIFIED AS: gains and losses reported, net of investments in bonds. 1) AVAILABLE FOR SALE applicable taxes, in the Statement of 2) FAIR VALUE OPTION Changes in Capital and Surplus. Fair value option investments are carried at fair value with changes in fair value, net of applicable projected income taxes, reported in net investment income. ------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN LIMITED Carried at the underlying US GAAP equity If aggregate interests allow the holding PARTNERSHIPS, HEDGE FUNDS with results from the investment's entity to exercise more than minor AND PRIVATE EQUITY INTERESTS operations recorded, net of applicable influence (typically more than 3%), the taxes, as Unrealized gains (losses) investment is carried at Net Asset Value directly in the Statements of Changes in ("NAV") with changes in value recorded to Capital and Surplus. net investment income. Where the aggregate interests allow the entity to exercise only minor influence (typically less than 3%), the investment is recorded at NAV with changes in value recorded, net of tax, as a component of accumulated other comprehensive income in shareholder's equity. ------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN SUBSIDIARY, Subsidiaries are not consolidated. Consolidation is required when there is a CONTROLLED AND AFFILIATED determination that the affiliated entity ENTITIES (SCAS) The equity investment in SCAs are is a variable interest entity (VIE) and accounted for under the equity method and the holding entity is the primary recorded as Common stock investments. beneficiary of the activities of the VIE. Dividends are recorded within Net Investment Income. Investments in SCAs with greater than 50 percent ownership of voting rights are generally consolidated. Investments in SCAs where the holding entity exercises significant influence (generally ownership of voting interests between 20 percent and 50 percent) are recorded at equity value. The change in equity is included within operating income. ------------------------------------------------------------------------------------------------------------------ STRUCTURED SETTLEMENTS Structured settlement annuities where the For structured settlements in which the claimant is the payee are treated as reporting entity has not been legally completed transactions (thereby allowing released from its obligation with the for immediate gain recognition), claimant (i.e. the reporting entity regardless of whether the reporting remains the primary obligor), resulting entity is the owner of the annuity. gains are deferred and amounts expected to be recovered from such annuities are recorded as assets. ------------------------------------------------------------------------------------------------------------------ STATEMENT OF CASH FLOWS Statutory Statements of Cash Flows must The Statements of Cash Flows can be be presented using the direct method. presented using the direct or indirect Changes in cash and short-term methods, however are typically presented investments and certain sources of cash using the indirect method. Presentation are excluded from operational cash flows. is limited to changes in cash and cash Certain non-cash items are required to be equivalents (short-term investments are included in the statement of cash flows excluded). All non-cash items are and disclosed to the extent material. eliminated from the presentation of cash flows.
-------------------------------------------------------------------------------- 10 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------ TRANSACTIONS NAIC SAP TREATMENT US GAAP TREATMENT ------------------------------------------------------------------------------------------------------------------ DEFERRED FEDERAL INCOME Deferred income taxes are established for The provision for deferred income taxes TAXES the temporary differences between tax and is recorded as a component of income tax book assets and liabilities, subject to expense, as a component of the Statement limitations on admissibility of tax of Operations, except for changes assets. associated with items that are included Changes in deferred income taxes are within other comprehensive income where recorded within capital and surplus and such items are recorded net of applicable have no impact on the Statement of income taxes. Operations. ------------------------------------------------------------------------------------------------------------------ STATUTORY ADJUSTMENTS Certain asset balances are designated as All assets and liabilities are included (applied to certain assets nonadmitted, are excluded from the in the financial statements. Provisions including Goodwill, Statutory Statement of Assets and are for uncollectible receivables are furniture and equipment, reflected as deductions from capital and established as valuation allowances and deferred taxes in excess of surplus. are recognized as expense within the limitations, prepaid Statement of Operations. expenses, overdue receivable balances and unsecured reinsurance amounts) A Provision for reinsurance is established for unsecured reinsurance amounts recoverable from unauthorized and certain authorized reinsurers with a corresponding reduction to Unassigned surplus. ------------------------------------------------------------------------------------------------------------------
The effects on the financial statements of the variances between NAIC SAP and US GAAP, although not reasonably determinable, are presumed to be material. E. Significant Statutory Accounting Policies -------------------------------------------------------------------------------- Premiums -------------------------------------------------------------------------------- Premiums for insurance and reinsurance contracts are recorded as gross premiums written on the inception date of the policy. Premiums are earned primarily on a pro-rata basis over the term of the related insurance coverage. Extended reporting endorsements are reflected as premiums written and are earned on a pro-rata basis over the stated term of the endorsement unless the term of the endorsement is indefinite in which case premiums are fully earned at inception of the endorsement along with the recognition of associated loss and LAE. Unearned premium reserves are established on an individual policy basis, reflecting the terms and conditions of the coverage being provided. Unearned premium reserves include the portion of premiums written relating to the unexpired terms of coverage as of the date of the financial statements. For policies with coverage periods equal to or greater than thirteen months and generally not subject to cancellation or modification by the Company, premiums are earned using a prescribed percentage of completion method. Reinsurance premiums under a reinsurance contract are typically earned over the same period as the underlying policies, or risks, covered by the contracts. As a result, the earnings pattern of a reinsurance contract generally written for a 12-month term may extend up to 24 months, reflecting the inception dates of the underlying attaching policies throughout the 12-month period of the reinsurance contract. Reinsurance premiums ceded are recognized as a reduction in revenues over the period reinsurance coverage is provided. Insurance premiums billed and outstanding for 90 days or more are nonadmitted and deducted from Unassigned surplus. Premiums for retrospectively rated contracts are initially recorded based on the expected loss experience, based upon historical ratios of retrospectively rated loss development and earned on a pro-rata basis over the term of the related insurance coverage. Additional or returned premium is recorded if the estimated loss experience differs from the initial estimate and is immediately recognized in earned premium. The Company records accrued retrospectively rated premiums as written premiums. Gross written premium net of ceded written premium ("Net written premiums") that were subject to retrospective rating features as of December 31, 2014, 2013 and 2012 were as follows:
--------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 2014 2013 2012 --------------------------------------------------------------------------------------------- Net written premiums subject to retrospectively rated premiums $112,287 $114,240 $154,505 Percentage of total net written premiums 2.1% 2.0% 3.0% ---------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 11 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- As of December 31, 2014 and 2013, the admitted portion of accrued premiums related to the Company's retrospectively rated contracts were $694,174 and $938,213, respectively, which will be billed in future periods based primarily on the payment of the underlying expected losses and LAE. Unsecured amounts associated with these accrued retrospective premiums were $144,799 and $211,983 as of December 31, 2014 and 2013, respectively. Ten percent of the amount of accrued retrospective premiums receivable not offset by retrospective return premiums or other liabilities to the same party, other than loss and LAE reserves, or collateral (collectively referred to as the unsecured amount) have been nonadmitted. The following table represents the reconciliation of total accrued retrospective premiums to the admitted amounts:
----------------------------------------------------------------------------------- DECEMBER 31, 2014 2013 ----------------------------------------------------------------------------------- Total accrued retrospective premium $ 713,461 $ 965,890 Less: nonadmitted amount (10 percent) (13,151) (19,017) Less: nonadmitted for any person for whom agents' balances or uncollected premiums are nonadmitted (6,136) (8,660) ----------------------------------------------------------------------------------- ADMITTED AMOUNTS $ 694,174 $ 938,213 -----------------------------------------------------------------------------------
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. The Company establishes loss reserves for high deductible policies net of the insured's contractual deductible (such deductibles are referred to as "reserve credits"). The Company establishes a nonadmitted asset for 10 percent of paid losses recoverable in excess of collateral held on an individual insured basis, or for 100 percent of paid losses recoverable where no collateral is held and amounts are outstanding for more than ninety days. Additionally, the Company establishes an allowance for doubtful accounts for such paid losses recoverable in excess of collateral and after nonadmitted assets. Similarly, the Company does not recognize reserve credit offsets where such credits are deemed uncollectible, as the Company ultimately bears credit risk on the underlying policies' insurance obligations. As of December 31, 2014 and 2013, the amounts of offsetting reserve credits on unpaid claims, recoverable on paid claims and nonadmitted balances were:
DECEMBER 31, 2014 2013 ------------------------------------------------------------------------------------ Reserve Credits on Unpaid Claims $ 3,698,401 $ 4,270,652 Recoverable on Paid Claims 110,084 114,716 Nonadmitted Balance 21,058 24,686 ------------------------------------------------------------------------------------
For warranty insurance, the Company generally provides 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 policy in proportion to the expected loss emergence. The expected loss emergence can vary 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 original warranties provided by the equipment manufacturer, if any. Deposit Accounting -------------------------------------------------------------------------------- Direct insurance transactions where management determines insufficient insurance risk transfer are recorded as deposits unless the policy was issued (i) in respect of the insured's requirement for evidence of coverage pursuant to applicable statutes (insurance statutes or otherwise), contractual terms or normal business practices, (ii) in respect of an excess insurer's requirement for an underlying primary insurance policy in lieu of self-insurance, or (iii) in compliance with filed forms, rates and/or rating plans. Assumed and ceded reinsurance contracts which do not transfer a sufficient amount of insurance risk are recorded as deposits with the net consideration paid or received recognized as a deposit asset or liability, respectively. Deposit assets are admitted if (i) the assuming company is licensed, accredited or qualified by the NY DFS, or (ii) the collateral (i.e., funds withheld, letters of credit or trusts) provided by the reinsurer meets all the requirements of the NY SAP, as applicable. The deposit asset or liability is adjusted by calculating the effective yield on the deposit to reflect the actual payments made or received to date and expected future payments with a corresponding credit or charge to Other Income in the Statements of Operations. Deposit assets are recorded to Other assets within the Statements of Admitted Assets, refer to Note 11A. Deposit liabilities and deposit liabilities - funds held are recorded to Other liabilities within the Statements of Liabilities, Capital and Surplus, refer to Note 11B. -------------------------------------------------------------------------------- 12 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Premium Deficiency -------------------------------------------------------------------------------- The Company periodically reviews its expected ultimate losses with respect to its unearned premium reserves. A premium deficiency loss and related liability is established if the unearned premium reserves and related investment income are collectively not sufficient to cover the expected ultimate loss projection. As of December 31, 2014 and 2013, the Company did not incur any premium deficiency losses. Retroactive Reinsurance -------------------------------------------------------------------------------- Transactions involving the transfer of loss and LAE reserves associated with loss events that occurred prior to the effective date of the transfer are recorded as retroactive reinsurance and reported separately from Reserves for loss and loss adjustment expenses in the Statements of Liabilities, Capital and Surplus. Initial gains or losses are recorded in Other Income within the Statements of Operations. Any resulting surplus gains are separately identified as Special surplus funds from retroactive reinsurance within Capital and surplus and are restricted for dividend payment. Amounts recorded in Special surplus funds from retroactive reinsurance are amortized into Unassigned surplus when actual retroactive reinsurance recovered exceeds the consideration paid. The special surplus from retroactive reinsurance for each respective retroactive reinsurance agreement shall be reduced at the time the ceding entity begins to recover funds from the assuming entity in amounts exceeding the consideration paid by the ceding entity under such agreement, or adjusted due to changes in reserves ceded under the contract. For each agreement, the reduction in the special surplus is limited to the lesser of amounts recovered in excess of consideration paid or the initial surplus gain. Any remaining balance in the special surplus from retroactive reinsurance derived from any such agreement shall be returned to Unassigned surplus upon elimination of all policy obligations. To the extent that the transfer of loss and LAE reserves is between affiliated entities and neither entity records a gain or loss, the transaction is accounted for as prospective reinsurance. Insurance Related Acquisition Costs -------------------------------------------------------------------------------- Commissions, premium taxes, and certain underwriting costs are expensed as incurred and are included in Other underwriting expenses incurred. The Company records a ceding commission liability equal to the excess of the ceding commissions received from reinsurers compared to the acquisition cost of the business ceded. The liability is amortized over the effective period of the reinsurance agreement in proportion to the amount of insurance coverage provided. Provisions for Allowances and Unauthorized or Overdue Reinsurance -------------------------------------------------------------------------------- The recoverability of certain assets, including insurance receivables with counterparties, is reviewed periodically by management. Amounts deemed uncollectible are reduced, with the required statutory basis provision for reinsurance deducted from surplus and reflected as a liability in Provision for reinsurance. Various factors are taken into consideration when assessing the recoverability of these balances including: the age of the related amounts due and the nature of the unpaid balance; disputed balances, historical recovery rates and any significant decline in the credit standing of the counterparty. Following the 2014 Pooling Restructure Transaction, the accounting practices prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania ("PA SAP") are applied in the determination of the Company's Provision for reinsurance. For 2013 and 2012, NY SAP was applied in the determination of the Provision for reinsurance. Loss and Loss Adjustment Expenses -------------------------------------------------------------------------------- Reserves for case, IBNR and LAE losses are determined on the basis of actuarial specialists' evaluations and other estimates, including historical loss experience. The methods of making such estimates and for establishing the resulting reserves are reviewed and updated based on available information, and any resulting adjustments are recorded in the period they are determined. Accordingly, newly established reserves for losses and LAE, or subsequent changes, are charged to income as incurred. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsurance policy based upon the terms of the underlying contract. See Note 5 for further discussion of policies and methodologies for estimating the liabilities and losses. -------------------------------------------------------------------------------- 13 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Structured Settlements -------------------------------------------------------------------------------- In the ordinary course of business, the Company enters into structured settlements to settle certain claims. Structured settlements involve the purchase of an annuity by the Company, generally from life insurers, to fund future claim obligations. In the event the life insurers providing the annuity do not meet their obligations, the Company would, in certain cases, become liable for the payments of benefits. As of December 31, 2014, the Company has not incurred a loss and there has been no default by any of the life insurers included in the transactions and the Company has not reduced its loss reserves for any annuities purchased where it is both the owner and the payee. Management believes that based on the financial strength of the life insurers involved (mostly affiliates) the likelihood of the Company becoming liable, and therefore incurring an incremental loss, is remote. The estimated loss reserves eliminated by such structured settlement annuities and the unrecorded loss contingencies are $1,135,621 as of December 31, 2014. As of December 31, 2014, the Company had annuities with aggregate statement values in excess of 1 percent of its policyholders' surplus with life insurer affiliates as follows:
LICENSED IN LIFE INSURANCE COMPANY STATE OF DOMICILE NEW YORK STATEMENT VALUE ---------------------- ----------------- ----------- --------------- American General Life Insurance Company Texas No $104,512 American General Life Insurance Company of Delaware Delaware No 251,372 The United State Life Insurance Company in the City of New York New York Yes 727,988
Fair Value of Financial Instruments -------------------------------------------------------------------------------- The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions. Assets and liabilities recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of three 'levels' based upon the observability of inputs available in the marketplace as discussed below: . Level 1: Fair value measurements that are based upon quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. The quoted price for such instruments is not subject to adjustment. . Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. . Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's policy is to recognize transfers in and out at the end of the reporting period, consistent with the date of the determination of fair value. The valuation methods and assumptions used in estimating the fair values of financial instruments are as follows: . The fair values of bonds, mortgage loans, unaffiliated common stocks and preferred stocks are based on fair values that reflect the price at which a security would sell in an arm's length transaction between a willing buyer and seller. As such, sources of valuation include third party pricing sources, stock exchanges, brokers or custodians or the NAIC Capital Markets and Investment Analysis Office ("NAIC IAO"). -------------------------------------------------------------------------------- 14 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- . The fair value of derivatives are determined using quoted prices in active markets and other market evidence whenever possible, including market-based updates, broker or dealer quotations or alternative pricing sources. . The carrying value of all other financial instruments approximates fair value. Cash Equivalents and Short Term Investments -------------------------------------------------------------------------------- Cash equivalents are short-term, highly liquid investments, with original maturities of three months or less, that are both; (a) readily convertible to known amounts of cash; and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Highly liquid debt securities with maturities of greater than three months but less than twelve months from the date of purchase are classified as short-term investments. Short-term investments are carried at amortized cost which approximates fair value. Bonds (including Loan Backed and Structured Securities) -------------------------------------------------------------------------------- Loan-backed and structured securities ("LBaSS") include residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS"), and asset-backed securities ("ABS"), pass-through securities, lease-backed securities, equipment trust certificates, loan-backed securities issued by special purpose corporations or trusts, and securities where there is not direct recourse to the issuer. Bonds and LBaSS with an NAIC designation NAIC IAO of "1" or "2" (considered to be investment grade) are carried at amortized cost. Bonds and LBaSS with an NAIC designation of "3," "4", "5", 5*, "6" or "6*" (considered to be non-investment grade) are carried at the lower of amortized cost or fair value. LBaSS fair values are primarily determined using independent pricing services and broker quotes. Bonds and LBaSS that have not been filed and have not received a designation in over a year, from the NAIC IAO, are assigned a 6* designation and carried at zero, with unrealized losses charged to surplus. Bond and LBaSS securities that have been filed and received a 6* designation can carry a value greater than zero. Bond and LBaSS securities are assigned a 5* designation when the following conditions are met: a) the documentation required for a full credit analysis did not exist, b) the issuer/obligor has made all contractual interest and principal payments, and c) an expectation of repayment of interest and principal exists. Amortization of premium or discount on bonds and LBaSS is calculated using the effective yield method. Additionally, mortgage-backed securities ("MBS") and ABS prepayment assumptions were obtained from an outside vendor or internal estimates. The retrospective adjustment method is used to account for the effect of unscheduled payments affecting high credit quality securities, while securities with less than high credit quality and securities for which the collection of all contractual cash flows is not probable are both accounted for using the prospective adjustment method. Mortgage Loans -------------------------------------------------------------------------------- Mortgage loans on real estate are stated primarily at unpaid principal balances, net of unamortized premiums, discounts and impairments. Impaired loans are identified by management as loans in which it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The Company accrues income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Non-performing loan interest income that is delinquent more than 90 days is generally recognized on a cash basis. Internal credit risk ratings are assigned based on the consideration of risk factors including past due status, debt service coverage, loan-to-value ratio or the ratio of the loan balance to the estimated value of the property, property occupancy, profile of the borrower and of the major property tenants, economic trends in the market where the property is located, and condition of the property. Preferred Stocks -------------------------------------------------------------------------------- Perpetual preferred stocks with an NAIC rating of "P1" or "P2", having characteristics of equity securities are carried at fair value. Redeemable preferred stocks with an NAIC rating of "RP1" or "RP2", which have characteristics of debt securities, are carried at amortized cost. All preferred stocks with an NAIC rating of "3" through "6" are carried at the lower of amortized cost or fair value. Unaffiliated Common Stock Securities -------------------------------------------------------------------------------- Unaffiliated common stock investments are carried at fair value with changes in fair value recorded as Unrealized gains(losses) in Unassigned surplus, or as realized losses in the event a decline in value is determined to be other than temporary. -------------------------------------------------------------------------------- 15 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Investments in subsidiaries and affiliated companies -------------------------------------------------------------------------------- Investments in non-publicly traded affiliates are recorded based on the underlying equity of the respective entity's financial statements as presented on a basis consistent with the nature of the affiliates operations (including any defined nonadmitted amounts). The Company's share of undistributed earnings and losses of affiliates are recorded as Unrealized gains (losses) in Unassigned surplus. Investments in joint ventures, partnerships and limited liability companies -------------------------------------------------------------------------------- Other invested assets include joint ventures and partnerships and are accounted for under the equity method, based on the most recent financial statements of the entity. Changes in carrying value are recorded as Unrealized gains(losses). Additionally, other invested assets include investments in collateralized loans that are recorded at the lower of amortized cost and the fair value of the underlying collateral. Changes in carrying value resulting from adjustments where the fair value is less than amortized cost are recorded as Unrealized gains (losses) in Unassigned surplus, while changes resulting from amortization are recorded as Net investment income. Derivatives -------------------------------------------------------------------------------- Derivative financial instruments are accounted for at fair value using quoted prices in active markets and other market evidence whenever possible, including market-based inputs to valuation models, broker or dealer quotations or alternative pricing sources, reduced by the amount of collateral held or posted by the Company with respect to the derivative position. Changes in carrying value are recorded as Unrealized gains/(losses) in Unassigned surplus. Net investment income and gain/loss -------------------------------------------------------------------------------- Investment income is recorded as earned and includes interest, dividends, and earnings from subsidiaries, loans and joint ventures. Realized gains or losses on the disposition or impairment of investments are determined on the basis of specific identification. Investment income due and accrued is assessed for collectability. The Company records a valuation allowance on investment income receivable when it is probable that an amount is uncollectible by recording a charge against investment income in the period such determination is made. Any amounts receivable over 90 days past due, or 180 days past due for mortgage loans that do not have a valuation allowance are nonadmitted by the Company. Evaluating Investments for Other-Than-Temporary Impairment -------------------------------------------------------------------------------- If a bond is determined to have an OTTI in value the cost basis is written down to fair value as a new cost basis, with the corresponding charge to Net realized capital gains (losses) as a realized loss. For bonds, other than loan-backed and structured securities, an OTTI shall be considered to have occurred if it is probable that the Company will not be able to collect all amounts due under the original contractual terms. For loan-backed and structured securities, an OTTI shall be considered to have occurred if the fair value of a security is below its amortized cost and management intends to sell or does not have the ability and intent to retain the security until recovery of the amortized cost (i.e., intent based impairment). When assessing the intent to sell a security, management evaluates relevant facts and circumstances including, but not limited to, decisions to rebalance the investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing. In general, a security is considered a candidate for OTTI evaluation if it meets any of the following criteria: . The Company may not realize a full recovery on their investment based on lack of ability or intent to hold a security to recovery; . Fundamental credit risk of the issuer exist; and/or . Other qualitative/quantitative factors exist indicating an OTTI has occurred. When a credit-related OTTI is present, the amount of OTTI recognized as a realized capital loss is equal to the difference between the investment's amortized cost basis and the present value of cash flows expected to be collected regardless of management's ability or intent to hold the security. -------------------------------------------------------------------------------- 16 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Common and preferred stock investments whose fair value is less than their carrying value for a period greater than nine months or at a significant discount to acquisition value are considered to be potentially impaired. For securities with unrealized losses, an analysis is performed. Factors include: . If management intends to sell a security that is in an unrealized loss position then an OTTI loss is considered to have occurred. . If the investments are trading at a significant (25 percent or more) discount to par, amortized cost (if lower) or cost for an extended period of time (nine consecutive months or longer); or . If a discrete credit event occurs resulting in: (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking protection from creditors under bankruptcy law or any similar laws intended for court supervised reorganization of insolvent enterprises; or, (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims; or . If there are other factors precluding a full recovery of the investment. Limited partnership investments whose fair value is less than its book value for a period greater than twelve months with a significant unrealized loss are considered candidates for OTTI. OTTI factors that are periodically considered include: . If an order of liquidation or other fundamental credit issues with the partnership exists; . If there is a significant reduction in scheduled cash flow activities between the Company and the partnership or fund during the year; . If there is an intent to sell, or the Company may be required to sell, the investment prior to the recovery of cost of the investment; or . If other qualitative/quantitative factors indicating an OTTI exist. Equities in Pools & Associations -------------------------------------------------------------------------------- The Company accounts for its participation in the Association (See Note 6) by recording its participation in . net premium participation as gross premium, . the underwriting and net investment income results in the Statements of Operations and Changes in Capital and Surplus, . insurance and reinsurance balances in the Statements of Admitted Assets and Liabilities, Capital and Surplus; and . all other non-insurance assets and liabilities recorded as Equities in Underwriting Pools and Associations in the Statements of Admitted Assets and Liabilities, Capital and Surplus. Foreign Currency Transactions -------------------------------------------------------------------------------- Financial statement accounts expressed in foreign currencies are translated into U.S. dollars. Foreign currency assets and liabilities are translated into U.S. dollars using rates of exchange prevailing at the period end date with the related translation adjustments recorded as unrealized gains or losses within Unassigned surplus in the Statements of Capital and Surplus. Gains or losses due to translating foreign operations to U.S. dollars are recorded as unrealized gains or losses. All other realized gains and losses resulting from foreign currency transactions, not in support of foreign insurance operations, are included in Other Income in the Statements of Operations. Retirement Plans, Deferred Compensation, Postemployment Benefits and Compensated Absences and Other Postretirement Benefit Plans -------------------------------------------------------------------------------- The Company's employees participate in various AIG-sponsored defined benefit pension and postretirement plans. AIG, as sponsor, is ultimately responsible for the maintenance of these plans in compliance with applicable laws. The Company is not directly liable for obligations under these plans. AIG charges the Company and its insurance company affiliates pursuant to intercompany expense sharing agreements; the expenses are then shared by the pool participants in accordance with the pooling agreement. The Company incurred the following employee related costs associated with these plans during 2014, 2013 and 2012:
------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 2014 2013 2012 ------------------------------------------------------------------------------------------------ Defined benefit plans $ 4,692 $ 14,572 $ 9,915 Defined contribution plans 5,875 7,066 7,246 Postretirement medical and life insurance plans 651 788 652 ------------------------------------------------------------------------------------------------ TOTAL $ 11,218 $ 22,426 $ 17,813 ------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 17 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Depreciation -------------------------------------------------------------------------------- Certain assets, principally electronic data processing ("EDP") equipment, software and leasehold improvements are designated as nonadmitted assets and their net book value is deducted from surplus. EDP equipment primarily consists of non-operating software and is depreciated over its useful life, generally not exceeding five years. Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the leasehold improvement. Income Taxes -------------------------------------------------------------------------------- The Company files a consolidated U.S. federal income tax return with AIG. AIG has more than 300 subsidiaries which form part of this tax return. A complete listing of the participating subsidiaries is included in Note 8. The Company is allocated U.S. federal income taxes based upon a tax sharing agreement (the "Tax Sharing Agreement") with AIG, effective January 1, 2012 and approved by the Company's Board of Directors. This agreement provides that the Company shall incur tax results that would have been paid or received by such company if it had filed a separate federal income tax return, with limited exceptions. Additionally, while the agreement described above governs the current and deferred tax recorded in the income tax provision, the amount of cash that will be paid or received for U.S. federal income taxes may at times be different. The terms of this agreement are based on principles consistent with the allocation of income tax expense or benefit on a separate company basis, except that: . The sections of the Internal Revenue Code relating to Alternative Minimum Tax ("AMT") are applied, but only if the AIG consolidated group is subject to AMT in the Consolidated Tax Liability, and; . The impact of deferred Intercompany Transactions (as defined in Treas. Reg. (S)1.1502-13(b)(1), if the "intercompany items" from such transaction, as defined in Treas. Reg. (S)1.1502-13(b)(2), have not been taken into account pursuant to the "matching rule" of Treas. Reg. (S)1.1502-13(c)), are excluded from current taxation, provided however, that the Company records the appropriate deferred tax asset and/or deferred tax liability related to the gain or loss and includes such gain or loss in its separate return tax liability in the subsequent tax year when the deferred tax liability or deferred tax asset becomes current. In 2014, the Company, modified the Tax Sharing Agreement to clarify certain tax attributes related to the 2013 Association distribution of AIG Europe Holdings Limited's ("AEHL") shares (see Note 6D). The gain resulting from the transfer was treated as currently taxable and the Company's resulting tax liability was waived in the form of a deemed capital contribution. As a result, the Company recognized a benefit to surplus of $21,494. The NY DFS responded to the related informational submissions describing the amendment with no objection. The Company has an enforceable right to recoup federal income taxes in the event of future net losses that it may incur or to recoup its net losses carried forward as an offset to future net income subject to federal income taxes. Under the Tax Sharing Agreement, tax liabilities related to uncertain tax positions and tax authority audit adjustments ("TAAAs") shall remain with the Company for which the tax liabilities relate. Furthermore, if and when such tax liabilities are realized or determined to no longer be necessary, the responsibility for any additional tax liabilities, benefits or rights to any refunds due remains with the Company. In 2014, the Company settled for cash certain tax payables and receivables with AIG. Such payables and receivables related to TAAAs that were reflected in an amended federal income tax return filing for the tax years 2007 to 2011, which was filed with the Internal Revenue Service ("IRS"). In the prior year, the tax receivables were not admitted into surplus and as a result, the Company recognized a statutory capital benefit of $17,533 upon cash settlement. In accordance with Circular Letter 1979-33 issued by the NY DFS, AIG shall establish and maintain an escrow account for amounts where the Company's separate return liability exceeds the AIG consolidated tax liability. -------------------------------------------------------------------------------- 18 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Deferred Taxes -------------------------------------------------------------------------------- The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance, if necessary, to reduce the deferred tax asset to an amount that is more likely than not to be realized ("adjusted gross deferred tax asset"). The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires management to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it would be to support a conclusion that a valuation allowance is not needed. Our framework for assessing the recoverability of deferred tax assets requires us to consider all available evidence, including: . the nature, frequency, and amount of cumulative financial reporting income and losses in recent years; . the sustainability of recent operating profitability of our subsidiaries; . the predictability of future operating profitability of the character necessary to realize the net deferred tax asset; . the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and, . prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset. The adjusted gross deferred tax asset is then assessed for statutory admissibility. The reversing amount eligible for loss carryback or the amount expected to be realized in three years is admissible, subject to the defined surplus limitation. The remaining adjusted gross deferred tax asset can be admitted to the extent of offsetting deferred tax liabilities. 2. ACCOUNTING ADJUSTMENTS TO STATUTORY BASIS FINANCIAL STATEMENTS -------------------------------------------------------------------------------- A. Change in Accounting Principles -------------------------------------------------------------------------------- 2014 Changes -------------------------------------------------------------------------------- In 2014, the Company adopted the following changes in the Statements of Statutory Accounting Principles ("SSAP"): Affordable Care Act Assessments: On June 12, 2014, the NAIC issued SSAP No. 106, Affordable Care Act Assessments ("SSAP 106"), which provides accounting and disclosure guidance related to assessments on entities that issue health insurance. Under the Affordable Care Act ("ACA"), an assessment becomes payable to the U.S. Treasury once a health insurer provides health insurance for any subject U.S. health risk during the calendar year, in an amount based upon the amount of health insurance provided by such company in the prior year. Under SSAP 106, the amount of the assessment shall be expensed and recognized as a liability once the entity provides qualifying health insurance. Additionally, the guidance requires the recognition in Special Surplus, as a reclassification from Unassigned Surplus, of an amount equal to its estimated subsequent fee year assessment based upon the health insurance written in the current year. The special surplus is restored to unassigned surplus in the following year, when the health insurer recognizes the expense for the assessment. The guidance additionally requires disclosure regarding certain information relevant to the calculation of the assessment. The Company has segregated surplus in the amount of $777 related to the assessment expected to be payable in 2015, and the company recognized an expense during 2014 of $621. Risk-Sharing Provisions: On December 12, 2014, the NAIC issued SSAP No. 107, Accounting for the Risk-Sharing Provisions of the Affordable Care Act. This statement provides accounting guidance for the Risk Adjustment Program, the Transitional Reinsurance Program, and the Transitional Risk Corridor Program of the ACA. While the Company participates in the health insurance market and is subject to certain provisions of the ACA, such as the assessment described above, with the exception of the industry-wide assessment on health insurers to fund the Transitional Reinsurance Program, the Company's health insurance policies are not subject to the risk sharing provisions of the ACA. The impact of the guidance on the Company relates solely to the treatment of Transitional Reinsurance Program assessment. -------------------------------------------------------------------------------- 19 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 2013 Change -------------------------------------------------------------------------------- In 2013, the Company adopted the following change in the SSAP: Transfers and Servicing of Financial Assets: In March 2012, the NAIC issued SSAP No. 103 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This guidance supersedes SSAP No. 91R Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and conforms to the US GAAP guidance on accounting for transfers of financial assets. The adoption, which was effective January 1, 2013, did not have any impact on the Company's statutory basis financial statements. B. Adjustments to Surplus -------------------------------------------------------------------------------- During 2014, 2013 and 2012 the Company identified corrections that resulted in after-tax statutory adjustments to beginning capital and surplus of $(6,366), $(94,261) and $(29,278), respectively. In accordance with SSAP No. 3, Accounting Changes and Corrections of Errors ("SSAP 3"), the corrections of errors have been reported in the 2014, 2013 and 2012 statutory financial statements as adjustments to Unassigned Surplus. The impact of these corrections would have been to reduce the 2013 and 2012 net income by $25,080 and $40,655, respectively. Management has concluded that the effects of these errors on the previously issued financial statements were immaterial based on quantitative and qualitative assessment. The impact to surplus, assets and liabilities as of January 1, 2014, 2013 and 2012 is presented in the following tables:
----------------------------------------------------------------------------------------------------- POLICYHOLDERS' TOTAL ADMITTED 2014 ADJUSTMENTS SURPLUS ASSETS TOTAL LIABILITIES ----------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2013 $ 5,091,687 $ 23,671,479 $ 18,579,792 ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS: ASSET CORRECTIONS 58,578 58,578 - LIABILITY CORRECTIONS (70,960) - 70,960 INCOME TAX CORRECTIONS 6,016 6,016 - ----------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS (6,366) 64,594 70,960 ----------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2014 AS ADJUSTED $ 5,085,321 $ 23,736,073 $ 18,650,752 -----------------------------------------------------------------------------------------------------
An explanation for each of the adjustments for prior period corrections is described below: Asset corrections - The increase in net admitted assets is the result of a) an increase in reinsurance recoverables related to the reversal of an accrued liability; b) an adjustment of an intangible asset resulting from the sale of the Canadian Branch of American Home Assurance Company c) an increase in admitted assets due to AIOA's under utilization of reserves to offset the aged premium receivable in their nonadmitted penalty determination; partially offset by d) a decrease in reinsurance recoverables due to an increase in the related SSAP No. 5R, Liabilities, Contingencies and Impairment of Assets ("SSAP 5R") reserve; and e) a decrease in reinsurance recoverables on paid losses related to miscoded ceded reinsurance. Liability corrections - The increase in total liabilities is primarily the result of a) an increase in loss reserves resulting from errors identified during the completion of a reserve substantiation study, b) an increase in IBNR related to asbestos business and in the calculation of the insolvent and commute estimate, c) an increase in the "Taxes, licenses, and fees" related to workers' compensation surcharges, d) an increase in "Ceded reinsurance premiums payable" resulting from unrecorded profit commission with Aerospace Agency, e) an increase in intercompany payables due to prior year costs incurred from the development of a claims systems; and f) an increase to the unpaid loss reserves resulting from miscoded ceded reinsurance on a facultative claim; partially offset by g) a correction to the historical loss provision for balances previously charged off. Income tax corrections - The decrease in taxes is primarily the result of a) corrections to prior period balances for adjustments to the current and deferred tax assets and liabilities and b) the tax effect of the corresponding change in asset and liability corrections. -------------------------------------------------------------------------------- 20 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
POLICYHOLDERS' TOTAL ADMITTED 2013 ADJUSTMENTS SURPLUS ASSETS TOTAL LIABILITIES ---------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2012 $ 6,004,343 $ 23,974,474 $ 17,970,131 Adjustments to beginning Capital and Surplus: Asset corrections (237,503) (237,503) - Liability corrections 154,162 - (154,162) Income tax corrections (10,920) (10,920) - ---------------------------------------------------------------------------------------------------- Total adjustments to beginning Capital and Surplus (94,261) (248,423) (154,162) ---------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2013 AS ADJUSTED $ 5,910,082 $ 23,726,051 $ 17,815,969 ----------------------------------------------------------------------------------------------------
An explanation for each of the adjustments for prior period corrections is described below: Asset corrections - The decrease in total admitted assets is primarily the result of a) nonadmitting investment assets; b) a reduction in deductible recoverable relating to high deductible policies; c) a decrease in other assets; and d) reductions in premium and reinsurance assets partially offset by e) an increase in assets identified as deposits. Liability corrections - The increase in total liabilities is primarily the result of a) an increase in reinsurance payables; b) adjustments to tax, license, and fee reserves; c) an increase in excess ceding commission accruals; d) corrections to deposit accounting liabilities; and e) an increase in loss reserves relating to an asset correction noted in b) above. Income tax corrections - The decrease in taxes is primarily the result of a) correction to prior period balances for adjustments to the current and deferred tax assets and liabilities and b) the tax effect of the corresponding change in asset and liability corrections.
---------------------------------------------------------------------------------------------------- POLICYHOLDERS' TOTAL ADMITTED 2012 ADJUSTMENTS SURPLUS ASSETS TOTAL LIABILITIES ---------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2011 $ 5,667,303 $ 23,901,312 $ 18,234,009 Adjustments to beginning Capital and Surplus: Asset corrections 4,232 4,232 -- Liability corrections (26,436) -- 26,436 Income tax corrections (7,074) (7,074) -- ---------------------------------------------------------------------------------------------------- Total adjustments to beginning Capital and Surplus (29,278) (2,842) 26,436 ---------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2012 AS ADJUSTED $ 5,638,025 $ 23,898,470 $ 18,260,445 ----------------------------------------------------------------------------------------------------
An explanation for each of the adjustments for prior period corrections is described below: Asset corrections - The net amount relates to corrections for the following items: a) deemed dividend resulting from the forgiveness of a loan to an affiliate, b) reconciling items relating to other assets and deposit programs partially offset by c) overstated allowance accounts; d) reduction of accrued recoverable related to self insured retention programs. Liability corrections - The increase in total liabilities is primarily the result of corrections for: a) IBNR statutory to GAAP differences; b) unearned premium and outstanding loss reserves resulting from reserve validations; partially offset by c) taxes, licenses and fees reserve for residual market plans and, d) deposit program liabilities. Income tax corrections- The decrease in taxes is primarily the result of corrections for: a) current and deferred tax assets and liabilities; and b) the tax effect of the corresponding change in asset and liability corrections. -------------------------------------------------------------------------------- 21 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 3. INVESTMENTS -------------------------------------------------------------------------------- A. Bond (including Loan-backed and Structured Security) Investments -------------------------------------------------------------------------------- The reconciliation from carrying value to fair value of the Company's bond investments as of December 31, 2014 and 2013 are outlined in the table below:
--------------------------------------------------------------------------------------------------------------- GROSS GROSS CARRYING UNREALIZED UNREALIZED FAIR DECEMBER 31, 2014 VALUE GAINS LOSSES VALUE --------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENTS $ 618,156 $ 12,266 $ (4,731) $ 625,691 ALL OTHER GOVERNMENTS 265,689 9,436 (149) 274,976 STATES, TERRITORIES AND POSSESSIONS 1,121,081 91,461 (14) 1,212,528 POLITICAL SUBDIVISIONS OF STATES, TERRITORIES AND POSSESSIONS 1,628,632 79,441 (3) 1,708,070 SPECIAL REVENUE AND SPECIAL ASSESSMENT OBLIGATIONS AND ALL NON-GUARANTEED OBLIGATIONS OF AGENCIES AND AUTHORITIES AND THEIR POLITICAL SUBDIVISIONS 4,187,851 225,779 (1,629) 4,412,001 INDUSTRIAL AND MISCELLANEOUS 10,279,531 597,624 (48,710) 10,828,445 --------------------------------------------------------------------------------------------------------------- TOTAL $18,100,940 $1,016,007 $ (55,236) $19,061,711 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- GROSS GROSS CARRYING UNREALIZED UNREALIZED FAIR DECEMBER 31, 2013 VALUE GAINS LOSSES VALUE --------------------------------------------------------------------------------------------------------------- U.S. governments $ 458,904 $ 13,227 $ (6,956) $ 465,174 All other governments 421,888 13,773 (286) 435,375 States, territories and possessions 1,360,768 69,716 (6,325) 1,424,159 Political subdivisions of states, territories and possessions 1,808,897 80,496 (5,332) 1,884,061 Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 4,706,143 161,925 (55,943) 4,812,125 Industrial and miscellaneous 8,023,757 496,437 (44,325) 8,475,869 --------------------------------------------------------------------------------------------------------------- TOTAL $16,780,357 $ 835,574 $(119,167) $17,496,763 ---------------------------------------------------------------------------------------------------------------
The carrying values and fair values of bonds at December 31, 2014, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
------------------------------------------------------------------------------------------- CARRYING FAIR DECEMBER 31, 2014 VALUE VALUE ------------------------------------------------------------------------------------------- Due in one year or less $ 374,198 $ 377,017 Due after one year through five years 2,541,961 2,634,811 Due after five years through ten years 4,296,130 4,489,244 Due after ten years 3,373,310 3,580,414 Structured securities 7,515,341 7,980,225 ------------------------------------------------------------------------------------------- Total bonds $18,100,940 $19,061,711 -------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 22 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- B. Mortgage Loan Investments -------------------------------------------------------------------------------- The minimum and maximum lending rates for mortgage loans during 2014 were: --------------------------------------------------------------------------------
----------------------------------------------------------------------- MINIMUM MAXIMUM LENDING LENDING CATEGORY RATE % RATE % ----------------------------------------------------------------------- RETAIL 4.2% 5.1% OFFICE 3.2% 5.5% INDUSTRIAL 3.8% 5.0% MULTI-FAMILY 3.9% 5.3% HOTEL/MOTEL 3.8% 4.4% OTHER COMMERCIAL 4.3% 6.3% -----------------------------------------------------------------------
The maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages was 75 percent. All of the mortgage loans were in good standing as of December 31, 2014. The Company did not have any advanced amounts for taxes or assessments. The following table details an analysis of mortgage loans as of December 31, 2014 and 2013:
---------------------------------------------------------------------------------------------------------------------- RESIDENTIAL COMMERCIAL ----------------------------------------------- FARM INSURED ALL OTHER INSURED ALL OTHER MEZZANINE TOTAL ---------------------------------------------------------------------------------------------------------------------- 2014 RECORDED INVESTMENT CURRENT $-- $-- $-- $-- $1,049,708 $-- $1,049,708 2013 Recorded Investment Current $-- $-- $-- $-- $ 536,056 $-- $ 536,056 ----------------------------------------------------------------------------------------------------------------------
C. Loan-Backed and Structured Investments -------------------------------------------------------------------------------- The Company did not record any non-credit other than temporary impairment losses during 2014 for loan-backed and structured securities. As of December 31, 2014, the Company held the following loan-backed and structured securities for which it recognized $27,338 of credit-related OTTI during 2014 based on the present value of projected cash flows being less than the amortized cost of the securities: -------------------------------------------------------------------------------- 23 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
BOOK/ADJUSTED CARRYING VALUE AMORTIZED COST PRESENT VALUE OF FAIR VALUE AT DATE OF FINANCIAL BEFORE CURRENT PROJECTED CASH RECOGNIZED AMORTIZED COST TIME OF STATEMENT WHERE CUSIP PERIOD OTTI FLOWS OTTI AFTER OTTI OTTI REPORTED ---------------------------------------------------------------------------------------------------- 00703QAD4 $11,079 $10,961 $ 118 $10,961 $10,929 3/31/2014 02148DAE0 6,211 6,079 132 6,079 5,700 3/31/2014 02149DAN9 7,890 7,869 20 7,869 7,511 3/31/2014 02150XAA9 11,486 11,427 59 11,427 10,988 3/31/2014 05949A4R8 8,190 8,124 66 8,124 8,069 3/31/2014 073870AA5 13,468 12,762 705 12,762 13,235 3/31/2014 07820QCD5 5,450 5,362 88 5,362 5,302 3/31/2014 12668AGN9 12,623 12,351 271 12,351 12,518 3/31/2014 12669GY70 16,707 16,505 202 16,505 15,787 3/31/2014 23243AAB2 334 206 128 206 328 3/31/2014 320516AA5 11,501 11,299 202 11,299 11,106 3/31/2014 45254NKQ9 3,525 3,417 108 3,417 3,504 3/31/2014 46630GAH8 7,061 7,044 17 7,044 7,014 3/31/2014 52523MAD2 7,174 7,097 77 7,097 7,007 3/31/2014 576433QT6 5,819 5,766 53 5,766 5,779 3/31/2014 57645TAA5 228 185 43 185 224 3/31/2014 59023RAJ8 6,680 6,604 76 6,604 6,594 3/31/2014 751150AH6 2,513 2,441 72 2,441 2,474 3/31/2014 863579B72 12,868 12,465 403 12,465 12,053 3/31/2014 86359LTG4 10,502 10,399 103 10,399 10,378 3/31/2014 94984NAA0 8,361 8,324 37 8,324 8,277 3/31/2014 007036HV1 3,995 3,960 35 3,960 3,950 6/30/2014 007036VF0 6,569 6,509 60 6,509 6,270 6/30/2014 00703AAA5 12,664 12,290 374 12,290 11,961 6/30/2014 02149DAN9 7,770 7,712 58 7,712 7,495 6/30/2014 02150XAA9 11,001 10,869 131 10,869 10,576 6/30/2014 02151JAA9 17,086 16,977 109 16,977 16,817 6/30/2014 02151RAB9 7,369 7,225 144 7,225 7,360 6/30/2014 05530MAA7 4,686 4,581 105 4,581 4,684 6/30/2014 07820QCD5 5,368 5,298 70 5,298 5,306 6/30/2014 12566TAD9 8,648 8,311 337 8,311 8,622 6/30/2014 12638PAH2 5,674 3,216 2,458 3,216 5,671 6/30/2014 12667FX34 3,552 3,504 49 3,504 3,543 6/30/2014 126694A40 46 32 15 32 43 6/30/2014 126694GF9 7,489 7,392 97 7,392 7,289 6/30/2014 12669FN25 4,884 4,817 66 4,817 4,767 6/30/2014 12669GY70 16,079 15,602 478 15,602 15,524 6/30/2014 17025TBE0 9,113 9,027 86 9,027 9,056 6/30/2014 320516AA5 16,713 16,399 314 16,399 16,264 6/30/2014 32051GJ55 6,285 6,095 190 6,095 6,185 6/30/2014 32053AAB2 6,742 6,623 119 6,623 6,666 6/30/2014 45670PAC2 5,851 5,688 162 5,688 5,830 6/30/2014 52524YAK9 17,511 16,944 567 16,944 17,228 6/30/2014 52525LAQ3 2,853 2,563 290 2,563 2,808 6/30/2014 55027YAD0 1,835 1,792 43 1,792 1,809 6/30/2014 61748HLA7 7,245 7,208 37 7,208 7,102 6/30/2014 76110H2J7 8,102 7,927 176 7,927 8,076 6/30/2014 855541AC2 10,181 10,156 25 10,156 9,987 6/30/2014 863579B72 12,042 12,027 15 12,027 11,638 6/30/2014 88522WAD5 12,071 11,790 281 11,790 12,060 6/30/2014
-------------------------------------------------------------------------------- 24 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
BOOK/ADJUSTED CARRYING VALUE AMORTIZED COST PRESENT VALUE OF DATE OF FINANCIAL BEFORE CURRENT PROJECTED CASH RECOGNIZED AMORTIZED COST FAIR VALUE AT STATEMENT WHERE CUSIP PERIOD OTTI FLOWS OTTI AFTER OTTI TIME OF OTTI REPORTED ---------------------------------------------------------------------------------------------------- 933634AA5 4,393 4,346 46 4,346 4,303 6/30/2014 94980MAA6 24,777 24,065 712 24,065 24,636 6/30/2014 94984NAA0 7,902 7,790 112 7,790 7,840 6/30/2014 94984SAE1 10,766 10,584 181 10,584 10,695 6/30/2014 94984UAE6 6,675 6,585 91 6,585 6,445 6/30/2014 007036QE9 5,149 5,120 29 5,120 5,134 9/30/2014 007036VF0 6,492 6,424 67 6,424 6,178 9/30/2014 02149DAN9 7,587 7,570 17 7,570 7,298 9/30/2014 02150XAA9 10,641 10,611 30 10,611 10,264 9/30/2014 02660KAA0 14,671 12,317 2,354 12,317 14,402 9/30/2014 02660LAB6 3,052 3,041 11 3,041 2,932 9/30/2014 05949A4R8 7,290 7,132 158 7,132 7,259 9/30/2014 126380AU8 2,449 2,417 32 2,417 2,356 9/30/2014 12668AXL4 4,345 4,330 15 4,330 4,341 9/30/2014 126694GF9 7,317 7,253 64 7,253 7,154 9/30/2014 12669FN25 4,706 4,700 6 4,700 4,629 9/30/2014 16163LAR3 9,165 9,020 145 9,020 9,012 9/30/2014 17313FAA0 15,003 14,733 270 14,733 14,864 9/30/2014 25150RAF2 12,180 11,993 186 11,993 11,870 9/30/2014 320516AA5 16,168 15,981 187 15,981 15,924 9/30/2014 32053AAB2 6,470 6,369 101 6,369 6,431 9/30/2014 41161PJX2 13,506 11,844 1,662 11,844 12,777 9/30/2014 456610AA2 3,799 3,769 30 3,769 3,627 9/30/2014 45662FAA8 3,028 2,937 90 2,937 3,020 9/30/2014 45662FAD2 3,861 3,817 45 3,817 3,850 9/30/2014 45668JAF3 5,013 4,920 93 4,920 4,948 9/30/2014 466286AA9 4,699 4,662 36 4,662 4,616 9/30/2014 46630GAH8 6,488 6,371 117 6,371 6,462 9/30/2014 68389FKQ6 14,454 14,221 233 14,221 13,951 9/30/2014 93936RAA2 8,764 8,693 72 8,693 8,714 9/30/2014 94983GAD0 6,860 6,765 95 6,765 6,856 9/30/2014 94984NAA0 7,548 7,292 256 7,292 7,529 9/30/2014 007036HV1 3,700 3,693 7 3,693 3,639 12/31/2014 007036QE9 5,027 4,915 111 4,915 4,964 12/31/2014 007036VF0 6,442 6,315 127 6,315 6,137 12/31/2014 02149DAN9 7,561 7,413 148 7,413 7,188 12/31/2014 02150XAA9 10,531 10,321 209 10,321 10,065 12/31/2014 02151RAB9 6,885 6,724 161 6,724 6,872 12/31/2014 05530VAA7 522 515 7 515 513 12/31/2014 05530VAB5 5,137 5,046 91 5,046 4,948 12/31/2014 058928AD4 1,248 1,237 11 1,237 1,219 12/31/2014 05946XR62 3,215 3,077 138 3,077 3,171 12/31/2014 05946XYX5 7,269 6,991 278 6,991 7,179 12/31/2014 05951GAD4 4,405 4,368 37 4,368 4,056 12/31/2014 07387AEG6 3,383 3,358 25 3,358 3,349 12/31/2014 07401CAS2 8,564 8,236 328 8,236 8,521 12/31/2014 125439AA7 6,338 6,206 132 6,206 6,234 12/31/2014 12628KAE2 3,199 2,927 272 2,927 3,094 12/31/2014 126380AU8 2,415 2,230 184 2,230 2,251 12/31/2014 12669FN25 4,517 4,465 52 4,465 4,380 12/31/2014
-------------------------------------------------------------------------------- 25 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
BOOK/ADJUSTED CARRYING VALUE AMORTIZED COST PRESENT VALUE OF DATE OF FINANCIAL BEFORE CURRENT PROJECTED CASH RECOGNIZED AMORTIZED COST FAIR VALUE AT STATEMENT WHERE CUSIP PERIOD OTTI FLOWS OTTI AFTER OTTI TIME OF OTTI REPORTED ---------------------------------------------------------------------------------------------------- 12669GA92 5,695 5,513 181 5,513 5,591 12/31/2014 16162WPG8 12,605 12,304 301 12,304 12,434 12/31/2014 17313FAA0 14,828 14,335 493 14,335 14,642 12/31/2014 25150WAA2 6,539 6,407 133 6,407 6,354 12/31/2014 25151YAC3 7,033 6,992 41 6,992 7,018 12/31/2014 320516AA5 15,837 15,511 326 15,511 15,507 12/31/2014 32051GJ55 5,959 5,830 129 5,830 5,824 12/31/2014 32051GLQ6 7,751 7,642 109 7,642 7,679 12/31/2014 32053AAB2 6,273 6,160 113 6,160 6,235 12/31/2014 36242D4W0 4,458 4,423 35 4,423 4,331 12/31/2014 45254NML8 5,150 5,089 61 5,089 5,147 12/31/2014 45660LDE6 29,837 29,017 820 29,017 29,839 12/31/2014 45660LP29 9,966 9,810 155 9,810 9,769 12/31/2014 45662FAD2 3,742 3,683 58 3,683 3,702 12/31/2014 45668JAF3 4,969 4,847 122 4,847 4,931 12/31/2014 46630GAH8 6,051 5,953 97 5,953 6,046 12/31/2014 550279AA1 7,297 6,732 565 6,732 7,161 12/31/2014 55027YAD0 1,717 1,680 38 1,680 1,680 12/31/2014 576433QT6 5,066 5,013 53 5,013 5,017 12/31/2014 57645TAA5 304 303 1 303 302 12/31/2014 59023RAJ8 5,676 5,564 112 5,564 5,540 12/31/2014 61748HLA7 6,737 6,628 109 6,628 6,333 12/31/2014 617538AC7 8,225 8,080 145 8,080 7,356 12/31/2014 74923JAE7 5,992 5,574 418 5,574 5,250 12/31/2014 76110H7B9 5,095 4,999 96 4,999 4,848 12/31/2014 768277AA3 2,920 2,611 308 2,611 2,798 12/31/2014 78473WAE3 14,381 14,196 185 14,196 14,048 12/31/2014 855541AC2 9,943 9,794 149 9,794 9,636 12/31/2014 86359B5P2 5,846 5,835 11 5,835 5,747 12/31/2014 86359DUR6 5,383 5,280 103 5,280 5,357 12/31/2014 86359PAC4 8,253 8,149 103 8,149 7,920 12/31/2014 86361PAA4 3,856 3,831 25 3,831 3,760 12/31/2014 86362RAC5 4,734 4,576 158 4,576 4,694 12/31/2014 92922F7Q5 9,923 9,700 223 9,700 9,797 12/31/2014 92926WAA5 28,240 27,371 869 27,371 27,646 12/31/2014 933634AA5 4,038 3,994 44 3,994 4,028 12/31/2014 933638AA6 8,045 7,979 66 7,979 7,887 12/31/2014 93364AAB8 1,907 1,896 11 1,896 1,841 12/31/2014 93364FAD3 3,789 3,736 53 3,736 3,751 12/31/2014 94983GAA6 3,974 3,889 85 3,889 3,968 12/31/2014 94984SAE1 9,797 9,485 312 9,485 9,649 12/31/2014 94984UAE6 6,286 6,101 185 6,101 6,077 12/31/2014
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 26 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The following table shows the aggregate unrealized losses and related fair value relating to those securities for which an OTTI has not been recognized as of the reporting date and the length of time that the securities have been in a continuous unrealized loss position: Aggregate unrealized losses: Less than 12 Months $ 15,151 12 Months or longer $ 20,215 Aggregate related fair value of securities with unrealized losses: Less than 12 Months $1,046,407 12 Months or longer $ 371,592
D. Unrealized losses -------------------------------------------------------------------------------- The fair value of the Company's bonds and stocks that had gross unrealized losses (where fair value is less than amortized cost) as of December 31, 2014 and 2013 are set forth in the table below:
-------------------------------------------------------------------------------------------------------- DECEMBER 31, 2014 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL --------------------------------------------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES -------------------------------------------------------------------------------------------------------- U.S. GOVERNMENTS $ 337,299 $ (1,255) $ 24,724 $ (1,364) $ 362,023 $ (2,619) ALL OTHER GOVERNMENTS 24,617 (2,415) 573 (50) 25,190 (2,465) STATES, TERRITORIES AND POSSESSIONS 13,639 (4) 1,086 (10) 14,725 (14) POLITICAL SUBDIVISIONS OF STATES, TERRITORIES AND POSSESSIONS 4,826 (3) - - 4,826 (3) SPECIAL REVENUE 197,974 (48) 121,146 (1,581) 319,120 (1,629) INDUSTRIAL AND MISCELLANEOUS 1,913,012 (49,247) 421,245 (25,229) 2,334,257 (74,476) -------------------------------------------------------------------------------------------------------- TOTAL BONDS 2,491,367 (52,972) 568,774 (28,234) 3,060,141 (81,206) -------------------------------------------------------------------------------------------------------- AFFILIATED - - 21,736 (4,858) 21,736 (4,858) NON-AFFILIATED 27,724 (5,435) - - 27,724 (5,435) -------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS 27,724 (5,435) 21,736 (4,858) 49,460 (10,293) -------------------------------------------------------------------------------------------------------- TOTAL STOCKS 27,724 (5,435) 21,736 (4,858) 49,460 (10,293) -------------------------------------------------------------------------------------------------------- TOTAL BONDS AND STOCKS $2,519,091 $(58,407) $590,510 $(33,092) $3,109,601 $(91,499) --------------------------------------------------------------------------------------------------------
DECEMBER 31, 2013 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL --------------------------------------------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES -------------------------------------------------------------------------------------------------------- U.S. governments $ 166,481 $ (4,910) $ 4,513 $ (511) $ 170,994 $ (5,422) All other governments 54,133 (5,929) - - 54,133 (5,929) States, territories and possessions 184,341 (6,325) - - 184,341 (6,325) Political subdivisions of states, territories and possessions 160,011 (5,332) - - 160,011 (5,332) Special revenue 1,182,735 (48,499) 46,375 (7,444) 1,229,110 (55,943) Industrial and miscellaneous 1,606,368 (53,144) 279,823 (4,201) 1,886,190 (57,345) -------------------------------------------------------------------------------------------------------- TOTAL BONDS 3,354,069 (124,139) 330,711 (12,156) 3,684,779 (136,296) -------------------------------------------------------------------------------------------------------- Affiliated - - 21,480 (5,115) 21,480 (5,115) Non-affiliated 27,570 (2,893) - - 27,570 (2,893) -------------------------------------------------------------------------------------------------------- Total common stocks 27,570 (2,893) 21,480 (5,115) 49,050 (8,008) -------------------------------------------------------------------------------------------------------- TOTAL STOCKS 27,570 (2,893) 21,480 (5,115) 49,050 (8,008) -------------------------------------------------------------------------------------------------------- TOTAL BONDS AND STOCKS $3,381,639 $(127,032) $352,191 $(17,271) $3,733,829 $(144,304) --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 27 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- E. Realized Gains/(Losses) -------------------------------------------------------------------------------- Proceeds from sales and associated gross realized gains (losses) for the years ended December 31, 2014, 2013 and 2012 were as follows:
----------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 2014 2013 2012 ----------------------------------------------------------------------------------------- EQUITY EQUITY EQUITY BONDS SECURITIES BONDS SECURITIES BONDS SECURITIES ----------------------------------------------------------------------------------------- Proceeds from sale $2,737,487 $21,041 $1,834,014 $3,272 $3,047,963 $2,830 Gross realized gains 78,299 5,154 56,537 50 133,853 21 Gross realized losses (13,617) (804) (6,960) (61) (6,685) (86)
F. Derivative Financial Instruments -------------------------------------------------------------------------------- The Company's currency derivative financial instruments were entered into to manage risk from currency exchange rate fluctuations, and the impact of such fluctuations to surplus and cash flows on investments or loss reserves. While not accounted for under hedge accounting, the currency derivatives are economic hedges of the Company's exposure to fluctuations in the value of receipts on certain investments held by the Company denominated in foreign currencies (primarily GBP and EUR), or of the Company's exposure to fluctuations in recorded amounts of loss reserves denominated in foreign currencies (primarily JPY). Market Risk The Company is exposed under its currency derivatives to fluctuations in value of the swaps and forwards and variability of cash flows due to changes in exchange rates. Credit Risk The current credit exposure of the Company's derivative contracts is limited to the fair value of such contracts. Credit risk is managed by entering into transactions with creditworthy counterparties and obtaining collateral. Cash Requirement The Company is subject to collateral requirements on its currency derivative contracts. Additionally, the Company is required to make currency exchanges on fixed dates and fixed amounts or fixed exchange rates, or make a payment in the amount of foreign currency physically received on certain foreign denominated investments. The currency derivatives do not qualify for hedge accounting. As a result, the Company's currency contracts are accounted for at fair value and the changes in fair value are recorded as unrealized gains or losses in the Statements of Operations and Changes in Capital and Surplus until the derivative expires at which time the related unrealized amounts are recognized in Realized capital gains/losses. The Company did not apply hedge accounting to any of its derivatives for any period in these financial statements. The following tables summarize the outstanding notional amounts, the fair values and the realized and unrealized gains or losses of the derivative financial instruments held by the Company for the year ended December 31, 2014 and 2013.
------------------------------------------------------------------------------------------ DECEMBER 31, 2014 YEAR ENDED DECEMBER 31, 2014 ------------------------ ------------------------------ UNREALIZED OUTSTANDING FAIR REALIZED GAINS/ CAPITAL GAINS / DERIVATIVE FINANCIAL INSTRUMENT NOTIONAL AMOUNT VALUE (LOSSES) (LOSSES) ------------------------------------------------------------------------------------------ SWAPS $ 933,978 $ 33,230 $(14,509) $ 33,230 FORWARDS 70,662 (578) 3,028 (578) ------------------------------------------------------------------------------------------ TOTAL $1,004,640 $ 32,652 $(11,481) $ 32,652 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ DECEMBER 31, 2013 YEAR ENDED DECEMBER 31, 2013 ------------------------ ------------------------------ UNREALIZED OUTSTANDING FAIR REALIZED GAINS/ CAPITAL GAINS / DERIVATIVE FINANCIAL INSTRUMENT NOTIONAL AMOUNT VALUE (LOSSES) LOSSES ------------------------------------------------------------------------------------------ Swaps $ 655,560 $(17,416) $ (7,575) $(17,416) ------------------------------------------------------------------------------------------ Forwards 83,105 (2,937) (4,812) (2,937) ------------------------------------------------------------------------------------------ TOTAL $ 738,665 $(20,353) $(12,387) $(20,353) ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 28 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Derivative instruments reported on the Statements of Admitted Assets and the Statements of Liabilities, Capital and Surplus have been reduced by the amount of collateral held or posted by the Company with respect to the derivative position. G. Other Invested Assets -------------------------------------------------------------------------------- During 2014, 2013 and 2012, the Company recorded the following OTTI impairment losses on investments in joint ventures and partnerships:
--------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2014 2013 2012 --------------------------------------------------------------------------------------- Advanced Technology Ventures VII, L.P. $ 7,329 $ - - Prides Capital Fund I LP 3,781 3,904 - General Atlantic Partners 78, L.P. 1,850 - - PineBridge Private Equity Portfolio, L.P. 1,060 - - GA-GTCO US AIV, L.P. - 10,704 - Steel Partners Holdings L.P. - - 4,569 General Atlantic Mauritius Limited - - 2,276 Hunter Global Investors LP - - 1,578 Investments individually less than $1 million - 1,919 - --------------------------------------------------------------------------------------- TOTAL $ 14,020 $ 16,527 8,423 ---------------------------------------------------------------------------------------
H. Investment Income -------------------------------------------------------------------------------- The Company had no accrued investment income receivables over 90 days past due. Investment expenses of $24,394, $23,870 and $29,000 were included in Net Investment Income for the years ended December 31, 2014, 2013 and 2012, respectively. I. Financial Instruments with Credit Risk -------------------------------------------------------------------------------- The Company is exposed to credit risk relating to its investments both from potential issuer, geographic or activity concentrations. These risks are managed strategically using asset allocation methodologies that select primarily high quality investments and asset diversification. In addition, AIG company-wide credit risks are monitored by AIG's Financial Risk Group ("FRG") who attempt to avoid unwanted or excessive risk accumulations, whether funded or unfunded. To minimize the level of credit risk, the Company may require third party guarantees, reinsurance or collateral, such as letters of credit and trust collateral accounts. The Company monitors its aggregate credit exposure. The Company's largest exposures by investment category to a single issuer/borrower/investment, excluding the U.S. government, U.S. government agency securities and those U.S. government money market funds as of December 31, 2014 are as follows:
--------------------------------------------------------------------------------------------- ISSUER DESCRIPTION OF EXPOSURE AMOUNT PERCENTAGE OF TOTAL ADMITTED ASSETS --------------------------------------------------------------------------------------------- L Street II Limited Liability Company Bonds $ 335,092 1.3% Operating Pool Short Term Investments 282,664 1.1% New York New York Bonds 262,433 1.0% Washington Mutual Incorporated Bonds 220,315 0.8% The Bear Stearns Companies Limited Liability Company Bonds 216,513 0.8% New York State Dormitory Authority Bonds 199,491 0.8% Chamonix Portfolio Other Invested Assets 175,311 0.7% Wells Fargo & Company Bonds 172,090 0.7% California State Bonds 168,921 0.6% Knightsbridge Student Housing - United Kingdom Student Accommodation Portfolio Commercial Mortgage Loan 159,970 0.6%
-------------------------------------------------------------------------------- 29 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The amounts and percentages of the Company's total admitted assets held in bonds by NAIC rating as of December 31, 2014 are: --------------------------------------------------------------------------------
------------------------------------------------------------------------------------ PERCENTAGE OF TOTAL ADMITTED BONDS AMOUNT ASSETS ------------------------------------------------------------------------------------ NAIC-1 $ 15,111,207 57.3% NAIC-2 2,341,980 8.9% NAIC-3 426,532 1.6% NAIC-4 415,194 1.6% NAIC-5 49,832 0.2% NAIC-6 50,769 0.2% ------------------------------------------------------------------------------------ Total 18,395,514 69.8% ------------------------------------------------------------------------------------
The following table shows the Company's foreign investment exposures by country categorized by NAIC sovereign ratings as of December 31, 2014:
---------------------------------------------------------------------------------------- NAIC - 3 COUNTRY NAIC - 1 NAIC - 2 OR BELOW ---------------------------------------------------------------------------------------- United Kingdom $ 897,174 $ - $ - Cayman Islands 579,073 - - Spain - 20,505 - Mexico - 8,608 - Argentina - - 38,104 Barbados - - 6,707 Other 1,064,246 11,376 1,066 ---------------------------------------------------------------------------------------- Total $ 2,540,493 $ 40,489 $ 45,877 ----------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- The Company's unhedged foreign currency exposures, categorized by the country's NAIC sovereign rating as of December 31, 2014:
---------------------------------------------------------------------------------------- NAIC -3 OR COUNTRY NAIC -1 NAIC -2 BELOW ---------------------------------------------------------------------------------------- United Kingdom $ 513,185 $ - $ - Netherlands 79,742 - - Spain - 6,961 - Argentina - - 13,575 Other 179,543 - - ---------------------------------------------------------------------------------------- TOTAL $ 772,470 $ 6,961 $ 13,575 ----------------------------------------------------------------------------------------
The following table shows the three largest non-affiliated privately placed equity investments held by the Company as of December 31, 2014:
---------------------------------------------------------------------------------------- PERCENTAGE OF TOTAL ADMITTED ISSUER AMOUNT ASSETS ---------------------------------------------------------------------------------------- Chamonix Portfolio $ 175,311 0.7% Blackstone Real Estate Partners (BREP) VI, LP 105,453 0.4% Sands Portfolio Final Upsize 56,833 0.2% ---------------------------------------------------------------------------------------- Aggregate Exposure $ 2,485,904 9.4% ----------------------------------------------------------------------------------------
J. Restricted Assets -------------------------------------------------------------------------------- The Company had securities deposited with regulatory authorities, as required by law, with a carrying value of $890,664 and $1,155,475 as of December 31, 2014 and 2013, respectively. -------------------------------------------------------------------------------- 30 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 4. FAIR VALUE OF FINANCIAL INSTRUMENTS -------------------------------------------------------------------------------- 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 as of December 31, 2014 and 2013:
--------------------------------------------------------------------------------------------------------- 2014 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL --------------------------------------------------------------------------------------------------------- BONDS $ - $ 418,887 $ 122,153 $ 541,040 COMMON STOCKS 25,664 - - 25,664 DERIVATIVE ASSET - 25,874 7,774 33,648 DERIVATIVE LIABILITIES - (996) - (996) MUTUAL FUNDS 26,832 - - 26,832 --------------------------------------------------------------------------------------------------------- TOTAL $ 52,496 $ 443,765 $ 129,927 $ 626,188 --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- 2013 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL --------------------------------------------------------------------------------------------------------- Bonds $ - $ 286,787 $ 24,684 $ 311,471 Common stocks 36,576 - - 36,576 Derivative asset - - 428 428 Derivative liabilities - (16,279) (4,502) (20,781) Mutual funds 31,747 - - 31,747 --------------------------------------------------------------------------------------------------------- Total $ 68,323 $ 270,508 $ 20,610 $ 359,441 ---------------------------------------------------------------------------------------------------------
There were no assets carried at fair value that were transferred between Level 1 and Level 2 during 2014 and 2013. A. Fair Value Measurements in (Level 3) of the Fair Value Hierarchy -------------------------------------------------------------------------------- The following tables show the balance and activity of financial instruments classified as level 3 in the fair value hierarchy for the years ended December 31, 2014 and 2013.
------------------------------------------------------------------------------------------------------------------ TOTAL UNREALIZED PURCHASES, REALIZED GAINS GAINS SALES, BEGINNING (LOSSES) INCLUDED IN (LOSSES) ISSUANCES, BALANCE AT BALANCE AT TRANSFERS TRANSFERS OUT NET INVESTMENT INCLUDED IN SETTLEMENTS, DECEMBER 31, 2014 JANUARY 1, 2014 INTO LEVEL 3 OF LEVEL 3 INCOME SURPLUS NET 2014 ------------------------------------------------------------------------------------------------------------------ BONDS $ 24,684 $81,179 $(110,203) $3,644 $(79,264) $202,113 $122,153 DERIVATIVES (4,074) - - - 11,848 - 7,774 ------------------------------------------------------------------------------------------------------------------ TOTAL $ 20,610 $81,179 $(110,203) $3,644 $(67,416) $202,113 $129,927 ------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2014, bonds of $110,203 which are no longer carried at fair value, were transferred out of Level 3. Bond balances of $81,179 were transferred into Level 3 and carried at fair value during 2014. Prior to the transfer, the securities were Level 3 but not carried at fair value. There were no bonds or common stocks carried at fair value transferred to/from Level 3 originating in Levels 1 or 2. There were no derivative balances transferred to/from Level 3 during 2014. -------------------------------------------------------------------------------- 31 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------- TOTAL REALIZED GAINS (LOSSES) UNREALIZED PURCHASES, BEGINNING INCLUDED IN GAINS SALES, BALANCE AT NET (LOSSES) ISSUANCES, BALANCE AT JANUARY 1, TRANSFERS TRANSFERS OUT INVESTMENT INCLUDED SETTLEMENTS, DECEMBER 31, 2013 2013 INTO LEVEL 3 OF LEVEL 3 INCOME IN SURPLUS NET 2013 ---------------------------------------------------------------------------------------------------------------------- Bonds $ 55,092 $ 44,342 $ (171,814) $ 5,699 $ (33,231) $ 124,596 $ 24,684 Derivatives - 7,975 - - (12,049) - (4,074) ---------------------------------------------------------------------------------------------------------------------- TOTAL $ 55,092 $ 52,317 $ (171,814) $ 5,699 $ (45,280) $ 124,596 $ 20,610 ----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2013, bonds of $171,814 which are no longer carried at fair value, were transferred out of Level 3. Bond balance of $44,342 was transferred into Level 3 and carried at market value during 2013. Prior to the transfer, the securities were Level 3 but not carried at fair value. Derivative balances of $7,975 were transferred into Level 3 and carried at fair value during 2013. Prior to the transfer, the securities were level 2 and carried at fair value. There were no bonds or common stocks carried at fair value transferred to/from Level 3 originating in Levels 1 or 2. B. Fair Value of all Financial Instruments -------------------------------------------------------------------------------- The table below details the fair value of all financial instruments except for those accounted for under the equity method as of December 31, 2014 and 2013:
--------------------------------------------------------------------------------------------------------------------- AGGREGATE FAIR NOT PRACTICABLE DECEMBER 31, 2014 VALUE ADMITTED ASSETS LEVEL 1 LEVEL 2 LEVEL 3 (CARRY VALUE) --------------------------------------------------------------------------------------------------------------------- BONDS $ 19,061,712 $ 18,100,940 $ 199,531 $ 15,199,173 $ 3,663,008 $ - COMMON STOCK 25,664 25,664 25,664 - - - DERIVATIVES - ASSETS 33,648 2,338 - 25,874 7,774 - DERIVATIVES - LIABILITIES (996) (996) - (996) - - MORTGAGE LOANS 1,112,182 1,049,708 - - 1,112,182 - MUTUAL FUNDS 26,832 26,832 26,832 - - - PREFERRED STOCK 34,674 18,412 - - 34,674 - SHORT TERM INVESTMENTS 294,574 294,574 10,923 283,651 - - --------------------------------------------------------------------------------------------------------------------- TOTAL $ 20,588,290 $ 19,517,472 $ 262,950 $ 15,507,702 $ 4,817,638 $ - --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- AGGREGATE FAIR NOT PRACTICABLE DECEMBER 31, 2013 VALUE ADMITTED ASSETS LEVEL 1 LEVEL 2 LEVEL 3 (CARRY VALUE) --------------------------------------------------------------------------------------------------------------------- Bonds $ 17,496,764 $ 16,780,357 1,938 14,654,585 2,840,241 - Common stock 36,576 36,576 36,576 - - - Derivatives - assets 428 428 - - 428 - Derivatives - liabilities (20,781) (20,781) - (16,280) (4,502) - Mortgage loans 551,617 536,056 - - 551,617 - Mutual funds 31,747 31,747 31,747 - - - Short term investments 308,868 308,868 233 308,634 - - --------------------------------------------------------------------------------------------------------------------- TOTAL $ 18,405,219 $ 17,673,251 $ 70,494 $ 14,946,939 $ 3,387,784 $ - ---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 32 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 5. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) -------------------------------------------------------------------------------- A roll forward of the Company's net reserves for losses and LAE as of December 31, 2014, 2013 and 2012, is set forth in the table below:
-------------------------------------------------------------------------------------------------------------- 2014 2013 2012 -------------------------------------------------------------------------------------------------------------- RESERVES FOR LOSSES AND LAE, END OF PRIOR YEAR $ 12,445,415 $ 12,300,489 $ 12,466,514 -------------------------------------------------------------------------------------------------------------- Incurred losses and LAE related to: Current accident year 3,957,869 3,525,027 4,006,581 Prior accident year 190,857 275,409 252,121 -------------------------------------------------------------------------------------------------------------- TOTAL INCURRED LOSSES AND LAE $ 4,148,726 $ 3,800,436 $ 4,258,702 -------------------------------------------------------------------------------------------------------------- Paid losses and LAE related to: Impact of pooling restructure transaction 1,563,011 - - Current accident year (1,033,539) (744,185) (1,218,287) Prior accident year (3,694,053) (2,911,325) (3,206,440) -------------------------------------------------------------------------------------------------------------- TOTAL PAID LOSSES AND LAE (3,164,581) (3,655,510) (4,424,727) -------------------------------------------------------------------------------------------------------------- RESERVES FOR LOSSES AND LAE, END OF CURRENT YEAR $ 13,429,560 $ 12,445,415 $ 12,300,489 --------------------------------------------------------------------------------------------------------------
For 2014, the Company reported adverse loss and LAE net reserve development of $190,857, which includes a loss reserve discount benefit of $14,789 due to changes in the payout pattern assumptions, accretion, as well as the impact of the Combined Pooling Agreement (Note 6). The adverse development is comprised mainly of development on the Constructions class of business of $87,439, the National Accounts class of business of $82,957, and the Executive Liability class of business of $68,784 partially offset with $(119,961) of favorable develpoment from the Japan branch transfer. Original estimates are increased or decreased, as additional information becomes known regarding individual claims. Included in this increase, is $31,500 of unfavorable prior year loss development on retrospectively rated policies as of December 31, 2014, which was offset by additional premiums. For 2013, the Company reported adverse loss and LAE net reserve development of $275,409 including accretion of loss reserve discount of $58,231. The adverse development was mostly attributable to Transportation, Construction and Property classes of business partially offset by favorable development in Excess Casualty and Personal lines. Included in this increase, is $32,040 of unfavorable prior year loss development on retrospectively rated policies as of December 31, 2013, which was offset by additional premiums. For 2012, the Company reported adverse loss and LAE net reserve development of $252,121 including accretion of loss reserve discount of $24,929. The adverse development was mostly attributable to Primary Casualty, Public Entity Runoff, and the Excess Casualty classes of business partially offset by favorable development of Financial Lines. Included in this increase, the Company experienced $22,320 of unfavorable prior year loss development on retrospectively rated policies as of December 31, 2012, which was offset by additional premiums. The commutation of an internal reinsurance treaty under which a U.S. subsidiary previously ceded workers' compensation claims Defense Base Act (DBA) to a non-U.S. subsidiary also contributed $33,549 of adverse development. The Company's reserves for losses and LAE have been reduced for anticipated salvage and subrogation of $189,882, $197,595 and $173,365 as of December 31, 2014, 2013 and 2012, respectively. The Company paid $11,270 $10,186 and $16,673 in the reporting period to settle 190, 173 and 194 claims related to extra contractual obligations or bad faith claims stemming from lawsuits as of December 31, 2014, 2013 and 2012, respectively. A. ASBESTOS/ENVIRONMENTAL RESERVES -------------------------------------------------------------------------------- The Company has indemnity claims asserting injuries from toxic waste, hazardous substances, asbestos and other environmental pollutants and alleged damages to cover the clean-up costs of hazardous waste dump sites (environmental claims). Estimation of environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1986 and prior years, cannot be estimated by conventional reserving techniques. Environmental claims development is affected by factors such as inconsistent court resolutions, the broadening of the intent of policies and scope of coverage and increasing number of new claims. The Company and other industry members have and will continue to litigate the broadening judicial interpretation of policy coverage and the liability issues. If the courts continue in the future to expand the intent of the policies and the scope of the coverage, as they have in the past, additional liabilities would emerge for amounts in excess of reserves held. This emergence cannot now be reasonably estimated, but could have a material impact on the Company's future operating results or financial position. -------------------------------------------------------------------------------- 33 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The Company has exposure to asbestos and/or environmental losses and LAE costs arising from pre-1986 general liability, product liability, commercial multi-peril and excess liability insurance or reinsurance policies as noted below:
ASBESTOS LOSSES ENVIRONMENTAL LOSSES ------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 2014 2013 2012 2014 2013 2012 ------------------------------------------------------------------------------------------------------------------------ Direct - Loss and LAE reserves, beginning of year $ 1,185,364 $ 1,229,896 $ 1,350,806 $ 83,569 $ 84,847 $ 55,848 Impact of pooling restructure transaction (438) - - 5,907 - - Incurred losses and LAE (107,471) 96,945 (20,822) 33,094 26,547 42,532 Calendar year paid losses and LAE (109,053) (141,477) (100,088) (24,787) (27,825) (13,533) ------------------------------------------------------------------------------------------------------------------------ Loss and LAE Reserves, end of year $ 968,402 $ 1,185,364 $ 1,229,896 $ 97,783 $ 83,569 $ 84,847 ------------------------------------------------------------------------------------------------------------------------ Assumed reinsurance - Loss and LAE reserves, beginning of year $ 280,670 $ 158,787 $ 161,724 $ 5,357 $ 6,941 $ 5,628 Impact of pooling restructure transaction (40,857) - - (815) - - Incurred losses and LAE 113,981 9,271 19,159 8,876 3,084 1,379 Calendar year paid losses and LAE (81,371) 112,612 (22,096) (672) (4,668) (66) ------------------------------------------------------------------------------------------------------------------------ Loss and LAE Reserves, end of year $ 272,423 $ 280,670 $ 158,787 $ 12,746 $ 5,357 $ 6,941 ------------------------------------------------------------------------------------------------------------------------ Net of reinsurance - Loss and LAE reserves, beginning of year $ - $ - $ - $ 50,205 $ 51,573 $ 38,587 Impact of pooling restructure transaction - - - (1,164) - - Incurred losses and LAE - - - 18,030 18,668 22,205 Calendar year paid losses and LAE - - - (11,515) (20,036) (9,219) ------------------------------------------------------------------------------------------------------------------------ Loss and LAE Reserves, end of year $ - $ - $ - $ 55,556 $ 50,205 $ 51,573 ------------------------------------------------------------------------------------------------------------------------
The Company estimates the full impact of the asbestos and environmental exposure by establishing full 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. The Company had asbestos loss and LAE - IBNR and bulk reserves as follows:
------------------------------------------------------------------------------------------------------------------------- ASBESTOS LOSS RESERVE LAE RESERVE DECEMBER 31, 2014 2013 2012 2014 2013 2012 ------------------------------------------------------------------------------------------------------------------------- Direct basis: $ 547,464 $ 748,407 $ 718,611 $ 60,829 $ 84,188 $ 81,879 Assumed reinsurance basis: 95,699 133,025 83,016 10,633 13,315 7,822
The Company had environmental loss and LAE - IBNR and bulk reserves as follows: --------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------- ENVIRONMENTAL LOSS RESERVE LAE RESERVE DECEMBER 31, 2014 2013 2012 2014 2013 2012 -------------------------------------------------------------------------------------------------------------------------- Direct basis: $ 31,779 $ 16,406 $ 13,897 $ 13,619 $ 7,031 $ 5,956 Assumed reinsurance basis: 1,290 683 203 552 199 62 Net of ceded reinsurance basis: 18,118 10,046 6,579 7,765 4,212 2,795
B. LOSS PORTFOLIO TRANSFER -------------------------------------------------------------------------------- Effective April 1, 2014, the Company and certain AIG affiliated insurers (collectively, the "2014 Reinsureds", each of which is a member of the US Combined Pool) entered into two loss portfolio transfer reinsurance agreements with Eaglestone Reinsurance Company ("Eaglestone"), an affiliate. Under these agreements, Eaglestone assumed loss portfolio transfers of certain Public Entity and Occupational Accident reserves from the 2014 Reinsureds. The total consideration received from Eaglestone, on a funds withheld basis, was $252,606, equal to the total of the subject reserves for losses and LAE. -------------------------------------------------------------------------------- 34 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- C. Discounting of Liabilities for Unpaid Losses or Unpaid Loss Adjustment Expenses -------------------------------------------------------------------------------- The Company discounts both its workers' compensation (both tabular and non-tabular) and certain retained asbestos (non-tabular) reserves. The calculation of the Company's tabular discount is based upon the mortality table used in the 1999 US Decennial Life Table, and applying a 3.5 percent interest rate. Only case basis reserves are discounted. The December 31, 2014 and 2013 liabilities include $1,275,727 and $1,677,259 of such discounted reserves, respectively. Tabular Reserve Discount -------------------------------------------------------------------------------- The table below presents the amount of tabular discount applied to the Company's reserves as of December 31, 2014, 2013 and 2012.
----------------------------------------- LINES OF BUSINESS 2014 2013 2012 ---------------------------------------------------------------------------------------------- Workers' Compensation Case Reserves $ 186,911 $ 214,846 $ 211,531
Non-Tabular Discount -------------------------------------------------------------------------------- The Company's non-tabular workers' compensation case reserves are discounted using the Company's own payout pattern and a 5 percent interest rate, as prescribed by NY SAP. The table below presents the amount of non-tabular discount applied to the Company's reserves as of December 31, 2014, 2013 and 2012.
----------------------------------------- LINES OF BUSINESS 2014 2013 2012 ---------------------------------------------------------------------------------------------- Workers' Compensation Case Reserves $ 383,098 $ 423,418 $ 455,052
6. RELATED PARTY TRANSACTIONS -------------------------------------------------------------------------------- A. Combined Pooling Agreement -------------------------------------------------------------------------------- As described in Note 1, effective January 1, 2014, the National Union Admitted Lines Pooling Agreement and the AIG Property Casualty Surplus Lines Pooling Agreement, were ammended through a series of reinsurance commutations and novations, and subsequently entered into the Combined Pooling Agreement. The Combined Pooling Agreement represents a new reinsurance quota share agreement whereby the Pool Members share the underwriting risks including premiums earned, losses and LAE incurred, underwriting and other expenses and related assets and liabilities in accordance with the respective companies' percentage participation. All lines of business written by the Combined Companies are subject to the pooling arrangement with the exception of American Home's Japan and Argentina Branches. The Combined Companies are also parties to reinsurance agreements with non-affiliated reinsurers covering the business subject to the pooling agreement and have a contractual right of direct recover from the non-affiliated reinsurers per the terms of such reinsurance agreements. As a result of the January 1, 2014 transaction, insurance assets and liabilities (subject to the agreement) were transferred and the new pooling agreement was accounted for on a prospective basis. The objective of the transaction was to better align legal entity underwriting risk with AIG PC's capital structure. The new Combined Pooling Agreement was approved by the individual company's Insurance Department state of domicile. -------------------------------------------------------------------------------- 35 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Consideration received or (paid) on the 2014 pooling restructure is as follows:
------------------------------------------------ COMPANY AMOUNT ------------------------------------------------ National Union $ 1,494,167 American Home 2,075,418 Lexington 3,019,176 Specialty (1,680,822) C&I (1,672,791) APCC 779,421 New Hampshire (1,988,914) ISOP (1,988,914) AIU (36,741)
-------------------------------------------------------------------------------- 36 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The following table shows the changes in assets, liabilities and surplus of the Company corresponding to the consideration recieved as a result of the 2014 Pooling Restructure Transaction:
---------------- AMOUNT ---------------- ASSETS: Agents' balances or uncollected premiums $ (197,645) Funds held by or deposited with reinsured companies (29,716) Other insurance assets (88,509) --------------- TOTAL ASSETS (315,869) --------------- LIABILITIES Unearned premium reserves 334,466 Reinsurance payable on paid losses and loss adjustment expenses (50,050) Reserves for losses and loss adjustment expenses 1,563,011 Funds held by company under reinsurance treaties 19,344 Ceded reinsurance premiums payable 38,066 Other insurance liabilities (138,645) --------------- TOTAL LIABILITIES $ 1,766,193 --------------- STATEMENT OF OPERATIONS AND CHANGES IN SURPLUS Net premiums written 334,466 Change in unearned premium reserves (334,466) --------------- Premiums earned - --------------- Other underwriting expenses incurred (6,644) --------------- Net income (6,644) --------------- TOTAL CHANGE IN SURPLUS (6,644) --------------- NET IMPACT $ 2,075,418 --------------- CONSIDERATION RECEIVED Securities received $ 272,133 Cash received 1,803,285 --------------- CONSIDERATION RECEIVED $ 2,075,418 ---------------
The Combined Pool members received a permitted practice from the domiciliary states that resulted in the reporting of consideration for the transfer of undiscounted loss reserves as paid (or negative paid) losses within losses incurred, rather than presenting such amounts within premiums written and earned. This permitted practice only relates to the inception of the pooling arrangement. As a result, the consideration paid relating to unearned premium is reflected as negative premiums written, as offset by the change in unearned premium and the consideration relating to the transfer of undiscounted loss reserves and loss adjustment expenses were recorded as negative paid losses, as offset by the change in net losses incurred. This permitted practice had no effect upon net income or surplus for the period. Statutory accounting principles allow for prospective accounting treatment for modifications to existing intercompany pooling agreements that do not result in a gain in surplus to the insurance group or to the impacted companies. Transfer of both assets and the liabilities valued at statutory book value ensures that there is no impact to surplus as a result of implementing a modification to an existing pooling arrangement. Under the terms of the Combined Pooling agreement, which was approved by the individual company's Insurance Department state of domicile, all assets and liabilities were transferred at statutory book value, gross of admissibility, recoverability allowances, provisions and discount amounts. Due to the exclusions of these amounts, there were impacts to the individual companies' net income and surplus amounts, mainly due to the prescribed or permitted practices of the individual company's Insurance Department state of domicile. Specifically, changes in discount resulting from the net reduction in workers' compensation reserves retained following the reduction in the Company's pooling participation percentage were reflected as a charge to income based on the state prescribed discount rates. In addition, the Combined Pool members were compensated for any previous acquisition costs associated with unearned premium reserves that were subject to transfer, as well as certain expense reallocations that had no net effect to the Combined Pool. As a result of the transaction, the Company recorded an increase/(decrease) in its Assets, Liabilities, Surplus and Net Income subsequent to the changes associated with the net consideration received (described above), yet inclusive of the change in discount, acquisition costs and expense reallocation adjustments as follows:
NET ADMITTED LINE DESCRIPTION ASSETS LIABILITIES SURPLUS NET INCOME ---------------- ------------ ----------- --------- ---------- Change in nonadmitted assets $41,668 $ - $ 41,668 $ - Worker's compensation discount - 106,377 (106,377) (106,377) Other allocations 12,230 10,302 1,928 5,793 ------- -------- --------- --------- TOTAL $53,898 $116,679 $ (62,781) $(100,584) ------- -------- --------- ---------
B. American International Overseas Association -------------------------------------------------------------------------------- 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, American Home and National Union. -------------------------------------------------------------------------------- 37 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- At the time of forming the Association, the member companies entered into a 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 in 2013. See Note 6D for changes in this business and percentages. The 2014 and 2013 participation percentages for the pool member companies are set forth in the table below:
-------------------------------------------------------------------------------- NAIC CO. PARTICIPATION MEMBER COMPANY CODE PERCENT -------------------------------------------------------------------------------- Combined Pool member companies, as follows: National Union 19445 78% New Hampshire 23841 12% American Home 19380 10% --------------------------------------------------------------------------------
The Company's participation in the Association is pooled among all Pool members in proportion to their participation in the Pool. The Association's fiscal year end is November 30. Although the fiscal year end for the members of the Company 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 (and therefore on a one month lag). The Company's participation in the Association's assets and liabilities at December 31, 2014 and 2013 was as follows:
-------------------------------------------------------------------------------- DECEMBER 31, 2014 2013 -------------------------------------------------------------------------------- Assumed reinsurance premiums receivable $ 249,779 $ 243,127 Funds held by ceding reinsurers 165,795 164,884 Reinsurance recoverable 86,823 120,033 Equity in underwriting pools and associations 117,991 138,321 -------------------------------------------------------------------------------- TOTAL ASSETS 620,388 666,365 -------------------------------------------------------------------------------- Loss and LAE reserves 726,202 977,472 Unearned premium reserves 254,927 303,265 Funds held 14,994 26,494 Ceded balances payable 77,566 138,809 Assumed reinsurance payable 82,202 147,633 Other liabilities 45,354 17,682 -------------------------------------------------------------------------------- TOTAL LIABILITIES 1,201,245 1,611,355 -------------------------------------------------------------------------------- TOTAL SURPLUS $ (580,857) $ (944,990) --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 38 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- C. Significant Transactions -------------------------------------------------------------------------------- The following table summarizes transactions (excluding reinsurance and cost allocation transactions) that occurred during 2014, 2013 and 2012 between the Company and affiliated companies in which the value exceeded one-half of one percent of the Company's admitted assets as of December 31, 2014, 2013 and 2012. This table also includes all capital contributions and dividends:
ASSETS RECEIVED BY ASSETS TRANSFERRED BY 2014 THE COMPANY THE COMPANY -------------------------------------------------------------------------------------------------------------- DATE OF EXPLANATION OF TRANSACTION TRANSACTION NAME OF AFFILIATE STATEMENT VALUE DESCRIPTION STATEMENT VALUE DESCRIPTION -------------------------------------------------------------------------------------------------------------- 01/17/14 CAPITAL CONTRIBUTION (a) AIG PC US $1,292,577 SECURITIES $ - - 01/17/14 CAPITAL CONTRIBUTION (a) AIG PC US 610 CASH - - 01/17/14 CAPITAL CHANGES (a) AIG PC US 9,312 IN KIND - - 04/01/14 DIVIDEND (b) AIG PC US - - 233,554 SECURITIES 12/19/14 DIVIDEND AIG PC US - - 150,000 CASH 12/31/14 CAPITAL CONTRIBUTION (c) AIG PC US 21,494 IN KIND - - VARIOUS PURCHASE OF SECURITIES C&I 629,431 SECURITIES 630,124 VARIOUS VARIOUS PURCHASE OF SECURITIES ISOP 648,111 SECURITIES 653,606 CASH VARIOUS PURCHASE OF SECURITIES NHIC 581,580 SECURITIES 585,029 CASH --------------------------------------------------------------------------------------------------------------
(a)Refer to Note 6A for more details on the 2014 Pooling Restructure Transaction (b)Refer to Note 6D for more details on The Company's Japan Branch Conversion (c)Refer to Note 1E, Income Taxes, for more detail --------------------------------------------------------------------------------
------------------------------------------------------- ASSETS RECEIVED BY ASSETS TRANSFERRED BY 2013 THE COMPANY THE COMPANY ------------------------------------------------------------------------------------------------------------- DATE OF EXPLANATION OF TRANSACTION TRANSACTION NAME OF AFFILIATE STATEMENT VALUE DESCRIPTION STATEMENT VALUE DESCRIPTION ------------------------------------------------------------------------------------------------------------- 3/19/2013 Dividend AIG PC US $ - - $ 77,000 Cash 3/26/2013 Purchase of securities Lexington 66,542 Securities 66,551 Cash 3/31/2013 Dividend AIG PC US - - 524 In kind 4/1/2013 Dividend AIG PC US - - 23,000 Cash 5/13/2013 Dividend AIG PC US - - 180,000 Cash 9/6/2013 Dividend AIG PC US - - 220,000 Cash 9/30/2013 Dividend AIG PC US - - 320,000 Cash 9/1/2013 Dividend AIG PC US - - 394,435 In kind 12/11/2013 Purchase of securities Association 34,884 Securities 35,446 Cash 12/19/2013 Sale of securities National Union 372,650 Cash 353,142 Securities -------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 39 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------- ASSETS RECEIVED BY ASSETS TRANSFERRED BY 2012 THE COMPANY THE COMPANY ----------------------------------------------------------------------------------------------------------------- DATE OF TRANSACTION EXPLANATION OF TRANSACTION NAME OF AFFILIATE STATEMENT VALUE DESCRIPTION STATEMENT VALUE DESCRIPTION ----------------------------------------------------------------------------------------------------------------- 3/27/2012 Dividend AIG PC US $ - - $ 1,589 Cash 3/27/2012 Dividend AIG PC US - - 48,411 Securities 5/10/2012 Dividend AIG PC US - - 315,000 Cash 6/27/2012 Dividend AIG PC US - - 10,000 Cash 11/1/2012 Dividend AIG PC US - - 129,000 Cash Various Dividend AIG PC US - - 18,716 In kind 10/23/2012 Sale of securities LSTREET I, LLC 159,498 Cash 153,951 Securities 12/27/2012 Sale of securities AIG 563,313 Cash 514,499 Securities 12/27/2012 Capital contribution AIG PC US 300,000 Cash - - Various Capital contribution AIG PC US 1,471 In kind - - Various Capital contribution AIG PC US 52,613 In kind - - Various Capital contribution AIG PC US 166 In kind - - -----------------------------------------------------------------------------------------------------------------
D. Restructuring Foreign Operations -------------------------------------------------------------------------------- As part of its efforts to simplify the legal entity structure, enhance transparency and streamline financial visibility, AIG PC continued to restructure the foreign branch operations of the Pool members. Generally, the results of these foreign branch operations, with the exception of American Home's Japan and Argentina branches, were historically reported as part of the operations of the Association by its member companies. The U.S. member companies of the Association share their participation with the other members of the Combined Pool. Japan Branch Conversion -------------------------------------------------------------------------------- On April 1, 2014, The Company transferred substantially all the assets and liabilities of its Japan Branch to American Home Assurance Co. Ltd. (AHJ), a Japanese-domiciled insurance company that is 100% owned by AIG Property Casualty International (PCI), in exchange for 1,000 Class A shares of AHJ (the AHJ Shares). The AHJ Shares received by American Home were then distributed to AIG and such shares were further distributed to AIG PC and then contributed to PCI as capital contributed from AIG PC. The fair value for the AHJ shares was $233,554 equal to the fair value of the branch on the effective date of transfer. -------------------------------------------------------------------------------- 40 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The following reflects the impact of American Home's Japan Branch transfer (at statement value) on American Home's statutory financial statements during 2014:
NET IMPACT -------------- ASSETS Cash and invested assets $ (895,105) Agents' balances or uncollected premiums (34,695) Reinsurance recoverable on loss payments (28,835) Receivables from parent, subsidiaries and affiliates (2,909) Other admitted assets (15,652) --------------------------------------------------------------------- TOTAL ADMITTED ASSETS (977,196) --------------------------------------------------------------------- LIABILITIES Reserves for losses and LAE (181,096) Unearned premium reserves (385,617) Commissions, premium taxes and other expenses payable (8,738) Reinsurance payable on paid loss and LAE (32,740) Funds held by company under reinsurance treaties (3,833) Other liabilities (81,958) --------------------------------------------------------------------- TOTAL LIABILITIES (693,982) --------------------------------------------------------------------- NET ASSETS $ (283,214) --------------------------------------------------------------------- STATEMENT OF OPERATIONS Premium written $ (566,713) Premiums earned (181,096) Losses incurred (181,096) Net realized capital gains - investment 26,437 Net realized capital (losses) - foreign exchange (39,181) Net realized capital (losses) - other (95,992) --------------------------------------------------------------------- Net Income / (Loss) (108,736) --------------------------------------------------------------------- Change in unrealized capital (loss) (26,437) Change in unrealized foreign exchange 39,181 Change in nonadmitted assets 46,332 --------------------------------------------------------------------- Total change in capital and surplus (49,660) --------------------------------------------------------------------- NET IMPACT (233,554) --------------------------------------------------------------------- DIVIDENDS TO STOCKHOLDER (233,554) ---------------------------------------------------------------------
The impact on net income from the transaction includes a net realized loss of $108,736 comprised of the difference between the statutory net assets transferred, adjusted for nonadmitted assets (primarily capitalized EDP costs) of $95,992, the fair value of the stock distributed, to a loss on the realization of foreign exchange net assets $39,181, partially offset by the gain on the sale of invested assets of $26,437. The Company and AHJ followed a statutory notice procedure, provided for under Japanese law, to facilitate the transfer of the branch's in-force business to AHJ without the need to obtain consent from each policyholder or ceding company individually. Based on the responses received during the notice procedure, the Company and AHJ determined that eligible policyholders effectively consented to the transfer. As a result, the completion of the notice procedure resulted in complete extinguishment of American Home's obligations under insurance policies eligible for transfer under the notice procedure. AHJ agreed to assume primary responsibility (including policy administration and claims handling) for the policies not eligible under the notice procedure (the "Excluded Policies"), and further agreed to indemnify, defend and hold harmless the Company for any costs or expense the Company incurs with respect to such policies. In addition, AIG Japan Holding Kabushiki Kaisha ("AIGJHKK"), an affiliated company which owns 100% of AHJ, has agreed to guarantee AHJ's obligations to indemnify the Company for any costs or expenses arising from the Excluded Policies after the transfer date. -------------------------------------------------------------------------------- 41 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- As a result of AHJ's assuming primary responsibility for the Excluded Policies and the Company's determination that it is probable that the Company will not be called upon to make any payments with respect to the Excluded Policies, the Company has reduced its loss reserves on such policies to zero from the effective date of the transfer. As of December 31, 2014, there was approximately $62,130 in loss reserves on Excluded Policies recorded by AHJ. Loss Portfolio Transfers -------------------------------------------------------------------------------- Japan Redirect In 2013, the AIG PC US insurance companies entered into a series of novations, commutations and other agreement modifications that redirected the Japanese exit reinsurance flows from the Association members and nominees to National Union. The transaction had the overall effect of eliminating the Association's participation in any business from Japan, by transferring such reinsurance arrangements directly to the former Admitted Pool members through National Union. The difference between the consideration paid and the reserves transferred represents reimbursement of commissions ceded and the transfer of other receivables and payables. American International Overseas, Ltd. (AIOL) De-risk In 2013, AIOL withdrew from the Association and entered into a final settlement with American Home, New Hampshire and National Union that effected a full transfer to National Union of all assets, liabilities, and interests (whether present or future, and known or unknown) relating to AIOL's membership in the Association and participation in the reinsurance agreement that governs the insurance business pooled in the Association. Effective December 1, 2013 all profits and losses arising from the Association are shared as follows: American Home (10 percent), New Hampshire (12 percent) and National Union (78 percent). A majority of the loss reserves transferred were executed by novation agreements, with the remaining reserve transfers being executed via commutation or other forms of agreement. The companies have obtained a permitted practice to present the consideration received in relation to loss reserves transferred as negative paid losses rather than as premiums earned. Therefore, all of the consideration received in relation to loss reserves transferred to the former Admitted pool members as a result of this transaction are treated the same way, regardless of the legal form of the agreement that effected the change. Absent this permitted practice, $654,906 of negative paid losses would instead have been presented as earned premiums at the total pool level. Commission expenses represent an allowance for acquisition expenses to AIOL associated with the transferred unearned premiums. -------------------------------------------------------------------------------- 42 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The impact of the Japan redirect and AIOL de-risk loss portfolio transfers are reflected in the following table after the impact of the US pooling:
---------------------------------------------------------------------------------- JAPAN AIOL DE- REDIRECT RISK TOTAL ---------------------------------------------------------------------------------- ASSETS: Insurance balances receivable, net $ 46,249 $ 134,472 $ 180,721 Equities in pools and associations - 322,942 322,942 ---------------------------------------------------------------------------------- TOTAL ASSETS $ 46,249 $ 457,414 $ 503,663 ---------------------------------------------------------------------------------- LIABILITIES: Reserves for loss and LAE $ 155,132 $ 654,906 $ 810,038 Unearned premium reserves 428,153 203,188 631,341 ---------------------------------------------------------------------------------- TOTAL LIABILITIES $ 583,285 $ 858,094 $1,441,379 ---------------------------------------------------------------------------------- STATEMENT OF OPERATIONS AND CHANGES IN SURPLUS: Premiums written $ 428,153 $ 191,119 $ 619,272 ---------------------------------------------------------------------------------- Premiums earned - (12,069) (12,069) Losses incurred - (18,163) (18,163) Commission expense 178,859 48,141 227,000 Change in nonadmitted assets - (63,422) (63,422) Other - (252) (252) ---------------------------------------------------------------------------------- TOTAL CHANGE IN SURPLUS $(178,859) $(105,721) $ (284,580) ---------------------------------------------------------------------------------- NET IMPACT $(358,177) $(294,959) $ (653,136) ---------------------------------------------------------------------------------- Cash $ - $ 129,807 $ 129,807 Bonds - 35,446 35,446 Settlement of intercompany pooling balances 358,177 129,706 487,883 ---------------------------------------------------------------------------------- NET CONSIDERATION RECEIVED $ 358,177 $ 294,959 $ 653,136 ----------------------------------------------------------------------------------
Distribution of Affiliate -------------------------------------------------------------------------------- In September 2013, the Association distributed shares of AEHL, cash and bonds to its members. The following details the distribution components received by the former Admitted Pool members from the Association: --------------------------------------------------------------------------------
----------------------------------------------------------- NATIONAL AMERICAN NEW DECEMBER 31, 2013 UNION HOME HAMPSHIRE TOTAL ----------------------------------------------------------- AEHL Shares $433,879 $394,435 $473,322 $1,301,636 Cash 269,354 416,559 118,623 804,536 Bonds - - 73,489 73,489
-------------------------------------------------------------------------------- 43 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- Immediately following the receipt of this distribution, all of the AEHL shares received by New Hampshire, National Union and The Company were distributed by way of dividend and return of capital to AIG PC US. The former Admitted Pool members shared the Association interest (and the resulting AEHL consideration) in accordance with their pool participation percentages. The following table shows the impact of the contributions and distributions related to this transaction on each of the former Admitted Pool members:
------------------------------------------------------------------------------------------------------------------ NATIONAL AMERICAN NEW DECEMBER 31, 2013 UNION HOME HAMPSHIRE C&I ISOP APCC TOTAL ------------------------------------------------------------------------------------------------------------------ Change in: Total Assets $(293,810) $(239,450) $ 11,789 $(138,454) $ 18,430 $ 18,430 $(623,065) Total Liabilities - 22,288 287,681 - - - 309,969 Statement of Operations and Changes in Surplus: - - - - - - - Net Income 368,415 349,025 48,476 106,646 48,476 48,476 969,514 Unrealized gains/(losses) (228,347) (216,328) (30,046) (66,100) (30,046) (30,046) (600,913) Dividends paid (198,716) (394,435) (142,233) (179,000) - - (914,384) Return of capital (235,162) - (152,089) - - - (387,251) ------------------------------------------------------------------------------------------------------------------ TOTAL SURPLUS: $(293,810) $(261,738) $(275,892) $(138,454) $ 18,430 $ 18,430 $(933,034) ------------------------------------------------------------------------------------------------------------------
Branch Conversions For the 2013 reporting period, the following foreign branches that were previously reported as part of the Association were converted to locally domiciled insurance companies or branches of regional insurers. Accordingly, their direct operations are no longer reported as part of the Association:
------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2013 EFFECTIVE DATE BRANCH NAME TRANSFEREE ENTITY ------------------------------------------------------------------------------------------------ 12/1/2012 Jamaica Branch of American Home Chartis Jamaica Insurance Company Limited 12/1/2012 Panama Branch of National Union AIG Seguros Panama, S.A. (fka Chartis Seguros Panama, S.A.) 3/1/2013 Honduras Branch of American Home AIG Seguros Guatemala, S.A. (fka Chartis Seguros Guantemala) 6/1/2013 Papua New Guinea Branch of American AIG PNG Limited Home ------------------------------------------------------------------------------------------------
On the effective date of the 2013 conversions, the former Admitted Pool's allocation of these branches total assets and liabilities were $21,743 and $18,432 respectively. These balances were previously reported as Equities in Pools and Associations. -------------------------------------------------------------------------------- 44 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- E. Amounts Due to or from Related Parties -------------------------------------------------------------------------------- At December 31, 2014 and 2013, the Company reported the following receivables/payables balances from/to its Ultimate Parent, subsidiaries and affiliates (excluding reinsurance transactions). Intercompany agreements have defined settlement terms and related receivables are reported as nonadmitted if balances due remain outstanding more than ninety days past the due date as specified in the agreement.
--------------------------------------------------------------------- COMPANY 2014 2013 --------------------------------------------------------------------- Balances with National Union $ 135 $13,504 Balances with other member pool companies 574 55 Balances with other affiliates 28 4,027 --------------------------------------------------------------------- Receivable from parent, subsidiaries and affiliates $ 737 $17,586 --------------------------------------------------------------------- Balances with National Union $188,731 $ - Balances with other member pool companies 83 - Balances with other affiliates 61,518 16,642 --------------------------------------------------------------------- Payable to parent, subsidiaries and affiliates $250,332 $16,642 ---------------------------------------------------------------------
Federal and foreign income taxes receivable/(payable) under the Tax Sharing Agreement at December 31, 2014 and 2013 were $(4,811) and $(2,818), respectively. The Company did not change its methods of establishing terms regarding any transactions with its affiliates during the years ended December 31, 2014 and 2013. F. Capital Maintenance Agreements -------------------------------------------------------------------------------- AIG generally manages capital with its non-life insurance companies through internal, Board-approved policies and guidelines. AIG was party to a consolidated capital maintenance agreement ("CMA") with AIG PC and certain of its domestic non-life Insurance companies as of December 31, 2014. Among other things, the CMA provided that AIG would maintain the total adjusted capital of these non-life insurance companies, measured as a group (the "Fleet"), at or above the specified minimum percentage of the Fleet's projected total authorized control level RBC at a minimum percentage of 300 percent. As a result of AIG, AIG PC and these domestic non- life insurance companies' views as to the sufficiency of managing capital through internal, Board-approved policies and guidelines, it was agreed amongst the parties to terminate this CMA effective February 19, 2015. The state insurance department regulators were notified of such agreement. G. Guarantees or Contingencies for Related Parties -------------------------------------------------------------------------------- The Company has issued guarantees whereby it unconditionally and irrevocably guarantees all present and future obligations and liabilities arising from the policies of insurance issued by certain insurers who, as of the guarantee issue date, were members of the AIG holding company group. The guarantees were provided in order to secure or maintain the guaranteed companies' rating status issued by certain rating agencies, as disclosed in Note 10. H. Management, Service Contract and Cost Sharing Arrangements -------------------------------------------------------------------------------- As an affiliated company of AIG, the Company utilizes centralized services from AIG. The Company is allocated a charge for these services, based on the amount of incremental expense associated with operating the Company as a separate legal entity. The amount of expense allocated to the Company each period was determined based on an analysis of services provided. The following table summarizes the allocated expense from AIG related entities that exceeded one-half of one percent of the Company's admitted assets during 2014 and 2013:
------------------------------------------------------------ AFFILIATES 2014 2013 2012 ------------------------------------------------------------ AIG Global Claims Services, Inc. $265,397 $270,723 $241,398 AIG PC Global Services, Inc. 152,804 134,150 39,741 ------------------------------------------------------------ TOTAL $418,201 $404,873 $281,139 ------------------------------------------------------------
In 2014 and 2013 management service costs included severance expenses pertaining to an AIG-wide initiative to centralize work streams into lower cost locations and create a more streamlined organization. -------------------------------------------------------------------------------- 45 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- As of December 31, 2014 and 2013, short-term investments included amounts invested in the AIG Managed Money Market Fund of $282,664 and $305,575, respectively. 7. REINSURANCE -------------------------------------------------------------------------------- In the ordinary course of business, the Company may use both treaty and facultative reinsurance to minimize its net loss exposure to a) any single catastrophic loss event; b) to an accumulation of losses from a number of smaller events; or c) to provide greater risk diversification. In addition, the Company may assume reinsurance from other insurance companies. Based on the terms of the reinsurance contracts, a portion of expected IBNR losses will be recoverable in accordance with terms of the reinsurance protection purchased. This determination is necessarily based on the estimate of IBNR and accordingly, is subject to the same uncertainties as the estimate of IBNR. Ceded amounts related to paid and unpaid losses and loss expenses with respect to these reinsurance agreements are generally substantially collateralized. The Company remains liable to the extent that the reinsurers do not meet their obligation under the reinsurance contracts after any collateral is exhausted, and as such, the financial condition of the reinsurers is regularly evaluated and monitored for concentration of credit risk. The following table presents direct, assumed reinsurance and ceded reinsurance written and earned for the year ended December 31, 2014, 2013 and 2012:
-------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 2014 2013 2012 ---------------------------------------------------------------------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED -------------------------------------------------------------------------------------------------------------------- Direct Premiums $ (211,371) $ 171,624 $ 928,608 $1,005,255 $1,192,441 $1,276,901 Reinsurance premiums assumed: Affiliates 7,798,864 7,460,072 7,001,709 6,771,303 6,737,056 6,840,322 Non-affiliates 134,025 128,937 198,363 189,579 164,020 147,946 -------------------------------------------------------------------------------------------------------------------- GROSS PREMIUMS 7,721,518 7,760,633 8,128,680 7,966,137 8,093,517 8,265,169 -------------------------------------------------------------------------------------------------------------------- Reinsurance premiums ceded: Affiliates 763,633 713,378 883,552 1,242,338 1,459,199 1,391,378 Non-affiliates 1,458,472 1,454,350 1,392,708 1,297,174 1,429,927 1,516,102 -------------------------------------------------------------------------------------------------------------------- NET PREMIUMS $5,499,413 $5,592,905 $5,852,420 $5,426,625 $5,204,391 $5,357,689 -------------------------------------------------------------------------------------------------------------------- 2014 Direct Written Premiums includes the impact of ($726,095) reserve transfer due to the Japan Branch Conversion. --------------------------------------------------------------------------------------------------------------------
As of December 31, 2014 and 2013, 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 RESERVES FOR PREMIUM LOSSES AND LOSSES RESERVES LAE AND LAE ------------------------------------------------------ DECEMBER 31, 2014: AFFILIATES $516,995 $114,919 $ 9,593,610 NON-AFFILIATES 457,698 289,870 2,954,258 ------------------------------------------------------ TOTAL $974,693 $404,789 $12,547,868 ------------------------------------------------------ DECEMBER 31, 2013: Affiliates $515,958 $111,061 $ 8,399,417 Non-affiliates 453,567 332,092 3,126,356 ------------------------------------------------------ Total $969,525 $443,153 $11,525,773 ------------------------------------------------------
-------------------------------------------------------------------------------- 46 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- A. Reinsurance Return Commission -------------------------------------------------------------------------------- The maximum amount of return commission which would have been due to reinsurers if all of the Company's reinsurance had been cancelled as of December 31, 2014 and 2013 with the return of the unearned premium reserve is as follows:
------------------------------------------------------------------------------------------------------------------------ ASSUMED REINSURANCE CEDED REINSURANCE NET --------------------------------- --------------------------------- -------------------------------- PREMIUM RESERVE COMMISSION EQUITY PREMIUM RESERVE COMMISSION EQUITY PREMIUM RESERVE COMMISSION EQUITY ------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 2014 AFFILIATES $3,731,362 $502,953 $516,995 $ 72,838 $3,214,366 $430,114 ALL OTHER 95,835 12,918 457,698 64,484 (361,863) (51,566) ------------------------------------------------------------------------------------------------------------------------ TOTAL $3,827,197 $515,871 $974,693 $137,322 $2,852,503 $378,548 ------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 2013 Affiliates $3,392,845 $515,261 $515,958 $ 81,974 $2,876,887 $433,287 All Other 90,762 13,784 453,567 72,061 (362,805) (58,278) ------------------------------------------------------------------------------------------------------------------------ TOTAL $3,483,607 $529,045 $969,525 $154,035 $2,514,082 $375,009 ------------------------------------------------------------------------------------------------------------------------
B. Unsecured Reinsurance Recoverable -------------------------------------------------------------------------------- Individual reinsurers with unsecured balances in excess of 3 percent of policyholders' surplus at December 31, 2014 and 2013 are as follows:
----------------------------------------------------------------- REINSURER 2014 2013 ----------------------------------------------------------------- Affiliates: Combined Pool $8,281,349 $ 6,817,334 Eaglestone Reinsurance Company 820,561 721,588 AIU Insurance Company, Ltd. - Japan 13,207 - Other affiliates 14,271 294,269 ----------------------------------------------------------------- TOTAL AFFILIATES $9,129,388 $ 7,833,191 ----------------------------------------------------------------- Swiss Reinsurance America Corp 352,014 246,246 Transatlantic Reinsurance Company 234,143 247,096 Munich Reinsurance Company - 209,140 Hannover Ruckversicherungs Se - 162,325 Other - 2,710,763 ----------------------------------------------------------------- TOTAL NON-AFFILIATES 586,157 3,575,570 ----------------------------------------------------------------- TOTAL AFFILIATES AND NON-AFFILIATES $9,715,545 $11,408,761 -----------------------------------------------------------------
C. Reinsurance Recoverable in Dispute -------------------------------------------------------------------------------- At December 31, 2014 and 2013, the aggregate of all disputed items did not exceed 10 percent of capital and surplus and there were no amounts in dispute for any single reinsurer that exceeded 5 percent of capital and surplus. The total reinsurance recoverable balances in dispute are $133,254 and $106,456 as of December 31, 2014 and 2013, respectively. -------------------------------------------------------------------------------- 47 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 8. INCOME TAXES -------------------------------------------------------------------------------- At December 31, 2014, the Company had gross deferred tax assets ("DTA") of $1,461,633. Management believes that it is more likely than not that these assets will be realized in the foreseeable future therefore the Company has not recorded a valuation allowance against its deferred tax asset. Tax planning strategies had no impact on the determination of the net admitted DTA. The components of the Company's net deferred tax assets/liabilities ("DTA"/"DTL") as of December 31, 2014 and 2013 are as follows:
------------------------------------------------------------------------------------------------ 12/31/2014 12/31/2013 CHANGE ------------------------------------------------------------------------------------------------ ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL ---------------------------------------------------------------------------------------------------------------------- Gross DTA $1,336,702 $ 124,961 $1,461,663 $1,632,278 $155,688 $1,787,966 $(295,576) $(30,727) $(326,303) Statutory Valuation Allowance - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------- Adjusted Gross DTA 1,336,702 124,961 1,461,663 1,632,278 155,688 1,787,966 (295,576) (30,727) (326,303) Nonadmitted DTA 177,901 - 177,901 737,369 - 737,369 (559,468) - (559,468) ---------------------------------------------------------------------------------------------------------------------- Subtotal Admitted DTA 1,158,801 124,961 1,283,762 894,909 155,688 1,050,597 263,892 (30,727) 233,165 DTL 231,280 258,113 489,393 206,310 204,422 410,732 24,970 53,691 78,661 ---------------------------------------------------------------------------------------------------------------------- Net Admitted DTA/(Net DTL) $ 927,521 $(133,152) $ 794,369 $ 688,599 $(48,734) $ 639,865 $ 238,922 $(84,418) $ 154,504 ----------------------------------------------------------------------------------------------------------------------
The following table shows the summary of the calculation for the net admitted DTA as of December 31, 2014 and 2013:
--------------------------------------------------------------------------------------------------------------------------------- 12/31/2014 12/31/2013 CHANGE --------------------------------------------------------------------------------------------- ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL ORDINARY CAPITAL TOTAL --------------------------------------------------------------------------------------------------------------------------------- Carried back losses that reverse in subsequent three calendar years $ - $ - $ - $ - $ - $ - $ - $ - $ - Adjusted gross DTAs realizable within 36 months or 15 percent of statutory surplus (the lesser of 1 and 2 below) 794,369 - 794,369 667,773 - 667,773 126,596 - 126,596 1. Adjusted gross DTAs realizable within 36 months 794,369 - 794,369 1,060,737 - 1,060,737 (266,368) - (266,368) 2. 15 percent of statutory surplus - - 968,030 - - 667,773 - - 300,257 Adjusted gross DTAs that can be offset against DTLs 364,432 124,961 489,393 227,136 155,688 382,824 137,296 (30,727) 106,569 --------------------------------------------------------------------------------------------------------------------------------- Total DTA admitted as the result of application of SSAP 101 $1,158,801 124,961 1,283,762 $ 894,909 $155,688 $1,050,597 $ 263,892 $(30,727) $ 233,165 ---------------------------------------------------------------------------------------------------------------------------------
----------------------- 2014 2013 ----------------------- Ratio Percentage Used To Determine Recovery Period And Threshold Limitation Amount 394% 307% Amount Of Adjusted Capital And Surplus Used To Determine Recovery Period And Threshold Limitation in (2) above. $6,453,535 $4,451,821
The following table shows the components of the current income tax expense (benefit) for the periods listed:
----------------------------------------------------------------------- CURRENT INCOME TAX 2014 2013 CHANGE ----------------------------------------------------------------------- Federal income tax $(31,781) $(36,464) $ 4,683 Foreign income tax 8,740 10,320 (1,580) ----------------------------------------------------------------------- Subtotal (23,041) (26,144) 3,103 ----------------------------------------------------------------------- Federal income tax on net capital gains 53,044 37,062 15,982 ----------------------------------------------------------------------- Federal and foreign income taxes incurred $ 30,003 $ 10,918 $19,085 -----------------------------------------------------------------------
-------------------------------------------------------------------------------- 48 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The following table shows the components of the DTA split between ordinary and capital DTA as of December 31, 2014 and 2013:
------------------------------------------------------------------------- 2014 2013 CHANGE ------------------------------------------------------------------------- ORDINARY Discounting of unpaid losses $ 330,284 $ 319,135 $ 11,149 Nonadmitted assets 91,762 151,137 (59,375) Unearned premium reserve 207,839 214,763 (6,924) Bad debt expense 28,536 42,360 (13,824) Goodwill & deferred revenue - 23,704 (23,704) Net operating loss carry forward 344,479 546,670 (202,191) Foreign tax credit carry forward 55,869 53,974 1,895 Deferred tax on foreign operations 928 867 61 Investments 238,147 211,583 26,564 Deferred loss on branch conversions 458 458 - Intangibles - 15,915 (15,915) Other temporary difference 38,400 51,712 (13,312) ------------------------------------------------------------------------- Subtotal 1,336,702 1,632,278 (295,576) ------------------------------------------------------------------------- Statutory valuation allowance adjustment - - - Nonadmitted 177,901 737,369 (559,468) ------------------------------------------------------------------------- ADMITTED ORDINARY DEFERRED TAX ASSETS $1,158,801 $ 894,909 $ 263,892 ------------------------------------------------------------------------- CAPITAL Investments $ 113,785 $ 150,894 $ (37,109) Unrealized capital losses 10,268 3,886 6,382 Deferred loss on branch conversions 538 538 - Other temporary difference 370 370 - ------------------------------------------------------------------------- Subtotal 124,961 155,688 (30,727) ------------------------------------------------------------------------- Statutory valuation allowance adjustment - - - Nonadmitted - - - ------------------------------------------------------------------------- ADMITTED CAPITAL DEFERRED TAX ASSETS 124,961 155,688 (30,727) ------------------------------------------------------------------------- ADMITTED DEFERRED TAX ASSETS $1,283,762 $1,050,597 $ 233,165 -------------------------------------------------------------------------
The following table shows the components of the DTL split between ordinary and capital DTL as of December 31, 2014 and 2013:
-------------------------------------------------------------------- 2014 2013 CHANGE -------------------------------------------------------------------- Ordinary Investments $211,216 $191,255 $ 19,961 Other temporary differences 20,064 15,056 5,008 -------------------------------------------------------------------- Subtotal 231,280 206,311 24,969 -------------------------------------------------------------------- Capital Investments $107,639 $ 40,660 $ 66,979 Unrealized capital gains 150,374 135,753 14,621 Other temporary differences 100 28,008 (27,908) -------------------------------------------------------------------- Subtotal 258,113 204,421 53,692 -------------------------------------------------------------------- Deferred tax liabilities 489,393 410,732 78,661 -------------------------------------------------------------------- Net deferred tax assets/liabilities $794,369 $639,865 $154,504 --------------------------------------------------------------------
-------------------------------------------------------------------------------- 49 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The change in net deferred tax assets is comprised of the following:
----------------------------------------------------------------------------------------------- 2014 2013 CHANGE ----------------------------------------------------------------------------------------------- Adjusted gross deferred tax assets $1,461,663 $1,787,966 $(326,303) Total deferred tax liabilities (489,393) (410,732) (78,661) ----------------------------------------------------------------------------------------------- Net deferred tax assets/ (liabilities) 972,270 1,377,234 (404,964) Deferred tax assets/(liabilities) - SSAP 3 (6,195) Deferred tax assets/(liabilities) - unrealized (8,239) ----------------------------------------------------------------------------------------------- Total change in net deferred tax $(390,530) ----------------------------------------------------------------------------------------------- Change in deferred tax - current year (304,459) Change in deferred tax - current year - other surplus items (86,071) ----------------------------------------------------------------------------------------------- Change in deferred tax - current year - total $(390,530) -----------------------------------------------------------------------------------------------
The following table shows the components of opening surplus adjustments upon current and deferred taxes for the year ended December 31, 2014
------------------------------------------------------------- CURRENT DEFERRED TOTAL ------------------------------------------------------------- SSAP 3 impact: SSAP 3 - general items $1,459 $(6,195) $(4,736) SSAP 3 - unrealized gain/loss - 4 4 ------------------------------------------------------------- Subtotal impact to admitted assets 1,459 (6,191) (4,732) SSAP 3 - nonadmitted impact - 10,748 10,748 ------------------------------------------------------------- Total SSAP 3 impact $1,459 $ 4,557 $ 6,016 -------------------------------------------------------------
-------------------------------------------------------------------------------- 50 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The provision for federal and foreign income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The following table presents a reconciliation of such differences in arriving at total taxes related to the Company for the years ended December 31, 2014, 2013 and 2012:
------------------------------------------------------------------------------------------------------------------------ 2014 2013 2012 -------------------- -------------------- -------------------- DESCRIPTION AMOUNT TAX EFFECT AMOUNT TAX EFFECT AMOUNT TAX EFFECT ------------------------------------------------------------------------------------------------------------------------ Net Income Before Federal Income Taxes and Capital Gains Taxes $ 838,233 $293,382 $ 713,908 $ 249,868 $ 302,637 $105,923 Book to Tax Adjustments: Tax Exempt Income (171,222) (59,928) (202,777) (70,972) (212,356) (74,325) Dividend Received Deduction (978) (342) (438) (153) (622) (218) Subpart F Income, Gross-Up & Foreign Tax Credits - 443 (428,635) (87,051) 63,904 (2,445) Transfer Pricing (30,638) (10,723) - - - - Stock Options And Other Compensation 19,747 6,911 14,354 5,024 9,756 3,415 Non-Deductible Penalties 345 121 348 122 90 31 Change in Nonadmitted Assets 164,915 57,720 (86,943) (30,430) 42,101 14,735 Change in Tax Position - (230) - 599 - (549) Return to Provision - 2,525 - (2,844) - (4,319) Reversal of Book/Tax Difference on Share Distribution 119,438 41,803 - - - - Branch Incorporation & Conversion - - (497) (174) (1,005) (352) Other 7,945 2,780 18,066 6,322 - - ------------------------------------------------------------------------------------------------------------------------ Total Book to Tax Adjustments 109,552 41,080 (686,522) (179,557) (98,132) (64,027) ------------------------------------------------------------------------------------------------------------------------ Total Tax $ 947,785 $334,462 $ 27,386 $ 70,311 $ 204,505 $ 41,896 ------------------------------------------------------------------------------------------------------------------------ Federal and Foreign Income Taxes Incurred - (23,041) - (26,144) - (31,163) Federal Income Tax on Net Capital Gains - 53,044 - 37,062 - 48,295 Change in Net Deferred Income Taxes - 390,530 - 27,917 - 22,439 Less: Change in Deferred Tax--Other Surplus Items - (86,071) - 31,476 - 2,325 ------------------------------------------------------------------------------------------------------------------------ Total Tax $ - $334,462 $ - $ 70,311 $ - $ 41,896
For the year ended December 31, 2014, the table above includes $41,803 of tax effected adjustments reflecting the different treatment for book and tax purposes of the distribution of the AHJ's assets and liabilities as detailed in Note 6.
OPERATING LOSS AND TAX CREDIT CARRY FORWARDS At December 31, 2014, the Company had net operating loss carry forwards originating during the years 2010 to 2012 and expiring through 2032 of: $984,226 At December 31, 2014, the Company had no capital loss carry forwards. $ - At December 31, 2014, the Company had no AMT credit carry forwards. $ - At December 31, 2014, the Company had foreign tax credits originating during the years 2009 to 2014 and expiring through 2024 of: $ 55,869
There were no deposits reported as admitted assets under Section 6603 of the Internal Revenue Service (IRS) Code as of December 31, 2014. The Company does not believe that the liability related to any federal or foreign tax loss contingencies will significantly change within the next 12 months. A reasonable estimate of such change cannot be made at this time. As of December 31, 2014, the Company recorded gross receivables related to tax return errors and omissions in the amount of $16,424, all of which were nonadmitted. As of December 31, 2014, there were no liabilities related to uncertain tax positions. The U.S is the only major tax jurisdiction of the Company, and as of December 31, 2014, the tax years from 2000 to 2013 remain open. -------------------------------------------------------------------------------- 51 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The following table lists those companies that form part of the 2014 AIG consolidated federal income tax return: --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------ COMPANY COMPANY COMPANY COMPANY COMPANY ------------------------------------------------------------------------------------------------------------------------------ A.I. Credit Consumer AIG Financial Products AIG Specialty Aircraft 32A-810 Inc. Aircraft 74B-27602 Inc. Discount Company Corp. Insurance Company A.I. Credit Corp. AIG Financial AIG Spring Ridge I, Aircraft 32A-987 Inc. Aircraft 74B-29375 Inc. Securities Corp. Inc. AeroTurbine, Inc. AIG Funding, Inc. AIG Trading Group Inc. Aircraft 32A-993, Inc. Aircraft 75B-26276 Inc. AGC Life Insurance AIG G5, Inc. AIG Travel Assist, Inc. Aircraft 33A-132, Inc. Aircraft 75B-28833 Inc. Company Agency Management AIG Global Asset AIG Travel Insurance Aircraft 33A-272 Inc. Aircraft 75B-28834 Inc. Corporation Management Holdings Agency, Inc. Corp. AH SubGP 1384 AIG Global Claims AIG Warranty Services Aircraft 33A-358 Inc. Aircraft 75B-28836 Inc. Woodglen, LLC Services, Inc. of Florida, Inc. AH SubGP 1470 AIG Global Real Estate AIG Warranty Services, Aircraft 33A-364 Inc. Aircraft 76B-26261 Inc. Palmetto, LLC Investment Corp. Inc. AH SubGP 1548 Walnut, AIG Global Services, AIG WarrantyGuard, Aircraft 34A-152 Inc. Aircraft 76B-26327 Inc. LLC Inc. Inc. AH SubGP 1597 AIG Insurance AIG.COM, Inc. Aircraft 34A-216 Inc. Aircraft 76B-26329 Inc. Broadmoor, LLC Management Services, Inc. AH SubGP 1600 Rainer, AIG International Inc. AIG-FP Capital Aircraft 34A-395 Inc. Aircraft 76B-27597 Inc. LLC Funding Corp. AH SubGP 1631 AIG Kirkwood, Inc. AIG-FP Capital Aircraft 34A-48 Inc. Aircraft 76B-27600 Inc. Broadway, LLC Preservation Corp. AH SubGP 1694 Sonoma, AIG Life Holdings, Inc. AIG-FP Matched Aircraft 34A-93 Inc. Aircraft 76B-27613 Inc. LLC Funding Corp. AH SubGP 479 Sunrise, AIG Life of Bermuda, AIG-FP Pinestead Aircraft 73B-25374 Inc. Aircraft 76B-27615 Inc. LLC Ltd. Holdings Corp. AH SubGP 835 AIG Lodging AIGGRE 6037 Investor Aircraft 73B-25375 Inc. Aircraft 76B-28132 Inc. Whispering, LLC Opportunities, Inc. LLC AH SubGP GAG Gandolf, AIG Markets, Inc. AIGGRE DC Ballpark Aircraft 73B-26315 Inc. Aircraft 76B-28206 Inc. LLC Investor, LLC AH SubGP MDL, LLC AIG Matched Funding AIGGRE Hill7 Investor Aircraft 73B-26317 Inc. Aircraft 77B-29404 Inc. Corp. LLC AICCO, INC.(DE) AIG North America, AIGGRE Lane Field Aircraft 73B-26323 Inc. Aircraft 77B-29908 Inc. Inc. Investor LLC AIG Advisor Group, Inc. AIG Offshore Systems AIGGRE Market Street Aircraft 73B-28249 Inc. Aircraft 77B-32717 Inc. Services, Inc. II LLC AIG Aerospace AIG PC European Aircraft 32A-1658 Inc. Aircraft 73B-28252 Inc. Aircraft 77B-32723 Inc. Adjustment Services, Inc. Insurance Investments Inc. AIG Aerospace Insurance AIG PC Global Aircraft 32A-1695 Inc. Aircraft 73B-30036 Inc. Aircraft A330 143 Inc. Services, Inc. Services, Inc. AIG Assurance Company AIG Portfolio Solutions Aircraft 32A-1905 Inc. Aircraft 73B-30645 Inc. Aircraft A330 72 Inc. LLC AIG Capital Corporation AIG Procurement Aircraft 32A-1946 Inc. Aircraft 73B-30646 Inc. Aircraft A330 98 Inc. Services, Inc. AIG Central Europe & AIG Property Casualty Aircraft 32A-2024 Inc. Aircraft 73B-30661 Inc. Aircraft Andros Inc. CIS Insurance Holdings Company Corporat AIG Claims, Inc. AIG Property Casualty Aircraft 32A-2594 Inc. Aircraft 73B-30671 Inc. Aircraft B757 29377 Inc. Inc. AIG Commercial AIG Property Casualty Aircraft 32A-2731 Inc. Aircraft 73B-30730 Inc. Aircraft B757 29382 Equipment Finance, Inc. Insurance Agency, Inc. Inc. AIG Consumer Finance AIG Property Casualty Aircraft 32A-3147 Inc. Aircraft 73B-31127 Inc. Aircraft B767 29388 Group, Inc. International, LLC Inc. AIG Credit (Europe) AIG Property Casualty Aircraft 32A-3148 Inc. Aircraft 73B-32796 Inc. Aircraft Lotus Inc. Corporation U.S., Inc. AIG Credit Corp. AIG Real Estate Aircraft 32A-579 Inc. Aircraft 73B-32841 Inc. Aircraft SPC-12, Inc. Investment & Management Co. (P.R.), Inc. AIG Direct Insurance AIG Realty, Inc. Aircraft 32A-585 Inc. Aircraft 73B-33220 Inc. Aircraft SPC-14, Inc. Services, Inc. AIG Employee Services, AIG Relocation, Inc. Aircraft 32A-645 Inc. Aircraft 73B-38821 Inc. Aircraft SPC-3, Inc. Inc. AIG Equipment Finance AIG S1, Inc. Aircraft 32A-726 Inc. Aircraft 73B-41794 Inc. Aircraft SPC-4, Inc. Holdings, Inc. AIG FCOE, Inc. AIG Securities Lending Aircraft 32A-760 Inc. Aircraft 73B-41796 Inc. Aircraft SPC-8, Inc. Corp. (fka AIG Glbl Sec Lend) AIG Federal Savings AIG Shared Services Aircraft 32A-775 Inc. Aircraft 73B-41806 Inc. Aircraft SPC-9, Inc. Bank Corporation AIG Financial Advisor AIG Shared Services Aircraft 32A-782 Inc. Aircraft 73B-41815 Inc. AIU Insurance Services, Inc. Corporation-- Company Management Service
-------------------------------------------------------------------------------- 52 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------- COMPANY COMPANY COMPANY COMPANY COMPANY ---------------------------------------------------------------------------------------------------------------------------- Akita, Inc. Delos Aircraft Inc. Interlease Aircraft SA Investment Group, United Guaranty Trading Corporation Inc. Mortgage Insurance Company of North Carolina AM Holdings LLC Design Professionals Interlease Management SAAHP GP Corp. United Guaranty Association Risk Corporation Partners Insurance Purchasing Group, Inc. Company Ambler Holding Corp. DIL/SAHP Corp. International Lease SAFG Retirement United Guaranty Finance Corporation Services, Inc. Residential Insurance Company American Athletic Club, DirectDME, Inc. Intrepid Security, Inc. SagePoint Financial, United Guaranty Inc. Inc. (fka AIG Fin Residential Insurance Advisors) Company of North Carolina American General Eaglestone Reinsurance Iris Energy Holding LP SAI Deferred United Guaranty Annuity Service Company (FMLY Iris Energy Compensation Services, Inc. Corporation Hold Corp.) Holdings, Inc. American General Eastgreen, Inc. Klementine Holdings, SCSP Corp. VALIC Financial Assignment Corporation Inc. Advisors, Inc. American General Euclid Aircraft, Inc. Klementine Leasing, Service Net Solutions VALIC Retirement Assignment Corporation Inc. of Florida, LLC Services Company of New York American General F 2000, Inc. Knickerbocker Service Net Warranty, Vision2020 Wealth Bancassurance Services, Corporation LLC Management Corp. Inc. American General Center FALCON-116 (UTAH) Lexington Insurance Sierra US Leasing, Inc. Webatuck Corp. Trust Company American General Financial Service Livetravel, Inc. Spicer Energy LLC Western National Insurance Agency, Inc. Corporation Marketing Group, Inc. American General First Mortgage Macori, Inc. [Texas] Spicer Holding Corp. Whitney US Leasing, International, Inc. Insurance Company Inc. American General Fleet Solutions Maksin Management States Aircraft, Inc. Woodbury Financial Investment Management Holdings Inc. Corporation Services, Inc. Corporation American General Realty Flying Fortress Inc. Medical Excess SubGen NT, Inc. Investment Corporation Insurance Services, Inc. American Home Flying Fortress MG Reinsurance SunAmerica Affordable Assurance Company Investments Inc. Limited Housing Partners, Inc. American International Flying Fortress US MIP Mezzanine, LLC SunAmerica Capital Facilities Management, Leasing Inc. Services, Inc. Inc. American International Forest SAHP Corp. MIP PE Holdings, LLC SunAmerica Fund Group, Inc. Services, Inc. American International FQA, LLC Morefar Marketing, Inc. SunAmerica Retirement Realty Corp. Markets, Inc. American International FSC Agency, Inc. Mt. Mansfield Team Classic Golf Reinsurance Company, Company, Inc. Services, Inc. Ltd. Apollo Aircraft Inc. FSC Securities National Union Fire Temescal Aircraft Inc. Corporation Insurance Company of Pittsburgh, Pa. Applewood Funding Corp. G4.00.01 US7004P2 National Union Fire The Gulf Agency, Inc. Insurance Company of Vermont Barnegat Funding Corp. Global Loss Prevention, New England Sports, The Insurance Inc. Recreation & Company of the State of Entertainment RPG, Pennsylvania Inc. CABREA, Inc. Grand Savannah SAHP New Hampshire The Variable Annuity Corp. Insurance Company Life Insurance Company Charleston Bay SAHP Grand Staircase Aircraft New Hampshire Top Aircraft, Inc. Corp. Inc. Insurance Services, Inc. Charmlee Aircraft Inc. Granite State Insurance Park Topanga Aircraft Travel Guard Group, Company Inc. Inc. Chartis Bonfire Health Direct, Inc. Pearce & Pearce, Inc. Travel Guard Corporation Worldwide, Inc. Chartis Excess Limited Hyperion Aircraft Pelican 35302, Inc. UG Corporation Financing Inc. Chartis Iraq, Inc. Hyperion Aircraft Inc. Pine Street Brokers UG Shared Services, Corp. Inc. Chartis Latin America ILFC Aviation Pine Street Real Estate United Guaranty Investments, LLC Consulting, Inc. Holdings Corp. Commercial Insurance Company of North Carolina Chartis Libya, Inc. ILFC Dover, Inc. Prairie SAHP Corp. United Guaranty Corporation Chartis Memsa Holdings, ILFC Holdings, Inc. Risk Specialists United Guaranty Credit Inc. Companies Insurance Insurance Company Agency, Inc. Commerce and Industry ILFC Volare, Inc. Risk Specialists United Guaranty Insurance Company Companies, Inc. Insurance Company
-------------------------------------------------------------------------------- 53 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 9. CAPITAL AND SURPLUS, DIVIDEND RESTRICTIONS AND QUASI-REORGANIZATIONS -------------------------------------------------------------------------------- A. Common Stock -------------------------------------------------------------------------------- In 2014 the Company increased the par value of its common stock from $11.5065 per share to $17.00 per share at the time it received $1,302,500 in capital from its immediate parent. As a result of this transaction, American Home's common capital stock was increased by $9,312 and its gross paid in and contributed surplus was increased by $1,293,187. The transaction was approved by American Home's board of directors and NY DFS. Refer to Note 6A for more details on the Pooling Restructure Transaction. B. Dividend Restrictions -------------------------------------------------------------------------------- Under New York law, the Company may pay cash dividends only from Unassigned surplus determined on a statutory basis. New York domiciled companies are restricted (on the basis of the lower of 10 percent of statutory earned surplus, adjusted for special surplus items, as of December 31, 2014, or 100 percent of adjusted net investment income for the preceding thirty-six month period ended December 31, 2014) as to the amount of dividends they may declare or pay in any twelve-month period without the prior approval of the NY DFS. The maximum dividend amount the Company can pay in 2015 is $724,524 without the prior approval of the NY DFS. Other than the limitations above, there are no restrictions placed on the portion of Company profits that may be paid as ordinary dividends to the stockholder. The Company has agreed to provide advance notice to the NY DFS of (i) any proposed transactions between the Company and AIG or an AIG affiliate not in the ordinary course of business, and (ii) any proposed dividend declarations or distributions. The Company paid the following dividends during 2014 and 2013:
----------------------------------------------------------------------------------- 2014 STATE APPROVAL ------------------------------- ----------------------- DATE PAID AMOUNT TYPE OF DIVIDEND REQUIRED OBTAINED ----------------------------------------------------------------------------------- 4/1/2014 $ 233,554 EXTRAORDINARY YES YES 12/19/2014 150,000 EXTRAORDINARY YES YES ----------------------------------------------------------------------------------- TOTAL $ 383,554 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- 2013 STATE APPROVAL ------------------------------- ----------------------- DATE PAID AMOUNT TYPE OF DIVIDEND REQUIRED OBTAINED ----------------------------------------------------------------------------------- Various $ 524 Ordinary No Not required 3/19/2013 77,000 Ordinary No Not required 4/1/2013 23,000 Ordinary No Not required 5/13/2013 180,000 Ordinary No Not required 9/1/2013 394,435 Extraordinary Yes Yes 9/6/2013 220,000 Ordinary Yes Yes 9/30/2013 320,000 Extraordinary Yes Yes ----------------------------------------------------------------------------------- TOTAL $1,214,959 -----------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 54 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- C. Capital & Surplus -------------------------------------------------------------------------------- Changes in balances of special surplus funds are due to adjustments in the amounts of reserves transferred under retroactive reinsurance agreements and when cash recoveries exceed the consideration paid. The portion of Unassigned surplus at December 31, 2014 and 2013 represented or reduced by each item below is as follows:
------------------------------------------------------------------------------------------ AS ADJUSTED* YEARS ENDED DECEMBER 31, 2014 2013 2013 ------------------------------------------------------------------------------------------ Unrealized gains and losses (net of taxes) $ 191,706 $ 237,471 $ 27,943 Nonadmitted asset values (412,681) (1,143,851) (1,167,295) Provision for reinsurance (60,702) (57,751) (57,751) * As Adjusted includes SSAP 3 prior year adjustments
The Company exceeded minimum RBC requirements at both December 31, 2014 and 2013. With the approval of the NY DFS, American Home executed a quasi-reorganization effective March 31, 2012; which restated Gross Paid-in and Contributed Surplus to Unassigned surplus. The impact of the quasi reorganization is as follows:
--------------------------------------------------------------------------------------- Change in Gross Paid-in and Contributed Surplus Change in Unassigned surplus --------------------------------------------------------------------------------------- 2012 $(1,000,000) $1,000,000 ---------------------------------------------------------------------------------------
10.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: Workers' Compensation Residual Market Assessment: In April 2007, the National Association of Insurance Commissioners (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 Office of the New York Attorney General, and the New York State Department of Insurance. 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 were 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 certain AIG entities' writing and reporting of workers compensation insurance between 1985 and 1996. -------------------------------------------------------------------------------- 55 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 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. This regulatory settlement agreement, which was agreed to by all 50 states and the District of Columbia, included, among other terms, (i) AIG's payment of $100 million in regulatory fines and penalties; (ii) AIG's payment of $46.5 million in outstanding premium taxes and assessments; (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 regulations 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 million in contingent fines in the event that AIG fails to comply substantially with the compliance plan requirements. In furtherance of the compliance plan, the agreement provided for a monitoring period from May 29, 2012 to May 29, 2014 leading up to a compliance plan examination. After the close of the monitoring period, as part of preparation for the actual conduct of the compliance plan examination, on or about October 1, 2014, AIG and the lead states agreed upon corrective action plans to address particular issues identified during the monitoring period. The compliance plan examination is ongoing. There can be no assurance that the result of the compliance plan examination will not result in a fine, have a material adverse effect on AIG's ongoing operations or lead to civil litigation. Accident and Health: In connection with the previously disclosed multi-state examination of certain accident and health products, including travel products, issued by National Union, AIG PC, on behalf of itself, National Union, and certain of AIG PC's insurance and non-insurance companies (collectively, the 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, the parties (i) paid a civil penalty of $50 million, (ii) entered into a corrective action plan describing agreed-upon specific steps and standards for evaluating the parties' ongoing compliance with laws and regulations governing the issues identified in the examination, and (iii) agreed to pay a contingent fine in the event that the parties fail to satisfy certain terms of the corrective action plan. 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. Caremark Litigation: AIG, National Union Fire Insurance Company of Pittsburgh, Pa. and AIG Specialty Insurance Company (f/k/a American International Specialty Lines Insurance Company) (collectively, the "AIG Defendants") have been named 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 intervened in the first-filed action, and the second-filed action was 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 actions, 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 AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage. The complaints filed by the plaintiffs and the intervenors request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. The AIG Defendants deny the allegations of fraud and suppression, assert that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement, that the claims are barred by the statute of limitations, and that the statute cannot be tolled in light of the public disclosure of the excess coverage. The plaintiffs and intervenors, 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. On August 15, 2012, the trial court entered an order granting plaintiffs' motion for class certification, and on September 12, 2014, the Alabama Supreme Court affirmed that order. AIG and the other defendants petitioned for rehearing of that decision and that petition was denied on February 27, 2015. The matter will return to the trial court for general discovery (which has not yet commenced) and adjudication of the merits. The Company is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation. Other Proceedings: 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. -------------------------------------------------------------------------------- 56 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- 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. B. Leases -------------------------------------------------------------------------------- Lease expenses are allocated to the Company based upon the percentage of space occupied with the final share of cost based upon its percentage participation in the Combined Pool. C. Other Commitments -------------------------------------------------------------------------------- As part of its hedge fund, private equity and real estate equity portfolio investments, as of December 31, 2014, the Company may be called upon for additional capital investments of up to $416,690. The Company may also be called upon for an additional $7,046 in connection with guarantees related to its real estate equity investments. In connection with its inter-company reinsurance program with AIG South Africa Limited, the Company contracted with The Standard Bank of South Africa Limited to issue a standby letter of credit to AIG South Africa Limited that secures the Company's reinsurance payment obligations up to ZAR 1,200,000 (USD equivalent of $103,712). The Company agreed to reimburse the bank for any amounts paid by the bank under the stand by letter of credit. As of December 31, 2014 and 2013, the product warranty liability balance for the Company was $17,180 and $64,837, respectively. D. Guarantees -------------------------------------------------------------------------------- The Company has issued guarantees whereby it unconditionally and irrevocably guaranteed all present and future obligations and liabilities arising from the policies of insurance issued by certain insurers who, as of the guarantee issue date, were members of the AIG holding company group. The guarantees were provided in order to secure or maintain the guaranteed companies' rating status issued by certain rating agencies. The Company would be required to perform under the guarantee in the event that a guaranteed entity failed to make payments due under policies of insurance issued during the period of the guarantee. The Company has not been required to perform under any of the guarantees. The Company remains contingently liable for all policyholder obligations associated with insurance policies issued by the guaranteed entity during the period in which the guarantee was in force. Each guaranteed entity has reported total assets in excess of its liabilities and the majority have invested assets in excess of their direct (prior to reinsurance) policyholder liabilities. Additionally, the Company is party to an agreement with AIG whereby AIG has agreed to make any payments due under the guarantees in the Company's place and stead. Furthermore, for any former affiliate that has been sold, the purchaser has provided the Company with hold harmless agreements relative to the guarantee of the divested affiliate. Accordingly, management believes that the likelihood of payment under any of the guarantees is remote. -------------------------------------------------------------------------------- 57 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- The following schedule sets forth the effective and termination dates (agreements with guarantees in run off), of each guarantee, the amount of direct policyholder obligations guaranteed, the invested assets and policyholder surplus for each guaranteed entity as of December 31, 2014:
POLICYHOLDER ESTIMATED POLICYHOLDERS' DATE OBLIGATIONS @ INVESTED ASSETS LOSS @ SURPLUS GUARANTEED COMPANY DATE ISSUED TERMINATED 12/31/2014 @ 12/31/2014 12/31/2014 12/31/2014 --------------------------------------------------------------------------------------------------------------------------- 21st Century Advantage Insurance Company (f/k/a AIG Advantage Insurance Company ) * 12/15/1997 8/31/2009 $ 1,582 $ 28,476 $- $ 28,356 21st Century North America Insurance Company (f/k/a American International Insurance Company ) * 11/5/1997 8/31/2009 29,694 557,442 - 545,022 21st Century Pinnacle Insurance Company (f/k/a American International Insurance Company of New Jersey) * 12/15/1997 8/31/2009 3,307 42,131 - 41,401 21st Century Superior Insurance Company (f/k/a American International Insurance Company of California, Inc.) * 12/15/1997 8/31/2009 25 30,237 - 29,891 AIG Edison Life Insurance Company (f/k/a GE Edison Life Insurance Company) ** 8/29/2003 3/31/2011 7,733,081 82,426,475 - 2,328,737 American General Life and Accident Insurance Company +++ 3/3/2003 9/30/2010 7,853,922 158,565,284 - 9,166,744 American General Life Insurance Company 3/3/2003 12/29/2006 31,229,198 158,565,284 - 9,166,744 American International Assurance Company (Australia) Limited # 11/1/2002 10/31/2010 443,000 1,799,000 - 574,000 Chartis Europe, S.A. (f/k/a AIG Europe, S.A.) ++++ 9/15/1998 12/31/2012 4,513,447 13,807,304 - 5,406,154 Chartis Seguros Mexico SA (f/k/a AIG Mexico Seguros Interamericana, S.A. de C.V.) ## 12/15/1997 - 211,808 115,107 - 82,537 Chartis UK (f/k/a Landmark Insurance Company, Limited (UK)) ++++ 3/2/1998 11/30/2007 407,944 13,807,304 - 5,406,154 Farmers Insurance Hawaii (f/k/a AIG Hawaii Insurance Company, Inc.) * 11/5/1997 8/31/2009 5,250 88,474 - 83,869 Lloyd's Syndicate 1414 (Ascot Corporate Name) 1/20/2005 10/31/2007 25,143 653,453 - 107,332 SunAmerica Annuity and Life Assurance Company (Anchor National Life Insurance Company) +++ 1/4/1999 12/29/2006 12,391,218 158,565,284 - 9,166,744 SunAmerica Life Insurance Company +++ 1/4/1999 12/29/2006 6,117,702 158,565,284 - 9,166,744 The United States Life Insurance Company in the City of New York 3/3/2003 4/30/2010 4,527,366 27,459,735 - 2,008,834 The Variable Annuity Life Insurance Company 3/3/2003 12/29/2006 49,279,673 76,393,389 - 3,618,076 --------------------------------------------------------------------------------------------------------------------------- TOTAL $124,773,361 $851,469,661 $- $56,927,338 ---------------------------------------------------------------------------------------------------------------------------
* 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"), n/k/a Zurich Insurance Company Limited. 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 ("Edison") 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. Edison merged into Gibraltar Life Insurance Co., Ltd. ("GLIC") on January 1, 2012. The policyholder obligations disclosed represent those of the guaranteed entity as of December 31, 2014. Invested assets and policyholders' surplus disclosed represent the amount reported by GLIC as of December 31, 2014. +++ The guaranteed companies were formerly a subsidiary of AIG. In previous years, AIA provided the direct policyholders obligations as of each year end. However, starting in 2014, AIA declined to provide financial information relative to these guarantees. The financial information reflects amounts as of December 31, 2012, at which time the guaranteed entities had invested assets in excess of direct policyholders' obligations and were in a positive surplus position. The guaranteed policyholder obligations will decline as the policies expire. Additionally, the guaranteed entities have an insurer financial strength rating for 2014 of "AA-" from Standard & Poor's. -------------------------------------------------------------------------------- 58 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- ++++ The policyholder obligations, invested assets and policyholders' surplus disclosed represents those of the guaranteed entity as of September 30, 2014. # The guaranteed company merged into American General Life Insurance Company effective December 31, 2012. The policyholder obligations disclosed represent those of the guaranteed entity. Invested assets and policyholders' surplus disclosed represent the amount reported by American General Life Insurance Company as of December 31, 2014. ## The guaranteed companies merged into AIG Europe Limited (AEL) (f/k/a Chartis Europe Limited) effective December 1, 2012.The policyholder obligations disclosed represent those of the guaranteed entity as of November 30, 2013. Invested assets and policyholders' surplus disclosed represents the amount reported by AEL as November 30, 2014. E. Joint and Several Liabilities -------------------------------------------------------------------------------- AIU and American Home are jointly and severally obligated to policyholders of their former Japan branches, in connection with transfers of the business of those Japan branches to Japan-domiciled affiliates in 2013 and 2014, respectively. Under the terms of the transfer agreement, the Japan affiliates are financially responsible for 100% of the obligations associated with such policies, and the Company's management expects such affiliates to satisfy their obligation. The Company carries no reserves with respect to any contingent liabilities, if the affiliates would fail to satisfy the obligations. As of December 31, 2014, the Japanese affiliates carried $102,312 of loss reserves in respect of such policies. If the Japan affiliates were to fail to satisfy their obligations, the Company's share of the aggregate exposure under the pooling agreement is $74,184. Each member of the Combined Pool is also jointly and severally obligated to the other pool members, in proportion to their pool share, in the event any other pool member fails. 11.OTHER SIGNIFICANT MATTERS -------------------------------------------------------------------------------- A. Other Assets -------------------------------------------------------------------------------- As of December 31, 2014 and 2013, other admitted assets as reported in the accompanying Statements of Admitted Assets were comprised of the following balances:
------------------------------------------------------- OTHER ADMITTED ASSETS 2014 2013 ------------------------------------------------------- Deposit accounting assets 9,297 16,971 Guaranty funds receivable on deposit 6,348 7,047 Loss funds on deposit 40,208 51,570 Other assets 85,008 74,395 ------------------------------------------------------- TOTAL OTHER ADMITTED ASSETS $140,861 $149,983 -------------------------------------------------------
-------------------------------------------------------------------------------- 59 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- B. Other Liabilities -------------------------------------------------------------------------------- As of December 31, 2014 and 2013, other liabilities as reported in the accompanying Statements of Liabilities, Capital and Surplus were comprised of the following balances:
---------------------------------------------------------------------------------- OTHER LIABILITIES 2014 2013 ---------------------------------------------------------------------------------- Accounts payable $ 4,050 $ 43,367 Accrued retrospective premiums 27,445 44,075 Advance premiums - 5,147 Amounts withheld or retained by company for account of others 2,951 3,797 Deferred commission earnings 32,996 25,900 Deposit accounting liabilities 63,649 91,911 Deposit accounting liabilities-funds held - 2,015 Liability for pension and severance pay - 15,254 Policyholder funds on deposit - 14,735 Remittances and items not allocated 13,575 25,287 Retroactive reinsurance payable 164 158 Retroactive reinsurance reserves-ceded (9,564) (9,259) Servicing carrier liability 3,477 4,962 Escrow funds (NICO) 34,511 29,946 Other accrued liabilities 195,842 241,819 ---------------------------------------------------------------------------------- TOTAL OTHER LIABILITIES $369,096 $539,114 ----------------------------------------------------------------------------------
C. Other (Expense) Income -------------------------------------------------------------------------------- For the years ended December 31, 2014, 2013 and 2012, other (expense) income as reported in the accompanying Statements of Operations and Changes in Capital and Surplus were comprised of the following balances:
------------------------------------------------------------------------------ OTHER (EXPENSE) INCOME 2014 2013 2012 ------------------------------------------------------------------------------ Other income $ 18,654 $ 22,740 $ 43,336 Fee income on deposit programs 3,893 7,089 6,641 Equities and deposits in pools and associations 6,180 (5) 39 Interest expense on reinsurance program (39,522) (38,802) (39,541) Foreign exchange gain (loss) - 153 225 ------------------------------------------------------------------------------ TOTAL OTHER (EXPENSE) INCOME $(10,795) $ (8,825) $ 10,700 ------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 60 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012. AMERICAN HOME ASSURANCE COMPANY Statutory Basis Financial Statements (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- D. Non- Cash items -------------------------------------------------------------------------------- For the years ended December 31, 2014, 2013 and 2012, the amounts reported in the Statements of Cash Flow are net of the following non-cash items:
-------------------------------------------------------------------------------------------------- NON-CASH TRANSACTIONS 2014 2013 2012 -------------------------------------------------------------------------------------------------- CAPITAL CONTRIBUTION FROM PARENT: Tax Sharing Agreement $ 21,494 $ - $ 52,613 Pooling Restructure Transaction 1,301,890 - - Other - - 1,637 DIVIDENDS TO PARENT: Securities (233,553) - (48,411) Other - (395,483) (18,716) LOSS PORTFOLIO TRANSFER: Premiums collected - (220,140) 8,083 Benefit and loss related payments 68,784 (592,647) 58,384 Funds held (75,782) - (66,467) Securities - 35,446 - Other 6,998 777,341 - POOLING RESTRUCTURE TRANSACTION: Premiums collected 562,004 - - Miscellaneous expense (income) 51,134 - - Benefit and loss related payments 1,091,450 - - Commission and other expense paid 284,095 - - Net deposit on deposit-type contracts and other insurance (12,835) - - Other (1,975,848) - - JAPAN BRANCH TRANSFER: Premiums collected (391,829) - - Net investment income 2,002 - - Benefit and loss related payments (135,804) - - Commission and other expense paid (26,283) - - Securities 794,089 - - Other (8,622) - - --------------------------------------------------------------------------------------------------
12.SUBSEQUENT EVENTS -------------------------------------------------------------------------------- Subsequent events have been considered through April 28, 2015 for these Financial Statements issued on April 28, 2015. Type I - Recognized Subsequent Events: None Type II - Nonrecognized Subsequent Events: During 2015, NYDFS approved an extraordinary dividend declaration of $600,000. The dividends were paid on February 2, 2015. On April 1, 2015, the Company issued a promissory note with a face amount of $121,697 to AIU in relation to the purchase of AIG China. AIU distributed the promissory note within the AIG group of companies, and eventually the promissory note was received by the Company as a capital contribution. -------------------------------------------------------------------------------- 61 NOTES TO FINANCIAL STATEMENTS - As of December 31, 2014 and 2013 and for years ended December 31, 2014, 2013 and 2012.